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spk16: This conference is being recorded. Our participants, please stand by. Your conference is ready to begin. Good morning and welcome to the BMO Financial Group's Q2 2024 Earnings Release and Conference Call for May 29th, 2024. Your host for today is Christine Viau. Please go ahead.
spk01: Thank you and good morning. We will begin the call with remarks from Darrell White, BMO CEO, followed by Typhoon Tuzun, our Chief Financial Officer, and Piyush Agrawal, our Chief Risk Officer. Also present today to take questions are Ernie Johansson, Head of BMO North American Personal and Business Banking, Nadeem Herji, Head of BMO Commercial Banking, Alan Tannenbaum, Head of BMO Capital Markets, and Dellen Kamenga, Head of BMO Wealth Management, and Darrell Hackett, BMO U.S. CEO. As noted on slide two, forward-looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Daryl and Typhoon will be referring to adjusted results in their remarks unless otherwise noted. I will now turn the call over to Daryl.
spk04: Thank you, Christine, and good morning, everyone. Today, we announced adjusted net income of $2 billion and adjusted earnings per share of $2.59, with a $0.04 increase in our dividend, up 5% over last year. We achieved strong pre-provisioned pre-tax earnings growth of 7% from last year, driven by continued momentum in Canadian personal and commercial banking and strengthening performance in our capital markets and wealth businesses. Canadian P&C delivered record revenue, up 13% year-over-year, with industry-leading growth in customer acquisition, contributing to market share gains. We've seen strong momentum from newcomers to Canada, up 35% compared with last year, due to the success of BMO's New Start program, pre-arrival digital tools and advice, all aimed at helping new Canadians make real financial progress. BMO Capital Markets, had strong PPPT of $642 million within the range we have guided to and up 21% from last year, driven by good client activity and record results in debt underwriting. We met our commitment to positive operating leverage this quarter, which was very strong at 3%. Expenses were down from last year and from last quarter from the achievement of the Bank of the West cost synergies and a large portion of the incremental operational efficiency savings we announced last year. we remain focused on delivering positive operating leverage for the full year. Credit risk, while elevated from last quarter, is well managed in what continues to be a challenging environment for many of our customers, where some individuals and businesses are being impacted by prolonged higher interest rates and a slowing economy. We now expect somewhat fewer and delayed rate cuts this year in both Canada and the US, with the Bank of Canada expected to begin lowering rates this summer. and the Fed in the fall at a moderated pace. Our balance sheet is stronger than ever with a growing core deposit base, a CET1 ratio of 13.1% and prudent loan loss provisions. Since Q2 of 2023, which was the first quarter after the closing of the Bank of the West acquisition, we have effectively and quickly rebuilt our liquidity and capital positions. During that period, we added $48 billion in customer deposits, kept our liquidity and funding ratios stable, and added a full 90 basis points to our CET1 ratio, positioning us very well for capital allocation optionality heading into 2025. Our U.S. businesses continue to be a key differentiator for BMO, with our U.S. segment contributing 45% to the bank's earnings and a significant driver of long-term growth. We have a strong foundation, building on our position as a top 10 U.S. bank. With a presence in 14 of the top 25 MSAs and a leading market share in businesses like RV Marine, Equipment Finance, and Wine and Spirits, we are competing from a position of strength. Since March of last year, the U.S. banking industry has experienced more muted loan growth, and intensified deposit competition as the Fed continues quantitative tightening. Meanwhile, BMO's strategy hasn't changed. We're building clear competitive advantages in a highly fragmented market structure. And as a result, we've delivered resilient performance ahead of U.S. regional bank competitors, reflecting our deep experience competing in this market, the expanded scale of our business, and strong execution of cost savings. Pre-provision pre-tax earnings in our U.S. segment exceeded $1 billion for the fifth consecutive quarter, growing 7% over last year, well above pure averages. Over the last four quarters, we've grown deposits, we've seen stability in commercial lending, and we've managed margins. Brand recognition is strong, having achieved a meaningful share of voice in California and surpassing our targets for awareness and consideration, leading to good customer acquisition In retail in particular, we've improved branch productivity in the New West markets by 17% since the beginning of the fiscal year, complemented by strong digital sales and digital adoption. March was a record new high for new business generation across the retail and commercial businesses, including record client referrals. In commercial banking, we've retained over 90% of our clients post-conversion, and we're now building our base with good new client acquisition. We're unlocking cross-sell opportunities and expanding in key verticals. For example, in our wine and spirit sector, our combined teams are exporting expertise from the U.S. West Coast to grow and better serve clients in the Canadian winery market, while bringing M&A expertise to our U.S. clients with five completed or underway deals. We're also leveraging are leading North American treasury management and payment solutions. The capabilities we offer are not easily replicated and continue to be enhanced, including seamless access to FX trading capabilities and cross-border money movement. Clients that bank with us on both sides of the border have deeper relationships with over 10% higher revenue and 30% higher deposits. While the overall environment may continue to constrain revenue growth in the near term, we continue to invest to build on our early success and capture profitable market share and create value for the long term. Our digital first strategy is an important driver of our growth aspirations, and we've empowered our teams to develop and deploy leading digital solutions that drive tangible customer and business value. We're using agile practices to accelerate time to market, deploying increasingly sophisticated data and analytics, including AI, and leveraging cloud engineering to drive modernization and deliver more, faster, with greater quality and security. Cloud computing is a critical enabler for business transformation across BMO, and we're seeing meaningful business benefits. We're modernizing legacy wealth infrastructure within the cloud and have invested in industry-leading workflow tools in capital markets to increase efficiencies, and deliver better customer experiences. In retail banking, we've delivered 2 million AI-enabled conversations with BMO Assist and over 80 million BMO Insights to help our customers better manage their finances. As a result, we're not only being recognized with our clients' trust in business, but this quarter, BMO ranked among Fast Company's list of the world's most innovative companies of 2024. the only Canadian or US bank recognized out of more than 600 winning organizations. At the heart of BMO's culture is our commitment to ethical business practices, including a responsible approach to AI development that guides the execution of our strategy to strengthen and grow our bank. This quarter, we were again recognized by the Ethisphere Institute as one of the world's most ethical companies for the seventh consecutive year. an important differentiator for our bank. I'll now turn it over to Typhoon.
