Q4 2020 Bank of Montreal Earnings Call
[music].
Please standby for your meeting is about to begin.
And please be advised on this conference call is being recorded.
Good morning, and welcome to the B Mall financial group's Q for Twentytwenty earnings release and conference call for December 1st Twentytwenty. Your hosts for today is Mr., Tom Flynn Chief Financial Officer.
This is Lynn. Please go ahead.
Okay. Thank you operator, and good morning, everyone and thank you for joining on.
Our agenda for today's Investor presentation is as follows.
I'll begin the call with remarks from Darryl White BMO CEO I will then provide a review of the bank's financial performance, which will be followed by a presentation by Pat Cronin, our chief risk officer.
We have with US today on the call are any johansen from PNC, Canada did Casper from U.S. PNC, Dan Barkley from BMO capital markets, and Joanna Rotenberg from BMO wealth management.
After our presentations, we will have a question and answer period for questions from pre qualified analysts to give everyone an opportunity to see opportunity to participate. Please keep it to one question. Please.
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.
Also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and for the overall bank.
Management assesses performance on a reported and an adjusted basis and considers both to be useful in assessing underlying business performance.
Airline I will be referring to adjusted results in our remarks, unless otherwise noted as reported.
Additional information on adjusting items, the bank's reported results and factors and assumptions related to forward looking information can be found in our 2020 annual report and our fourth quarter 2020, <unk> earnings release and with that Daryl overview. Thank you Tom and thank you all for joining us this morning.
Today, we announced another very strong operating quarter with adjusted earnings per share of $2.41 and strong pre provision pretax earnings of 2.5 billion up 7% from Q4 of last year.
In a year that has seen extraordinary change and challenges that have dramatically impacted global economies and the like.
Lives and livelihoods of millions of people BMO has been on the frontline advancing economic recovery supporting our customers communities and employees through uncertainty and hardship.
I've been deeply inspired by our employees across the bank, who have kept their focus firmly on our customers as we collectively adapted.
Two and executed unparalleled change acting with courage empathy and providing stability amid the uncertainty.
In the context of this environment the bank delivered solid and resilient results this year pre.
Asian pretax earnings for the year of 9.4 billion were up 7%, we achieved above target operating leverage of 2.7% and improved our efficiency ratio to below 60%.
We added to our provision for performing loan losses through the year and are very comfortable with our allowance coverage as we said at our investor event in September our commitment to superior superior risk management is a defining characteristic for BMO and we expect to continue our long track record of outperforming the industry on credit.
Our capital position strengthened and with a cetone ratio of 11.9%, we remain well positioned for any environment.
These results are a testament to the fundamental strength of the bank that have served us through time, and we will continue to drive future growth.
These include the benefit of our well diversified businesses that together produced resilient earnings the strong operating momentum we had going into the crisis that we've sustained and most importantly, our ability to quickly adapt to the evolving environment, while continuing to execute against our strategic priorities.
We're delivering against our commitments to build and strengthen our competitive position, including allocating resources to areas, where we are best positioned and to deliver strong returns now and in the future.
As part of these efforts, we're winding down our presence in non Canadian energy markets going forward BMO capital markets energy business will be focused on the Canadian energy market, where we believe our competitive positioning is strongest and where we will continue our deep and longstanding commitment to supporting clients.
We're also continuing to deliver on our efficiency commitments through a targeted and disciplined approach. We held full year expenses stable to last year accelerating our efforts through the year and improving efficiency by 160 basis points in the second half of the year, we achieved an efficiency ratio for.
Below 58% the target we set for 2021 at our 2018 Investor day, and we're committed to doing more over the medium term.
Turning to our operating groups each of our businesses demonstrated resilient performance this year advance their strategies and deepened customer loyalty can.
Canadian PNC delivered good relative performance continuing to grow revenue and expand market share. Despite a period of lower client activity.
We took action to reduce expenses in the second half of the year and stood by our retail and commercial customers, providing hardship relief to support them through the crisis and positioning us to grow with them through the recovery.
In U.S. PNC.
Revenue was up with good loan and strong deposit growth offsetting pressure from lower interest rates combined with a continued focus on expense management, we delivered strong operating leverage of 4.6% and improved our efficiency ratio to below 55%. Another target we achieved ahead of schedule.
Capital markets responded to meet very strong client activity in light of extraordinary market volatility delivering record revenue up 12% for the year and focused expense management, producing operating leverage of 13%.
With an efficiency ratio of 60%, we're well positioned to sustain our momentum into 2021.
In wealth management earnings also increased year over year as we grew client assets loans and deposits benefited from strong online brokerage revenue and continued to lead the market in Canadian ETF flows we.
We delivered strong expense management and positive operating leverage while continuing to strategically invest in the business, including enhancing our digital investment solutions.
Our overall U.S segment remains a key contributor representing approximately one third of our earnings and delivering strong 14% pre provision pretax earnings growth for the year.
We continue to advance our us platform, leveraging strong integration and collaboration across our retail commercial wealth and capital markets businesses.
We're staying ahead of the evolving needs of our customers introducing innovative solutions that improve their financial wellbeing. For example on Canadian PNC, we expanded our suite of credit card offerings with two new BMO eclipse visa cards that provide customers greater reward flexibility and earnings potential allow.
And with their lifestyle.
We launched our family bundle checking account option. The first of its kind in Canada, helping families save by grouping separate accounts under one monthly fee.
For our us retail and small business customers, we've launched a savings reward program with a monthly cash bonus that helps them build strong savings habits.
