Q1 2020 Earnings Call
All participants piece continues down by the conference will be getting momentarily once again piece could do just standby and we thank you for your patience.
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Please standby your meeting is about to begin.
Please be advised said this conference call is being recorded good morning, and welcome to the via <unk> Financial Group's Q1, 2020 earnings release and conference call for February 25th 2020, your host for today isn't Ms. Jill ammonia head of Investor Relations. That's I mean, there. Please go ahead.
Good morning, thank for joining us today.
For today's Investor presentation is as follows we will begin the call with remark from Darryl White.
Oh, followed by presentations from Tom Flynn, the banks, Chief Financial Officer, and Pat Cronin, our Chief risk Officer, we have with US today Cam Fowler from Canadian PNC, and Dave Katz Burke from U.S. can see Dan Barclays here for female capital markets and Joanna Rotenberg is here for female wealth management.
After their presentations, we will have a question and after a period, where we will take questions from prequalified analysts to give everyone an opportunity to participate. Please keep it to one question Daryl will then close the call, but concluding remarks.
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 are 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 an adjusted basis and considers both to be useful and assessing underlying business performance.
General and 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 first quarter 2020 report to shareholders without that I'll hand things over to.
Merrill Thank you Jill and good morning, everyone.
Today, we reported a very strong and balanced Q1 performance with earnings of 1.6 billion up 5%, including revenue up 8% and pre provision pre tax earnings up 16%.
All of our businesses contributed delivering good performance consistent with business potential and with clear momentum in key areas of competitive strength.
In Q4, we expressed to you confidence going into the new year with optimism around stabilizing economic environment overall client sentiment sentiment and of course, our own business plan.
Today's report supports that view.
For the quarter, we delivered operating leverage of 4.6% with every business above 2%.
Efficiency improved a significant 270 basis points year over year with a strong total bank revenue performance and disciplined expense management.
And we remain committed to an expense growth rate of 2% or better for the year.
The strength of our operating performance allowed us to earn through elevated provisions.
Overall portfolio credit quality remains good with some pressure in two areas and we expect provisions to come down from this quarter's level.
Todd will discuss provisions in more detail in his remarks.
Capital remained strong at 11.4%, even after absorbing regulatory changes in the quarter.
Our U.S. segment continues to deliver against healthy expectations U.S.P.P.P.T. was up 10% with a particularly good contribution from capital markets.
This quarter.
Every one of our businesses contributed to achieving our objective of consistent long term financial performance executing against clear customer driven competitively differentiated strategies.
Starting with Canadian PNC, we had another strong quarter with net income growth of 8% and P.P.P.T. growth of 10%.
Robust loan and deposit growth contributor to overall strong revenue growth of 7%, resulting in the highest operating leverage for Canadian PNC in the past 12 quarters at 3.6%.
We're seeing steady market share gains across almost every product category, including personal deposits lending and cards as well as commercial deposits and lending all consistent with the strategy, we outlined at Investor day.
In personal we were extremely proud to receive the top overall score and JD powers 2020, Canadian retail banking advice study, marking a major leap forward from our third place ranking last year.
Female placed first in five of seven categories in the study, which measures customer satisfaction with the advice and guidance they receive from five major Canadian banks.
At the same time.
The PMO performance plan was rated best checking account with a big bank in Canada by money sense magazine.
On the digital innovation side this quarter, we introduced female insights a personalized automated solution that uses artificial intelligence to provide actionable insights to help customers manage their day to day finances and cash flow.
Canadian commercial also continues to be a core elements of our success as we drive above market performance inline with our risk appetite and with no change in our disciplined approach to pricing.
Our success is driven by our expertise our unparalleled industry knowledge and our commitment to going in a above and beyond for our customers.
An increasingly that's with the support of digital innovation as well for example, PMO business Express our industry, leading small business lending platform, which allows customers to be approved for alone in just minutes is on track to surpassed $1 billion in new authorizations next month.
Turning to U.S.P. and see we had another good quarter absorbing the full impact of recent rate decreases well well still driving year over year constant currency revenue growth of 3% and P.P.T. growth of 5% disciplined expense management helped deliver positive operating leverage of 2.1% and a new.
New low efficiency ratio of 55.2%.
NIM remained relatively stable quarter over quarter with the benefit of deposits growing faster than loans and our expectations are for continued stability through the year.
Our U.S. commercial business delivered double digit year over year loan and deposit growth with some expected quarter over quarter moderation in loan growth.
This quarter, we announced the opening of our first commercial banking office in Los Angeles building on an already strong presence in southern California as many companies had headquartered in California have significant Canadian operations. It's further proof of our commitment to provide our north American customers with unparalleled commercial expertise and value.
We look forward to talking to you about this along with more on our strategy to continue to build our leading north American commercial presence at our April six investor event.
And U.S. personal and business banking.
Our deposit momentum continues with digitally acquired deposits growing nearly 65% quarter over quarter digital accounted for just over 20% total retail deposit growth this quarter in the U.S. with 98% of that coming from markets outside of Illinois and Wisconsin.
Turning to wealth management with net income growth of 21%.
P.P.T. growth of 24% on operating leverage of 5.9% wealth management delivered a strong balanced performance delivered driven by higher client assets continued diversification through double digit loan and deposit growth.
And the benefit of disciplined expense management.
The business continues to strengthen and streamlined with targeted investments in key competitive growth areas. This quarter, we launched a suite of seven E.S.G.E.T. apps that add to our leadership position and we led the industry on F net inflows.
