Q3 2020 Bank of Montreal Earnings Call
[music].
Good morning, and welcome to the people financial group's Q3 2020 earnings release in conference call for August 20, FY 2020.
Your host for today, it's Ms. Jill hominids.
Net of Investor Relations with common. 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 BMO CEO, followed by presentations from Tom Flynn, The banks, Chief Financial Officer, and Pat Cronin, our Chief risk Officer, we have with US today arranger Hansen from Canadian PNC and.
Dave Kasper from U.S. PNC, Dan Barkley is here for BMO capital markets and Joanna Rotenberg is here for be my wealth management. After their presentations, we will have a question and answer a period, where 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 assessing underline business performance.
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 third quarter 2020 report to shareholders with that I will hand things over there.
Okay.
Thank you Jill and good morning, everyone and thank you for joining us today.
Today, we delivered adjusted earnings per share of $1.85 and strong pre provision pretax earnings of $2.6 billion up 12%, allowing us to absorb prudent loan loss provisioning and deliver sustained capital strength.
Year to date, ERP was $7 billion up 7%.
Our US segment again demonstrated the value of its mature and scalable platform with ppt in the quarter up 31%.
In this challenging environment diversification matters more than ever our diversification across across both businesses and jurisdictions was a key driver to the strength and resiliency of our financial performance.
For the quarter.
Our total bank efficiency ratio was 56.8% and operating leverage was 5.3%.
Year to date, we've delivered operating leverage of 2.9% despite the challenging environment.
Expense management was strong in the quarter with expenses down 2% year over year and also from Q2.
We're maintaining disciplined expense management as we said we would targeting overall expenses to be flat for the year and we intend to carry this year's disciplined approach into 2021.
We are as committed as ever to be a more agile more efficient bank and we are applying lessons from the recent experience to accelerate our progress.
Our CPT one ratio is strong at 11.6% and today, we announced a quarterly dividend of one dollar and six cents per common share.
Together, we've all been facing one of the most challenging economic periods in history, and although uncertainty remains there are signs of optimism.
The resiliency of our customers our employees and the economies we operate in has been admirable.
Adding to the uncertainty of coal good we've recently been reminded of how far our society still has to go to eliminate racial injustices.
PMO will always stand up for a society that is more just we're all people are valued equally.
That includes raising our voice to denounce racism.
This is integral to reaching our objective of zero barriers to inclusion as we live our purpose to boldly grow the good in business and life.
Turning now to our financial results.
Canadian PNC had top tier momentum going into the crisis in the quarter, we worked through the impact of lower rates and loan growth, while keeping expenses flat year over year to earn over $1 billion of ppt.
Looking ahead, we see steady improvement on revenue growth and strong expense management.
US PMC, Pete Us PMC delivered us $486 million of ERP in the quarter up 12% year over year.
With continued discipline and focus on expenses the business achieved a new low efficiency ratio of 52.8%.
Year to date Us Pncs efficiency ratio was 54.5% ahead of schedule relative to our 2018 Investor day, three year target of the mid Fiftys.
Overall, the business continues to benefit from an integrated strategy that combines the strength of our commercial platform with a focused and growing personal business.
In the quarter, we were one of just eight us banks chosen to offer mobile first checking accounts managed by a Google pay.
This exciting collaboration with Google as a natural next step in our existing strategy to grow our digital deposits and to support our customers financial lives in more places, where they're spending their digital time.
Before I continue I want to remind everyone about our virtual investor event on September thirtyth, focusing on our North American commercial banking business.
We look forward to welcoming everyone again after having had to postpone the event in the spring our ability to strategically grow our commercial business in both Canada, and the us while maintaining consistent and prudent underwriting and credit management has long been a competitive differentiator for BMO. So we hope you can join us.
Capital markets had a record quarter with net income of 435 million and ppt of $716 million, reflecting an improved environment and strong client activity.
Operating leverage was very strong at 24.1%.
With an efficiency ratio of 53.1%.
Both global markets and investment in corporate banking had record revenue performances, reflecting strength and earnings diversification capital markets provides both in Canada and in the United States.
Although this quarter's results benefited from a particularly active environment, we performed well within it and looking forward. We firmly believe in the long term earnings power of our capital markets franchise.
Wealth management also had a very good quarter with net income of 349 million up 35% driven by improved global equity markets and strong growth in online brokerage activity and new accounts.
Revenue increased 6% year over year and expenses declined 5% with disciplined cost management.
Operating leverage was 11.1% with a new low operating efficiency ratio of 63.7%.
Clients continue to trust us with their investments and reward us with their business as reflected in record client loyalty scores in the quarter.
Despite the challenging environment, we have stayed focused on our core objectives, and we continue to drive value against our strategic priorities I'll leave you with four key observations first we have strong operating momentum having earned $7 billion of ppt year to date upside.
7% from the prior year with year to date operating leverage of 2.9%.
And we continued to see long term opportunities for market share gains and prudent growth in our targeted areas of focus.