We've also continued to advance our digital experience in line with customers rapidly evolving preferences with solutions that anticipate their needs. We're focused on enabling customers to bank on their terms, including enhancements to our digital payment capabilities evolve lending journeys and the launch of a proprietary AI powered Ics.
Spirits to help customers predict and avoid potential cash shortfalls.
This progress extends across all business lines and as part of our broader journey to a more digitally led operating model that drives customer experience efficiency speed and scale.
Looking ahead to 2021, while the path of the pandemic and the economic recovery remains on certain we now know that vaccines will be available relatively soon and there's good reason to be optimistic about the associated economic recovery accelerating as 2021 progresses.
While we expect revenue growth in parts of our business could remain constrained in the near term we are committed to our financial objectives over the medium term.
We've strengthened our competitive and capital position and we're confident in our opportunities to grow as business investment and consumer spending recover through 2021.
And regardless of the environment, we'll continue our commitment to disciplined expense management and ongoing efficiency improvement since 2016, we've improved our efficiency by over 4%, having made permanent changes to our cost base, while maintaining strategic investments to fuel business growth.
We're aiming to keep expenses stable again next year and again deliver positive operating leverage.
Clearly the world is in a much different place today than it was a year ago disc.
Despite the challenges conditions are in place for real change and we are acting quickly and decisively to extend our position as a leading north American bank on.
For bank has been tested and Weve proven our resilience for.
For driving forward led by our purpose to boldly grow the good in business and life. We're proud to have been recognized by the Wall Street Journal and as 2020 ranking of the world's most sustainably managed companies, which placed BMO first among all banks in the world and 15th among all global companies.
In addition, BMO ranked in the top 10% globally among the most sustainable companies on the Dow Jones sustainability index, a recognition of our commitment to accelerate positive change for a sustainable and inclusive future.
Now I'll turn the call back to Tom to discuss the fourth quarter in more detail.
Okay. Thank you Daryl and good morning, everyone. My comments will for will focus on the fourth quarter results and start on slide nine.
The bank's performance remained good in the quarter with pre provision pretax earnings up 7% income flat to last year operating operating leverage above 2% and a strong capital position.
Q4 reported EPS was $2 on 37 cents and net income was 1.6 billion net.
Adjusted EPS was $2.41 and adjusted net income was 1.6 billion, both essentially unchanged from last year.
Adjusting items are similar in character to past quarters and are shown on slide 28.
Turning now to revenue fourth quarter net revenue was $6 billion up 4% from last year. Good revenue performance in capital markets and wealth management was partially offset by decreases in PNC Bank net.
Net interest income of $3.5 billion was up 5% on an ex trading basis net interest income increased 1% with higher balances largely offset by lower margin.
Net non interest revenue was $2.5 billion up 2% for last year.
We continue to focus on disciplined expense management expenses were up just 1% from last year with operating leverage of 2.1%.
Before moving on as you know in Q1 of each year, we expense deferred compensation granted to employees were eligible to retire.
As a reminder, in Q1 of fiscal 20. This is this expense was $90 million in Q1.
And lastly for the quarter the provision for credit losses was $432 million and Pat will speak to this in his remarks.
Moving to capital on Slide 10, our capital position strength and again this quarter the common equity tier one ratio was 11.9% up 30 basis points from Q3.
As shown on the slide the increase reflects growth in retained earnings and the issuance of common shares under the drip.
Risk weighted assets were flat in the quarter with impacts from lower loans offsetting model and methodology changes.
Moving to our operating groups and starting on slide 11, Canadian PNC net income was $648 million compared to $710 million last year, reflecting lower revenue and higher credit provisions.
Revenue decreased 2%.
Net or sorry, non interest revenue was down primarily driven by lower credit card and deposit fees and net interest income was relatively unchanged as higher balances offset lower margins.
Average loans were up 3% with commercial loans up 4% deposit growth continued to be strong with personal up 11% and commercial up 31%, reflecting higher liquidity retained by customers in this environment.
Net interest margin was up six basis points from last quarter, reflecting the benefit of deposits growing faster than loans and higher loan margins, partially offset by lower deposit margins expenses were down 1% from last year.
The provision for credit losses was $191 million with the provision on performing $11 million.
Moving to us PNC on slide 12, and my comments here will speak to the US dollar performance net income of 253 million was down from $305 million last year due to higher credit provisions with lower revenue more than offset by lower expenses per.
Pre provision pre tax earnings growth was 3%.
Revenue was down 2% as lower deposit margins and non interest revenue were partially offset by higher deposit balances and loan margins.
On the balance sheet average commercial loans were up 1% and personal down 2% average deposit growth was strong at 28%.
Net interest margin was up three basis points from last quarter, primarily due to higher loan margins and deposits growth deposit growth exceeding loan growth, partially offset by lower deposit margins.
Expenses were down 5%, reflecting lower employee related costs and our continued focus on expense management.
Operating leverage was strong at 3.5%.
The provision for credit losses was $135 million with impaired provisions down from last year and performing.
Turning to slide 13, BMO capital markets had net income of $387 million up 38% from last year results reflect strong revenue in our trading businesses and good results in investment and corporate banking.
Revenue was up 17%.
Global markets revenue increased driven by strong client activity and interest rate equities and commodities trading.
Investment and corporate banking revenue was up 7% with higher corporate banking related revenue and higher corporate lending and underwriting fees.
<unk> expenses were well managed and up just 2%.