We also recently opened a new private wealth offices in both Dallas and Atlanta, joining forces with our commercial bankers there.
This is a great example of how we're increasing our wealth penetration with our commercial and business banking customers a key growth segment for bema.
Capital markets had a very strong quarter with positive contributions across businesses and geographies net income growth was 38% with P.P.P.T. up 50%.
It was a good start to the year with potential for revenue opportunities greater than we would have expected a quarter ago.
Investments we've made in capital markets are proving their return as the business is now more consistently performing in line with earnings potential.
Our U.S. capital markets business for example, delivered net income above $100 million U.S. and pipelines across the franchise remain good.
In January we announced an agreement to acquire clear pool, a cloud based electronic trading platform with customized double algorithmic strategies. This acquisition emphasizes our commitment to clients as we provide leading edge innovative trading technology to our global client base and we expand our business in areas of opportunity and strain.
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Another area of opportunity for US is sustainable finance this quarter BMO capital markets led the first Canadian sustainability say sustainability linked to credit facility for a major corporate client.
Following on the footsteps of our inaugural sustainability bond.
These initiatives are cementing a leadership role for us within the market one that will help drive long term sustainable financial performance.
So looking ahead.
We feel confident for 2020, we have a strong and diversified business well executed strategies and great momentum our performance. This quarter reflects our disciplined approach and our commitment to our strategy and we're confident in our ability to build on our performance through the year.
Our success will be determined by the consistency of strategy and performance as well as consistency of purpose.
Our purpose to boldly grow the good and business on life unites our employees builds trust and loyalty with our customers and sets a clear path for our future.
Today, we're very proud to be named by the Ethisphere Institute as one of the world's most ethical companies for 2020, a recognition that we've now received three years in a row and for the second consecutive year BMO Harris Bank was recently recognized by Forbes magazine and its annual list of America's Best employers for.
Diversity recognition that highlights our commitment to encouraging diversity and supporting all our employees.
Diversity in all its facets is a cornerstone to our success supporting inclusive communities and workplaces is a critical component of that this quarter, we announced a research partnership with the Canadian Center with the center for addiction.
And mental health, culminating in a corporate playbook to advance mental health awareness and workplaces, we incurred every corporate leader to take accountability by adopting the playbook as we firmly believe business performance success is only possible when dialect directly tied to a strong commitment to workplace mental health.
Supporting our customers our communities and our employees is how beaman will continue to drive long term sustainable value and strong relative financial performance and so with that I'll turn it over to Tom to talk about the first quarter financial results.
Okay. Thank you Daryl and good morning, everyone. My comments. This morning, we'll start on slide eight Q1 reported EPS was $2.37 and net income was 1.6 billion.
Adjusted EPS was $2.41 up 4% and adjusted net income of 1.6 billion was up 5% as Daryl said results in the quarter reflect good performance across our businesses with pre provision pre tax earnings growth of 16% operating leverage of 4.6% with each operating group.
Above 2% good revenue growth and operating leverage helped us comfortably earned through higher credit losses in the quarter.
Adjusting items this quarter are similar to past quarters and are shown on slide 25.
Turning now to revenue.
Net revenue of 6 billion was up 8% from last year, reflecting strong performance and be more capital markets Canadian PNC and BMO wealth management.
<unk> expenses increased 3%, largely reflecting higher employee related expenses, given strong revenues and higher technology costs, partially offset by the benefits from productivity initiatives.
We continue to make good progress on efficiency with total bank efficiency at 60.3% in the quarter.
As a reminder expenses in the first quarter of each year include costs related to stock based compensation for employees, who are eligible to retire. This expense was 90 million in Q1, excluding these costs the efficiency ratio would have been 58.8% in the quarter.
We are on track to deliver the expense savings from our Q4 restructuring charge inline with prior guidance as a reminder, the expected annualized run rate savings in Q4. This year, approximately 300 million with fruitful with full year benefits in the income statement of approximately 200 million these savings will contribute.
To achieving our 2% or better expense growth target for the year.
Moving now to slide nine for capital.
The common equity tier one ratio was 11.4% unchanged from last year or last quarter, rather with retained earnings growth offset by the impact of regulatory changes and the adoption of by press 16, which together had a 16 basis points impact on the ratio and higher risk weighted assets.
We expect the previously announced acquisition of clear pool group to close in the second quarter with the capital ratio impact of a little less than 10 basis points.
Moving to our operating groups and starting on slide 10, Canadian PMC had another strong quarter. In Q1 net income was 700 million up 8% and pre provision pretax earnings growth was 10%.
Revenue was strong at 7% driven by higher balances higher margins and non interest revenue.
Total loans were up 7% with commercial loans up 15%.
Mortgage growth through proprietary channels, including advertising Helocs was 6% deposit growth continued to be very good at 14%.
Expenses increased 3%, primarily due to higher technology and pension costs operating leverage was strong at 3.6% and efficiency improved to 47.3%.
Moving to U.S. PNC on slide 11 in my comments here speak to the U.S. dollar performance net income of 275 million was down down from strong performance a year ago due to higher credit provisions, partially offset by higher revenue as a reminder, credit provisions benefited from a recovery in Q1 of last year.
Pre provision pre tax earnings growth was good at 5%.
Revenue was up 3% driven by loan and deposit growth and higher fee income, partially offset by a lower net interest margin.
Average loan growth was 12% with commercial up 13 and personal up nine.
Deposit growth continued to be strong up 11% from last year.