Second we added prudently to our allowance for performing loans in the quarter, while at the same time recording a stable impaired loss ratio of 38 basis points.
With $3 billion of coverage on performing loans relative to our expectation of future losses, we are appropriately provisions.
Third.
We are delivering on expense management and efficiency commitments and we will do more.
We're benefiting from the fore sight, we had at the end of last year entering what we expected would be a tougher revenue environment with industry, leading expense management and a comprehensive and strategic understanding of the levers that we'll continue to drive efficiency.
And fourth we have a strong capital and liquidity position with liquidity coverage ratio of 147%.
At 11.6% CPT, one we have the capacity to continue to absorb the impacts of an uncertain environment, while maintaining flexibility to invest and grow in areas of strategic importance.
Overall, we have the appropriate defensive positioning for an uncertain environment with our diversified business model meaningful performing loan coverage and more capital than we had before cobot.
And at the same time, our operating momentum has been tested and proven to remain among the best in class setting us up well for the eventual economic recovery.
And as I said at the beginning of this year, we have the energy the resilience in the focus and see growth potential across all of our businesses. We will continue to drive towards our goals, while unwavering Lee providing support to our customers and our communities.
Ill now turn it over to Tom.
Thank you Daryl and good morning, everyone. My comments will start on slide eight with the highlights of our results.
Our diversified businesses produced good results in Q3, despite the challenges we face given the pandemic pre provision pretax earnings growth was strong and we continue to be in a very good spot with our capital and liquidity positions.
Q3 reported EPS was $1.81 and net income was 1.2 billion.
Adjusted EPS was $1.85 and adjusted net income was 1.3 billion.
Down from last year due to higher credit provisions.
Adjusting items are similar in character to past quarters and are shown on slide 29.
Turning now to revenue third quarter net revenue was $6 billion up 4% from last year with good revenue performance in capital markets and wealth and PNC banking businesses affected by lower interest rates.
Net interest income of $3.5 billion was up 10% on an ex trading basis net interest income was down 1%, reflecting lower interest rates and lower results and corporate services.
Net non interest revenue was 2.5 billion compared to $2.6 billion last year.
We continue to focus on expense management expenses were down, 2% and down 3% in constant currency and excluding a gain on an office building sale last year.
The provision that provision for credit losses was 1.1 billion and Pat will speak to this in his remarks.
Moving now to slide nine for capital our capital position continues to be strong and well above regulatory requirements. The common equity tier one ratio was 11.6% up 60 basis points from Q2 as shown on the slide at the change in the ratio reflects growth and retained earnings lower risk weighted assets the adjustment for.
Transitional arrangements for expected credit loss provisioning and other smaller net positive items.
Lower risk weighted assets, primarily reflect a decline in corporate and commercial lending from the elevated levels in the prior quarter and in addition, a lower CB eight charge and model changes with these partially offset by changes in asset quality.
Given the strong capital ratio, we have eliminated the discount on the dividend reinvestment plan.
As you know our US Bank holding company recently went through the seek R&D fast process and had a stress capital buffer higher than we thought appropriate to see CCAR results will not impact our U.S strategy or results.
Moving to our operating groups and starting on Slide 10, Canadian PMC had net income of 320 million, reflecting higher credit provisions and lower revenue.
Revenue decreased 4% due to lower noninterest revenue, which was above trend last quarter.
Net interest income was relatively unchanged as higher balances were offset by lower margins.
Average loans were up 5% with commercial loans up 9% deposit growth was again strong with personal up 14, and commercial up 31%, reflecting higher liquidity retained by customers in this environment.
On an as at period end basis loans were up 4% from last year.
Net interest margin was down four basis points from last quarter, primarily due to lower deposit margins, reflecting lower interest rates, partially offset by the benefits of deposits growing faster than loans.
Expenses were relatively unchanged from last year as higher pension and technology costs were offset by lower employee related expenses and lower discretionary expenses.
The provision for credit losses was $570 million with the provision on performing $313 million.
Moving to use PMC on slide 11, and my comments here will speak to the U.S. dollar performance.
Net income of 199 million was down from last year due to higher credit provisions, partially offset by lower expenses.
Pre provision pre tax earnings growth was strong at 12%.
Revenue was flat as higher deposit and loan balances were offset by lower deposit margins and non interest revenue.
Loan growth moderated with average commercial loans up 7% and personal up 6%.
Average deposit growth was very good at 32%.
On an as at period end basis loans were up 3% from last year.
Net interest margin was down five basis points from last quarter, primarily due to lower deposit margins due to the low interest rate environment, partially offset by loans growing faster than deposits.
Expenses were down 9% from last year with our expense management focus contributing to lower expenses across most areas, including technology employee and advertising expenses.
The provision for credit losses was 247 million with the provision on performing a 166 million.
Turning now to slide 12.
Chemo capital markets at very strong results in the quarter with net income of $435 million.
Results reflect a good performance in our trading businesses record earnings in the U.S segment, and a good performance and investment in corporate banking.