The provision for credit losses was $64 million with the recovery on performing loans of 41.
Moving now to slide 14 wealth management had good results in the quarter with net income of $328 million up 9% from last year.
Traditional wealth net income of $261 million was up 6% with higher revenue, partially offset by expenses loan and deposit growth continued to be good year over year.
Insurance net income was $67 million up from $55 million last year.
For the wealth segment overall revenue was up 4% and expenses, 3% from last year.
Turning now to slide 15 for corporate services, the net loss was $86 million and essentially unchanged from last year.
To conclude we had good operating performance in the fourth quarter and for the year, we continue to make progress on efficiency and delivered positive operating leverage for the fifth year in a row results demonstrate the benefits for our diversified business mix and active management of the business through the year.
And with that I'll hand, it over to Pat.
Okay. Thank you Tom and good morning, everyone.
Overall, our risk performance was strong this quarter and we saw improvement in most of our key risk metrics, specifically looking at credit performance, both impaired and performing loan loss provisions came in much lower than recent quarters underscoring the cautious optimism in the credit outlook that we expressed coming out of Q3 and at our Investor day on so.
September.
Starting on slide 17, the total provision for credit losses was $432 million or 38 basis points down significantly from $1.054 billion or 89 basis points last quarter.
The PCL on impaired loans were very good given the current environment with impaired provision of $339 million or 30 basis points down from 38 basis points on the third quarter.
We also recorded a provision non performing loans of $93 million, which was the result of an improving economic environment being more than offset by a more severe adverse scenario, which reflects the continued uncertainty of the resurgent virus.
When we look at our actual loss experience over the past few quarters of acute economic stress and our current fort loss forecast for the next 12 months, we feel quite comfortable that our current allowance provides adequate provisioning against what we expect our impaired loan losses to be in the coming year.
Turning to the impaired loan credit performance on the operating groups, where we saw positive trends in almost all of our business segments in our consumer businesses. We continue to be encouraged by the resiliency of our retail customers Canadian consumer provisions on impaired loans were $94 million a significant decrease from their level last quarter.
This decrease was mainly driven by lower 90 day delinquency levels on personal loans, including auto loans on personal lines of credit.
US consumer PCL on impaired loans also decreased compared to last quarter due to lower provisions on mortgages on auto loans, good recoveries and some benefit from deferrals, which relieved near term stress for a small proportion of our borrowers.
We would note that the low 90 day delinquency and Canadian consumer was due in part to the payment deferral program freezing the credit status of a cohort of accounts some of whom would have otherwise age to 90 day delinquency an impairment.
Consequently, now that the vast majority of deferrals of expired, we do expect to see some increase in consumer delinquency and PCL on the coming quarters.
In our commercial businesses, we have seen similarly, encouraging credit performance provisions for impaired loans and Canadian commercial declined from $127 million or 56 basis points in Q3 to $86 million or 39 basis points for this quarter.
The quarter over quarter decline was even more notable in our US commercial business were impaired loans provisions declined from $94 million or 35 basis points in Q3 to $46 million or 18 basis points for this quarter.
Within our US commercial segment. We also saw a decline in provisions for transportation finance as tighter truck capacity and improved spot rates resulted in improvements across all delinquency categories.
Provisions for impaired loans and capital markets were $105 million this quarter up from $79 million in Q3.
These elevated provisions continued to be concentrated in oil and gas however, given the more stable commodity price environment over the past two quarters and the significant drop in oil and gas formations. This quarter, we do expect oil and gas provisions to moderate in the coming quarters.
Looking back at the PCL results for the full year. The total provision for credit losses was $2.953 billion or 63 basis points compared to $872 million or 20 basis points on the prior year.
The year over year increase was mainly the result of the pandemic, which drove higher provisions on both impaired and performing loans.
On slide 19, impaired formations declined 62% quarter over quarter to $662 million from $1.76 billion in Q3.
Formations decreased in both consumer and business lending with notable declines in coal that impacted sectors like services manufacturing and retail trade.
Gross impaired loans declined by 18% quarter over quarter to $3.6 billion or 79 basis points down from 95 basis points last quarter.
The impaired loan decline was primarily driven by lower formations and a higher level of paydowns on impaired loans, the latter largely coming from us commercial on capital markets.
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 retail trade and recreation.
These segments have experienced higher levels of risk migration and impaired formations since the start of the pandemic and continue to face headwinds given the macro environment.
However, it is important to note that notwithstanding the stress being seen in these sectors are impaired loan losses across all the segments have been quite manageable through fiscal 2020, reflecting strong origination practices and loan structures.
On page eight of the quarterly earnings release, we provided additional disclosure on customers with payment deferral arrangements.
Approximately 94% of all payment deferral arrangements with our business customers have now expired with a roughly 2% of those expired now delinquent or in default.
Approximately 88% of consumer and payment deferral arrangements in Canada, and 80% of US consumer arrangements have now expired with a little more than 2% of those expired now default or in or in delinquency.
In terms of the outlook, we remain cautiously optimistic.
We've been pleased with our overall risk performance given the acute stress on uncertainty caused by the pandemic and expect credit losses through fiscal 2021 to remain manageable.
While there is still considerable uncertainty in the future path for the pandemic and credit conditions can vary from quarter to quarter based on what we see today, we would not expect to add to our performing provision in the coming quarters and expect our impaired loan loss rate to average in the high thirtys to low fortys during the next fiscal year.
I will now turn the call back to the operator for the question and answer portion of today's call.