The net interest margin was down just one basis point from last quarter. The change in NIM was better than anticipated, reflecting less deposit spread price pressure and strong sequential deposit growth.
With expense growth of under 1% operating leverage was 2.1% in the quarter and efficiency 55.2%.
Provisions for credit losses were up from last year at a 113 million Pat will provide color on this in his remarks.
Turning to slide 12, chemo combo capital markets had a good quarter with net income of 362 million up 38%.
The U.S. business continue to have strong performance with net income of U.S. 110 million up 53% and representing 40% of capital markets earnings in the quarter.
Revenue was up 20% with strong growth across both global markets and investment in corporate banking.
Operating leverage was strong at 13%.
Over the last three quarters capital markets net income has averaged 320 million, which we feel is reflective of the earnings potential of the business.
Moving to slide 13 wealth management had a good quarter with net income of 300 million up 21%.
Traditional wealth net income of 208, Twittered, an 18 million was up 19%, reflecting higher revenue and positive operating leverage.
Loan and deposit growth continues to be strong at 14% and 12% respectively.
Insurance net income was 82 million up 26%, primarily due to positive market movements in the quarter. The higher insurance income in the quarter was offset by cost from stock based compensation expense in Q1, and so in effect. The underlying earnings were at the 300 million dollar level.
Expenses were up 2%, reflecting higher revenue base costs and operating leverage was strong at almost 6%.
Turning now to slide 14 for corporate services. The net loss was 106 million compared to a net loss of 76 million a year ago results decreased primarily due to lower treasury related revenue and higher expenses.
To conclude the strong first quarter performance demonstrates continued momentum in our business consistent delivery against our strategic priorities and the benefits of our diversified business mix and with that I'll hand, it over to Pat.
Thank you Tom and good morning, everyone.
Starting on slide 16, the total provision for credit losses, this quarter was $349 million or 31 basis points.
While our impaired provisions are elevated this quarter. The overall credit quality of our lending books remain sound and we do not see any indications of broad based credit weakness.
Consequently, based on current business conditions, we expect our loss rate on impaired loans to revert to more normal levels in the coming quarters.
The increase in impaired provisions this quarter was primarily due to higher losses in U.S. commercial largely due to normal quarterly loss variability as well as from specific weakness in transportation finance.
In addition, our corporate lending portfolios experienced higher losses, this quarter concentrated entirely with oil and gas accounts.
Apart from oil and gas lending and transportation finance or other lending portfolios exhibited stable credit metrics and low losses in the quarter.
Turning to the specific credit performance in the businesses Canadian consumer impaired loan provision decreased $7 million quarter over quarter to $103 million, which at approximately 26 basis points is lower both compared to last quarter as well as last year.
Also as shown in the supplementary financial information package Canadian consumer delinquencies decreased both compared to last quarter and to Q1 of 2019.
Canadian commercial PCL and impaired loans increased to $35 million from $24 million last quarter. There were no specific industry trends are themes observed and at approximately 16 basis points. This quarter's PCL rate reflects solid credit performance and Canadian commercial consistent with the long term average for this.
Business.
US consumer PCL and impaired loans was $16 million down slightly from the prior quarter.
US commercial PCL increased to $116 million due to one larger loss and elevated provisions in the transportation finance sector, reflecting continued weak conditions in the U.S. trucking market.
This weakness and transportation finance and the one larger loss I referred to accounted for approximately 50% of the total PCL in us commercial this quarter.
The remainder was a function of the normal variability, we see from time to time and commercial portfolios with no discernible theme.
Capital markets, PCL and impaired loans was $53 million consistent with last quarter. The provisions were entirely in the oil and gas sector and predominantly related to use natural gas accounts, we're very low commodity prices for natural gas continue to pressure some borrowers in the sector.
Switching briefly to slide 17, our us exploration and development exposure is $4.5 billion a decline of approximately 4% from the prior quarter.
Breaking this sector down further we estimate gas weighted gross loans and acceptances represent less than 1% of total business and government lending when measured on the basis of revenue.
Turning back to slide 16, the provision for credit losses on performing loans that was $25 million, mainly reflecting modest credit migration and balance growth.
On slide 18 formations were $831 million up modestly from $799 million in the last quarter with the increase fully attributable to business and government formations.
The ratio of gross impaired loans to total loans increased four basis points to 62 basis points, driven by the higher formations and lower write offs relative to recent quarters.
In summary, overall credit quality remains strong despite the higher provisions in our U.S. commercial portfolio and our natural gas loan book.
And although there will be some continued pressure in oil and gas and transportation finance I expect the impaired provision to nonetheless decline over the next few quarters with loss rates, averaging in the mid twentys basis points range.
I will now turn the call over to the operator for the question and answer portion of today's presentation.
Thank you.
I'll now take questions from the telephone lines. If you have a question and you're using a speaker phone. Please lift your handset before making your selection.
You have a question. Please press star one on your telephone keypad if at any time you wish account. So your question. Please press the pound side.
Please press star one at this time, if you have a question and the first question is from many grauman with Cormark Securities Securities. Please go ahead.
Hi, good morning.
I wanted to follow up on the credit side of things.
You gave a good detailed im just wondering more big picture what gives you confidence that's what you're seeing is not the beginning of something.
A more significant.
If you talk about a transportation in particular and then just overall key indicators that give you confidence in that.
Better outlook for the rest of there.
Sure. Thanks for the question, many yes, and I would definitely say that this quarter and our view is an anomaly and as I said in my comments, we expect the PCL to normalize starting in Q2, and then running for the balance of the year and the reason that we believe that is we look across the various portfolios first of all.