Revenue was up 27%.
Global markets revenue increased driven by strong client activity and interest rate in commodity trading partially offset by lower equity trading.
Investment in corporate banking revenue was good and increased slightly from last year with higher corporate banking related revenue, partially offset by lower underwriting and advisory fees.
<unk> expenses were up 3%, primarily driven by higher performance based costs given the revenue performance.
The provision for credit losses was 137 million with the provision on performing 58 million.
Turning now to slide 13 for wealth management.
Well had strong results in the quarter with net income of $349 million.
Traditional wealth net income of 279 million it was up 19%, reflecting benefits of but to have a disciplined expense management approach and stronger global markets loan and deposit growth continued to be good year over year.
Insurance net income was $70 million up 46 million from a below trend level last year.
<unk> expenses were down 5%, reflecting the benefits of our cost management programs.
Turning now to slide 14 for corporate services. The net loss was 118 million compared to a net loss of 25 million in the prior year results decreased primarily due to lower treasury related revenue and higher expenses driven by the impact of a gain on the sale of an office building last year.
To conclude our operating performance in the third quarter was strong and reflects the benefit of a diversified business mix.
We remain confident in our ability to manage through the current environment and to execute on our agenda.
And with that I will hand, it over to Pat.
Thank you Tom and good morning, everyone.
The current cobot 19 pandemic continues to have an impact on our risk profile and the evolving nature of the crisis continues to inform our positioning and provisioning.
We remain confident that our strong risk position going into the crisis and our long track record of successfully managing risks through challenging times will translate into manageable credit results as was the case this quarter.
Starting on slide 16, the provision for credit losses was $1.054 billion or 89 basis points down from $1.118 billion or 94 basis points last quarter.
PCL on impaired loans increased modestly from $413 million last quarter to $446 million this quarter or from 35 basis points to 38 basis points.
The provision for performing loans was $608 million.
Versus $705 million in the prior quarter.
Looking at the PCL and impaired loan results by operating group the quarter over quarter increase was driven by higher provisions in Canadian PNC and capital markets, partially offset by lower provisions in us PNC and wealth management.
Tcl on impaired loans in Canadian consumer increased slightly while Canadian commercial provisions increased principally due to co good related losses.
US consumer PCL on impaired loans was flat compared to last quarter, while us commercial losses decreased including in our transportation finance business, highlighting the resilient nature of the us commercial portfolio and the strong underwriting practices across all of our lending businesses.
Capital markets impaired losses increased modestly as oil and gas provisions remained at an elevated level, though within the range of our expectations for the quarter.
We also saw impairment and cobot impacted sectors that contributed to capital markets PCL unimpaired loans as well this quarter.
Turning to slide 17, the $608 million provision for credit losses on performing loans in the current quarter reflects the impact of the extraordinary and highly uncertain environment on credit conditions, the economy and scenario weights.
In particular, while our current credit experience remains within expectations. We believe the possibility of a slower economic recovery increased during the quarter given the resurgence of cobot 19 in many jurisdictions.
Performing alone allowance continues to be appropriate with coverage of trailing four quarter losses, a 2.1 times and coverage of the current quarter annualized at 1.7 times.
On slide 18 impaired formations were 1.76 billion, reflecting stress in certain cobot 19 impacted industries, such as services and retail as well as continued migration in the oil and gas sector.
We also had a large formation for a single borrower in the financing product sector on which we do not expect to take a loss.
Gross impaired loans were $4.4 billion or 94 basis points.
Up from 74 basis points last quarter.
On slide 19, gross loans and acceptances decreased approximately $28 billion with almost all of the decrease in business and government loans as a result of lower utilization with existing clients and the impact of foreign exchange.
So there has been sizable variability in business and government loan balances over the past two quarters, our fiscal year to date loan growth is still positive even excluding government relief programs.
On slide 21, we provide an overview of those sectors, where we have seen material cobot impacts on credit quality, which have been concentrated largely in sub segments of services in retail trade.
We continue to track these segments very closely and credit conditions are unfolding largely as expected given the macro environment.
Again this quarter, we provided additional disclosure on customers with payment deferral arrangements found on page nine of the Mdna.
At the end of Q3, we had 12% of our consumer balances and 6% of of our commercial balances under deferral arrangements.
In our commercial businesses, a large percentage of the deferrals granted have now come up for expiring and our experienced to date has been encouraging as roughly 90% of these loans have not been extended and delinquency and default rates have been very low so far.
While we have had less deferral expiring our consumer segments, given the longer deferrals granted our deferral expiry experience with our consumer clients has been similarly, encouraging so far.
With respect to consumer deferrals, 89% of the deferred balances our real estate secured lending with 97% of those deferred wrestle balances in Canada.
Of the deferred Canadian wrestle balances, the large majority or mortgages of which 34% our insured.
Credit quality of consumer deferrals varies by product, but the average Bureau score weighted by deferred balances is approximately 745 in Canada and 695 in the US with the average LTV of deferred wrestle balances approximately 59% in Canada and 55% in the U.S.