Thank you.
Please press star one at this time, if you have a question there will be a brief pause while other participants register we thank you for your patience.
The first question is from Meny Grauman from Scotia Bank. Please go ahead. Your line is open Sir.
Hi, good morning.
Capital ratios are higher than expected in continuing to move up.
We have.
On reawakening in.
M&A in the us regional banking.
Joe Im wondering if you could update us on your M&A outlook, how does the recent deal.
Change the way you are looking at.
M&A on your positioning in the us for you in us banking markets.
Start there.
Thanks, Manny it's Darryl.
So thanks for the question Youre right capital levels.
Our strong at 11.9%. We're we're we have more capital than we did before the pandemic.
So we feel good about the flexibility that that provides I guess I would say, though our first priority has been and remains deploying that capital for the use of our organic growth our clients.
On the investments that we're making in our people and our growth agenda.
There have been some shifts you're right in the U.S. landscape and we we always look at it as I've said to all of you before but at this time I would say on our posture is really no change from the past.
We're interested in that landscape, but the first priority.
Is organic and really nothing there has has changed despite the strong position that we're in.
And in terms of buybacks, how would you order your preference on buybacks versus.
Vesting in the business and then M&A, how would you rank those three categories yes.
Yes, so it's difficult to rank the many because it depends on the circumstances at the time as you know buybacks aren't available to US right now, but if you imagine in environment later, this year, where they where they were.
Available and we don't know when when and if that will be the case, but if you do imagine that environment.
I've always said that our first priority is to invest in organic growth why because it's worked for us and we have we've demonstrated that in strong recovery periods. We can in fact invest quickly and take share from competitors. So we like our ability to be able to do that.
At the appropriate time, if there was an M&A opportunity.
It was equivalent in all respects to a buyback we would probably pursue that M&A opportunity. If that helps you, but if there weren't than we would go to the buyback.
Thanks, and then just as a follow up just in terms of the other side of that divestments, you are getting out of the uinta oil and gas for on a bit.
Business are there any other areas that are non core areas that are still sort of being contemplated.
There was some rumor on the wealth management side on an on and you can talk to them, but are there any other.
Non core businesses that are potentially.
Being discussed.
No I think at this point many I would say, we always take a hard look at our portfolio I think we've we've signaled to all of you have losses, a while that we've been taking a bit of a harder look at our portfolio really just looking through the lens of efficiency and returns.
So you May you may see things as time goes on.
Net debt would be helpful, but not overly significant on the whole so net positive but not overly significant.
Thank you.
Thank you for the next question is from Ebrahim Poonawala Bank of America line opens.
Good morning.
Good day.
I guess, just as you think about per day.
Mentioned for the recovery from the pandemic over the course of the next year.
The loss in Wi Fi on expectation debt on how the mill in particular his position good commercial loan growth between Canada, and the us any at all to for both markets.
Well, maybe ingraham, it's Darryl I'll start and then I'll ask Dave on the commercial side to come in.
The short answer is I think we're very well positioned we've got we've got lots of capital as I said, a moment ago. We've shown in moments, where there has been strong commercial growth in the market. If you think back to 2019 in particular and the majority of 2018 that when the commercial market expands we have an ability to expand at the rate of them on.
Market or or better.
We think we're about as good as that as as anybody on we choose our clients quite carefully as we emphasized at Investor day, and manage our risk and I think you're seeing the outcomes of that risk management in the in the per day in the impaired provisions that we've we've shown you in the last couple of quarters. So the punch line is we really like our position as the as the economy recovers I've said before I do.
I believe that we're going to see a business led recovery and we will see that I don't know when but we will see that accelerate at some point through 2021 in our position within that is really is really quite good Dave would you would you complement that in any way.
Yes, I think.
Agree with what you said and I guess I'd.
I don't think we can underestimate the power of the news of this vaccine has had on the last couple of weeks in terms of on when we talk to our clients on both sides of the border Theres less uncertainty as a result of this theres more is as bad as things are right now they're thinking forward, they're thinking more about how they build.
The up their inventories most of our clients have had some sort of supply chain issues. Those are now starting to correct themselves.
In all of our businesses, where theyve contract is just because of the decline on receivables and inventory Thats coming back people are thinking again about acquisitions, they're thinking again about capital expenditures, so I'm I'm more positive.
I've always been positive on a more positive the things could turn around a little bit faster than what we would have initially thought.
Our pipelines are up not as strong as they were a year ago, but up quarter over quarter business activity is still up and just from our standpoint. We now we think we're pretty front footed in terms of spending our time with our clients and other prospective clients getting ready for this as Daryl said this is a time.
Generally show pretty well in terms of how we get out into the market, whether we've seen them in person or whether we're seeing them over.
James we're out there so I'm pretty positive I hope that helps give you a little bit more color.
That's a good perspective, and if I can just sneak in a follow up data on to your comments earlier that on it does feel like on the cell phones. The exit of the energy sort of non Canadian energy business, you acquired that portfolio at the end of 2018 on.
News about potentially selling on long counted asset management business.
Iceland coming on board as CFO. It seems like on the things that a channel, which Mike I know maybe positioning the bank as we think about strategically on the outlook for the next few years.
Just talk to us in terms of on.
Are you thinking about things differently on a on a more accelerated timeline as it comes down to shop.
Softening the business full force in double the for you can be in terms of autozone efficiency relative to the group.
Yes, I think it Ram I think the last part of what you said is important I mean, the focus on our OE inefficiency is accelerating but.
