Q4 2019 Earnings Call
All participants please standby you're meeting its about should again.
Please be advised that this conference call is being recorded.
Good morning, and welcome to that'd be a no financial group's Q4 2019 earnings release and conference call for December Threerd 2019.
Your host for today, if Smith gel hung up head of Investor Relations and some of that please go ahead.
Thank you good morning, and thanks for joining us today, our agenda for today's Investor presentation is as follows we will begin the call with remarks from Darryl White, you know CEO , followed by presentations from Tom when the banks, Chief Financial Officer, and Pot Cronin, our chief risk Officer, Daryl will then provide some outlook comments before we move onto the question and answer pure.
Yet we have with us today Cam Fowler from Canadian PNC, and Dave Kasper from U.S.P.M.C., Dan Barclays here for BMO capital markets, and Joanna Rotenberg, a tier for female wealth management. During the question. After a period, we will take questions from prequalified analysts to give everyone an opportunity to participate please keep it to one question.
On behalf of those speaking today I note that forward looking statements may be made during this call actual results could differ materially from forecasts projections or conclusions in these statements.
I'd also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall bank management assesses performance on a reported and adjusted basis and considers both to be useful in a sustained underlying business performance Darling, Tom will be referring to adjusted results in their remarks unless otherwise.
Noted as reported additional information on adjusting items, the banks reported results and factors and assumptions related to forward looking information can be found in our 2019 annual report and our fourth quarter 2019 earnings release without that I will hand things over to Darryl.
Thanks, Joe Good morning, everyone and thanks for joining us today.
This morning, we announced earnings for the fourth quarter of 1.6 billion and earnings per share $2.43. Both up 5% from last year, we delivered bank wide Preprovision pretax earnings growth of 11% in the quarter with positive operating leverage in every operating group.
Earnings per share for the year of $9.43 were up 5%, reflecting good revenue and income growth across our North American platform.
2019 was a year of strong and consistent delivery across our businesses with significant progress made against our strategic priorities revenue growth grew 6% P.P.P.T. earnings were up 7% and expenses.
We're well managed.
As expected expense growth in the second half of the or moderated significantly with expenses growing adjusted 2.6%.
All of our businesses are working hard to achieve their priorities.
Canadian PNC ended the year with a particularly strong quarter with excellent loan and deposit growth in both our personal and commercial franchises in commercial we're maintaining a dominant position with a strategic focus.
Having added targeted capacity that is driving incremental return.
We're winning on value through expertise on understanding of our clients' needs without sacrificing on our long term strategy of growth through diversification and prudent risk management.
You asked PNC continues to benefit from the same strategy as a top 10 commercial lender in the United States, We have a strong brand and offering an unparalleled understanding of client needs and the ability to compete effectively in every market.
We're building relationships for the long term with a strategic focus on continuing to diversify our revenue mix, which includes an increasing contribution from our treasury and payment solutions business and enhancing our return on equity.
Our U.S. personal business has long been the foundation that enables our commercial business to expand and grow today that personal business is successfully growing its deposit base with the same commitment to diversification in long term performance. We've opened deposit accounts in all 50 states digitally and in 2019.
Almost half of our U.S. deposit growth came from outside of Illinois, and Wisconsin up 10% from the prior year.
In wealth management.
We have clear momentum and key businesses that positions us for enhanced profitability going forward in our unified private wealth business. We grew our client base and deepen relationships delivering record levels of net new assets and our full service brokerage strong loan and deposit growth in private banking and significant gains in client loyalty.
We have a strong track record of providing award winning products and services, including recognition in the 2019 Thomson Reuters Lipper Fund awards for for remote EPS in Threed being on mutual funds and we continue to lead the Canadian ETF market in overall market share and in net new asset growth.
Capital markets had a good year in an environment that was mixed for many industry players revenue was strong with good contribution from our Kgs Alpha acquisition, but also reflecting the strength of both our businesses and geographic diversification.
At Investor Day, we set a five year target for revenue from our U.S. business to reach 45% to 50% of total capital markets, which we achieved in Q4 and in 2019.
Our overall U.S. segment continues to deliver above expectations. It now represents 34% of the banks total net income up from 28% in 2018 and 24% in 2017.
This is another target we achieved ahead of our expectations, having made good strategic choices in a favorable environment U.S. segment earnings increased 23% in 2019, followed by an increase following an increase of 27% the previous year.
Today, the U.S. segment is more broad based than ever with contributions across all businesses as they work together to provide a fully integrated client offering.
And all of our businesses, we continue to strengthen our competitive position, including allocating resources to the areas of highest earnings potential and performance as well as accelerating our delivery against priorities and simplifying the way we do business.
Now, let me turn to the restructuring charge, we announced today.
This was a decision that was made with serious consideration and it is entirely in line with our strategy and priorities that we've communicated.
All areas of the bank contributed to the charge and there will be ongoing accountability throughout the organization for the decisions that have been made.
The charge is one of a number of initiatives that will help us reach or efficiency target of 58% in 2021, while continuing to optimize efficiency beyond that without the need for additional charges.
We're seeing good energy and determination across the bank in reaching that objective and we've already made significant progress having improved our efficiency ratio by 410 basis points since 2015.
We ended the year with an efficiency ratio of 61.4%, even after absorbing the severance expense and capital markets with increasing momentum into the back half of the year as evidenced by our efficiency ratios of 59.9% and 60%.
Last two quarters.
On an underlying basis net of the capital market severance operating leverage for the year was 1.9% in constant currency.
All groups are contributing to our steadily improving efficiency performance.
Canadian PNC ended Q4 below 47%.