Overall, we've seen good performance on deferrals that have matured, reflecting the quality of the clients and the collateral.
On slide 22, we provide further detail on our oil and gas loan portfolio.
Losses, and impaired formations were elevated this quarter, but within expectations given the commodity price environment.
Our performing provision on oil and gas loans is approximately $300 million, representing roughly 2.25% of performing loans and 3.1% of the portfolio excluding pipelines.
The majority of our company continues to work remotely and our operational risk profile remains stable and consistent with our risk appetite.
As such we do not anticipate challenges to operating in this environment for the foreseeable future.
In terms of outlook there continues to be a high degree of uncertainty around the trajectory of the economic recovery.
But we feel with this quarter's addition to our performing alone allowance, we're well prepared and provisioned.
We have been pleased with our credit experience. So far during this crisis with credit migration payment deferral, expiry and impaired loan loss provisions well within expectations and utilization rates back to normal levels.
With that said, we do expect to see our impaired loan loss rate rise in the coming quarters and would guide to a rate in the forties in terms of basis points for the next few quarters.
With that ill turn the call over to the operator for the question and answer portion of today's call.
Thank you.
We will now take questions from the telephone line. If you have a question and you are using a speaker phone can you get your handset before making your selection. If you have a question. Please press star one on your telephone keypad gas for the question. Please press the pound sign. Please press star one at this time, if you have a question.
We have brief pause participants fixture. Thank you for your patience.
Let me first question is from Ebrahim Poonawala from Bank of America Securities. Please go ahead.
Good morning.
Hi, guys Scott on the question is floor.
But just falling off I think that you mentioned that you expect mtc has to be into 40 basis points range just stock to offset on the visibility that you have you think about photos, probably 90% of demicks fighting in the fourth quarter and all the formation impaired loans book in USA and Canada like when we talk to you.
Yes. Thanks here does it fit at a high degree of uncertainty at on.
How things play out over the next quarter tool looks to photos come to an end et cetera, So give us essential.
Confidence at all and what you're seeing that Ed and the migration patterns, we expect bookings us in Canada or the next quarter tool.
Okay sure. Thanks for the question Ebrahim.
Let me start with formations obviously they were elevated again this quarter and this is two quarters in a row.
Really what you're seeing there as a couple of things as I noted in my speech. We did have one very lumpy addition to formations. This quarter. It was about $300 million of that total formation number you saw there and we don't expect to take a loss we look at our collateralized more than covering our loan value. So I think you have to be a bit costs.
Yes, when you look at high formations uneven jail balances.
When you think about the impact on losses and of course keep in mind that our current.
Impaired loan provisions that we've taken in Q2 Q3 accurately we think reflect the impaired balances that we have today. So looking forward, obviously, we're going to see continued.
Continued stress in the cobot impacted sectors, and that's really what you're seeing this quarter you're seeing provisions.
And formation showing up in oil and gas as we highlighted last quarter, we expect to see that continue for the next two quarters and Thats whats, partly informing our thinking about our impaired loss outlook that I just gave you.
We've also done some very granular work around the consumer deferred balances. We as you can imagine we have very good information now about cash balances about credit card spending patterns and that's allowed us to do some very deep segmentation of that portfolio.
And in part Thats whats informed the performing provision this quarter.
So we think we're adequately prepare their for what might be coming when consumer deferrals roll off.
And then lastly, another maybe guide post for you if you want to think about it. This way if you look in our Mdna, we'll disclose what.
What our provision would be if all of our loans were in stage. One that gives you a pretty good estimate of what our loss estimation would be for the next 12 months, that's roughly about 47 basis points and so pretty consistent with that kind of mid fortys number that I gave you.
That of course is also informed quite deeply by some very detailed work we've done on the cobot impacted sectors in wholesale as well.
We've got another quarter under our belt of some pretty good analysis of those sub segments I'd say the good news is we are.
We're seeing the stress across the wholesale portfolio very concentrated in those particular subsectors and so the rest of the portfolio was actually performing quite well and so based on the detailed work we've done on those segments. The wholesale work that we've done or sorry, the consumer work that we've done the loss estimation model that try.
Angled rates pretty nicely with the with those numbers Im not gives us a fairly good degree of confidence around that mid fortys number ill caveat all that by saying the environment is highly uncertain.
And it really will depend largely on how the pandemic unfolds as we get into the fall.
The risk of a second and third wave is not insignificant, which is why you saw us build to performing provision this quarter.
Barring a second the totality of should we assume performing pcls pull back a little closer to predict corporate level than what we've seen in the last two quarters.
Yes, we think we're adequately provisioned right now that provision we took this quarter obviously reflects.
The risk of that second and third wave now so I would say barring any real major changes in the macro environment I would expect to see the performing provision declined quite substantially over the course of the next quarter too.
Thanks.
You next question is from John Aiken from Barclays. Please go ahead.