spk15: Thank you, Daryl. Good morning and thank you for joining us. My comments will start on slide 10. Second quarter reported EPS was $2.36 and net income was $1.9 billion. Adjusting items are shown on slide 38 and included the after-tax impact of the incremental FDIC special assessment of $50 million. The remainder of my comments will focus on adjusted results. Adjusted EPS was $2.59, down from $2.89 last year, and net income was $2 billion, down 7%. PPPT increased 7%, driven by strong performance in Canadian PNC, capital markets, and wealth management, partially offset by a decline in US PNC where loan demand continues to be muted while deposit pricing remains very competitive. Revenue was up 2% and expenses decreased 1% with good operating leverage of 3%. We delivered on our commitment to positive operating leverage this quarter as the benefit of our efficiency initiatives offset the impact of lower revenue growth. PPPT growth was offset by an increase in PCL which Piyush will speak to in his remarks. Moving to slide 11, our balance sheet remains well diversified with solid loan and deposit growth. Average loans grew 4% year over year, excluding the impact of last quarter's RV loan portfolio sale and the wind down of the indirect auto book. Consumer loans were up 7% and business and government loans were up 2% with good growth in Canadian PNC and capital markets, partially offset by lower commercial lending in US PNC. Average customer deposits increased 6% primarily from balanced growth in Canadian PNC and capital markets. Turning to slide 12, on an ex-trading basis, net interest income was down 1% from the prior year due to lower margins and was down 2% sequentially due to the impact of fewer days in the quarter. The decline in trading net interest income was offset in non-interest revenue. Compared with last quarter, NIM was modestly lower by two basis points. In Canadian PNC, the impact of lower deposit margins was offset by higher loan margins and favorable balance sheet mix, with NIM up three basis points. We expect NIM in Canadian PNC to tighten during the second half of the year due to the BA migration and continued deposit competition. In US PNC, lower deposit margins drove a 10 basis point reduction in NIM. Although we expect deposit competition to continue in the US, the quarterly impact on NIM should be more modest. Although the deposit environment is competitive in both countries, and migration to higher rate deposits continues at a decelerating pace. We maintain our expectation of relative full bank margin stability for the remainder of the year. Moving to slide 13. Expenses declined driven by the continued progress on enterprise operational efficiencies we began in the third quarter of last year and the full realization of Bank of the West cost synergies. While we achieve positive operating leverage this quarter and expect the same for the remaining two quarters of the year and for the full year, we are seeing profitable opportunities to capture market share in both Canada and the U.S. and will invest accordingly. Turning to slide 14, our capital position has strengthened with a CET1 ratio of 13.1%, up 30 basis points from the prior quarter, driven by internal capital generation the final quarter of common shares issued under the dividend reinvestment plan and lower source currency RWA as lower market risk was partially offset by higher credit risk. Our capital outlook for the rest of the year remains strong and is likely to remain above our management target. Moving to the operating groups and starting on slide 15. Canadian PNC net income was up 7 percent year-over-year, driven by strong PPPT performance, up 17 percent, partially offset by higher PCLs. Record revenue of $2.8 billion was up 13 percent, driven by higher net interest income, reflecting both solid balance growth and improved margins, and higher non-interest revenue, including the acquisition of air miles. Expenses were up 9%, reflecting the inclusion of air miles and higher technology costs. Loans were up 5%, with good growth in mortgages and commercial loans, and deposits were up 11%, reflecting continued growth in term products across both consumer and commercial clients. Moving to US PNC on slide 16. My comments here will speak to the US dollar performance. Net income was down 25% from the prior year with lower revenue and higher PCLs, partially offset by lower expenses. Revenue was down 7% driven by lower net interest income due to a 23 basis point reduction in margins, which is consistent with industry trends. Non-interest revenue decreased 11% as higher M&A advisory fees in commercial banking were offset by lower deposit fees in personal and business banking. Expenses were down 6%, reflecting good expense management, including cost synergies and operational efficiencies. Loans were up 1%, excluding the impact of the RV loan portfolio sale last quarter. Deposits remained relatively stable, with strong growth in term and money markets offsetting decreases in non-interest bearing balances. Moving to slide 17, BMO wealth management net income was up 33% from last year. Wealth and asset management revenue was up 4%, reflecting good operating performance with client asset growth and stronger markets, offsetting lower net interest income due to lower deposits and margins. Insurance revenue increased from last year, due to changes in portfolio positioning during the transition to IFRS 17 and was up $21 million from last quarter due to the impact of favorable changes in interest rates on investment results. Expense growth of 1% reflected higher revenue-based costs, which were largely offset by the benefit of efficiency initiatives. Moving to slide 18, BMO Capital Markets net income was up 23% year over year, reflecting strong PPPT performance of $642 million in the quarter, consistent with our guidance, partially offset by higher PCLs. Revenue in global markets was up 8%, primarily due to improved market conditions driving higher interest rate trading. Investment in corporate banking revenue was up 1%, as strong debt underwriting fees were mostly offset by lower advisory fees. Expenses were down 3 percent due to illegal provision in the prior year. Turning now to slide 19, corporate services net loss was $244 million compared with $63 million in the prior year and $316 million in the prior quarter. The decline in quarter-over-quarter loss was in line with our expectation and the increase relative to last year was driven by the lower net accretion of purchase accounting fair value marks as well as impact of treasury related activities. To conclude, this quarter our revenues improved and our expenses declined in line with our expectations. The power of our franchise is evident in our ability to deliver positive operating leverage while investing in future growth opportunities. We have built strategic flexibility as a competitive advantage that relies on the strength of our operational resilience and business and geographic diversity, and we expect our financial performance to reflect that strength as we move to a more supportive economic and market environment. I will now turn it over to Piyush.