US PMC continues to better its efficiency ratio with a 470 basis point decrease over the last two years wealth is also showing improvement while capital markets remains committed to its investor day target target of a ratio below 60% by 2023.
Well efficiency is an important focus for us it will not come at the sacrifice of investment.
We continue to make significant progress and digitizing our bank.
Demo employs an innovative model where business and technology are completely integrated through our chief information officers. It's a model that drives efficiency, while also encouraging collaboration and a culture that embraces the benefits of technology across the organization.
The result.
His success stories like BMO quick pay.
An offering that allows customers to pay their bills by email through the use of machine learning capability in optical character recognition.
A quick pay recently won the top digital Innovation award at the banking Technology Awards.
And another example, our online business banking platform now offers on the go authentication and approval with our mobile App and biometric I'd implementing a faster and more agile infrastructure.
This feature was awarded a 2019 impact innovation award from the I take group.
We also support innovation in our partnerships.
Recently, we announced the donation to the University of Toronto for a first of its kind program that integrates artificial intelligence with humanities.
This will enable us to better prepare our workforce for a future where companies when when they melt the best of technology and human creativity.
One of the keys to driving that creativity is our commitment to placing diversity and inclusion at the heart of our interactions with our customers and our employees.
This month, we introduced the true name feature on BMO Harris, Mastercard debit cards, meaning transgender and non binary people can now use their true name on their cards without the need for legal name change Bema was the first bank to issue cards under this groundbreaking initiative.
Reinforcing our status as a truly North American Bank. We recently received the American Chamber of Commerce in Canada is true North Social impact Award.
This award recognizes the banks meaningful social contributions across North America over the past year.
Our work with the United way in both Canada, and the U.S. is proof of this engagement, we recently announced our support of the merits Chicago's economic development plan with the first corporate donation through the United ways neighborhood Network initiative.
This donation builds on the groundbreaking community partnership work that we've already been doing with the United way of Greater Toronto.
As always our team is United in our commitment to be the best and strongest we can be for our customers our communities and our shareholders to reflect our simple powerful statement of purpose to boldly grow the good in business and in life.
And now I'll turn it over to Tom to talk about the fourth quarter.
Okay. Thank you Daryl and good morning, everyone. My comments will focus on the fourth quarter results and we'll start on slide nine.
Q4 reported EPS was $1.78 and net income was 1.2 billion.
Adjusted EPS was $2. Some 43 cents and adjusted net income was 1.6 billion both up 5% results in the quarter reflect good performance in our flagship PNC businesses and positive operating leverage and all groups.
Pre provision pre tax earnings growth was strong at 11%.
Lower income growth of 5% reflects higher credit losses, and a lower tax rate given a recovery last year.
Adjusting items. This quarter include a restructuring charge of 357 million after tax related to severance and a small amount of real estate related costs. The charge reflects a bank wide focus on accelerating the delivery of our agenda, including improving efficiency.
Initiatives underway are focused on digitization organizational redesign and simplification of the way, we do business the charge will impact approximately 5% of our workforce.
We expect our initiatives to drive expense savings of approximately $200 million in fiscal 20 and to achieve run rate savings of approximately 375 million by Q1 of 2021.
Adjusting items. This quarter also include a 25 million dollar after tax reinsurance adjustment, which I'll speak to later.
Adjusting items are shown on slide 26.
Turning now to revenue.
Net revenue of 5.8 billion was up 5%, reflecting good performance in our PNC businesses and to increases in wealth management and capital markets.
<unk> expenses increased 1%, reflecting higher technology and employee related costs, partially offset by lower premises expenses.
Operating leverage for the quarter was good at 3.8% and positive as I said earlier in each of the operating groups.
One reminder, related to the first quarter of next year in Q1 of each year, we expense deferred compensation granted to employees were eligible to retire. We expect we expect this number in Q1 to be roughly in line with the Q1 2019 expense of 115 million.
Moving to slide 10 per capital the common equity tier one ratio was 11.4% unchanged from the prior quarter.
Retained earnings growth, which absorbed and 11 basis point impact from the restructuring charge was offset by higher risk weighted assets the higher risk weighted assets in the quarter were driven by business growth.
Today, we announced an increase to our quarterly dividend of three cents per share to a dollar and six cents up 6% from last year.
As you know there are some changes coming in the first quarter fiscal 2020 that will impact the CE tier one ratio, we expect the adoption the buyer for 16 and changes related to credit risk and the securitization framework to have a combined impact of 10, sorry, 15 to 20 basis points on RCT one ratio in Q1.
Moving to our operating groups and starting on slide 11.
Canadian PNC had a very strong quarter with net income of 716 million up 6% pre provision pre tax earnings growth was strong at 10%.
Revenue growth was 7% driven by higher balances higher margins and increased non interest revenue.
Total loans were up 7% with commercial loans up 16% mortgage growth through proprietary channels, including amortizing Kellogg's was 5% deposit growth continued to be robust at at 13%.
NIM was up four basis points from last quarter, reflecting positive product mix changes and the benefit from rates.
Operating leverage was strong at 2.7% and the efficiency ratio improved to 46.6%.
Moving to U.S. PMC on Slide 12, my comments here will speak to the U.S. dollar performance.
Net income of 305 million was up 4% pre provision pre tax earnings growth was good at 9%. The difference in these growth rates, mainly reflects a low tax rate last year given a recovery.
Revenue growth was good at 4%, reflecting balanced growth net of lower net interest margin.
Average loan growth was 13% with commercial loans up 15% and personal up six deposit growth continued to be strong at 13%.
Net interest margin was down 11 basis points from last quarter due to lower deposit margins as a result, the feds interest rate cuts.