Good morning, the on deposit growth that you've experienced as being quite impressive obviously.
As the prepared commentary talking about customers wanting me to maintain liquidity.
At this stage in the games you have any sense in terms of how sticky is these deposits maybe if you don't when do you think you might have that that sense and then Tom if you can count on and give us some sense in terms of what impact. This heightened mobile deposits has had on the NIM compression experienced in the quarter. Please.
So thank you for the question.
On the deposits, we feel very very good I would say about our deposit growth, there's lots of liquidity as a general matter.
In the system and open about generally as you know, but our deposit growth has been above average and it does reflect a big focus that we've had on deposits.
In the bank over the last few years.
And so we're happy to have the liquidity and feel good about the underlying business performance.
We do think a portion of the excess deposit flow that we've seen over the last couple of quarters declines gradually over the next year or so and a portion of it we think we'll stay and as permanent and Theres, obviously, a fair bit of uncertainty around exactly.
How that plays out.
But in our management, we're assuming a portion of the extraordinary flows with the very very high growth rates that you've seen.
Those result in some gradual decline over the course of the next year and then I'm glad you asked a question about the impact on NIM.
We are sitting on meaningful excess liquidity.
We earn a lower rate of return on that liquidity, we're basically invested in.
Shortish stated securities and we've got Central bank deposits and so that does.
We have a downward impact on NIM and so if you look at the total bank excluding trading margin change in the quarter. It was down 17 basis points, excluding the impact of the a higher level of excess liquidity it would've been down about 10 and so.
Meaningful impact from the excess liquidity and on the all bank margin, we were down about 11, beps and around half of that was due to the excess liquidity and so as we look forward if some of those deposits.
Do get redeployed.
As customers do whatever they are going to do over time.
That will have a slight positive impact on NIM over the course of the next year.
Thanks for the color Tom I'll requeue.
Thank you.
Next question is from Gabriel Leung from National Bank Financial Please go ahead.
Good morning hear me.
Yes, we got you gave okay.
Just wanted to ask about the forbearance number the loans deferring payment and if you have some visibility on or what your modeling I guess for.
Those balances evolve over the next few months or quarters, and and where you wind up in terms of the percentage that go back to normal payment patterns versus those that don't.
And if you can go product by product product obvious and mortgages is the biggest chunk of that.
Sure. Thanks, its pack Gabriel Thanks for the question.
So I guess I'm not sure if you're asking in terms of balances, but thats, probably pretty straightforward, we would expect the bulk of the consumer.
Deferrals to roll off in Q4, we wouldn't anticipate.
Giving out additional deferrals there we think we'll move much more just simply to a case by case with our consumer customers. After that and then similarly for wholesale you've seen you can see in the Mdna a big chunk of the balances have actually already rolled off and as I indicated in my speech, we're seeing the vast majority of.
It was not opt for a second extension typically we granted about a three month extensions. There. Most are not did not want or need next second extension and of those of that very large majority that expired, we're seeing delinquency rates actually quite low.
Just in rough rough order of magnitude kind of in the kind of 1% to 2% in zone delinquency rates in terms of those that expired. So reasonably encouraging you could make an argument that those that have gone for second extensions, which again is a pretty small percentage of the total might be lower credit quality. So you might see that delinquency rate drift up a little bit but.
That's how we're thinking about what's going to happen when deferrals roll off we actually based on what we're seeing so far.
And keep in mind and consumer even though you don't really see it and Mdna, we've had about $4 billion of consumer balances also come up for expiry.
And you don't see it because we've also given out early in the quarter, we offset that with some additional deferrals, we granted but if you look at just what consumer a deferrals came out for expiring in the quarter. The experience was pretty similar the vast majority of them don't opt for a second extension and the delinquency levels that were seeing.
In that segment are kind of in and around that same ballpark and so as we look out.
That's why and again when you compare that to the performing provisions that we've now taken which contemplate potential for R.W. shape recovery or extension of the crisis.
57 basis points or coverage in Canadian consumer.
Gives us some pretty good competence that even if that does turn out to be maybe higher delinquencies than we think.
Theres some good performing provision coverage there as well in the stories pretty much the same on wholesale.
I was hoping maybe it's just too tough to put a number out there but as a.
Both.
When you said a bulk of loans will go back to normal.
70% 80 90.
Anything you can provide there because it does.
Kind of inform how we would calculate our impaired loan balances should be beginning in 2021.
Yes, I guess, it's really hard for me to forecast because it's going to depend so much on on the health Pat path that we take over the fall, but I. All I can tell you is what we're seeing so far and particularly in wholesale more than half of the of the deferrals up now expired. So it's a pretty good data set.
And you could think of it as kind of 90% don't need a second extension.
So we'll see what the payment pattern looks like of that 90%, but I would expect it to be to go back to normal and so kind of a 90 10 kind of a number.
As kind of where we are now and obviously in the fall that's going to be higher because the extensions will mature and so if I had the cockpit I'd probably put the delinquency rates kind of in the somewhere between kind of one to five percentish of the deferral balances as they Royal Dutch and then.