Starting with the consumer books in particular, both Canada and the US consumer books continue to be very solid I think when you look at the PCL numbers in the delinquency rates. There's no reason for us to conclude that those low losses will continue for the balance of the year.
Ladies and commercial at 16 basis points again, a very solid quarter, we see no sector weakness or underlying decay in the credit metrics. So we expect Canadian commercial to stay within that range over the balance of the year when I look at capital markets. The story really is just use natural gas.
Outside of Nat gas, we had virtually no PCL and any other sector in capital markets. This quarter and then with respect to Nat gas, we do expect that to moderate over the course of the year, we look at.
Our portfolios from the bottom up in both Houston and in Calgary, We see that PCL rates coming down in Q2 Q3 in Q4, they won't be zero of course, but I think if you look at the two goalpost sub zero and where we were this quarter somewhere in the middle of that range is probably a pretty good forecast for the balance of the year.
So that really just leaves us commercial and of course TF as I mentioned is a spot of weakness, but keeping mind. The numbers are relatively small there in terms of total losses.
That's a really a cyclical issue very specific to that sector I would expect the loss to be somewhat similar next quarter, and then declining linear lead to the about to the to the ended the year.
Apart from that we really had one lumpy loss as I mentioned and not plus TF was really 50% of the PCL with us commercial as we look at all the other sectors. We don't see any reason to think that the rest of the portfolio wont perform fairly consistent with what you saw through most of 2019.
And so and then when I look at the credit metrics in particular for us commercial.
At the weighted average probability of default in that sector. It actually went down slightly from Q4 and is virtually flat relative to Q1 of last year. So that tells me. There is no broad based deterioration in the portfolio outside of that weakness and TF and know that same trend for the probability of default is similar to the.
Wholesale portfolio in aggregate and so when I look across the books when I look at the sectors. When I look at the strength of the consumer portfolio the strength of Canadian commercial on the strength of capital markets outside of oil and gas to me that all adds up to two a moderation in the loss rates again into that range.
The mid 20 basis point range that I talked about in my comments.
And just as a follow up we've heard from other banks that talks about krona virus and just saying it's too early to tell but just to.
Clarify when you talk about your outlook, you're assuming no issues from from that emerging risks sensing.
Yeah, I would say first and foremost many it's probably too early to tell I think for the moment. Our first concern is obviously with the health and safety of our employees in Asia and the other affected reason regions.
We're obviously very focused on business continuity as well to ensure that we've got continuity.
In all of our regions in the event. It gets worse, we are looking very closely at the tail risks within our mark to market books, and we're not seeing any short term impacts there either from coded 19 were running things fairly close to home and those books and then lastly in credit portfolios that of course will take probably longer.
To play out it will depend a little bit on how severe it gets on how long it lasts but.
When we look at first order effects, we don't see concentration in the sectors that would have severe impact certainly for things say like cruise ships, where we have no exposure at all.
That gives us some comfort that the first order impacts are probably relatively minor of course second order impacts from things like supply chain disruption.
And slowing economic conditions broadly will take longer to play out and so we'll probably it's too early to tell we would see that as we drive through the balance of the year and then you might see some of that show up in front in the performing provision as well.
It probably in the short term will show up in changes in macroeconomic forecast to the extent that our economics group decides to change that.
And but longer term, it's probably too early to say.
Thank you.
Thank you.
Next question is from Steve Theriault with eight capital. Please go ahead.
Thanks very much.
Sticking with hot for a second.
So we launched yet.
Sorry can hear me okay. There, yes, we've got enough apologies.
So sticking with Pat.
No not to put too fine a point audit, but you mentioned mid Twentys a couple of times. So that is intended to be sort of your thoughts on the full year PCL rate or the remainder of your PCL rate no to be specific thats for the remainder of the year and obviously there can be quarter to quarter variability as you saw this quarter, that's pretty normal but.
On average for the balance of the year, we would expect to see something around that range for the next three quarters, Okay and it sounds like.
What we're hearing as the or wasn't idiosyncratic loss was that the was that the construction item or the services industry item, we see in the provision schedule and is there any detail you can give us on that was a fraud related or is it was it just something else.
No it in you're right it wasn't the construction sector.
It was not fraud related it was a client actually that we've had in the bank for many decades.
In in a fairly idiosyncratic part of the construction sector and so not really something we would see applicable to the rest of the sector.
And they just ran into some specific difficulties, we tried to work our way through with them, but unfortunately that led to a PCL in the quarter, you'll see that in the there is a bit of a spike in jail in that sector as well that's really just that one name that I'm talking about.
And then we actually exited exited our exposure there and so we don't anticipate any further PCL from that and we would expect that GE ill balanced actually go down next quarter.
Okay. Thanks, and then Tom if I could.
You talked through the the margin in the U.S. and obviously good news at the margin or to be done one basis point.
Talking about strong deposit growth you talked about competition.
Posit growth actually looks a little weaker than the last few quarters. So was it that deposit growth coming off or was it more the mix the deposit growth maybe just some color there yes sure. So.
I'd say, we're very happy with the margin in our us PNC business.
We had guided.
On our last call to a decline in the upper single digits and in fact, we came in that down one and the big drivers there were.
Sort of a better pricing environment in the market.
And when I say better better than what we had seen off of the earlier fed cuts.
And then as well.
We had our loans growing at a higher rate of deposits. So on the margin the relative return.
It is important and deposit growth exceeded loan growth and that helped the margin.