Expenses were well managed and relatively unchanged from last year investments in the business were largely offset by lower premises costs and an ongoing focus on efficiency.
Operating leverage was strong at 3.4% and efficiency ratio improved to 57.1%.
Turning to slide 13, BMO capital markets net income was 220 280 million for the quarter. The U.S. business continued to deliver strong performance with net income of Usninety $4 million up 60% from last year, and representing 45% capital markets earnings in the quarter.
Pre provision pretax earnings were up 5% from the prior year.
Revenue growth was up 4% with investment in corporate banking revenue down slightly from last year and global markets up 9%.
Expenses increased 3% in the quarter.
The provision for credit losses was $40 million compared to a small recovery last year.
Moving to slide 14 wealth management net income was 301 million up from 220 month 229 million last year.
Additional wealth net income of $246 million was up 22% from last year benefiting from higher revenue, including the impact of a legal item last year.
Average loan growth was strong again at 14% and deposits grew at 12% as we continue to diversify our product mix.
Insurance net income was 55 million up 28 million from a relatively low level last year.
As mentioned earlier adjusting items. This quarter included $25 million after tax net impact from reinsurance claims related to Japanese typhoons that were incurred after our communicated decision to wind down this business.
<unk> expenses were down 2%, reflecting blow trends expenses in the current quarter and a legal provision a year ago.
Turning now to slide 15 for corporate services. The net loss was above trend at 94 million compared to a net loss of 65 million a year ago results decreased primarily due to lower revenue, excluding teb, partially offset by lower expenses.
To conclude the fourth quarter performance demonstrates good momentum in our businesses and the benefits of our diversified business mix heading into 2020, we're focused on continuing to execute on our consistent strategy to to grow our north American business build customer loyalty leverage technology and drive efficiency and with that I'll hand, it over to.
Pat.
Thank you Tom and good morning, everyone.
Starting on slide 17, the total provision for credit losses, this quarter was $253 million or 23 basis points, a decrease of five basis points from last quarter.
Both provisions unimpaired and performing loans were lowered this quarter compared to the prior quarter with PCL impaired loans down $12 million and provisions on performing loans decreasing $41 million.
Turning to the credit performance in the businesses Canadian consumer impaired loan provisions decreased $23 million quarter over quarter to $110 million the improved Canadian delinquency rates disclosed in the supplementary financial information package also supports what we're we're seeing as continuing good underlying.
Buying loan performance in the Canadian consumer portfolio.
Canadian commercial PNC unimpaired PCL on impaired loans at $24 million is also down from the prior quarter, reflecting a constructive credit environment across most of the portfolio.
You asked consumer PCL and impaired loans was $17 million up from a low result of $8 million last quarter, but well within our expected range for this portfolio.
US commercial PCL and impaired loans decreased slightly from the prior quarter to $49 million, reflecting the stable credit performance that we saw across most of our commercial portfolios.
Capital markets, PCL and impaired loans was $32 million. The large majority of which was an oil and gas mostly related to three accounts.
The preferred the provision for credit losses on performing loans was $22 million a decrease of $41 million from the prior quarter. The decrease from the prior quarter reflects somewhat more positive macroeconomic variables and modestly lower balance growth versus Q3.
Turning to slide 18 formations were $799 million as an increase in business and government formations was partially offset by a decrease in consumer formations.
The largest increase in formations wasn't manufacturing across a range of sectors and geographies with no specific theme.
While oil and gas formations were also up from the last quarter with a few names driving most of the increase.
Oil and gas gross impaired loans ended the year at $404 million of which over 90% is based in the U.S.
Our risk approach in the U.S CMP spaces to lend conservatively against proven reserves and that is protected us well against losses in the past additional details on our oil and gas portfolio can be found on slide 23 in the appendix.
On gross impaired loans, our ratio of compared to total loans was 58 basis points well within our normal range.
We continue to see high levels of impairment in the us agricultural portfolio. However, given the relatively small size of the us AG portfolio at $2.1 billion and the fact that much of the impaired loans are collateralized by land, we remain comfortable that loss rates in this segment will be modest.
Our Canadian agricultural portfolio continues to experience low levels of impairment.
Slide 19 provides an overview of our loan portfolio by consumer product and industry overall portfolio growth was 1.6% quarter over quarter consistent with our comments earlier this year that loan growth would moderate.
Looking back at the full year provisions on impaired loans were $751 million or 17 basis points, which included the benefit of some larger recoveries in Q1 in Q2, reflecting the strong efforts of our loan workout team.
Rate of 17 basis points compares to a full year rate of 18 basis points in 2018.
Provisions on performing loans were $121 million in the year, which was within our expectations given loan balance growth and changes in scenario weights during the year.
The performing loan provision raised a total losses to 20 basis points for the full year at the low end of past guidance.
The performing loan allowance on the balance sheet increased to $1.6 billion in the year, providing 2.1 times coverage of our trailing four quarter impaired losses, confirming that we are prudently reserve.
You will note that in our annual disclosure, we've added a moderate downturn scenario to provide a view of potential credit performance during a more modest recession compared to that in the adverse scenario.
Looking ahead to the next year based on the current economic forecast and our outlook for loan balance growth. We expect to continue the look the loss rates of recent quarters with a total PCL rate in the low to mid twentys subject to some quarterly variability I will now turn the call over to Darryl.
Thanks Pat.
Looking ahead to next year, we are going into 2020 with confidence and good momentum in our businesses.
It's a general balanced optimism that shared by our clients in fact in the past couple of months. Many of them have expressed more confidence to me on general outlook than they did several months ago.