Right, but Dave Dave.
I would just anatomy of onto the next question now okay. Thanks. Thank you.
Thank you. The next question is from Paul Holden come see ABG. Please go ahead.
Thank you good morning.
One question for you in terms of the your expectations around.
And hair, mens and or credit migration, what kind of impact would you expect that to have on Q1 over the next 12 18 months guidance, but is there would be.
It's Tom Thanks for the thanks for the question.
Short answer would be we don't think it will be a significant factor on the.
One ratio.
We've looked at how.
No different scenarios playing out.
Related to the deferred loans might impact the cetone ratio and that works as the number.
Shouldn't be large we don't expect that to be a big thing that we'd be talking about in.
Q4 or Q1.
And then if you broaden the question out a bit and go to migration generally.
We expect a little bit of pressure all else equal.
From the margin as a result of migration, which we've talked about before.
But obviously feel good about.
With the ratio landed in the quarter and our ability to absorb that.
Got it okay. Thank you.
Thank you.
Your next question Keith Cherry Hill Capital. Please go ahead.
Thanks very much.
Let's begin with Tom.
After the big swing in CD won a couple of other.
Sort of follow ups.
From Paul in terms of asset quality so add.
Can you talk about when we think about going forward have we seen most of the impact from the reversal of of the drawdowns like and stop mostly run. Its course also wondering Tom if you can give us a little bit of some color around the model updates.
Yep sure so.
So in the first question related to weather, we've seen the impact of the reversal of the long draws.
I would say that the answer to that is yes. So in Q2, we and the industry saw very significant loan growth.
Resulting from higher loan utilization that puts some pressure on the ratio for us and for others and this quarter those.
Draws basically reversed.
And it was a pretty amazing curve when you look at which it was as far sharp spike up in Q2, and then a steep.
Glide path down in Q3, and we're now back to pretty much a normalized levels I wouldn't expect any any.
Meaningful ongoing movement, one way or another from that I think it is important to note that although we had the movement in balances related to the line draw activity.
Business and government loans are actually up 3% from the end of Q1 to the end of Q3. So there is underlying growth in the portfolio through that period, despite the big up and.
And and the big.
The big down.
And.
And then on the race show.
Generally.
We're comfortable with it we expect a little bit of migration going forward.
Growth.
Well.
Be dependent would agree on the outlook for the economy, but we we expect the ratio to continue to be.
Above 11% as we as we look forward over the next several several quarters.
Is it too early do you think about removing the trip discount that run its course, a little bit just given the.
The continued uncertainty we we have announced in the in the materials that we have eliminated the drip discount. So yes. So we turned it on.
At that moment in the pandemic when there was very high uncertainty and we had a very significant line draw utilization that we talked about.
And.
So we don't have any regrets over having done it but given where we sit now it's not needed and we have eliminated it.
That's great. Thanks.
Thank you.
Your next question is on many grauman from Scotiabank. Please go ahead.
Mr. Grauman your line is open.
Yes.
Thank you.
The next question will be from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, Good morning, just maybe back that Pat I, just want to maybe get a better understanding of what drove that performing loan pcls.
Because it Doesnt sound like it was changing changing your ass Allied doesn't sound like it was a change.
And your scenario ratings was this more than a management overlay in just taking a look at.
Migration and then just kind of tangled into that lies you've indicated that you expect performing loan pcls to to move quite a bit lower and subsequent to this is this just after this quarter should we just be thinking about growth and a little bit from migration as being the two main drivers. Thanks.
Sure. So I'll start with your last question first answer is yes, we would expect going forward, you're definitely going to still continue to see migration.
As I said in my opening comments migration is actually unfolded abyss somewhat better than we would've expected so but that will still be a feature in coming quarters, and then we would expect a return to loan growth and so that balance increase will drive it.
In terms of our thinking around the 608, it's really a combination of a few things.
Youre right the macro changes Didnt really drive much this quarter.
And balance changes actually reduced the provision we did see some migration in there and so that puts some upward pressure on it but again somewhat less than we thought so really it was a function we did change our scenario weights this quarter.
Shifting reduce.
Waiting on the benign scenario just given the heightened uncertainty in Q3 relative to Q2, we thought the possibility of the optimistic scenario I definitely decline and then maybe more importantly, what's driving the weighting of the adverse scenario is as I said in my comments the belief that.
There is now kind of a fourth scenario out there the w. shape.
That has.
Really the effect that's of an a non linear effect on credit losses. The longer we go the more you start, causing stress and companies outside of some of the more coded impacted sectors and so we tried to capture that with a heavier weighting on our adverse scenario. So that so that was a scenario weight change and then we did apply.
Hi, some expert credit judgment this quarter for a couple of reasons one.
I would the very granular work that I referred to on the consumer deferred population. We now have a quarter worth of spending pattern men. The behavioral pattern data on those customers. So we have a better sense, where the high risk customers are and so we topped up the estimate based on that additional work that we had done.