spk13: Thank you, Typhoon, and good morning, everyone. Starting on slide 21, the credit themes we've been seeing over the last several quarters continue to play out as the higher level of interest rates and slowing economic activity are reflected in credit migration and higher impaired loss rates. The total provision for credit losses was $705 million of 44 basis points, up from 38 basis points last quarter. Impaired provisions were $658 million, of 41 basis points, up from 29 basis points last quarter. Given the environment, we continue to manage our portfolios closely as per a long track record of good performance through cycles. In Canada, the increasing trend in credit card delinquencies and elevated consumer insolvencies over the last number of quarters have resulted in impaired losses of $247 million, up $44 million from prior quarter. We continue to take actions to manage losses within these portfolios, including pre-delinquency engagement with customers who are most vulnerable to payment stress. Our residential portfolio continues to perform well, including renewing customers, and the amount of variable rate loans and negative amortization declined further this quarter, down 34 percent year to date. U.S. retail impaired loan losses was $44 million, down $36 million from prior quarter. Our commercial portfolio remains well diversified across sectors and geographies. Canadian commercial impaired loan provisions were $48 million, up $14 million from last quarter. U.S. commercial impaired provisions were $244 million, up $141 million. Provisions primarily came from commercial real estate, transportation, and services sectors. Commercial real estate, including office, is performing in line with our expectations, and we maintain strong coverage. But given the rate environment, we do expect modest provisions going forward. Capital market impaired losses were $61 million, primarily driven by one idiosyncratic account in the insurance sector. On slide 24, our business and government portfolio continues to be well-structured and well-secured. While the impact of higher rates has resulted in negative credit migration, over half of the portfolio continues to be investment grade with low impairment levels of 1 percent. Moving to slide 22, performing provision for credit losses of $47 million primarily reflected portfolio credit migration and uncertainty in credit conditions partially offset by an improvement in the macroeconomic outlook. Having added to performing allowances for the last eight quarters, we are comfortable that a total performing allowance of $3.7 billion continues to provide appropriate coverage over performing loans at 56 basis points. Turning to slide 23 on impaired loans information. Impaired formations increased to about $2 billion, with all of the increase in business and government, where high rates are continuing to feed through to higher impairment. Gross impaired loans increased to approximately $5.3 billion, or 79 basis points, with increases across most industries, most notably in services. To conclude, we expect that the delay in central bank easing of monetary policy and slowing economic activity could keep impaired provisions at around these levels over the next couple of quarters. Given the quality and diversification of our portfolio, allowance coverage, and strong risk management capabilities, we remain well positioned to manage the current environment and emerging risks. I will now turn the call back to the operator for the Q&A portion of this call.
spk16: Thank you. We will now take the questions from the telephone lines. If you have a question and you are using a speakerphone, please lift the handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Abraham Poonawalla from Bank of America. Please go ahead. Your line is now open.
spk12: Thank you. I guess for you just on the comments around impaired PCLs. So one, impaired PCLs were 41 basis points in the second quarter. Should we assume that the guidance, I think it was around low 30s impact PCLs for the year, that's shifting more into the low 40s? And then just talk to us around your visibility on credit. I heard you say higher rates, but honestly, we've expected higher rates for a while, higher for longer. So I'm just trying to understand the risk if we don't get material rate cuts over the next 12 to 18 months, Is the risk that impaired PCLs could drift even higher? Just give us a sense of your visibility on credit and your comfort level that where impaired PCLs could peak out absent like a full-blown recession.
spk13: Yeah, Ibrahim, thank you for the question. When we gave the guidance of lower 30s, it was obviously predicated on our assessment of what monetary policy will be. And if you remember in the same guidance, we said we were expecting three to four rate cuts. in both Canada and the U.S., and also said there will be some intra-quarter volatility, just given the business mix we have on business and government. That, of course, has changed with the restrictive monetary policy, which I think is now getting moved out quite a bit. So, as Darryl said in his comments, it's probably one, probably zero in the U.S., probably two or three in Canada. That then changes the psychology or the sentiment of the consumer. Um, what you see today at 41 basis points, we are guiding around the same range for a couple of reasons. I can break it down. You're going to see, you've seen unemployment pick up, uh, about 5.3%, same time last year to around 6.3, going up to 6.5 in Canada. And so that is going to have an impact, especially on our unsecured portfolios in Canada. I think the mortgage consumer is very resilient. That continues while there will be an uptake in delinquencies. HPI is strong. And so we're figuring out or taking into account what unemployment will do to the unsecured portfolio. And then you have the exogenous factor of Canadian insolvencies or proposals that have been and continue to be surprisingly higher than general expectation. The second piece I would say is around the wholesale. And if I back up to where we are in this quarter, there are two or three underlying trends that I would probably call out. One, loan growth has remained muted. And this is not unique to BMO. This is, in fact, a market phenomena. And so you get about, I would say, a headwind into that impaired portfolio by two or three basis points when loan growth is muted. And then as I was going through the results you saw, We also have two or three large credits, one especially I called out in capital markets. And to put that in context, you know, $16 or $17 million of impaired can give you a basis point. So when you get 50 or 60 in capital markets, that's three or four basis points. So you take the three or four basis points there and the loan growth, you know, you would really get down from 41 to 35, which is just, again, a starting point of giving you a sense of how we performed this quarter. So we did expect rates, the impact to go up, and that's how we've landed here. But unemployment continues to take up. We're going to see a little bit of cyclical businesses in our mix of wholesale that may have higher losses, transportation, finance being one of them. And I can get into more detail, but just to give you the perspective of why we are guiding in the similar range, Again, with that caveat that there will be volatility because two or three large names can move that number around by three or four basis points. So I hope that's helpful. Of course, you know, going forward, much longer term, I think we'll revert back to our longer-term averages, but that's something we have to see rather than speculate on the rate cycle when that happens, and we'll provide you more guidance as we go along.