But but none none of that is a new notion we have accelerated our focus on efficiency quite quite successfully frankly, we've had a 4% improvement over the last for five years.
We're continuing to see more opportunities for improvement I'm, just a slight correction, we didnt acquire the entire non Canadian energy portfolio. In 2018 that was just a small portion of it and.
And so there it's just the same for the same lens that were looking through our OE inefficiency and as I said moment ago as you look forward.
May see things you may not but overall I wouldnt describe them as overly significant.
In in the hole in the Grand scheme of the bank, but but net net positive with an accelerated focus.
Okay. Thank you.
Thank you.
The next question is from jumping on this time.
National Bank financial. Please go ahead your line is open.
Hi quick question on the decline on the impaired loan balances.
In the commercial category in particular, the nearly a billion dollar reduction to jails and on the commercial category, you're wondering almost about the.
Accounts that returned to performing or did you sell on the loans anything like that.
Yes, yes.
Thanks for the question, it's Pat on the short answer is no we didnt sell on the loans its really a combination.
As you know very very low formations this quarter and in the US commercial business in particular formations were extremely low.
And then we did have some pay downs from impaired loans. So I think we've talked about this on the prior couple of quarters. There had been some chunky or loans that had gone into the impaired bucket. We didnt expect to take PCL, we expected to get paid down and some of that happen this quarter as well and then just the approving the improving economy broadly.
And then just some of the more improving trends, we're seeing in some of the harder hit segments cost some of that those impaired loans to move back up into performing status. So it was really the combination of those three things not loans sales channel.
A follow up to the commercial lending outlook there.
Canada on the US do you expect that the you could return to positive growth in commercial lending in the next few quarters or is that more you're optimistic, but it's going to take a while to rebound because I look at the U.S. in particular do you know if I, if I back out the nearly $5 billion of a.
Great. Thanks for that program loan growth.
We're getting into put some pretty.
Steep declines here.
Yes, it's Dave let me take a shot at that high share right and when the economy total.
It does here, particularly in our book, which is probably a little bit more skewed to financing working capital assets.
Comes down pretty quickly.
But on the upside as I talked I think it will come back pretty quickly as well. So I think it's going to be a couple of tough quarters year over year, but I feel pretty confident that when we given by the time, we get to the fourth quarter of 21, we'll be looking at loan growth again.
You got to think the PPP out of it but loan growth again, that's a mid single digits. So I think that would be.
Kind of where I see it happening and I, just it's hard to tell exactly when that will turn but I think by the end of the year, we will be looking at positive loan growth again.
Okay.
And then a big revenue impact for the energy business, but your EBITDA.
Yes, David it's Darryl debt.
Not.
Not not material.
And it and its net it takes time to go through it sorry downward gave so you know we're not in the same room, we're trying to be careful here, yes, I think we try and I think I heard your voice trying to get index.
No I think you gave us some road give growth.
For the bank.
Thank you.
Next question is from Scott 10 from Canaccord Genuity. Please.
Go ahead.
Hi, good morning, maybe going back to Dave on the us side here.
Your your and I are spread income has been a lot more resilient than think on appears that we track you kind of talked about commercial growth by moving kind of talked about the margin.
In the quarter and perhaps the outlook on that on that line item and in 2021.
Sure So you're talking about basically our NIM.
Which was.
Which was really quite good.
During the quarter and and frankly for the year better than.
So a couple of things that caused that much better deposit growth.
Than we had seen in the past better.
Better loan spreads frankly than we had seen.
As we've been we've tried to be very disciplined and continued but continue to support clients and then the offset assist the lower rates.
But we did pretty well to offset that this quarter and I think to your question going forward.
I don't see a big change.
Over time, we may see some deposits leak away as they actually get back into investing in businesses with our clients, but I don't see a big a big change as we go through the year.
And just lastly on the deposits commercial was up 54%, maybe kind of talk about that in and the outlook there.
Well, yes, we were up 50, some percentage growth in misses in the U.S., but commercial in Canada had strong growth as well I think it's just a reflection of.
The clients of pay down their debt they've backed up cash we've added an awful lot of clients, but unlike in past years, a lot on the clients, we at our coming over with loans they are coming over with deposits BMO.
Chemo is viewed as a very safe place to put their money.
On a good place to hold that until we start growing again, so I think it's really and lastly, one other thing Thats I wouldn't want to under emphasize we have a very strong basically leading business on our treasury and payments business, which is basically the managing give cash for our commercial clients. We've invested a lot on that and so that also has attracted more and more.
For operating business over the last for five years all of that is added up to a peer leading growth on the commercial deposits guidance on both sides of the border.
Thank you very much.
Thank you next.
Our next question from Doug Young from Deutsche Bank. Please go ahead. Your line is open.
Hi, Good morning, just for Pat just going back to I think its capital markets you add on recovery for performing loans of $41 million, hoping you can just maybe on what what drove that and then I think you mentioned on year yeah.
Your remarks that net performing.
Loan Hcl.
Reflected on.
Improved economic environment or potentially forward looking indicators, but then you put a more about waiting towards or pessimistic scenario, hoping you can maybe just talk a little bit about some of the moving pieces that went into the calculation of the performing loans Alan.
Overlays and whatnot. Thank you.
Sure. Thank you for the question Doug. So just first of all with respect to the capital markets declined in the performing provision that was principally driven by better outlook for that for impaired losses over the course on the next 12 months for oil and gas I think as you know we have we've actually added significantly to that provision over the course of fiscal two.
