Q1 2021 Bank of Montreal Earnings Call
Okay.
Please standby your meeting is about to begin please be advised that this conference call is being recorded.
Good morning, and welcome to the BMO financial group's Q1, 'twenty 'twenty, one earnings release and conference call for several years 'twenty through 2021.
Your host for today is Mr. Steve <unk> head of Investor Relations. Mr. <unk>. Please go ahead.
Thank you good morning, and welcome to be most first quarter 2021 investor presentation. Our agenda. Today is as follows we will begin the call with remarks from Darryl White Bmo's CEO, followed by presentations from Typhoon The Bank, Chief Financial Officer, and Pat Cronin, our chief risk Officer.
With us today, Ernie Johansen from Canadian P&C, Dave Casper from U S P&C, Dan Barclay from BMO capital markets, and Joanna Rotenberg from BMO wealth management.
After their presentations, we will have a question and answer period, where we will take questions from pre qualified analysts to give everyone. A chance to participate please keep it to one question and re queue on.
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 would also remind listeners of 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 underlying business performance Gerald.
<unk> will be referring to adjusted results in their 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 on our first quarter 2021 report to shareholders and with that I'll turn it over to Daryl. Thank.
Thank you Christina and good morning, everyone.
On our last call in December I expressed my confidence in the resilience of the economy and our customers to recover from the challenges brought on by the pandemic and in the underlying strength and positioning of our bank to deliver consistent top tier performance against that backdrop.
Our results today this quarter clearly demonstrate our potential.
The key drivers of our very strong performance reflect the execution of our purpose driven strategy, which are consistent over time.
Number one on advantaged business mix diversified across businesses and geographies positioned for resilience and growth number two operating momentum in each business through a focus on customer loyalty and consistent investment in digital capabilities product innovation and frontline teams delivering leading financial advice.
Number three targeted actions to improve efficiency and returns and drive long term profitability, including simplifying and digitizing processes number four differentiated risk management and capital allocation driving consistent credit outperformance and flexibility for capital deployment.
And number five our steadfast commitment to support the financial well being of our customers and communities today throughout the economic recovery period and beyond.
Within this framework, we announced today very strong first quarter operating results with adjusted net income of $2 billion.
Up 26% over last year and earnings per share of $3 six.
We delivered operating leverage of seven 1% with solid revenue growth of 6% compared to prior year and the prior quarter and a 1% reduction in expenses.
And strong pre provision pretax earnings growth of 16% from last year.
We continue to execute on targeted efficiency initiatives, while strategically investing in key areas for future growth.
This quarter's efficiency ratio of 56, 3%.
As an indication of our progress a significant improvement of 400 basis points from last year.
We continue to target stable expenses for the full year.
Credit performance was also very strong, reflecting both the credit quality of our loan portfolio and our commitment to superior risk management over time as we discussed at our Investor event in the fall.
Our capital position continues to strengthen with of CET, one ratio of 12, 4% positioning us well for growth and the eventual relaxing of constraints on returning capital to shareholders.
We achieved above target ROE of 15, 8% an increase of 230 basis points from last year.
Our U S segment is a key driver of diversified earnings growth now and in the future contributing over 40% of total bank earnings. This quarter net income doubled from last year and pre provision pretax earnings were up 48% with an efficiency ratio in this segment of $53 five.
5%.
The United States is making good progress in vaccine distribution with over 17% of the population receiving at least one dose as of mid February as the rollout continues and restrictions ease. This along with further fiscal stimulus and substantial household savings has led to higher economic growth.
Patients of 6% for 2021, and 4% for 2022 with both business investment and consumer spending poised to rebound quickly.
Our top tier commercial lending market position, leading deposit share in our core footprint of growing strategically focused capital markets presence and integrated approach to serving the north American market positions us.
Remarkably well for that recovery.
In Canada, while the recovery is projected to accelerate a little later this year GDP is still expected to grow 5% in 2021 and four 5% in 2022.
Our flagship Canadian P&C business continues to gain momentum in the current environment with another solid quarter of 4% ppt of growth.
Revenue continues to improve sequentially supported by good proprietary mortgage growth.