We expect the opportunities they're seeing in this somewhat more stable environment will support their propensity to continue to invest and build for future success.
In Canada, we expect macro economic conditions to remain constructive in 2020, improving modestly from 2019 was stable interest rates and unemployment running at a four decade low 5.6%.
In the US we expect economic activity to slow modestly in 2020 in response to trade protectionism.
With three interest rate cuts in the past four months lower interest rates should provide support to the us economy in 2020.
We intend to continue to grow by taking market share in this environment.
As we've said before we anticipate that commercial loan growth will moderate somewhat from the growth rates that we've seen for some time, both in Canada and the use.
On credit quality as you've just heard from our chief risk Officer, we're confident in the strong credit quality of our portfolios and we expect to see relatively stable credit environment in 2020 with Pcls in the low to mid Twentys.
Overall, while we anticipate some revenue headwinds in 2020 in a few areas, including absorbing the full impact of three us rate cuts in the early part of the year. We will continue to grow our business and we will maintain disciplined expense management targeting overall expense growth around the 2% level for the year with each.
Of our operating businesses working to deliver positive operating leverage.
Our financial objectives remain unchanged our goals over the medium term our to achieve average earnings per share growth of 7% to 10% return on equity of 15% or more and an annual net operating leverage of 2%. While some of these targets maybe more challenging in the current environment, we remain committed to them in longer term.
Yeah.
Our capital position remains strong with a CPT one ratio of 11.4%, we're well positioned to support our long term performance, while staying alert to opportunities for growth.
To conclude I'm very proud of what we've accomplished in 2019.
We've made good progress on our strategic priorities and I feel good about the clear momentum we have going into 2020, we have energy resilience and focus we see growth potential across all of our businesses.
We know where we're heading and we're accelerating how we'll get there.
By intensifying our focus on areas of competitive strength, we will continue to grow long term value for be most stakeholders and now I'll turn the quarter the call over to the operator for the question and answer portion of today's presentation.
Thank you we will now take questions from the telephone line.
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The first question is from Meny Grauman with Cormark Securities. Please go ahead.
Hi, Good morning, I wanted to ask about the restructuring charges, specifically, if you could talk to how you decide to take restructuring charges and.
Specifically I'm wondering when you took the Q2 charge in capital markets with the plan to take this Q4 charge or did something change in your outlook in what was that.
It's Tom I'll take that thanks for the question.
So the.
Firstly deal with your question around the Q2 capital markets charge. When we took that charge we were not expecting the fourth quarter charge that we took and as you know we absorb that charge within the capital market results and the way we think about it. This Q4 charges different in that it reflects that bank wide program to as we've said.
Accelerate delivery of our priorities, including improving efficiency. So when we're doing things on a bank wide basis.
Of this magnitude we take the approach that we've taken to putting the charge in corporate and adjusting.
In answer to what might have changed or shifted as we thought about the year. We were in and then look forward to next year.
We wanted to be in a position to continue to drive the efficiency and although we feel very good about our relative momentum and we feel good about our ability to grow next year in a couple of places there will be a little bit of pressure and too I would say offset or more than offset that we wanted to be in a position to drive very low expense growth and Daryl.
Talked about the target of 2%, which is what we're shooting for in the charge is an enabler of that and an enabler of us achieving the mid term efficiency target that we've set of 58.
Just as a follow up when you talk about the pressure that your first is that primarily margin pressure is there something on it.
No the margin pressure in the us.
It is a part of it and.
You saw that in the U.S. PNC margin in the quarter Theres, a little more that will roll through next quarter.
And GDP growth for the US is projected to be down slightly next year, our economists actually have Canadian GDP up next year compared to 19, So we're not expecting a big shift in the environment, but there are pockets of pressure and again, we do feel good about our ability to continue to outperform which we do think we've done in both of our PNC.
Businesses in particular over the last several quarters.
Thank you.
Thank you. The next question is from a deeper all the Shane and with National Bank Financial. Please go ahead.
A quick follow up on the restructuring charge.
But the cost savings that you're expecting.
Give me a sense of how that's going to move split across segments, where we have a few.
Got a follow up on your with loan growth.
So it's Tom Thanks for the question.
I guess I'd say, it's a it's a bank wide.
Focus and set of initiatives as we've talked about and so I would expect the savings that we've talked about to flow through each of our businesses in a fairly representative way and.
It's fair to think about that both by operating group and by geography.
And.
So it's true on on both dimensions.
All right.
Question on the life of loan growth in the you with his.
Teams for few quarters now on the.
Good thing to see.
People are growth, but on the other hand that.
You know.
Generate some concern would have.
Brought out a bar brought upon additional risk through the bank.
Growth versus the other three of them I'm looking at the oil and gas portfolio is one of the drivers in the past few years phenomenal growth in our sort of a few losses.
Hopefully you can.
Help me.
Frame.
Oil and gas growth and some of the credit issues, we're seeing today.
Sure its patent that thanks for the question I'll speak specifically to oil and gas the growth has been strong over the course over the last couple of quarters I think you'll see that the growth actually is starting to moderate or in this quarter and we would expect that to be the case going forward. The thing we like from a credit perspective in this segment, particularly in the US is that most.
That lending is reserve based and you look at the U.S., particularly the U.S. exploration development segment of the portfolio, 99% does that segment would be reserve based lending and so we would land pretty conservatively with fairly reasonable Len loan to value against proven reserves and so we think that actually Brad.
Protects us quite well in a downturn and so even though you might see formation rates in jail rates are higher in this segment.
