Announcement: Moody's Reviews Bank of Montreal for Downgrade following Marshall & Ilsley Acquisition Global Credit Research

- 17 Dec 2010
New York, December 17, 2010 -- Moody's Investors Service placed the long-term ratings of Bank of Montreal ("BMO", deposits at Aa2, unsupported Bank Financial Strength Rating at B-/A1) and its subsidiaries on review for downgrade following BMO's announcement of its plan to acquire Marshall & Ilsley Corporation ("M&I", deposits at A3, unsupported Bank Financial Strength Rating at C/A3, on review for upgrade, see related press release) in an all-stock transaction valued at $4.1 billion. BMO's short-term Prime-1 ratings were affirmed. RATINGS RATIONALE During the review, Moody's will examine the execution risks this major acquisition presents for Bank of Montreal. The transaction is transformative for BMO's US operations, and will present the firm with integration challenges. Risks include merging personnel and instilling a consistent credit culture in M&I's community-based banking network. These merger execution challenges are compounded by the fact that M&I has significant asset quality issues, and BMO's existing U.S. operations have underperformed and have not been consistently profitable in recent years. Although BMO's pro-forma capital ratios look strong, if the economy weakens significantly, the asset markdowns totaling $4.7 billion may not be sufficient to absorb all losses - particularly on M&I's troubled legacy CRE portfolios. Moody's will also review the capital position of Bank of Montreal under expected and stress loss scenarios -- particularly for M&I's real estate exposures. The rating agency observed that the merger would add scale and extend BMO's Midwest footprint. The merger will double the size of BMO's US branch network to roughly 700 branches and will transform its US franchise, if successfully executed. A successful integration will also tip the balance of BMO's earnings away from wholesale banking sources, which is positive for BMO bondholders. Moody's expects that BMO will eventually merge M&I into Harris BankCorp Inc. (deposits at A1, unsupported Bank Financial Strength at C+/A2). However M&I is facing significant challenges itself having reported eight loss-making quarters in a row. "Marshall & Ilsley has an attractive franchise in Wisconsin and other select Midwest markets,"said Peter Nerby, a Moody's Senior Vice-President. He cautioned that "M&I's recent losses illustrate some of the execution risks that this transaction represents for Bank of Montreal over the next couple of years." Bank of Montreal currently has a bank financial strength rating of B- which equates to an unsupported baseline credit assessment of A1. The baseline credit assessment of A1 reflects BMO's strong Canadian franchise in personal and commercial banking. These businesses have produced predictable pre-provision pre-tax earnings --- which should absorb the expected credit and integration costs associated with the M&I acquisition. "The stability of BMO's domestic earnings streams continues to underpin the bank's credit worth" Nerby observed. BMO's Canadian personal and commercial segment demonstrated this strength generating $1.6 billion in net income in 2010. Moody's continues to assume a very high likelihood of systemic support for Bank of Montreal. This assumption results in two notches of uplift to the bank's Aa2 deposit rating from its unsupported baseline credit assessment of A1. On Review for Possible Downgrade: ..Issuer: Bank of Montreal .... Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently B....Multiple Seniority Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Aa3 ....Multiple Seniority Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Aa3 ....Multiple Seniority Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Aa3 ....Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently Baa1 ....Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently Baa1 ....Subordinate Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Aa3 ....Senior Unsecured Deposit Note/Takedown, Placed on Review for Possible Downgrade, currently Aa2 ....Senior Unsecured Deposit Note/Takedown, Placed on Review for Possible Downgrade, currently Aa2 ....Senior Unsecured Medium-Term Note Program, Placed on Review for Possible Downgrade, currently (P)Aa2 ....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently a range of NR to Aa2 ....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently a range of NR to Aa2 ....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently Aa2 ....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently Aa2 ..Issuer: Bank of Montreal, Chicago Branch ....Senior Unsecured Deposit Note/Takedown, Placed on Review for Possible Downgrade, currently Aa2

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Aa2 ....Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently Baa1 ..Issuer: BMO Subordinated Notes Trust ....Subordinate Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently Aa3 ..Issuer: Harris N.A. .... Bank Financial Strength Rating, Placed on Review for Possible Downgrade, currently C+ .... Issuer Rating, Placed on Review for Possible Downgrade, currently A1 ....OSO Senior Unsecured OSO Rating, Placed on Review for Possible Downgrade, currently A1 ....Subordinate Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently A2 ....Senior Unsecured Bank Note Program, Placed on Review for Possible Downgrade, currently (P)A1 ....Senior Unsecured Bank Note Program, Placed on Review for Possible Downgrade, currently (P)A1 ....Senior Unsecured Deposit Note/Takedown, Placed on Review for Possible Downgrade, currently A1 ....Senior Unsecured Deposit Rating, Placed on Review for Possible Downgrade, currently A1 ..Issuer: Harris Preferred Capital Corporation ....Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently Baa1 ..Issuer: BMO Capital Trust II ....Preferred Stock Preferred Stock, Placed on Review for Possible Downgrade, currently Baa1 Outlook Actions: ..Issuer: Bank of Montreal ....Outlook, Changed To Rating Under Review From Stable ..Issuer: Bank of Montreal, Chicago Branch ....Outlook, Changed To Rating Under Review From Stable ..Issuer: BMO Capital Trust II ....Outlook, Changed To Rating Under Review From Stable ..Issuer: BMO Subordinated Notes Trust ....Outlook, Changed To Rating Under Review From Stable ..Issuer: Harris N.A. ....Outlook, Changed To Rating Under Review From Stable(m) ..Issuer: Harris Preferred Capital Corporation ....Outlook, Changed To Rating Under Review From Stable Moody's last rating action on Bank of Montreal was on January 22, 2010, when its long-term ratings were downgraded. The principal methodologies used in this rating were "Bank Financial Strength Ratings: Global Methodology" published in February 2007, and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" published in March 2007, and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt" published in November 2009. Bank of Montreal is headquartered in Toronto, Canada and its reported assets were C$412 billion as of October 31, 2010. New York Peter E. Nerby Senior Vice President Financial Institutions Group Moody's Investors Service JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 New York Robert Young MD - Financial Institutions Financial Institutions Group

Moody's Investors Service JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Moody's Investors Service 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653

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