BMO's Preferred Shares Redemption: Strategic Capital Shift or Investor Crossroads?

The Bank of Montreal (BMO) has set a critical deadline for holders of its Series 33 Non-Viability Contingent Capital (NVCC) preferred shares: August 25, 2025. The bank's decision to redeem these $25 par value shares at face value—coupled with a final dividend of $0.190875—marks a pivotal moment for investors. This move reflects BMO's broader capital management strategy in a shifting interest rate environment while presenting a fork-in-the-road for shareholders. Let's dissect the implications, risks, and opportunities.

The Redemption Mechanics

BMO's Series 33 shares, issued as 5-year rate-reset preferreds, will be called at $25 per share on August 25. Investors will receive this par value plus the final dividend, which, while modest, is a one-time payout. Crucially, shareholders must be on the record as of July 30, 2025, to claim both the redemption and dividend. The NVCC clause, which allows the bank to write down shares in a financial crisis, remains in effect unless holders convert to Series 34 shares (if available). This creates a strategic crossroads for investors: redeem at par, hold for potential conversion to floating-rate shares, or exit entirely.

Why Now? Timing and Rates Matter

The redemption's timing hinges on current interest rate dynamics. As of July 2025, the Bank of Canada's overnight rate is 2.75%, unchanged since March 2025. With the next rate decision looming on July 30, BMO may be anticipating further cuts or stability.

A lower rate environment could reduce BMO's refinancing costs, making early redemption of Series 33 shares—issued during a higher-rate period—strategically advantageous. By repurchasing these shares at par, BMO may aim to reduce its reliance on fixed-rate preferreds, freeing capital for new instruments that better align with prevailing rates. This aligns with banks' broader trends of optimizing capital structures amid volatile monetary policy.

Investor Risks and Considerations

1. Non-Cumulative Dividend Risk: Unlike cumulative preferred shares, missed dividends on Series 33 are not owed to investors. This highlights the importance of capturing the final payout before August 25.
2. NVCC Clause Exposure: While BMO has not triggered the NVCC clause historically, its inclusion means shares could be converted to common stock or written down in a crisis. This risk remains even post-redemption if holders opt for Series 34.
3. Opportunity Cost: Redeeming at par locks in $25 per share, but investors who hold might benefit if BMO issues higher-rate preferreds post-redemption. Conversely, failing to act risks missing the final dividend and losing the chance to convert terms.

Exit Strategies and Recommendations

Investors face three paths:

1. Redeem at Par (Default Option):
2. Pros: Immediate liquidity, no exposure to NVCC risks post-August 25.

3. Cons: Misses potential upside from Series 34 conversions or future rate resets.

4. Hold for Conversion to Series 34 (If Offered):

5. Pros: Floating-rate shares could outperform in rising-rate environments. BMO's history of rate resets (e.g., Series 33 itself was a reset from Series 32) suggests this is a likely path.

6. Cons: Requires faith in BMO's creditworthiness and tolerance for NVCC risks.

7. Reinvest in BMO's ETFs or Cash Alternatives:

8. Option 1: BMO's Core Plus Bond ETF (ZCPB) offers a 2.83% yield with short duration (under 1 year), mitigating rate sensitivity.
9. Option 2: BMO USD Cash Management ETF (ZUCM) (4.5% yield) provides liquidity and stability.

Act with Urgency

The July 30 record date is non-negotiable. Investors who miss this deadline risk losing the final dividend and redemption rights. For those holding Series 33, the clock is ticking to decide whether to cash out, convert, or reinvest.

Final Take

BMO's redemption is both a defensive move to optimize capital costs and a test of investor resolve. While the bank benefits from reducing fixed-rate liabilities in a lower-rate environment, shareholders must weigh immediate liquidity against potential long-term gains. My advice:
- Redeem if you prioritize capital preservation and lack conviction in BMO's future preferred issuances.
- Hold/convert if you believe rates will remain low or BMO's credit strength will endure.
- Diversify with short-duration bonds or cash to hedge against rate volatility.

Investors who act swiftly—and thoughtfully—will navigate this crossroads successfully. Those who delay risk being left behind in BMO's evolving capital landscape.

Disclaimer: This analysis is for informational purposes. Consult a financial advisor before making investment decisions.