Adding mortgage specialists and seeing strong renewal and refinancing rates.
We've gained market share in key areas of focus, including retail and commercial deposits cards and commercial loans.
We remain focused on improving efficiency, including our continued branch Digitization journey, which is streamlining processes and creating capacity for frontline employees through a better user and customer experience.
U S. P&C delivered very strong ppt of growth of 24% with higher revenue and effectively managed expenses.
Well commercial lending growth remained modest this quarter with overall loan utilizations still below pre COVID-19 levels, we're continuing to expand and add new clients.
The strong credit quality of our portfolio reflects our risk discipline competitive market position and in particular, our deep commitment to our clients throughout the pandemic.
For example, I want to recognize the tremendous efforts of our transportation finance teams, who supported the trucking industry and our customers by facilitating hundreds of PPP loans and deferring payments for thousands of carriers through the toughest months of 2020 to keep commerce flowing and customers on the road.
These actions position us to grow with our clients as the economic recovery builds.
BMO wealth management momentum continues to build with ppt of growth of 18% driven by strong net income and traditional wealth up 35% from last year.
Our performance reflects actions, we're taking to accelerate growth and returns consistent with that strategy. We entered into an agreement to sell our private banking business in Hong Kong and Singapore, while investing in key areas of competitive strength.
For example, this quarter, we launched new Etfs that offer exposure to transformative market trends, including first in Canada index products, providing access to five MSCI innovation indices as well as the S&P global clean Energy index.
This strategic approach to innovation has maintained our leadership position in ETF market flows for 10 years in a row.
We're also making ongoing enhancements to our online brokerage platforms that offer clients of full spectrum of digital investment options across BMO Investor line advice direct and smartphone app.
And we're growing our teams to meet the unprecedented customer demand, which led to record transaction volumes this quarter.
And BMO capital markets strong ppt of growth of 34% reflects actions we've taken over the past few years to further strengthen and reposition the business for sustained strong performance going forward.
We've maintained our strength in the Canadian market ranking number one in Canadian equity underwriting for 2020.
We've made targeted investments in our U S franchise, including the addition of kgs, which significantly added to our capabilities and we're deepening our expertise in high growth sectors, such as technology and health care.
In addition to our strong financial results, we continue to deepen our commitment to sustainability and our purpose as an early signatory to the United Nations principles for responsible banking and a leader in sustainable finance, we're playing a critical role to support the transition to a net zero carbon.
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In support of an inclusive society, we recently launched BMO empower of five year U S 5 billion pledged to advance and inclusive economic recovery and address key barriers faced by minority businesses communities and families.
This quarter, we were named as the top North American Bank on the list of corporate Knights 2021, Global 100, most sustainable corporations in the world.
And just this morning BMO was recognized by the Ethisphere Institute for the fourth year in a row as one of the world's most ethical companies.
Most importantly, we remain resolute in the support of our customers and communities in the face of ongoing challenges related to the pandemic and we're focused on helping them recover stronger as the economy rebounds. This includes doing our part to support widespread vaccinations as the best way to save lives and.
Reopening the economy.
In conclusion, I am confident that we have never been better positioned for the future as we drive towards a strong north American economic recovery through 2021 and into 2022 I'd now officially like to welcome take Boon.
To his first quarterly earnings call at BMO as you know Typhoon recently joined US as CFO and we're very happy to have him here Typhoon I'll turn it over to you to talk about the first quarter results.
Thank you Darryl good morning, and thank you for joining us today I'll start my comments on slide 10.
During the quarter, we had very strong revenue growth. Despite the low rate environment on muted loan demand and we continue to prudently manage expenses as a result, adjusted pre provision pretax earnings were up 16% with positive operating leverage across each group.
Tier one reported EPS was $3 <unk> and.
Net income was 2.02 billion.
Adjusted EPS was $3 <unk>.
Up 27% from last year.
And adjusted net income was $2 4 billion up 26%.
Adjusting items are similar in character to past quarters and are shown on slide 30.
Average loans were up 1% year over year and relatively flat on a linked quarter basis.