We expect to provision for loan losses to be reasonably low so you'll see the PCL. We took this quarter relative to the formations you'll see it's a rate of around 15, 17%, we're pretty comfortable with that profile as we grow the book, it's a sector that we think we have a north American and arguably a global franchise. So we re.
Really have good lending standards and good bankers in the segment we've been in it for a long time, we understand how the cycles work and we're good at work out so we're pretty comfortable with the growth rate, especially given the secured nature of the of the lending that we do there.
This is Dave let me just add a little bit to your question on the us loan growth, which on the commercial side would not include oil and gas, but that was high and I think you mentioned, 15% I would expect.
In the next year that it would moderate from that the growth has really come from adding new customers throughout the United States, where we still have a lot of white space.
We have not been in any way.
Compromised on risk appetite that we've had it continues to be the same and I'm very comfortable with the growth we've had but I would expect just for similar reasons, we talked about before would be some moderation in 2027 help.
Thank you okay.
Thank you. The next question is from John Aiken with Barclays. Please go ahead.
Good morning, Pat just carrying on from given his question we've seen the gross impaired loan ratio ticking up now I understand I completely get with the underlying security. How you can have provisions falling when when formations are going up but there's been a trend for the last three four quarters, where we've seen greater amounts of formations how comfortable.
Are you did this is going to ease off for expectations that we're going to see continued impaired formations going through for 2020 out of similar pace.
Sure and thanks for the question and I think we've been flagging for awhile that we would have we we expected the impaired loan and the band the PCL rate to drift up really from really benign level that you would have seen in 2018 and 2019 I mean, if you look back at Q4 18, the gross impaired loan rate in the portfolio was the lowest we saw.
In a decade and so there's like just logically going to be some upward drift in that at 58 basis points just to put that into context for you. The average Yale rate over the past three years was 56 in the past five years was 59, so I actually see that rate in more or less than normal zone.
For for where we are in the cycle I'll split it though into two pieces consumer I would say is actually quite strong.
Wholesales, a little bit towards the higher end of the range and as we've noted that's really being driven much more by some sector specific issues related to oil and gas and agriculture. Those two sectors make up 40% of our total gross impaired loan portfolio right now.
As we've talked about in the past, we expect loss rates to be low there because the oil lending has secured against reserves on the AG lending has secured against land. So im not uncomfortable with where we are I think we've been expecting a drift upward in the loss rates and I would expect it to stabilize at this level going forward given the fair.
The stable economic environment that we're seeing.
And fairly modest Yale rates and many of the other sectors that that we're growing in business and government.
Thanks Pat.
Great I mean, when we take a look at the U.S. business formations I understand that you can take a look at oil and gas and even.
On the AG side as being a little bit more.
I guess specific but we actually are seeing inflation in some of the others like manufacturing, even though you said it was broad based is the fact that we're seeing hotspot sandoz varying to varying degrees and difference.
Segments is this concerning or are you still quite confident that.
Thank you said leveling off in 50, 55, 40 50 basis points is expectations going forward.
Yeah, I would say it's not concerning.
Deal with manufacturing specifically because that was one of the bigger formations this quarter.
Formations as I'm sure you've seen in the past can be quite lumpy and if you look at manufacturing in particular, you look back at formations NGL rates over the course of the last two years, you'll actually see they've been running low including even in Q3 of this year. So this is quite specific to this quarter and this to me reflects the normal lumpiness that you see in a big second.
Segment like manufacturing that really reflects four names.
One in Canada, three in the US no theme to them from completely different sub sectors. So if your question as I am I seeing systemic themes within the portfolio reflected by those kinds of formation rates. The answer is no.
Great. Thanks pedal ritu.
Thank you. The next question is from Steve scenario with eight capital. Please go ahead.
Thanks, if I could just start with a follow up on capital.
Tom.
Based on year end in the 15 to 20 basis points of headwind it looks like for.
Excuse me Q1, it looks like you could be with normal accretion you could be below that 11.5% level through much and maybe all of 2020. So wondering is there anything you're looking at are aware of that might provide some upside to the C. I guess I'm asking in the context of prior indications that the buybacks on pause here until you get above 11 and Uh huh.
Yes so.
Few things.
In Q1, we will have as others will.
The adjustment so our impact for that is in the 15% 20 basis points level.
And we talked normally about the ratio going up by 10 to 15 basis points per quarter that continues to be our expectation and as we've said for the last few years, given the strong commercial and corporate loan growth. We've had were more likely to be at the lower end of that range. Then the upper end of the range.
In terms of buybacks.
The.
Focus on that from our perspective goes up I'd say as we.
Approach the 11 five ratio on this one.
And so as we look forward, there's some potential for activity in the middle ish of the year.
And exactly wherever land will be a function of the loan growth that we've got but.
We think theres a reasonable chance that mid this year could be Q2 could be Q3, theres some activity under the buyback as we approach had 11 five level.
Okay. That's helpful and then.
I did want to ask on the U.S. capital markets very strong even with the oil and with the oil and gas provision. If we look through that credit charge. It looks like earnings would be in US dollar terms, well over 100 million pretty close to double run rate from last year. So just.
Dan or or Tom maybe you can talk a bit about the sustainability, there and how much of that lift is due to the kgs acquisition. This year.
Well, thanks for noticing that yes, we had a very strong performance in the U.S. This year as we've talked about for a while we've been making good investments in people add in the Kgs acquisition.
So the that platform will be scalable and allow us to continue to grow.
I think as we looked at at this year, we wanted to get.
Over the next five years somewhere between 45, and 50% of our revenues out of the U.S., we've achieved that target now.
And our bullish that we can increase beyond that.