Tony we've recognized a lot of that impairment now so that helps drive that down, but secondly, where our forecast for the next 12 months is for significantly lower impairment and PCL in that sector than we would have seen enough 20.
We've seen a dramatic slowdown in negative migration for the oil and gas sector. In Q4, obviously, you can see a material decline in formations in jail balances on the PCL. This quarter really was driven much more by in some incremental provisions we took on some prior formations and not formations related to this quarter.
So all of that is good news. We also of course expect the book to decline over the course of the next year the price environment has been pretty stable over the past couple of quarters.
So that when we looked at what we had in terms of that performing provision for oil and gas within capital markets. It felt like there was room for us to release some of that.
In terms of the moving parts in the overall provision you pretty much GAAP both of them right.
Really the macroeconomic outlook got better this approved this quarter on quarter over quarter and that otherwise would have drove a reasonable release in the provision and our base case. This has really not changed over the course of Q3 Q for its a little bit better in line with consensus what really changed then as we moved from an adverse to a recession scenario.
In our downside case, and Thats really to reflect just a wider range of potential outcomes in that downside case, clearly we are seeing a resurgence of coded and more talk of locked down and so we thought we'd like to reflect a little more uncertainty in terms of what that downside case could look like and that more or less offset.
Net that benefit that we would have got from economic changes.
Balance growth was wasn't it was.
Would have been a small reduction to the provision this quarter.
So those are really the main moving pieces.
Then when we look at our overall coverage.
We had a billion and a half of impaired loan loss provisions. This quarter, we've now or this year in fiscal 20, we've now got in a little over 3 billion of allowance set aside for performing loans and we'd like to believe that some of the more difficult quarters are behind us.
So we think with that kind of coverage, we're very well positioned and we really didn't need to do much more than a bit of tweaking this quarter in terms of that aggregate balance so hopefully that helps net.
Just a qualification on you Didnt increase you're waiting for the downside you just changed your downside scenarios to be more of a recession is that correct.
No we did make some very minor adjustments quarter over quarter to the waiting.
And.
And we don't we don't generally disclose those but it was a slight.
A slight change quarter over quarter nothing meaningful.
I was on I listened to just the outlook on the commercial side and more as the optimistic outlook in terms of the vaccine and what not.
And on and listen to you being a little more conservative I guess on the performing loans.
You know how much of this is kind of just management overlay and how much and what would maybe the question is really what would it take you to kind of moves in the other direction do you have to see peak peak loss rates a charge offs yet.
What makes you knew instead of moving more pessimistic towards the more optimistic.
I would say I guess, principally a reduction in uncertainty like I said, we're still comfortable with our base case on we think the economy is going to continue to improve.
We're seeing lots of positive trends, particularly underlying wholesale business, but also consumer.
So nothing has really changed from that perspective, but we think until we see a reduction in uncertainty, which really means case numbers getting back under control.
Maybe another quarter of the same stable or improving trends, we're seeing and in consumer and business and then maybe a little bit more clarity on vaccine timing you know all of those things were way it will weigh into our thinking around around the provision.
And so and then maybe some of US and continued improvement in some of the sectors more uniquely hit by Cobot and Thats typically where you see that those overlays come in.
We have a fairly disciplined process around overlays on.
Just on Fortunately loss models have a harder time understanding some of the very unique impacts of cobot on sectors, and that's where we've been applying that management discretion. It.
It hasn't been broad it's been much more targeted like that and so again as we see continued improvement in some of those sectors continuation of the positive economic trends we're seeing.
You're likely to see some of that provision start to come back out again insights on point over the course for the next 12 months operator, I'll I'll just jump into say, we've got about 15 minutes on a number of.
Analysts in the queue. So I'd ask for analysts to keep it to one question with maybe one quick follow up on the way through thank you Sir.
Certainly thank you.
The next question is from Lamar per so from Cormark Securities. Please.
Please go ahead.
Thanks My question, So I think for most appropriate for Tom Tom can you unpack the movement in margins quarter over quarter day, all bank level, how much of it was due to deposits on growing loans higher loan margins and.
Then can you offer an outlook going forward. It just seems like the six basis points sequential increases seems a bit higher for me.
Yes so.
So I'll say a few things at the at the group level. So for the two PNC businesses.
On the drivers were similar and they included deposits growing at a higher rate than loans.
Higher loans spreads and we have been working on and improving loan spreads for a number of months and thats benefiting the margin.
And then on the negative side lower deposit spreads and so that blend has produced for the two PNC businesses on the quarter margins net up at the all bank level.
Excluding trading we were up seven basis points quarter over quarter.
By group PNC, Canada.
Helped by a couple of basis points capital markets same thing and corporate was better as well and corporate helped the all bank margin by four basis points quarter over quarter and that was in part because Q3 was a soft revenue quarter for corporate and we had a bounce back in.
In Q4, and Q4 was a little better than average Q3 worse than average on so that helped that the all bank level.
And then looking out to next year.
We expect a bit of pressure on the margin as we go through the year.
Kind of a gradual impact from low rates.
And to some degree.
We think we'll get a benefit to the margin from the excess liquidity that we're holding.
Running off through the course of this year.
And as we talked about last quarter, the excess liquidity that we're holding.
Earns a lower margin and so that is depressing NIM all else equal and in the quarter. The excess liquidity is about negative nine basis points to the margin and so through next year as excess liquidity thats in the system a day.
Drains out we expect.