And those are the big two drivers and.
Looking forward for the balance of the year, we do expect to be in a better place.
And then we had thought and so give or take we think the better margin holds through the balance of the year.
Okay. That's helpful. Thank you.
Thank you next question is from Scott Chen with Canaccord Genuity. Please go ahead.
Thanks, so much just sticking to the U.S. side.
See loan growth is pretty strong up 12% in total.
Are you still sticking to your high single digit.
Loan growth target in fiscal 2020, and if you are.
Maybe talk about why we think theres going to be deceleration throughout the year. Thanks.
So this is Dave yes, I think.
We would still stick to that I think I said at the last quarter.
Hi single digit I also so I thought it would probably exceed it has in the past exceed the market as we continue to grow into areas that we have not been in the past so I expect that to continue.
I don't see any variance from that we were off a little bit in the first quarter.
Still growing but not as much but I see that continuing to pick up.
In the rest of the and the rest of the year.
Okay. Thank you okay.
Thank you.
Next question is from your brain whenever that was bank of America. Please go ahead.
Hi, good morning, guys.
Just wanted to follow up back very quickly on oil and gas portfolio.
I'm sorry, if I missed it have you disclose how much of the book is.
Nat gas related listened oil.
Yeah, we estimate that you can work off of roughly less little less than 1% of total business and government loans comes from US natural gas and you can measure on the basis of revenue or production that's revenue.
And that's a pretty good estimate.
Got it and just in terms of when you talk to a lot of banks exposed to the Sheila sector in Texas.
And if you stay as it seems like.
Going to see maybe 12 24 months of just cleanup going on as kind of the capital sources for some of these companies have dried up.
Thank you.
Is your comfort that on the book a function off like you've done a deep dive and you don't expect any one also lumpiness over the next few quarters like what's driving that because when they use some of your peers in the U.S.
Kind of talk about potential for more volatility at least over the next year. Some of this flow through the pipe.
Yes, so we're certainly not forecasting when we think about loss rates are prospect for the sector increases in natural gas prices.
There's likely to be some upward migration on that price, but fairly modest over the course of the next couple of years. So I think were consistent there.
Our view on losses coming out of the U.S. natural gas book in the next couple of quarters is as I said based on a bottoms up analysis of our book and so we look at.
Not just for the cash flow of our various clients, but their ability to liquidate assets in the event.
Have a bankruptcy process and look at our asset coverage relative to loan value and so it's a fairly detailed analysis. Obviously there is there can be surprises in there but.
The number that I gave you that range that I gave you earlier.
You know is our best estimate at this time based on a reasonably detailed bottoms up analysis about us book.
Understood. Thank you. So just separate question to all model and I think you said capital markets last four quarters, the average being 20 million and Thats kind of what you view as the only follow for that business.
Does that imply that you don't expect.
Quarters like.
What we saw last year like a sub 200 million dollar quarters was that the message in there or I just want to make sure I understand that Becky, yes, I'll I'll say something briefly and then I'll hand, it over to Dan Barclays.
So we do see three twentyish as being reflective of the earnings potential of the business.
We've invested in the business over time and.
We've had very strong performance in the U.S. and so we're comfortable at that level, but I'll hand, it over to Dan to give a little color to that.
Sure. Thanks, Tom.
I appreciate the question.
As we look forward to I think Tom's highlighted the keep pace as we have made the investments across the us as well as adjusted one of our cost structure. What you see is that move up in to the next level of earning potential as Paul mentioned last few quarters average.
320.
We also had a very strong quarter this quarter above that at 362.
So that's what we see going forward.
The strength and most of the business as new as both in market side on the banking side of the corporate lending side.
All client driven when we look at the pipelines and what we've.
Seeing today, they've continued on into Q2.
And so yes, I think we're talking but thats, where we can see the business going forward.
Got it and just since we have you then you see us business, where you wanted to be like this if you can maybe if you talk about any investment spend on market share opportunity the to looking at activity given some of the sentiment maybe to European players just how do you think about the U.S. business wave stands today.
Yeah, I think consistent with.
We've been at quarter end. It this quarter last quarter ended Investor day last year.
We continue to put forward to drive and double our market share in the U.S.
We've made all the substantial investments and so now its into the scaling process around that we do have multiple investments in most of our product lines both people in banking.
The acquisition meeting cleared pool this quarter.
You'll remember back to the Kgs acquisition, we made 18 months ago. All of those are investments that are continuing to grow and will bear fruit.
Overtime, and so do have good confidence on our us business and the growth things either.
Thank you for taking my question.
Thank you. The next question is from gave the addition with National Bank Financial. Please go ahead.
Good morning, Thanks, Pat for your a better on a.
Okay. So this quarter is credit trend, but.
One of the frequent push backs I get from investors on.
Bank growth from the past few years in the commercial book of.
Theme percent type growth.
Good on one hand, but the worries about.
Credit quality down the road.
What kind of confidence.
But.
We view this quarter described as the view within credit losses, or one off or whatever won't start popping up.
Sure. So from now following this.
Strong period, the commercial growth we've had in the bank.
Canada, and the U.S. and favor for Cameron a great too.
Thanks, Thanks for the question and I'll start and then and then Dave and camp and jump in and it's good question I understand the concern the growth rates in 2019 were clearly high I can tell you that the PCL, you're seeing this quarter in us commercial I.
I would say virtually none of that came from any account that was added in 2019. The majority were a vintages, including that lumpy loss that I talked about that are quite a bit older that one goes back decades, and so in our view, it's not correlated I'll give you just one other stat, we look quite closely at the weighted average probability of default of new.