We are working towards or other targets to double market share as we go forward and so all of those are building to what I think as a relatively robust us outlook and very sustainable from where we are today.
Okay alright, thank you.
Thank you and the next question is from Robert Sedran CNBC capital markets. Please go ahead.
Good morning, I, just wanted to start with a follow up on the restructuring charge and its I guess for Daryl I mean, you mentioned.
This is probably the last one.
But there has been one every year for a number of years I'm curious what gives you the confidence in what should give your shareholders that confidence that this is truly the last one for the foreseeable future yes. Thanks, Rob.
It's a good question, let me give you a little bit context, if I go back.
Over the last couple of years, you'll have noticed that I've been asked and some conferences.
We take another charge.
And my response has been we don't know, but if we do it's very probable that we will say that we will not need to do it.
In the foreseeable future so thats exactly what we did today.
And unpacking that when I think about your question.
A few things that are going on that are different. The first is as you've seen. This is a this is a sizable move this is 5% of the banks global population that's in scope.
The second is you heard me say and you heard Tom say quite clearly we're holding the line a lot more tightly in the normal course on expense growth you saw us at 2.6% expense growth in the third and fourth quarter of this year that was not benefiting from this restructuring charge. So we're we're on a new path as far as a continuous improvement.
The operating efficiency of the bank and this charge is designed to accelerate.
Add path as we go forward and.
And it's also the case, Rob that if you think about the management through the spine of the organization.
And you look to the discipline that we expect from managers and this is I would say an important change in terms of how we're looking for people to make operating decisions every day, we're looking for people to invest in areas, where we have opportunities for growth and slow down in areas, where we don't without reliance on this this technique in the assist.
Have a charge and so thats, a very sort of clear message to the entire organization in terms of how we expect to manage ourselves going forward. So when I put all those together in addition to the real benefits that were starting to see from technology and Digitization. We're confident in telling you that will retire this play from our playbook.
Okay. Thank you and just a quick question for Cam I guess the margin has been up four basis points in each of the last two quarters I can't imagine that that is the rate environment. So is it business mix or is there something else going on and how sustainable do you think this level of net interest margin is for you.
Well I'll I'll take both camps speaking, it's a it's a combined effective mix and some flow through of the longer rates, primarily on the mix side, though you can see you can see the deposit growth in there and where we're seeing growth in other areas.
They are in the higher margin areas that we've not been a good in particular in cards. So that with commercial lending I think is helping with respect to outlook I'd say, we sustain that it will be broadly flat through 20 is what my expectation is.
Okay. Thank you.
Thank you.
Next question is from Doug Young with today's Chardan capital markets. Please go ahead.
Hi, Good morning, just wanted to go back to the restructuring charge that you took in capital markets in Q2, and so when I look at what you said then.
In terms of got into but I think it was and correct me if I'm wrong 40 million of savings. This year 80 next year.
Im spreads we haven't seen more of a drop in the capital market expenses and hoping you can unpack that and is that 40 million of savings this year.
Has that been achieved in should we still be expecting 80 million next year. So just hoping to get a little more detail on that thank you.
Sure.
So in terms of the the performance. This here, yes, we have saved the 40 million advertised.
The run rate is going to be 75 versus the 80, we talked about in Q2, two and Thats just really a.
Slight change and people that we've looked up.
And obviously with our participation.
Here in the corporate wide charge, we expect higher savings next year.
And so as we go forward I think that number you're using around 75 for next year is a good them.
And is there a reason why we havent seen more of an expense reduction overall over the last few quarters and capital markets is there something sticky in there.
I think the expenses have come down materially if you look at it on a full year basis.
I think the gross numbers up 14% 13, and a half, but if you take out the acquisition of Kgs and you take out the restructuring charge. We took in Q2, that's about 2% city.
Hi, just im just because they look at the Knicks ratio of being just over 67% in Q4. This year. Thank and it was the same last year. So I just entries I'll move I just I was just a little confused by that and I guess, Tom. It just just one question. There just for you and I think I see it a little bit tighter than that but we delivered positive operating leverage this quarter, which is the first quarter this year and as we.
Look forward, we expect to deliver meaningful operating leverage next year.
And then Tom just on the reinsurance business.
Is how long it can you remind us how long the tail is on this thing when does that risk roll off.
Thank you Kevin the tail is.
Pretty.
Sure so by the middle of next year.
It's basically gone it's not entirely gone, but it's very small at that point the middle of fiscal 2000, okay. Thank you.
Thank you. The next question is from Sumit Malhotra with Scotia capital. Please go ahead.
Thanks, Good morning start with the with.
The the statement the expense growth in 2020 will be in the range of 2%.
That's not overly different from what we saw in the in the second half of this year and frankly, not different from where I see.
Expectations for the bank before this charge was announced so.
Is the benefit that your deriving from from these these savings that you are talking just about having to be reinvested in other areas of the business because.
I know you look at these numbers very carefully as well it just doesn't seem like the of the targeted expense growth is different than we otherwise would have had.
Yes, thanks for the question.
I guess, a few things firstly.
We absolutely do continue to invest in areas of the business, where we think there are good growth opportunities.
I've been doing that for the last three years.
And we continue to do that and I'd say, we're pushing ourselves to differentiate more in terms of how we allocate resources, where we see opportunities where.
You know dedicating resources and where the reverses true we're going in the other direction.
And then there is a bit of a timing issue here. So I talked about in my comments, how the benefits from the charge in fiscal 2000, you would be 200 million and by Q1 of 21 the annualized.
Run rate would be more like around 375, and so the timing factor.
As part of the picture as well.
So.