EBIT of a bit of a positive to margin, but net net we think will be down slightly through the course of the year.
So just a quick follow up on the negative nine.
What would that go to in your best estimate.
Through the year can it go down to five basis point drag flow hit.
It's one of the it's sort of interesting questions. That's out there there is a lot of liquidity in the system.
We do think as the economy improves our liquidity will be put to work for.
For Dave talk about that and so.
Hard to say, but I think our expectation would be that it's down by at least half.
And there's.
There is going to be a range around it but it should be down by at least half.
Thank you.
Thank you for the next question is from Paul Holden from CBC. Please go ahead. Your line is open.
Thank you good morning wanted to go back to the conversation on.
On loan losses allowances and I guess my question is specific to say on the announcements that came out on the Canadian Federal government last night on those specifically targeted debt.
Over the impacted industry is what I'm wondering what your initial impressions.
Of those measures are and if those are a potential catalyst for seeing more optimistic assumptions for your allowances.
Sure. Thanks for the question Paul It's Pat.
Yes first of all we're definitely encouraged by what we saw last night and look forward to working with the government on on organizing the details of that program.
I would say definitely a positive although it at the moment, what we're seeing is loan sizes cap that $1 million, which will be primarily beneficial for the small business segment.
I think pretty obvious to say that there are definitely stress sectors that they're focused on hotels restaurants entertainment and leisure. So we think the government is spot on with the targeted approach that theyre taking on.
As as our small business portfolio in aggregate really isn't that big it's about 5% of our business and government loans and so we think it will be beneficial clearly and beneficial for the broader economy and beneficial to employment certainly in those sectors. So we're highly encouraged but in terms of material impact on the performing provision.
I guess, probably too early to say and if I may I suspect probably not a big amount.
Got it Thats helpful. Thank you.
Thank you next.
Next question from Darko Mihelic from RBC capital markets. Please go ahead.
Hi, Thank you my questions are for Pat Cronin.
Net.
Looking at the loans past due non impaired and I wanted to clarify.
Your discussion with respect to deferrals in frozen and can you. Let me know if if if if you've come off of a deferral and you have not major your first payment are you captured in this table.
Well I think dark Darko I think what you're seeing two you're seeing an uptick there. This is probably than the origin of your question, you're seeing a bit of an uptick in loans past due.
And not impaired and really what that is it's a bit of a technical anomaly that you are seeing their entry.
Interestingly the last day of the quarter fell on a weekend.
And.
The what that means is some of that payments for loans, particularly on our consumer division don't kept processed actually until the Monday and so they show as actually past due but not impaired as.
It's a real and Thats almost all of the elevation you are seeing in that number it doesnt happen very often we actually saw this might think maybe Q2 back in 2017 with almost the exact same dollar value phenomenon. There. So I wouldn't read too much into that loans do or loans past due not impaired non number.
Maybe broadly, though with respect to consumer deferrals, I think you've seen a pretty significant decline, we're seeing pretty encouraging trends with delinquency. We're more focused on ones that have expired and cycled so have gone through a payment cycle, some pretty encouraging trends there.
We.
The ones that are going current tend to be making full payment as opposed to partial almost the vast majority of them are full payment. We're finding if their current after one month for their highly likely to be current after too. So seeing some some definite positive trends there will continue to watch that segment closely but.
That's I guess I'll have to say on that.
Thank you and just a follow up on that then Pat So what is the I mean, it's difficult to find the number is difficult to back into one too. So what I'm really just curious about is.
How many people have come off on the deferral and have not made their first payment like what does the dollar amounts that were talking about and what is the assumption with respect to whether or not these people actually go all the way to impaired status.
Yes, so I can tell you about two for it with can consumer loans. When we look at well first of all about about like I said on Mike are opening remarks about the almost 90% of now expired and the delinquency rate of those that have expired is about 2%.
Its little less than Canada, quite a bit higher in the U.S., but mostly because the percentage that was delinquent going in was higher in the us and Canada. So that kind of gives you a perspective of what delinquency looks like right now.
And then we've got about 60% of that population that have actually gone through a full cycle of payment and the delinquency rates tend to be about the same still sitting in and around that 2%, maybe just slightly lower the vast majority of whats left on deferrals mortgages. So I don't expect those delinquency numbers to actually change a whole lot I mean.
I will watch it carefully as we go but so far we're seeing pretty good signs on delinquency.
Okay. So just so when I calculate when you say, 2% or delinquent do you need to do you mean, 2% of the peak amount of loans that were on deferral.
2% on what has now expired.
Okay all.
All right. So I'll have to work for them out on that okay. Thank you.
Okay.
Thank you next question is from Mario Mendonca from TD Securities.
Please go ahead.
Morning.
On.
The next free earnings growth deliver year in for.
I went to a view areas where.
Somewhat hey, Merriman capital your line is going to come to you to note Mr. Duncan.
Okay I will.
Give me a second.
As I reflect on year pretax pre provision earnings.
In 2000 and in this quarter.
There are number of areas, where it looks like the most probably outperform the peers, but the one particular that on one of the highlight was just in the.
On the fee income excluding capital markets from this there are a number of areas where be most just seems like it's been a bit more resilient.
He's deposit and payment fees some of those big broad categories can you speak to why those line items seem to sort of the effects.
The declines for seeing across the peer group is there something specific BMO that I may be missing.
As Tom I can take take a crack at that others can feel free to add add in.
So.
We have a very diversified non interest revenue stream and and some things through the course for the year were up others down.