spk12: Sure, thanks for that, and I'll follow up offline. And just one question for Daryl. Adjusted ROE 10.9%. Absent any improvement in the macro, can BMO do better than 11% return on equity anytime soon? Thank you.
spk04: Thank you, Ibrahim. The short answer is yes. I do remind folks that the ROTCE is an important metric for us as well, which is substantially higher than that. But you did hear Typhoon and I talk about continuing to push on positive operating leverage as we go forward. So assuming we can do that and assuming no change in the macro, I think we can continue to improve on where we are right now. And if there is a change in the macro to the positive, obviously we think we can do even better.
spk16: Thank you. The next question is from Matthew Lee from Canaccord. Please go ahead. Your line is now open.
spk09: Hey, good morning, and thanks for taking my question. When we look at GIL formations, it feels like a bit of a step up from the U.S. service industry, some CRE and wholesale trade. Can you ever talk to whether that stems from discrete identifiable clients or if it's more of a broad-based weakness in those industries?
spk13: Sure. So, Matthew, I don't think this is a systemic weakness. In fact, we've been assessing many of these sectors for quite some time. Some of the weakness I talked about was, for example, I'm just probably expanding on the point on transportation. For the last 18 months, you've seen freight rates have remained at an all-time low. Volumes haven't picked up. If we look at the American tonnage index, that's been at a low point. And resale values, because of oversupply, have also been impacted. But a business like transportation, we've been in for 40, 50 years. We've been through several cycles. We've managed through several cycles. And we are beginning to see some recovery of flattening out of delinquencies out there. To your other question around commercial real estate, it's a sector we've focused on. There was one large name this time around in our impairment. I'm actually optimistic to get back a partial recovery over the next few quarters, even on that, because it's a book we manage. It wasn't a surprise in our small watch list of names that we've been tracking more closely, even after reappraising them every few months, this name was within our expectation. So it is a couple of names and a couple of cyclical sectors in a diversified business, but it's not systemic to anything that I would call out for you.
spk09: All right. That's helpful. I'll read you.
spk16: Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is now open.
spk07: Good morning. Carol, I want to go back to some of the points you made in your opening comment. You emphasized strong capital and liquidity position, and you stated that BMO is positioned well for capital allocation optionality going into 2025. And I'm just I'm just hoping you can dig into what you're trying to say or what you mean by that statement.
spk04: Sure. Thanks, Doug. Listen, what I mean by it isn't anything more than what you heard. And when I say that, you know, I look back to a year ago at the end of the quarter after we closed the Bank of the West. I also advised in my opening comments that we've since built 90 basis points on the CET1 ratio. We've built almost $50 billion of deposits on our liquidity. You heard us last quarter announce that we were going to turn the drip off, and you saw us today consistent on dividend expectations. And as I look forward, Doug, over the next couple of quarters, we just see those trends at least stable, if not continuing to improve. And so setting us up for 2025, we feel like we're in a good position in terms of capital allocation. Optionality is exactly the word I used, and that's what I meant. And that goes to all the things we always talk to you about. We'll have, we think, a differentiated position from a capital availability perspective in the U.S. in particular, relative to many of the names we compete against there. And in Canada, we'll be with some of our peers and have lots of optionality to first serve our clients and then to consider other options if the capital continues to accrete beyond beyond our base levels. So that's a good place to be in and it's quite, we think at least, an impressive track record of progress on those metrics relative to a year ago after completing a large acquisition. That was the point I was trying to make. Is that helpful?
spk07: It is. I was just trying to kind of maybe find a point on it. Is it meaning that you are at a position to do further M&A, or would you be more inclined to be more active on buybacks given, you know, the flexibility on the capital side?
spk04: Yeah, no, it's a good question, Doug, and it's, you know, it's hard to be particular in the answer because, as you know, it depends on the circumstance. And, you know, as we look at the environment, you know, it continues to be, as we've outlined in our opening comments, a softer environment. in that environment, you're less likely, I think, to pursue M&A relative to, you know, having a worldview that says the clouds are parting. So that would be an important factor at the time. And it also goes to strategic attractiveness and price and all of the rest of it that we always talk about. You know, so subject to that, you know, but that's kind of my way of saying the M&A environment has to be helpful and constructive. We think when it is helpful and constructive, we are an attractive alternative for many potential candidates, but that doesn't mean you go ahead and do something. You go ahead and do something because it makes sense for shareholders in the aggregate. And if we get to a point where, you know, we've got excess capital in 25 and we're not pursuing because things don't make sense, then, of course, buybacks are on the table at some point as we go through 25.
spk07: Okay. And then second, just in your opening remarks, you talked about positive operating leverage. Okay. We both talked about positive operating leverage, but you also talked about making investments because you see profitable opportunities to take market share in Canada and the U S and, and I don't think, you know, you would make those investments to, you know, that would take you away from positive operating leverage. I think you've been clear on that, but I'm just curious as to just, trying to make sure we're not surprised by something like, can you dig into what those opportunities are? Can you kind of talk about what those investments might be and what that impact that might have on the expense line?