Certainly I think when you've announced these charges over the years, it's always been the the you will build into a greater level of savings I think what you're saying is as to the savings or the expense growth in 2020 may not be the different than we were expecting but perhaps it lowers the 2021 and beyond a level of increase.
The bank will achieve.
Gabriel It's Darryl I'll just comment on this is all I would say.
But by the way.
I assume it gave us a charismatic.
You guys are all starting to sound the same to me that's fine.
Look Tom's nodding his head the answer to your question Sumant is yes.
The additional point I wanted to make as and when you look at 2% ish for 2020.
Another way to think about it is that as you guys know you've got certain expenses that are much higher than that and you've got some that are much lower than that as you decompose. The expense base of a bank. For example, you'll have certain costs that you are locked into contractually you'll have pension you'll have real estate, you'll have certain things that will increase at a mix.
Mid single digit.
Expense rate you love technology that as we've told you we've invested above the 10% level for the last three years that will moderate a little bit into the mid to high single digits. As we go into next year do you have a whole bunch of things that pull the weighted average expense growth up and then you have a whole bunch of others, where frankly, we're looking at this is where the impact of the charge will come in were low.
Looking at direct controllable expenses across functions and groups that will be negative.
And so when you when you bring all that together you get to the number that we're giving you a 2% fashion I think the way you might think about it is that relative to the past couple of years. When you think about the expense grade of the bank growing at three and a half were four or a little over for that comparable relative to two is in our mind, a pretty big difference in a commitment to shareholders.
The fact of discharge wasn't contemplated.
Recently, a six months ago from what we heard Daryl did you decide that the 2021 nics target of 58% or maybe even the.
The 7% plus EPS growth that you target I know that's more medium term did you make the determination that those targets would be unable to be achieved without a restructuring charge of this magnitude I think I think the way to think about it as it this accelerates our ability to get there sooner and we're we're investing in this.
Now.
We don't expect to do it again and for sure Sumit in the last half of the year you saw things that we didn't see in the first half of the or including three rate cuts in the last four months and so whether that was in everybody's forecasts are not four months ago five months ago here, we are today.
And that will have some impact as we talked about for us and everybody else. As you guys have shown in your modeling on the revenue side. So I'd say I'd say, it's a combination of all those things.
Thanks for time.
Thank you. The next question is from Scott Chen with Canaccord Genuity. Please go ahead.
Good morning, I just had a follow up question 10. Many his question on U.S. margin.
Tom you talked about fiscal Q1 getting impacted I again can you kind of just clarify that comment are you talking about.
Higher sequential decline in margin in fiscal Q1.
So in Q1.
We'll just have some of the roll through from the fed cuts that we've already had so they're not fully in our numbers. We think that will result in the Q1 in being down about 10 basis points, so down a similar.
Amount in Q1 compared to Q4, and then after that we're expecting more stability and we don't think the fed moves again, we'll see how that plays out but on the assumption that they don't move and given the expectation that there will be some moderation in loan growth.
We think that.
The margin is going to be more stable after the after the Q1 point.
And then in Canada.
We do think as Kim said that the margin will be fairly stable through the course of the year.
Okay, and if I can just sneak one more just on the on the Canadian loan portfolio I see that consumer and other personal continues to do kind of increase.
And we're kind of see obviously higher leverage from consumers and some de levering I think across some of your peers, what's driving that.
Incremental growth and those portfolios for BMO.
It's Ken speaking.
I heard you say, what's driving the consumer lending growth in <unk> and Canada, So I'd say a couple of things.
On the on the bigger change side of things, we have quite strong card growth you can see that that's been the result of a battery of activities linked to stronger use of digital and data around our portfolio management and most of that is actually focused on doing more with our existing customer.
In addition to that in the cards line, you'll see more activity on the small business side, which is the result of two things on new product product suite that came out in recent quarters as well as.
Improved product capabilities that are more digital in nature link to line of credit.
So thats, what I'd say on the on the on the card side on the on the similar set of capabilities that actually driving the the lot of credit side on the personal and the last several quarters, we've seen stronger growth in that regard again more around.
Digital and data capabilities with existing customers.
His underneath that and then finally on the residential side, we've said that we would expect to be out or or just above the market here that we focus on the proprietary channels and with respect to that I think the combined effect of some salesforce adjustments that we've made by region as well as.
Offering and digital capabilities or are driving some strength there at 5%. So there's no one thing here, which I think is what we should be looking for I think to your point at the beginning about where the Canadian consumer is that I think it's conceivable that some of that activity does slow in the market modestly over there.
Next several quarters, which probably isn't a bad thing I would expect.
Our capabilities and momentum will likely continue about about where we are because we still have opportunity with our existing base and I would say also that the housing markets a little stronger probably than most people thought a couple of quarters ago and not that will be to the good.
Great appreciate the context. Thank you.
Thank you.
The next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning, first maybe for Tom.
Outside of the domestic PNC and U.S. PNC did you see any.
Meaningful change in margins at the bank generated this quarter.
I guess the only other thing I'd highlight.
Looking at the you know all bank quarter over quarter ex trading margin.
Is that we did have some pressure in corporate segment and that came through as a result of holding higher levels of liquid assets. So so that was a contributor to the the all bank ex trading quarter over quarter move.
But anything specific.
Ignoring the mix.
No no I'm.
The changes really I would say were driven by.
Mix and the fed cuts in the U.S. and so.
Other than the higher level of liquidity in corporate there was nothing at all unusual okay.
Just quick follow up than maybe not a quick follow up actually I was im looking at the the improvement in the banks.
Efficiency ratio since 2015, and it's been meaningful looks like a solid.