In Canadian P&C average loans were up 3% and up 1% in U S P&C, including 2% growth in commercial loans.
Average deposits were up 15% year over year and up 2% on a linked quarter basis, reflecting the highly liquid corporates and consumer balance sheets.
Turning to revenue.
First quarter net revenue was $6 4 billion up 6% from last year and last quarter with good momentum across each of our businesses.
And particular strength in capital markets benefiting from the enhanced capabilities that we offer our clients and our geographic diversification.
Total bank net interest margin decreased just one basis points sequentially and increased four basis points, excluding trading primed.
Primarily due to higher margins on the P&C businesses, partially offset by lower net interest income and corporate services.
Expenses were down 1% from last year due to our continued focus on expense management.
Quarter over quarter expenses were up 2% related to benefits expense in the first quarter of each year, including deferred compensation granted to employees, who are eligible to retire and by higher performance based compensation related to higher revenues.
Operating leverage was seven 1% overall and 4% or higher in each business group.
Our efficiency ratio was 56, 3% an improvement of 400 basis points from last year, and 240 basis points from last quarter.
Expense management will continue to be a top priority for us while we continue to invest for growth, especially in technology.
The total provision for credit losses was $156 million compared with $432 million last quarter.
Our credit results were very strong and Pat will speak to this in his remarks.
Moving to slide 11 for capsule, our capital position strengthened again this quarter the <unk>.
Common equity tier one ratio was 12, 4% up 50 basis points from 11, 9% in the fourth quarter.
As shown on the slide the increase predominantly reflects the impact.
All of internal capital generation and lower our WMA.
The decline in risk weighted assets from the prior quarter was driven by positive asset quality and model changes.
Based on our strong underlying organic capital generation capacity, we expect our regulatory capital ratios to continue to grow under the current constraints on capital management actions.
Moving to the operating groups and starting on slide 12.
Canadian P&C net income was $737 million.
Up 5% from last year, reflecting pre provision pretax earnings growth of 4%.
Revenue was up 1% from the prior year and up 3% from last quarter showing momentum.
Net interest margin increased six basis points from last quarter, reflecting higher loan margins and a favorable product mix.
Average loans were up 3% from last year with commercial loans up 1% and mortgages through proprietary channels and amortizing helocs up 9%.
Deposit growth continued to be strong with personal deposits up 7% and 28% growth in commercial deposits, reflecting higher liquidity retained by customers in the current environment.
Expenses were down 3% from last year, reflecting lower employee related costs and other operating costs, partially offset by higher technology related costs.
Operating leverage was positive, 4% and efficiency improved 190 basis points to 45, 4%.
The provision for credit losses was $147 million.
Moving to U S. P&C on slide 13, and my comments here will speak to the U S dollar performance.
Net income of $459 million was up 67% from last year due to lower commercial credit provisions higher revenue and lower expenses.
Pre provision pretax earnings growth was up 24%.
Revenue was up 7% from last year and up 9% on a linked quarter basis, reflecting growth in both net interest income and non interest revenue.
Net interest margin was up 17 basis points sequentially due to the higher loan margins.
And the impact of accelerated fee income on PPP loans of six basis points.
On the balance sheet average commercial loans were up two percentage year over year end of quarter over quarter, while personal lending balances declined.
Average deposit growth continued to be strong up 24% due to growth in commercial deposits.
Expenses were down 7%.
Operating leverage was strong at 14% and efficiency improved to 47, 9%.
There was a net recovery of $25 million in the provision for credit losses.
Overall, the results show the strength of our U S operations and its risk profile.
Moving to slide 14 wealth management had a very good results with net income of $366 million up 22% from last year.
Revenue increased 5% and expenses were down 1%.
Traditional wealth net income of $294 million.
It was up 35% from last year, and 13% from last quarter, reflecting higher non interest revenue due to stronger global markets increased online brokerage revenue and higher net interest income.
Insurance net income was $72 million down from a year ago and up from last quarter.
Assets under management and assets under administration increased 8% and 9% respectively.
Turning to slide 15.
BMO capital markets had a record quarter with net income of $489 million.
Up 35% from last year.