spk15: Yeah, it's nothing more than a reference to a number of businesses who are taking market share profitably, both in Canada and then a number of opportunities that we have, including you know, our newly expanded franchise in the US. And there will always be pockets where we think that combining our balance sheet strength, capital and liquidity, with the ability to take market share will, you know, will take advantage of those opportunities. But we believe we can do those even within the guidance of positive operating leverage. You know, that may mean that, you know, the expenses They tick up a little bit, but as long as we deliver positive operating leverage, we're quite comfortable leveraging our growth opportunities with smart investments.
spk07: And so there wasn't any one or two particular opportunities that you wanted to point out? No. I'll leave it there. Thank you.
spk16: Thank you. The next question is from Minnie Grauman from Scotia Capital. Please go ahead. Your line is now open.
spk02: Hi, good morning. I think it's very clear, and you highlighted it, that the higher for longer rate environment is definitely putting upward pressure on the impaired PCL ratio. But I'm wondering if there are any other factors here worth considering. One factor that I wanted to specifically get your comment on is just collections. How is that tracking relative to expectation? Is there anything there that would explain some of the upward pressure on impaired PCLs as well.
spk13: Yeah, I think, so your higher for longer, I think everybody's talking about it's a new normal, and so customers adjusting to a new normal of higher for longer always takes time, and you're seeing some of that come through over here. Specifically on collections, I wouldn't say that collections is getting impacted because of that. The obvious two or three points is When you haven't lost money in the past, you can't collect enough. So, you know, the impairments are beginning now, and that's going to build the collection inventory for the future. But the second part, which is a challenge for the industry, is when it comes through insolvencies or proposals, it's going to take a longer window for collect because you can't collect for the first four or five years. Those are just the way the rules are. So that does have an impact on collections. Other than that, in the normal write-offs, I think a collection window of one or two years remains as robust as it was even before. I don't know if, Ernie, you would like to add something here.
spk14: ERNESTO CORTES- Yeah, I was just going to add that we've been very successful in proactive contact to customers, getting in front of the situation for them and helping them navigate, whether that be mortgages or credit cards or any unsecured lending. And what we're finding is the receptivity has been very strong. and the performance of those contacts have been very helpful to the customers and ultimately in us being able to navigate and reduce losses. And I think that will continue as the market, as we talked about earlier, macro environment, interest rates higher for longer, and consumers are facing more cash flow efforts. But efforts are good, and they will continue over the course of the next probably year as we go forward.
spk02: Thanks for that. And then maybe just a question for Daryl. You know, just given the environment, are you seeing any increased regulatory scrutiny on AML processes for BEMA, especially in the U.S.? And I guess it's a related question. Is there a risk of material increase in spending relative to plan because of that?
spk04: You know, many short, I get it. The short answer is no. Regulatory scrutiny is pretty continuous rather than episodic, I would say. A couple thoughts come to mind. You mentioned the U.S. We've been operating in the U.S. continuously for decades. We're coming up, as it turns out, on our 40-year anniversary of the acquisition of the Harris Bank. And all the way through, we've built risk and governance and control infrastructure that would be appropriate for the size of the operations at the time. And now, as we talked about before, our programs are subject to ongoing reviews. So when I say it's continuous, that's exactly what it is in the jurisdictions that we operate, including in the U.S., where we transitioned to a Category 3 bank. So there was no surprise there. And, you know, just as we believe our AML program is mature and it's effective through that piece, we, of course, remain vigilant. And this goes to your question, I guess, on investment. Risks are elevated. Criminals are more sophisticated, as we know, and we therefore continue to invest and strengthen our practices. But all of that happens, whether it's AML fraud, advanced technologies that we introduce with the oversight and with the spending envelope that Typhoon outlined earlier in terms of how we look at our business planning. So nothing particularly unusual relative to the environmental factors that I think you're referring to.
spk02: Nothing additional relative to what you've been doing before?
spk04: Correct. It's all in the plan.
spk02: Thanks, John.
spk16: Thank you. The next question is from John Aiken from Jefferies. Please go ahead. Your line is now open.
spk05: Good morning. Just wanted to focus on U.S. deposit growth, given the environment where you've highlighted that it's very competitive. Can you discuss the strategy or the tactics of continuing to pursue the deposit growth in an environment where it is compressing your margins? Is this bringing in deposits that will hopefully then expand the customer base and be able to build more products? And secondarily, can you talk to how much of that growth was actually driven by your digital platform?
spk14: It's Ernie. I'll answer that question. Thanks, John. So a couple things. One, I would say, first of all, I'll do the personal and business banking side, and then I'll turn it to Nadine. But on the personal and business banking side, we have been successful in terms of growing overall deposits relative to the market. You've probably been noticing the industry has been negative in growth. We have actually had positive growth and really lead in this position. It's a function of a couple of things, the mix, the blend that we have happening between As you stated, new customer growth into the franchise, and we've been particularly pleased with what we've been seeing in our new Western markets, and that's driven through a combination of our branches and our digital capabilities, as you referred to. So we have digital capabilities that are on the BMO enterprise banking capability, and in our new markets in particular, we've been extremely pleased with how we've been performing. About 40% of our sales have been coming in through those on checking and savings accounts, the core franchise as well. So that's a big component of it, as well as our attraction factor of acquiring mass affluent customers into what we call our premier banking offer in the US that allows us to build full relationships and refer to our wealth colleagues. On the pricing side per se, we use obviously a number of tactics to be able to optimize, but what we're finding is, as you can imagine, more price competition in general in the U.S. marketplace. But overall, we're seeing the growth in our new customer base as well as just our real focus on full conversations with our customers to ensure that we're also migrating them proactively in some cases to our CD products. so that we're, at the whole, keeping our deposit franchise growing. And as I said, it is growing relative to the marketplace. And I'll turn it over to Nien to talk about commercial deposits in the U.S.