We did put in some additional provisions for based on what we were seeing in some of the co that impacted sectors.
Our view is that loss estimation models that look back at history can't really factor in the very unique impact on things like hotels, and restaurants, and fitness facilities, where they're not just exposed to economic decline, but right closure.
And then lastly, we are seeing some slightly higher loss given default rates as we work out.
Some of our distressed.
Loans out in this environment. The workout options are just lower than they would be in a normal environment and so as we roll forward. We would expect that to continue particularly for those cobot stress sectors and so we wanted to factor that in as well and the cumulative effect of all of that added up to the 608 million that you see this quarter.
So I guess just like the I guess it could be growth. It can be migration and then at duration changes relative to your expectations. That's another thing to think about is that.
Yes, that's absolutely correct, but with that said, we think when we now look at our total coverage. We actually are acknowledging some extent some de risk of some extension in duration already so.
Unless it gets quite a bit worse in terms of of expected duration.
We think were covered I'd have to caveat all that with of course, there's a huge amount of uncertainty out there, but we have started to factor in that risk of elongation of the recovery.
Thank you.
Thank you. The next question is from John Healy from RBC capital markets. Please go ahead.
Hi, Thank you good morning, maybe staying with pad.
One of the things that would be helpful horses to understand.
Amongst girls portfolio how many.
On the consumer side, how many are receiving served payments and the 4 billion that was repaid.
Is the delinquency ratio so small because they are actually receiving served payments still and similarly in the commercial side, how many of your commercial borrowers are tapping.
Programs, maybe that would be helpful statistics and ill Darko, It's Darryl I would suggest we ask Ernie to come in on the first part of your question on how the consumers behaving around serve and then Pat can copy off on the on the outlook.
Okay.
Good morning gecko, just a quick response on the third we typically find is that on the particularly in the lower end or the higher risk segments, we'll see a little bit more served so out of all the serve customers. We have in our franchise today about 10% of them are in our hard QIP program that gives you a perspective the size so it's not a.
Full driver, but certainly present, let me use that that language and and so as you think about going forward.
As you see customers coming out of the program, we're monitoring their behaviors as as Patrick said, they're making payments and just the particularly right. Now. We currently have a large portion of those in hardship continuing to make payments.
Well.
And then with respect to wholesale.
I think I am I don't have the number in front of me, but I can tell you that it's a fairly modest a proportion, particularly when to think about the fact that there isn't really a lot of direct to wholesale support coming from the governor from the government really programs.
And but within and the Canadian portfolio actually now has the disproportionate share of deferrals, we actually have seen a higher level of deferrals expire in the us than in Canada, just given the size of some of the accounts in Canada. They tend to be smaller end up slightly lower credit quality that are taking deferrals. So the amount that are.
On government relief or had to have taken government relief loans in our wholesale portfolios is relatively small.
Thank you just just to follow up an earnings to answer the 10% number is that 10% of the deferred that earn we called out merchant program or do you mean, 10% of the total portfolio. The total portfolio therapy. So what we're finding is you have a number of customers who are in the deferral programs that are not Ontario and and our.
Continuing to make payments as well as I said.
Okay. Thank you.
Thank you. The next question some Mario Mendonca from TD Securities. Please go ahead.
Good morning, if you could just started clean that when Apple just so I understand a little better.
And building up the provisions are you contemplating a period to when the government support both for individuals and for corporates has expired does that are you trying to build that into your allowances.
Yes, and thanks for the question, Larry I would say not explicitly.
You know, we but certainly with when I talk about the potential for a w. shaped recovery and the impact that that would have that the you could see that the cause of that might be a reduction in government relief payments, but we certainly haven't contemplated that specifically as we think about the numbers now.
So.
Just if we look forward then how should we think about this impacting your results could we see some period. In 2021, then were impaired loan losses, moving fairly higher but they're not necessarily offset by the release of the of the performing loan losses that is that something that could play out.
Yes, that's really going to be a function of the trajectory of of the pandemic and certainly if we see.
Recovery much faster than the performing provision now contemplates then.
The mathematical answer to that would be EPS.
Just one quick one on the liquidity one ratio that I keep track of I'm, not suggesting that its something that the banks will be familiar with just capturing all your liquidity is.
Comparing that to your loan balance.
That number is obviously Walmart lot in the last few quarters after like 71%.
Last year was probably in the mid Fiftys revenue, how do you look at that or how do you look at liquidity is going forward does that should that normalize in the next few quarters back to historical pattern of about sort of 50, 556%.
Liquidities prolonged yes, it's.
Yes, Tom Aereo so.
You can look at different different balance sheet metrics related to the amount of liquidity on the balance sheet and regardless of the metric you look at.
The conclusion would be that we currently have a lot of liquidity on the balance sheet.
The of reflects the liquidity in the system I think.
A degree of conservative behavior on the part of retail and commercial customers and.