Additions to the us commercial loan book and compare it to to the weighted average probability of default in the broader portfolio and in every quarter going back to Q1 of last year, new additions have been significantly better credit quality than the average in the portfolio and so on that basis would not expect to see pcls certainly haven't seen it.
This this quarter in terms of it being from recent vintage and would not expected over the course of the next 12 to 24 months.
So let me just to add to the this is Dave.
It's a great question. It's a great question on the U.S. and it's a natural question with the growth. We've had let me say a couple of things number one the growth has been pretty deliberate over a 10 year period and has largely been in areas, where we havent been in the past, where we know the business and most of the business that we're doing is where you've got assets be.
And I feel really good about the growth and would never apologize for it on this quarter. This was particularly lousy quarter from PCL and Trust me our team does two things really well.
They take care of their clients and they win new business that really good at that.
They hate losing money and they absolutely are beating themselves up a little bit this quarter as we all are because it's a tough quarter, especially when you lose a 40 year customer that youve supported for long time, that's tough, but as I look forward look into the next quarter and the rest of the year I've got the under on where pads.
That is PCL I think we're going to do very well as we generally do and now we'll see.
You're right to be skeptical.
We're going to up we're going to prove me wrong and as we have I think it's a it's just a really good business. It continues to be a good business and.
I think I'll stop there can may want to add a little bit on the commercial sector.
It's Cam speaking I'll, just say on the Canadian commercial side.
I'll remind you on this call we've talked about a strategy that's focused on on capacity creation and on diversification. So it's important to remember it like one of the big drivers of the strong growth that we're seeing in Canada is we have so much more capacity out there either in terms of hires we've made particularly in GCA.
On the capacity, we've created through the digital tools, where Darryl mentioned earlier, we're now we've now put a $1 billion through our automated lending platform. So a lot more capacity being deployed towards existing customers and prospects and two reasons I'd say around the confidence side.
Number one it's seven sectors and five regions, where we're seeing strength strength by strength I mean double digit so that's of as as broad and diverse as I think you can be.
Our in our country number one and number two further to pat's comments on both spread and weighted average probability of default the newer business, we're putting on is.
Stronger than the existing book so for those reasons, we're feeling.
And Gabriel's Pat just one more time, we'll hit this issue head on as well in the Investor event that we're holding that I'm sure you're aware of coming up it will be a combination events between.
The commercial segments and risk to walk you through exactly why weve uncomfortable with the growth rates.
And why the risk profile of portfolio remains consistent with with our appetite over the course of the last few years.
We look forward about a lot of people wondering how when.
Most if not all banks are finding hard to grow but you are doing fill in an improving credit quality of the same time.
Thank you.
Thank you.
The next question is from summit Malhotra with Scotia Bank. Please go ahead.
Thanks, and good morning first question is for.
Tom I think is for Tom just to go back to your your transportation Finance purchase it was about five years ago now that's what you on the spot.
I know when you bought this portfolio was about $12 billion I don't think it's all housed in the in the transportation section of your.
Your loan book breakout do you know approximately where this this portfolio.
Size is now a number of years after that purchase.
Yes, the the portfolio now is.
About 12.8 billion.
And.
I haven't looked at this number for awhile, but I think at the time of purchase it was closer to 10% 12, So it's grown.
At a gradual rate overtime, and we didn't expect it to be fast grower to mature business and a good win from an R. we perspective.
And so it's performed.
Largely inline with expectations were happy with the business and.
Could go on here, but I'm looking at Bhavan, So maybe I'll, let him out a few comments the only thing I would add to it I think those numbers are right in the business is largely housed in our commercial business in new us and probably 10% of it in our commercial business in Canada.
I would say and I think you've seen this before this team is been is by far the most experienced team in the industry. That's what we'd like the most about it they've been through the cycles they've seen the cycles. They generally can predict the cycles and in times like this and this was this I think will be a shorter cycle, but a number of.
Our competitors get in when things are really good and get out quickly and we've seen that recently a couple of gotten out and that just makes it better for us if we've got the best team to run this.
Through the cycles and I'm very very happy with it.
And this is more and more of an industry question, it's probably for you Dave I mean.
As you said, you're not going to apologize for loan growth and sequentially. It does it does seem to be a bit normal not to put too much emphasis on three months. We also have seen a decelerating trend in the fed data when it comes to to see an eye loan growth in the us.
In your opinion is at the.
The reflection of the industry to to margin trends or has there been perhaps.
Some deceleration in commercial activity in aggregate across the U.S I do think theres been particularly maybe in the last quarter last fiscal quarter.
A little bit of a slowness a little bit of concern.
Im uncertainty on the whole number fronts, we could go through the mall I've actually seen that put the the.
Krona virus aside of seem that actually pickup of late there seems to be a little bit more certainty in the U.S. as far as.
A number of issues that are work their way through so I don't expect that to continue and I expect.
The economy will probably pick up and we'll do the do as well so that fed data is.
Good to watch, but I would expect that the little bit better Thats my own personal view.
Hello.
Yes, that's good.
I was going to switch over to Cam Fowler, if thats, okay. I mean for is good.
Strong the momentum your business as you probably don't get enough questions.
One of the factors that I think is really been helping your.
Oh performance on revenue the last couple of quarters has been the.
The favorable trend on net interest margin compared to some of your peers I could go into some of the factors I think thats driving it.
The mix deposits, but I'd, rather hear from you maybe from a from a pure business perspective is there is there something in the way that.