spk03: Okay, thanks, Ernie. What I would say on the commercial side is that we've had significant focus on growing deposits overall, and you see that in our Canadian balance sheet. The U.S. is a bit more challenged with the way the macro environment is there, where we see a significantly higher mix shift What I will say is that that mixed shift has been going at a decelerating pace in the last few months. And so over the last three months, month over month, we have seen a deceleration of that mixed shift, which is positive. Now with the rates where they are, I still see margin pressure on deposits. It's still a competitive environment. But I do, as Taifu mentioned, see the level of margin compression dissipating and the mixed shift dissipating, which will be a positive to the overall deposit book. In terms of where we're focusing today, One of the things I will say is that we are highly focused on simplifying our treasury business, making it easier for clients to onboard, making it simpler for our employees to sell the treasury products, creating bundled pricing, which makes it easier for clients to sign up with us, and focusing a lot more on what I'll call the emerging mid-market space. Clients with good operating deposits, sole lead relationship, strong ROE, good loan-to-deposit ratio type portfolio, And so we are allocating our resources, capital, and focus onto businesses where we can gain that kind of traction. And frankly, beyond deposits, gaining opportunities for our wealth business as well.
spk05: Thanks for the call, guys. All the best.
spk16: Thank you. The next question is from Gabrielle Deschain from National Bank Financial. Please go ahead. Your line is now open.
spk11: Good morning. I want to look at the performing loan book for a minute here, specifically the Stage 2 classification. So they were around about 11.5% of your loans were classified as Stage 2 last quarter. That jumped up to 16% this quarter. I'm just wondering what the process is and what's involved in moving loans from Stage 1 to Stage 2. I know technically how it works, but What do you do specifically? Do you think you've gone with a fine-tooth comb and identified which commercial borrowers are on the brink or whatever because of higher rates and that we should see that balance be stable from here on out? Because that's where the bulk of formations should be emanating from, right?
spk13: Yeah. Thanks for the question. So we're always making a dynamic assessment of our borrowers and even for people who continue to be paying, the assessment really is, is there a change in the credit conditions that may affect future performance? And so our risk team working with the business, as they continue to evaluate customers, both on the retail side and wholesale side, are making the determination. And then based on that, we move customers from stage one to stage two. And the impact, as you know, is you go from a one-year to a lifetime loss. So the performing provision picks that up. I think this process has been going on for the last year and a half with the rate change cycle that's happened. Both the impact of rates and inflation that affects our clients' earnings has a material impact on where final ratings might be. And so, I think this will continue. This should be a dynamic process. No change in the risk management practice as we go forward. My expectation is if we go into the higher for longer, We will continue to evaluate what that means for our clients and book provisions. And where we are today, having built for eight quarters, I think we have prudently provisioned the coverage ratios as you look through different metrics when we compare ourselves in the context of our peers. We feel very good about that.
spk11: Yeah, I guess the other question I had is last quarter you had a pretty large performing provision. on a smaller increase in Stage 2 classifications, and this quarter was a smaller increase. I get there's some netting effect going on as you release some of those because of some of those Stage 2 going to Stage 3. Are you messaging that the buildup in performing provisions is more or less done for you in anticipation of what you're seeing in the market today?
spk13: Yeah, that's a hard question because performing provisions is a quarterly decision based on many factors. And so macroeconomy and how that moves the quality of our portfolios and the size of the portfolios, all of those will have an impact on what the final number is. And as you know, while we rely on models, we also sprinkle human judgment at the end just to understand what the models may not be saying. So until we see a peak in the impaired portfolio or we see a change around in the economy, I think there will continue to be small builds. I don't know how small or how for the sizes. I don't expect releases anytime soon. But the reason we feel good about this is performing provisions are supposed to precede impaired provisions. That's why you've seen the build over the last few quarters. And over the next one or two quarters, looking at the shape and size of our portfolios, we will give you better guidance on what the direction of performing will be.
spk11: Okay, and this is the last one for Typhoon. I missed it because I was distracted, but the outlook for US PNC NIM, big compression this quarter. Can you remind me of that and what the assumptions or moving pieces are?
spk15: Yes, my comment was that the biggest impact on this quarter's NIM was the deposit pricing competition and reduced spreads for deposits, but I said that I do not expect that phenomenon, although competition will continue, that it will impact quarterly NIM as much as it did this quarter. I suspect that there is a little bit more contraction left in the US, but we probably will not see a quarter over quarter compression similar to what we just saw in Q2. So a bit more down, but more stable outlook, I should say.
spk11: Okay, good. I forgot to take my riddle in today, so I missed that one. All right. Have a good one.
spk16: Thank you. The next question is from Lamar Persaud for Cormark Security. Please go ahead. Your line is now open.
spk08: Yeah, thanks. Just sticking along the Gabe's line of questioning there, I think I heard that you guys are expecting kind of stable-ish or flat-ish NIM at the all-bank level. So correct me if I'm wrong. How do you guys get there? Because I think I heard that we should expect some pressure in domestic retail and, you know, less pressure in U.S. retail. So how do you get flat-ish at the all-bank result, or did I just hear that wrong? Thanks.
spk15: No, I mean, you did hear that we are expecting stability in our all-bank NIM, and that is largely related to the five- to seven-year rates remaining where they are today because our reinvestments are continuing to provide good support against deposit price competition. And then in Canada, the phenomenon of BAs going away is really neutral at the bank level. It does not impact the banks.