And we do expect the excess liquidity to decline gradually over time and and so that means.
It likely sticks around through most of next year and potentially a bit into the following year and and the way we look at it as we we.
Manage the balance sheet in its components and so at a point in time.
We have an amount of what we consider to be just pure I write excess liquidity and thats over and above all the needs. We would have on the balance sheet, including.
The amount of normal what we call supplemental liquidity that we hold which is kind of all liquidity buffer and.
All of that liquidity as we talked about earlier is putting some downward pressure on that has interest margin as the liquidity comes down over the course of the next year or so that will be a bit of a positive impact on.
The margin and from a PML perspective, it actually isn't a big deal.
Because there is uncertainty about the timing of.
The reversal of the strong flows were investing that excess liquidity in a way that gives us good underlying asset liquidity and so the yields were earning.
Our relatively low a net net when you look at what we paid a customers it's not a big item one way or the other from a piano perspective.
Thank you.
Thank you.
Your next question. So many grauman from Scotiabank. Please go ahead.
Hi, Good morning, I Hope you can hear me now.
We can.
The question I wanted to ask was just a follow up on capital we've gone through the mother of all stress test now so really I wondering if is there any validity to the view that we.
We went into this crisis with capital ratios that were too high end.
Look to the other side.
You'd be comfortable running with lower capital ratios given that you're at 11 six now we've had again the biggest crisis, we could ever imagined and it looks to be in great shape, you've eliminated the drip discount. So im just wondering your thoughts on that.
It's Tom I'll take that.
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My mind actually goes to a slightly different place on the question. So we feel.
Very good about the capital ratio that was true last quarter and it's true. This quarter. We think we've got lots of capital for the risk in the business and to convey.
Confidence to.
Our stakeholders.
And one of the outstanding questions.
That the market has kind of had I would say around bank valuations as weather.
Over time, there would be some higher multiple attached to the sector given the reduced risk that results from higher capital levels and higher liquidity levels and the industry as you know relative to.
10 years ago is operating with much much much higher levels of capital and liquidity multiples I would say really havent rerated to reflect that greater stability and so we'd have some hope when we get through this that people will look back and reflect on the multiple given.
The higher security that results from the capital position.
Maybe there's a little bit of room on the capital ratio itself.
But.
The stronger thought I have is around the quality of the balance sheet the quality of income stream and the resulting multiple.
Thanks for that.
Thank you.
Your next question is from Nigel just from Baird.
Research. Please go ahead.
Thank you good morning.
So now you mentioned that you took a fairly close look at the deferral balances. This quarter described it fairly well I was wondering if you could touch on.
The the mix a stage two loans in the deferral book and there was a meaningful increase in this phase two loans and the reason I asked that is because when I look at your states to balances I mean did move marginally higher mortgage and commercial but to actually down for.
Credit cards, and other consumer so that impacts performing loans in the quarter from the deferrals.
That driven by higher migration of stage, two or did you take and build more allowances and what you already had placed in stage two for us were deferral loans or is it a bit of both.
Yeah, it's actually a little bit of both I think that the what you may have seen over the course of Q2 in Q3 really the only thing that happened that was because that was different with that that caused.
Impaired formations to be different over the two quarters was changes in collections practices. So we actually reduced our intensity of collections quite a bit in Q2.
Obviously to be sensitive to our customers that were under stress and then we resumed normal collections practices in Q3 and that caused some distortion.
In.
In migration between stages over the quarter and a little bit of distortion and in the build up the impaired loan balances between the two quarters.
Okay and touch any comments on stage two relative to.
Deferrals itself have you meaningfully increase.
Denouncing these two currently or is that relatively safe.
It's relatively the same.
Okay. Thank you.
Thank you, yes, or no further questions at this time I'd like to turn the meeting back over to Mr. one.
Thank you operator, I will wrap up with a recap of some of the key drivers that we think about from the perspective of our performance and our positioning for the future. There are four of them number one we have strong operating performance and momentum you've all had a lot of great questions for Tom and Pat through this call and it's been fun to watch them work, but.
We also want to acknowledge the great performance of our operating businesses that have come through in a really good way through through the through the particularly challenging environment and we think we have further opportunities for targeted share gains and growth over time.
Secondly, as you heard today, we are prudently provisioned, we expect to continue to outperform the industry on credit which has been a defining strength of BMO for decades Thirdly, we are delivering on our expense commitments to you and we expect it to do more and fourthly as you heard today, we've got a strong capital position 11 points.
6% C. One and liquidity at a 147% LCR, which tells you that we have to capacity to absorb any additional uncertainty while at the same time, maintaining the flexibility to invest in grow so putting it all together I think what you're seeing in this quarter is the strength and resilience of our diversified business model tested.
In proven performing well and we're confident in both our defensive positioning and our ability to outperform in the eventual economic recovery. So thank you all for your time today, we look forward to speaking to you again on September Thirtyth at our Investor event.
Thank you next conference has now ended please disconnect your lines at this time and thank you for your participation.