Your business and your team has approach growth.
Across your product base that is.
Driving that outperformance in margin, which.
Perfect and again this quarter.
Thanks, Thanks for the question Thanks for the 10th to chat for little while as well.
I think you.
You probably answered it for me in in Investor Day.
In 18, we talked really specifically about the Canadian PMC business, and we talked about outsized growth in deposits in payments and in commercial and you can see you know.
Roughly two years on we are taking market share in all of those categories and so to me that that mix and the quality of mix point is the single biggest driver. It is really important that deposits are moving like that's really important the payments are moving like that so that to me is.
Is the biggest driver.
Last one for you do you have you seen any change in the competitive environment in commercial because there does seem to be some difference in and tone from the individual banks as to where their outlook on commercial loan growth in 2020 lies.
Hi.
I would say that it's it's a little different by by region and by sector into the into the point I made earlier about the diversification of our of our of our growth. It does feel a little different everywhere I would say on the hole that we would expect some moderation towards the back half of year like in Q.
Three in Q4.
But.
Thats, an absolute comment from a relative perspective, I would expect us to be firmly in the front.
Thanks for time.
Thank you next question is from Robert Sedran CNBC capital markets. Please go ahead.
Good morning, just sticking with the Canadian business I wanted ask about the the payments and the credit card side and I'm not sure if it's for cam or for Tom or perhaps for both but.
You do see good outstanding growth in their credit card business, but I see the card fee line is down.
In the supplemental at that the all bank level so I.
I guess for Cam, which cards are which category of cards are already are the ones that are doing best for you that are performing best for you and then perhaps some explanation as to why that card fee line is down please sure that that card fee line will come back.
Two things that are play I think in this quarter are a little bit on me a little bit on the interchange pressure side and a little bit on the Quebec legislation side.
But I do expect things to things to improve on the back half of your our best performing.
It's a it's a pretty well rounded performance on the card side and that the entire books moving as we expected it would based on some investments we've made on.
Marketing proposition and data.
Where I'm, maybe most pleased ablate has been the growth on the on the small business suite that we launched just a little over a year ago, four or five new cards and capabilities, which has been.
Smaller base, but fastest growing within within the book, but on the round I think it's.
Strong across the entire book and I would expect there to be a little better in the back.
I was under the impression that we're going to see some pressure on the card fee line in the second half of the year, but I guess for you you are saying thats not the case.
I think that there there will be different forms of pressure I, just think that we have momentum that will see us through.
Okay. Thank you.
Thank you next question is from metal human dumped path with TD Securities. Please go ahead. Good morning, just first just a quick clarification you referred to the.
You referred to the Canadian commercial Pcls ratio at about 16 basis. One is that right. That's correct and then I think you also said that was consistent with your long term average and the reason I'm asking is.
We get a very different number when I look at the industry and so.
Curious about is what time period are looking or you have you take into account the periods one commercial real estate was a problem.
Yeah, like we're I, certainly I'm not going back to the financial crisis, I think our our books are quite a bit different and in particular commercial real estate is quite a bit different in terms of our mix at least here PMO versus what it was then.
When you look at.
If you look at that level I would say, it's relatively consistent with what you would have seen through kind of 16, 17, and 18 and early 18, we went into a very strong credit period. As you know late eight late 2018 in 2019.
That was about as good as credit conditions can get for commercial portfolios and we saw that both in Canadian and us commercial and so I think we've been flagging for a while that we're likely to drift up from those very benign points that we saw then but.
Thing up to a 16 basis point level to me is very consistent with what you would expect to see from reasonably well diversified commercial portfolio.
With the size of ours.
So the long term average that I would come up as I mentioned, others would see something similar would be something closer to 50 basis points, but that's including some very very rough times in commercial real estate is your point here that you would look at those periods and say, they're not representative of the most current business mix and practices.
Yeah, I guess, maybe I wouldn't I wouldn't read too much into that consistent with long term averages we could debate on what that right long term average is my main point was that 16 basis points. That's a really good number from a loss rate whether you look at versus really rough times or even relatively benign times, that's a really good loss rate for our commercial portfolio and.
Clearly in really rough times like a financial crisis, I can get worse, but I don't expect that to occur in the next year, which is why I'm comfortable that we'll see that kind of a level continue for the next three or four quarters. Okay, and then quickly going back to covert 19 I look at your.
Loan mix.
It does there there are number of categories here like manufacturing gestation finance.
What I think of as some of the largest categories.
Your loan book.
When you think when you stress tests I imagine you started doing some stress testing for for Covance 19.
It would it be fair to say that a lot of your larger categories would be sort of in the cross hairs of a meaningful slowdown.
Growth Cross border I, well I guess first of all I would say, it's really hard to tell and as far too early to say secondly, I don't know that I would even agree with that with that assertion because those segments. As you say are quite large they're also extremely diverse and particularly manufacturing and services as you mentioned those encompass so many sub vertical.
Goals, some of which as you point out might be in the cross hairs. Many others will not and so you're really seeing a large sector. That's a collection of a lot of sub sectors and.
That's an unfortunate way that that we have to group it but I think it doesn't lend itself to the characterization that you're making okay. That's fair and then just finally when you talk about margins in the U.S. and looking for stability in margins in the U.S.
Presumably you're not contemplating any rate cuts and the reason I am asking it this way because again going back to this virus issue there are number of.
Economists out there are calling for the us to get more aggressive on rate cuts.
To sort of as an insurance policy against a slowdown caused by Covance. So.