spk08: So you can see the dynamic where some pressure in the U.S. retail, less than we saw this quarter, and some pressure in the domestic business and still have flat-all banks. So then it's at the corporate level. Just help me understand those pieces, like how you get to flat at the consolidated banks
spk15: Yes, the quarter-over-quarter impact of the corporate side should provide some support for the broader bank NIM.
spk08: Okay. And then, Piyush, if I may, Gabriel is kind of going along the lines that I'm thinking in terms of his performing question there. Wonder if you could just talk about, you know, why shouldn't we see performing PCLs move materially higher, just given these trends in formations and higher unemployment and longer, higher for longer rates? Like, if I look at your coverage ratio, it's only up two basis points since the end of 2023. Sure.
spk13: So, I'd say that on the performing, again, similar to the way I answered, there's so many things that go into a performing provision. As you think about, so we've obviously considered the macro economy in our forecast. We've considered things around higher unemployment. And that's why within the performing provision, you'll see a higher allocation towards Canadian retail. We felt our coverages there need to be higher, and we've done that. So that, I think, continues as we go forward. The other thing I would say is we look at trends, and you talked about the impaired portfolio. On our impaired portfolio, we've historically had a 15 to 20 percent reservation. This quarter was a bit higher. But we look for trends with the formation of what it's telling us, and then dynamically adjust where we can in terms of allocation of our capital, of our portfolio mix. And don't forget, we also have a very large synthetic portfolio on our credit insurance outlined. And so some of the losses, as we move forward, we think will get covered also through insurance protection. So there are several ins and outs that go in. And that's why I feel we will grow our performing provisions. We just don't see it grow sizably as we had last quarter, which was really the impact of a one-time model impact as we go forward. OK, thanks.
spk08: Appreciate the time.
spk01: And just in the interest of time, perhaps I could ask operator if we could limit one question as we try to fit everybody in. Thank you.
spk16: Thank you. The next question is from Nigel D'Souza from Everitus Investments Research. Please go ahead. Your line is now open.
spk07: Thank you. I just wanted to quickly follow up on impaired provisions. And last time you had significant impaired formations. I think you mentioned a loss rate of 12% around there, and you mentioned it's higher. So this quarter, so any details on what the loss rate was? This quarter, it looks like you're seeing higher loss rates in manufacturing, retail, trade, and commercial real estate. Given the context that the macroeconomic environment has not deteriorated substantially and policy rates have not changed, what's driving the increase in loss rates?
spk13: Yeah, so there's a couple of factors that go in. There's obviously client behavior. And so as you've seen supply of credit change, especially in the U.S. with what's happening with the regional banks, refinancing for many of our clients gets more limited. And those who had postponed refinancing, hoping rates will come down sooner, are finally, they have to hit a maturity while they're coming to us. So we work with these clients extensively. In fact, that's a huge relationship trade for us is working with our clients over cycles. We continue to do that. In the impairment provision rate, which I was answering in the previous question, which is in the 15%, 20% range, it can move around a bit depending on the cycle or the sector that's in the impaired book. Transportation finance, I said, was higher. We had a large CRE loss. We also had a large capital markets loss. And so when you've got larger cash though unsecured, you may have a higher loss in that quarter. But at the end, it's such a diversified book. There's no concentrations that come up that I feel pretty confident that going forward, the trends should come back to where we've been over the last few years.
spk07: And sorry, just to follow up on a point you made there on the extension of maturities in commercial real estate, the 2023 maturities we know across the industry, All of that was extended to 2024, and we haven't seen the rate cuts provided relief. So could you just provide us some color on how active BMO has been? You mentioned your special accounts management team, but how active have you been in renegotiating, modifying, or extending maturities over the last year? And what could the impact from that actions be going forward in terms of maturities in the pipeline?
spk13: So you'll see that in our watch list. You'll see that in our embed formation. Commercial real estate-impaired formations are still, I would say, compared to the market, lower, so we've actually done better. But we haven't taken our eyes off it. We've said in calls before, we've looked at every large loan in the office space, which is where most of the stress has been in the U.S. market. And we only have a handful, and we've been working with our borrowers. In fact, over the last few quarters, several borrowers have refinanced, several the loans which we had on our watch list were paid off and the one large loan this quarter where we've taken the impairment I've also added that I'm confident over the next few quarters as we work with our sponsors and buyers and we may get a partial recovery even on that now there is stress in the sector you read about this but it again it depends uh city to city property to property and again the assessment has been very good we continue to reappraise so This is going to continue, and we'll keep reporting back to you as you see through our results on any of these events.
spk16: Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
spk06: Good morning. I want to take the credit position, credit question, but maybe from a more positive perspective now. It's been my experience over the years that BMO has, in the past, impaired PCLs a little sooner. taken some pretty big provisions, and then a year or so later, we get these really unusually outsized recoveries that continue for some time. So the nature of my question is this. Has anything changed relative to the past in BMO's impairment disciplines, provisioning disciplines, or is there anything different about this cycle that would cause us to rethink that historical trend, the trend where elevated provisions, elevated impairments relative to peers, and then elevated recoveries a year or so or two years later.
