Bank of Montreal’s acquisition of Milwaukee, Wis.-based Marshall & Ilsley Corp. could be transformative for the bank, but t it carries both credit risks and integration challenges, analysts says.

Moody’s Investors Service has placed its long-term ratings of BMO (TSX:BMO) on review for possible downgrade, the rating agency said Friday. Moody’s said that the review 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,” it said, adding that risks include merging personnel and instilling a consistent credit culture.

“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,” Moody’s said.

Moody’s said that while 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.

Another rating agency, DBRS confirmed its ratings on BMO, saying that it believes the acquisition is “a good strategic and geographic fit” for BMO’s Harris Bankcorp, Inc. in the United States, adding that BMO’s sizable domestic franchise and strong financial risk profile also supports its ratings.

“The combined business will provide BMO’s U.S. personal and commercial banking business with much-needed scale and strength, which help offset the increased credit risk,” DBRS said. It added that the acquisition is consistent with BMO’s desire to grow its U.S. Midwest banking franchise.

“Given M&I’s focus on commercial lending, wealth management and community banking, there are synergies that can be derived from the transaction. Cost savings are estimated to be pre-tax $250 million, representing 7.5% of the combined entity and realized over three years. Notwithstanding the fact that revenue synergies have not been factored in, the acquisition is expected to be accretive to earnings per share in year two,” DBRS said.

DBRS also believes there are credit risk concerns at M&I, but says that these risks are expected to be manageable. And, it acknowledges that the deal also faces integration risk. “Over the medium term, should risk levels and performance of M&I be significantly weaker than anticipated, it may result in negative rating action for BMO,” it said.

Analysts at UBS Securities LLC sid that the price being paid for M&I is rich, and will likely drive positive stock price performance for other troubled banks. “However, we don’t believe that all buyers will be willing to pay the multiples for a troubled institution that BMO paid for M&I,” UB said. And, as a result, it doesn’t expect to see a wave of meaningful consolidation in the U.S. banking business until 2012.

IE