When asking what I'm asking here as you are not contemplating anything of that nature, when you're referring to stable margins in the U.S.
Hi, Marriotts, Tom two things.
Number one that's correct so the outlook of.
Stable ish assumed no cuts and then second point.
If we did have another fed cut.
The impact would be in the zone of a couple of Bips.
Thank you.
Thank you.
Next question will be from Darko Mihelic with RBC capital markets. Please go ahead.
Hi, Thank you. Good morning, my questions are for Pat Pat when I hear you speak about transportation finance.
And the natural gas segment.
It sounds to me like there's been a significant increase in credit risk and therefore, we should see.
His movement into stage to a lifetime loss recognized against it and then going forward if they do fall into impaired well, we'll see a stage three but the net impact should be much less in future.
I can't tell I look at page 28 of your supplemental.
As it looks to me like Thats occurred so I'm confused a little bit and perhaps you can also.
Help me understand a little bit with respect to whats happened this quarter. So in other words, how many of the.
Files that hit this quarter came immediately from stage one into stage three.
And how many of them, we're actually in stage two last quarter.
Yes, I guess, it's we probably don't have enough time to come into a file by filed the composition I would say you did see you did see some of the stage one and two migration this quarter and I can tell you have a of those balance increases in both stage one in stage two roughly about 60%.
It was credit migration, 40% was balanced growth, but from one to two there was a concentration in that migration in oil and gas and transportation finance and then a bit in some of the other sectors as well and so it's certainly not broad based the what you might have seen this quarter in provisions as well keep in mind that some of those pcls.
Can come from things that are already in stage, three where we took a provision in a prior quarter and then that pre provision was increased in this quarter due to factors like we've gone a long way through liquidation process and the outcome turned out to be slightly worse than we thought and that was the case this quarter as well, we actually saw some pcls coming out of stage three.
And then as well some that went from stage one.
And into three.
So.
Is it faced is it fair to say that you have already migrated a significant proportion of these accounts into stage too and that is what gives you comfort going forward that even if they fall under stage three wells, but you've already got to significant reserve against natural gas and transportation finance or is that not the case no that that is the key.
Yes, and I look at something like say the watch list in the oil and gas space. The watch list in oil and gas actually went down this quarter versus Q4, so that to your point that Im just because we moved it into impaired status and took the provisions that we thought it doesn't guarantee as I said earlier that we don't see further provisions coming there is potential for more migration the.
It will be concentrated in U.S. gas, but things are fairly stress there, but outside of that as I said, we don't see a lot and that's what gives me some comfort around the guidance that I've given for the next couple of quarters on what those losses could look like.
And last question then is there can you maybe provide a bit of a quantum in terms of if I have a stage to provision against a natural gas or transportation finance and it were to migrate to stage three what's the quantum of differences. It is it that the PC the increase in the PCL once it hits stage three would be another 10.
Percent would it be 50, you have any sort of rough idea or any any what you've seen so far is maybe perhaps looking at the historical can you give us an idea I mean that ultimately is what's going to give us comfort that the future provisions really should be light given the fact that you're going from stage two to stage three and the difference between the two is nominal.
Or is it not normal.
Yeah, I mean, it's really going to be case by case as you would imagine stage two tends to be a bit more quite a bit more formulaic in terms of the provision when it gets to stage three we actually start to look through the details of asset value asset coverage.
Sale valuations and things like that in the for that particular name and so.
It's it's hard to draw.
A parallel the way you're looking for but your experience. So far how do you have any kind of insight you can share.
Yes, generally speaking I would say that provision that we take in stage two is probably not that dissimilar to what you might see on average over the longer term for the provision will ultimately take and stage once once it gets into impaired.
Okay. That's helpful. Thank you.
Thank you.
There are no further questions shredders at this time, but not I'd like to turn the meeting over to Mr. Darryl White.
Okay. Thank you operator in summary, I want to come back to where I started this was a very good quarter for BMO at 4.6% operating leverage and when I look across all of our businesses all of our businesses performed well closer to their longer term potential we're seeing new levels as you heard through the call of earnings run rate.
Patients, particularly from our wealth and capital markets businesses. You also heard that PCL was elevated but we earned through it and we expect it to come down next quarter and for the balance of the year.
We are investing and driving revenue in key competitive growth areas.
While maintaining our commitment to 2% or less expense growth for the year with continued progress on our efficiency ratio everyone at BMO understands that being more efficient makes us more competitive and even better positioned to drive long term strong relative financial performance our commitment to our clients on our purpose is unwavering.
Recently, we sadly lost one of the greatest champions of that purpose.
So on behalf of all of us at female I want to take a moment to formally acknowledge the passing of a great friend, great business leader and a true statement Miss your Jacques when he was an architect of the Canadian broker dealer industry, a figurehead for our bank is home province of Qubec and a model of purpose driven leadership for all he will be greatly.
Yes.
Thank you all for participating in today's call. We look forward to speaking to you again.
In may thank you.
Okay.
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Okay opinion, not because it had been.
Okay that she was funding.
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I must have enough on 50, though please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion, that's because at that.
I mean.
She was pending.
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Hi, Physpeed, though.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
That's good for that.
Yes.
Yeah, she with funding.
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Fair enough office depot.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion, not because it had been.
Okay, that's associated with funding.
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I must have enough on 50, though.
At this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion, that's because at that.
I mean.
She was pending.
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Hi, Physpeed, though.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay.
So tell me.
Yeah, she would funding.
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