spk04: Yeah, Mario, it's Daryl. I might try and help you with that, and while I have the mic operator, I think what we'll do is we'll extend the call for five more minutes because we've got a few people in the queue, and I'll ask people to try to stick to the one question, and I'll ask my team to try to stick to quick answers so we can get to all of you, and I'll try to lead by example here. So, Mario, I think the short answer is no, nothing has changed. Our appetite hasn't changed. Our underwriting practices haven't changed. The composition, particularly in the wholesale side of the business, where, as we told you before, 90% of the relationships are sole or lead relationships, haven't changed. So our ability to work through as opposed to be at the end of the line in credit negotiations as we work out is, in the end of the day, advantaged relative to some, I would say, and to your question, unchanged. Now, I can't necessarily extrapolate that and say that that will result in accelerated recoveries as compared to others. As you point out, that has happened in the past. It might happen, but what I can tell you, and I've sat around this table for a long time looking at these cycles, is that the way we approach recovery the business, the way we're looking at the diversification of the business and where these particular impairments are coming from right now isn't a particular surprise relative to prior peaks and valleys that I've seen. And so the scenario that you outline is certainly possible. I can't go so far as to say it's probable, but it's certainly possible because there isn't anything underlying that's suggested otherwise. Is that helpful?
spk16: Thank you. The next question is from Mike Rezenovich from Keefe, Brouillette, and Woods. Please go ahead. Your line is now open.
spk18: Hi, good morning. Just a quick one for Piyush. Just not sure if you can delineate or if there is a difference at all, but have you seen more noise from existing legacy relationships, longer-term relationships in that commercial lending book versus the new ones that you would have acquired a few quarters ago with Bank of the West? Just trying to understand if there's a specific source in terms of client base between legacy and new clients that drove that PCL to more than double in the quarter sequentially?
spk13: Yeah, Mike. No, thanks for that. The short answer is no, just in the interest of time. I'll just add one more sentence. We've actually fully integrated Bank of the West. It's one BMO portfolio. And so we look at it end-to-end like any other practice. All of our policies, processes, everything is the same. But Going back to the beginning, it's the same U.S. performance across Bank of the West and our legacy book.
spk16: Thank you. The next question is from Darko Mihalic from RBC Capital Markets. Please go ahead. Your line is now open.
spk17: Hi. Thank you for fitting me in, Piyush. I'm going to follow that same line of questioning from Mike, but I'm going to do it a little differently. When I compare your impaired experience in the quarter versus your U.S. peers is worse. And so possibly there's a timing impact here, meaning your quarter ends in April and the U.S. banks ended in March. So part of this perhaps could be explained if there were a lot of files that went impaired in April. And then secondarily, when I compare you to TD, where there is no difference in timing It's also significantly more impairments, which perhaps may not necessarily see Bank of the West, but might suggest Midwest to the west coast of the U.S. of A. So I wonder if you can just comment on whether or not those observations lead to that conclusion that there were a lot of impairments in April from the Midwest out to the west.
spk13: Darco, thank you. I wouldn't say it is a Midwest or a California or any other geographic question. If I were to just peel it back for you on the US commercial side, there are two or three big, or the US side, there's two or three big reasons. One is you've got to back out the idiosyncratic loans. Like the larger files are not a regular feature. They'll come idiosyncratically, which is exactly what happened. So that's one piece. We've never lost money. I would say never. close to almost never on the financial sector, and this is the one loan we had in capital markets that was large. Second is within our wholesale book, we have the transportation business. That's a very cyclical business compared to the rest of the industry. It's much more, I would say, small truckers, less than 10 when you compare the small business delinquency index in the U.S. and compare our performance. Not only have we been better than the delinquency index, we are better over 40 years, And so I think this quarter, we took the higher impairment on that. We feel good about that performance because with the summer, tonnage is picking up, freight trade shall move up, and I think as supply goes down, this should do well. And then the third is you've got borrowers in different sectors that were just, you know, with higher leverage who were feeding the heat from inflation and then the higher interest rate coming to us and working out a solution, and so that's why it's a little bit more this quarter. This may, like I said, continue if rates don't change, but there's nothing unique, I would say, on the overall portfolio that is system-wide. It's just these one-off events that add up to our U.S. performance. You know, on the other side, momentum is really good. Risk appetite continues to be strong, and I think Nadeem has touched on this, where if I look at pipelines and activity, I actually think, you know, both loan growth and client engagement will result in just a better overall mix of revenue to overcome these losses.
spk16: Thank you. The last question is from Paul Holden from CIBC. Please go ahead. Your line is now open.
spk00: Thanks for making the time. I want to ask a question quickly on your US mid-market private equity lending business, if that's adding any noise to the impairments, and then two, if that's adding any noise to the revenue lines for those mark-to-market positions, I guess the LP positions you take in some of those funds. Thank you.
spk13: Yeah, so we've got a very good, strong presence with our private equity partners. The private equity, I think you're referring to the call program or the sponsor fund lending has been an exceptional strength, so I don't see any losses from that. That's not the impairment. You know, there'll be small names of operating companies that we take very granular positions in. Those, you know, are part of the regular higher risk profile that we've always known. But in general, I think it's the market activity is muted on the revenue side. Let me hand it over to Nadeem because I know we have a regular discussion on pipeline, and the pipelines are very rich, and some of those are probably waiting for the election cycle in the U.S. Nadeem?
spk03: Yeah, thanks, Piyush. I would just say activity has been muted, so that's definitely dappened or ability to grow within that space. But we are seeing as capital markets activity is increasing, we are seeing M&A starting to increase. There are M&A transactions waiting for the election to see if policy changes will change their mind about the transaction or not. So things are delayed for a little bit longer, specifically in the U.S., than we'd like it to be. But to your question, no, we haven't had significant FMV-type losses in that book that are contributing to the numbers you're talking about.
spk16: Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Darrell White.
spk04: Okay, thank you all for your questions. I'll just close by saying that we remain confident in the growth opportunities across our businesses and importantly, as I said earlier, the power of the integrated North American franchise. We're clearly building competitive advantages in a highly fragmented U.S. market. Our strategy isn't changing and we are poised to press those advantages. So thank you all for your time today and we look forward to speaking to you again in August. Thank you.
spk16: The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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