Down.
And when you look at our mix compared to others on the credit side credit card business side.
On the year was generally pretty tough and balances were down fees were down.
And our exposure to that part of the market.
Is.
Not bad, but a little below some others and so some others would have been more impacted by.
Negative results.
On that front.
And our commercial business, maybe is helping a little bit and we we obviously skew somewhat to the commercial side.
We have been active in managing that business, Dave has talked about that so that might have.
Helped us a bit and it.
As we look out to next year.
We are seeing a rebound in consumer spending we are expecting an uptick in M&A activity in capital markets fee streams in the wealth business given reasonably resilient equity markets are likely to be in good shape and so so.
We are reasonably optimistic about what that line looks like in total for the next year.
Okay. Just a quick follow up then so I totally understand the reference to cards I can see that fairly clearly as I look at my own numbers.
Would be.
The most better performance than say deposit and payment services would that could that be connected to the the overweight and commercial.
It was.
Sorry, Tom I was yeah yep.
Yes go ahead.
Only a positive it's you can see it not only on our deposit growth, but in our treasury management fees and Thats been a non it's been over for five years as you continue to grow clients.
And you have their operating business set so thats a positive on both sides of the border.
On the same to be true for credit and lending fees. The overweight in commercial would also help that line presumably.
Well, yes, but to the extent that.
Your your loans are down there wouldn't be as much on fees. There. So I think we've worked through that.
So I think the point, you're making is positive and it's maybe in spite of.
Lower loans that we've had on the past so just more of on as loans continue to grow and start growing again, I think thats just more positives on the road.
Thank you.
Thank you.
Next question is for Mike reside on its from Credit Suisse. Please go ahead. Your line is open I think thanks for taking my question. Good morning, once talk a bit about expenses as I'm looking at your pretax pre provision earnings on an adjusted basis down actually quite a bit from last quarter I think is down about 5%.
Im wondering in this age of COVID-19 on I'm imagining that you're seen probably the same things at all your peers are seeing with respect to just how much more quickly people are turning to digital channels and if you can maybe best question for Ernie or per day, but in your Canadian us businesses.
The PNC banking side is this something that could be an opportunity with respect to maybe a bit more aggressive on the branch cutting I think you had a little bit of closures on a net basis in Canada not much in the US the last couple of quarters.
If you can talk to that that there would be helpful.
Thanks, Thanks, Mike is there any for the question. The question you're you're spot on we're seeing an increase in both service transactions and sales through our digital channel and we're also seeing a return back to slightly normal levels and reality in the branch network, but that said we're constantly looking at the footprint.
They are there opportunities for us to tell.
To pull back to create a different operating model, whether they be our service capability. So that is what we are looking at and we'll continue to focus on net cobot ebbs and flows.
We're managing that act accordingly, now and we've got a lot of learning through the pandemic on how to really optimize between our branches our call center and our digital channel. So really there's a there's a good momentum going forward for us in the business overall and cost management.
To that end, we already demonstrated that this year and will continue to accelerate on that agenda into next.
Okay. Thanks for that and then.
Curious with respect to future cost cutting is BMO going to stick to the previous on.
Methodology of onetime adjustments, taking restructuring charges or is it is it going to gravitate to a more sort of year on just within the the regular run rate of earnings.
So on the latter loans.
It's it's Darryl Mike the latter is the answer a year ago I said, so I think pretty definitively.
That if we are to go after cost cutting measures it would be taken in the normal course in the lines of business without taking a charge at the top of the house.
There was in fact, even a little bit of that in the quarter that we've just announced and not not not enough to matter. So we don't even call. It out in particular, so going forward. The model is very much the latter.
Great. Thanks for the color.
And with that operator, I think we're going to have to I think we're going to have to wrap so im just going to grab the Mike here and thank everyone.
As you've heard today and as I said last quarter. There are for key drivers of our performance and our outlook that I'd like to highlight number one we're building on clear on top tier operating momentum and proven strengths on.
Among them are strong customer focus and loyalty and we see clear longer term opportunities for growth in our targeted areas of focus number two we are appropriately provisioned and have an enduring commitment to superior risk management that sets us up for continued outperformance in the industry on credit a defining strength for BMO.
Number three we have strong capital and liquidity positions that give us the capability to absorb any remaining uncertainty and the flexibility to invest in growth number for we're delivering on our expense and efficiency commitments with strategies in place to do more and when I roll. It all up our diversified model I would say has been too.
Tested and proven resilient and I'm confident in the continued execution of our strategy to drive leading performance as the recovery accelerates through 2021.
And before I close I want to acknowledge the tremendous impact that Tom has made at BMO, it's almost impossible to overstate. It. He served in a number of critical areas for the bank as your Treasurer, Chief risk Officer and of course, CFO, helping to lead the bank through the global financial crisis successive acquisition.
And and now a global pandemic I know he's the he's developed very strong relationships with many of you on the call many investors and analysts and as one of my most deeply valued partners I will Miss his contributions at this particular table.
Look forward at the same time to welcoming our incoming CFO typhoon to zone at our Q1 call I wish you all a safe holiday season, and I look forward to talking to you again in the new year. Thank you.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Is this line still open are we done.
It's open Mr. box for that can hang it up for your view on too.
I would just I would have thought we were doing a post call discussion with the.
Have they all hung up okay. Thank you you're welcome have a good day. Thank you.
This conference is no longer being recorded net.
As you put modest growth the homes that debt debt.