You know, maybe a little under 300 basis points, maybe 270 basis points as what I've been looking at that time period from 2000, and maybe a little more yeah, probably over 300 basis points.
In that time period.
Bank has had some meaningful restructuring charges as well about 600 million pre tax.
Your your outlook over the next two years would imply another say 300 basis point improvement in the Knicks ratio, where it stands today I think that's about right.
With call it $488 million pretax restructuring charges and the reason I'm going to the numbers here is it seems to me like the next two years the revenue environment is going to be more challenging than the last five years.
But yet you're looking for it as meaningful an improvement of the efficiency ratio for over a much shorter period of time all of this to really get.
<unk>.
What is your level of confidence in the 68%.
It's a it's Tom.
I would say we are focused on the delivery of the 58.
I won't quibble with your numbers, but I will say ours are a little different so so since 2015.
The adjusted efficiency ratio is down.
400 and.
10 basis points, you might cut the number slightly differently, but the adjusted numbers down by 410 since 2015 and as we look forward.
We're going to be focused on growing the business investing where we see opportunity and being very aggressive on expenses elsewhere that will drive the low expense growth that we've talked about for next year and then over the last three years.
We and others have had a very significant level of investment in technology and our tech spend as we've talked about has been growing at a double digit rate on a base. That's north of 2 billion, we expect that level of spend to moderate as we go forward and that's because we've got.
Good capabilities in place we've made lots of investments and we think we can afford to with that dialed down the growth a little bit which will help but some of the savings that we generated from efficiencies absolutely went to funding in effect.
That technology spend.
And you hear us talking about our diversified business mix, we do like the mix. We've got it's roughly 40% PNC, Canada 20 across us banking wealth in capital markets and we do think we've got upside in the capital markets business coming from the investments that we've made in the U.S.
We think our wealth business will have a good growth as we look into next year and good operating leverage.
And as we look at.
Relative performance in the PNC businesses, we feel good about heading into next year. So I wouldn't say the targets an easy target, but we think with all of the things that we've got underway.
It's one that is with a lot of hard work achievable and the topline to get to that efficiency ratio, you're not implying suggest anything special to topline just.
What are your standard maybe 5% topline growth.
Justin would be sufficient that that's correct like mid single digits topline got it. Thank you. Thanks.
Thank you we have time for one last question, which will be from Darko Mihelic with RBC capital markets. Please go ahead.
Hi, Thank you I just wanted to revisit the capital markets business and I'm looking specifically at your supplemental.
And I'm looking at page 11.
The sub pack and what I'm looking at their as the trading component.
And if you look at line 20, it's bouncing around all over the place this year from 81 to 94 120 to 203.
Im just wondering I don't get this granular my model, but I am looking at this overall and I'm wondering is this kgs alpha what's causing the volatility and how should we think about trading going forward from here is this like the new run rate the new normal.
Or should we expect significant growth here on the interest rate side and overall total trading.
Hey, it's down here.
Yeah, I think the the dynamic when you take a look at some of those quarter over quarter numbers.
Is there was an impact in what we call are structured note business.
And that structure note business when we look at the way we trade sometime shows up in equity sometimes shows up in interest rates.
And so thats, what is driving a lot of that quarterly volatility.
As we look forward I think an average over those quarters is probably the right way to look at it.
We do anticipate growth we have made the investment in kgs.
Our securitized products business, we continue to make investments in that and do see meaningful growth coming from it.
Over the next 24 to 36 months.
Okay meaningful growth.
How would you characterize meaningful growth.
I think for us a as we've talked about on Investor day, we're looking for us platform to grow at kind of a 10% revenue CAGR and I think that would be consistent with that.
Okay. Thanks, very much quick question last one I promise it will be fast going to the U.S. PNC business, Dave what might help us is just going back to Gabes question about.
Loan growth.
I understand it your business is really in about eight core states and then you have some specialty sectors, what would be great to know.
Is the growth that's happening say outside of a couple of course states. So if I if I heard of say core states for you I would always think of Illinois and Wisconsin.
And if I think thinking about this over a five year period, how much growth has come from the other states and or the specialty sector and I don't I don't expect it how do you remember at your fingertips, but it was very helpful to know kind of what's driving that growth and then the question circling back as why does it moderate if you are growing in specialty in these other states why does it actually have to moderate.
So good question Darko as the first part is the growth has been really a national business for a long period of time, the we absolutely do business in those core states on the commercial side, but we haven't we have for the last 20 years.
Fight, where our people may be.
And all of these specialized groups and in some in geography, we're out in the marketplace. All the time, so I would say well over 50%.
Well over 50% of where the loans are actually book, where the clients are is outside of that core business and has been and continues to grow.
And for example, our asset based lending business, our dealer finance business or our food and consumer business. That's a national business and continues to go. The reason I think it will look I don't think it will subside because we've exhausted all of our opportunities I think it will subside to some extent if it does just based on the general economic view.
So not a slowdown from our standpoint other than just what I think will be a slower economic growth in the U.S. Sutton help yes. It does thank you okay. Thanks.
Thank you. This concludes the question and answer session I would now like to turn the meeting over to Daryl like.
Thank you operator, and thank you to all of you for your questions in conclusion as I mentioned earlier, we're going to 2020 with good momentum in all of our businesses our commitment to our strategic priorities in key areas of focus will continue to guide us as we build on the decisions that we've made and the foundation, we've established to the position.
Brings the bank forward with continued good performance all of our employees are United in our ability to compete effectively serving our customers shareholders and communities well. Thank you for joining the call today, we wish all of you the very best for the holiday season, and a successful year ahead.
Thank you.
Conference has now ended.
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