Reflecting particularly strong performance in our trading businesses and contribution from the U S, including our investments in kgs.
Total revenue was up 15% from last year and 14% from last quarter.
Global markets revenue increased 25% driven by strong client activity in interest rates equities and commodities trading.
Investment in corporate banking revenue was relatively unchanged.
Expenses were up 3%, reflecting mostly higher performance based costs.
The provision for credit losses was $43 million.
Turning now to slide 16 for corporate services.
The net loss was $143 million compared to a net loss of $105 million last year.
In summary, our business lines of results display the strength of our diversified business model and the result of our intense focus on expense control, while we continue to invest for growth and efficiency.
Looking ahead, we expect the economic environment to improve especially during the second half of the year with broadening vaccine rollout and continued global fiscal and monetary stimulus.
We expect loan demand to slowly strengthen along with a pickup in economic activity and contribute to average loan growth.
We also expect our full year net interest income to be close to last year's level as our overall NIM should tightened by only if by only a few basis points from here.
Full year expenses should remain well managed and in line with last year with quarterly positive operating leverage throughout the year.
To conclude we had a very good start to the year and look to continue to enhance our performance with a strong focus on efficiency and smart investments to position our company's performance for further growth on profitability.
Overall, we remain confident in our ability to manage through the current environment and deliver against our strategic priorities.
And with that I will turn it over to Pat.
Thank you Tiffany and good morning, everyone.
Overall, we were pleased with our risk performance again this quarter and we saw improvement in most of our key risk metrics from our strong fourth quarter results.
And credit performance, both impaired and performing loan loss provisions showed of second quarter of improvement underscoring the cautious optimism. We previously expressed in the credit outlook.
Starting on slide 18, the total provision for credit losses was $156 million or 14 basis points down from $432 million or 37 basis points last quarter.
Given the current environment. Our overall credit performance was strong this quarter with impaired provisions of $215 million or 19 basis points down from $339 million and 29 basis points in the fourth quarter.
We also recognized of release on performing loans of $59 million, which was the result of an improving economic environment and positive credit migration largely offset by the impact of the uncertain environment on credit conditions, including a modest increase in our adverse scenario weighted.
With approximately $3 billion of performing loan allowances and moderating loan impairment and provisions we continue to remain comfortable that our allowance provides adequate provisioning against loan losses in the coming year.
Turning to the impaired loan credit performance and the operating groups, where we saw positive trends in almost all of our business segments.
On our consumer businesses, we continue to be encouraged by the resiliency of our retail customers and.
In Canadian P&C consumer loan losses were $91 million down slightly from the prior quarter with moderate delinquency rates in all products and better than expected performance from the accounts that have exited payment deferrals.
<unk> amongst those customers that were granted payment deferral remains low at under 2% of balances with most of the deferrals now having expired.
And U S P&C consumer losses were $13 million up from the low levels of last quarter and like the Canadian consumer segment benefited from stronger than expected performance on the deferral of population.
In our commercial and corporate businesses, we've seen similarly, encouraging credit performance driven largely by our U S performance, where we posted a second quarter of low impaired provisions.
In U S. Commercial we reported impaired loan provisions of $7 million of declined from $46 million last quarter. The.
The decline in provisions was driven by very low formations this quarter across all commercial sectors.
This improved PCL loss experience included the transportation finance business, where tighter truck capacity and higher spot rates are leading to low delinquency rates low levels of impairment and solid operating performance in this business.
Canadian commercial also had strong credit performance this quarter with $58 million of impaired loan losses down from $86 million in the prior quarter.
Our capital markets business also saw improvement in its quarterly provisions, where this quarters provision for impaired loan losses of $45 million was down significantly from the Q4 provision of $105 million the.
Line was driven by low formations across all sectors, and particularly in oil and gas where the pricing environment continues to improve.
On slide 20 impaired formations at $665 million were very similar to the low level, we saw last quarter and consistent with formation levels, we experienced pre COVID-19.
Gross impaired loans declined by $196 million to 74 basis points down from 78 basis points last quarter.
While we are seeing a modest increase in consumer formations and gross impaired loan balances as expected with the ending of payment deferral arrangements in that segment. This has been largely offset by a continued decline in commercial formations, particularly in oil and gas were formations again were very low this quarter.
On slide 22, we provide an overview of those sectors, where we have seen material COVID-19 impacts on credit quality, which have been concentrated largely in sub segments of services retail trade and recreation.
These segments of 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 of these segments have been quite modest relative to the formations to date, reflecting strong origination practices and loan structures. We will continue to closely monitor these segments, particularly if there is a protracted.
<unk> time period for Lockdowns or vaccine Rollouts, which could put further stress on these sectors.
In.
Of the outlook, we remain cautiously optimistic given the solid credit performance, we've seen in the last two quarters and we expect credit losses through fiscal 2021 to remain manageable.
While uncertainty remains in terms of the future path of the pandemic assuming progress continues to be made with vaccination in our key markets and we continue to see a reduction in Covid cases, we would expect further releases from our performing provision in the coming quarters and expect our impaired loan loss rate to be in the rain.
<unk> of 25 to 30 basis points over the next quarter or so and then average roughly 30 basis points thereafter.
I will now turn the call back to the operator for the question and answer portion of this call.
Thank you.
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Okay.
Yeah.
The first question is from EBITDA.
Bank of America. Please go ahead your line is open.
Yes.
Thank you and good morning.
Hi.
Two part question I guess on data you alluded to sort of growth outlooks in Canada, and the U S. Net of some concern that the delayed vaccines rollout in Canada.
Good day of debit covey.
All of their if you could talk to in terms of just how has the last two or three months teams. Good outlook in terms of how the Canadian business Oh. Please all of toward the next few quarters and also if you could comment on just the U S growth outlook on all of the commercial lending there's still a lot of liquidity in the market do you see a meaningful pickup.
Commercial loan growth.
In the next quarter of til.
Yes.
Okay. Thanks <unk> I'll.
Take the first part of your question on part of the second part of your question on by Dave and David for it as well.
Look on the outlook for Canada relative to the U S. You heard in my prepared remarks optimism in both places I think that's the that's the place you have to start with.
We're looking at an increase in our view in the U S. Given the pace of their vaccine rollout as well as the higher probability of the stimulus package going through at this point. So they're naturally we have a very positive view on the U S. We're at 6% GDP growth for 2021 in Canada, there is a slower.
Pace of vaccine rollout as you know, but we are equally positive in time, we just think theres a little bit of of lag maybe it's three months, maybe six months before you get the same level of economic backdrop that you have in the U S. A consequence of that is probably a little bit longer before the unemployment rate in Canada gets back to where it was pre COVID-19 relative to the <unk>.
The U S might get there, but look when you put it all together.
If I'm bifurcate them through 2021 IBRA.
Abraham that's one thing and there might be of lag on pace, but in 2022, I would say to you we're pretty equally confident in both economies and very very positive based on everything we can see on commercial loan growth.
In both places look.
Client confidence.
And all of the conversations that I'm, having and our people are having is increasing on a pretty rapid rate and that effectively at the end of the day drives the demand for our commercial loan growth and we're seeing that on both sides of the border for the same reasons that I gave you the economic overview, so Dave I'll turn it to you to particular is loan growth because I think.
I think if I heard you right Abraham you were asking particularly about expectations for U S commercial.
Thank you.
Thanks, Daryl and just a little bit more context around Canada and the U S.
Because our business on the commercial side of this north American and so many of our Canadian clients have a substantial amount of their business in the U S barrels right it will lag but they.
We're seeing the same.
The benefits of the U S economy that are U S clients are to some extent, but on a bit of of lag basis.
Our loan growth this quarter in the U S was better than I expected items.
I was optimistic last quarter I'm more optimistic as we go into the rest of the year.
For the following reasons and let me let me go back first and say here's some of the issues. This is not in the U S. It's not really a demand issue. It's a supply issue we have a lot of our sectors that can that get.
The inventory they need and despite that it gets better and better every year, but this is again, it's on a demand issue and so of supplies open up as inventories open up it will just get better and better.
Across our sectors IC growth.
We're still probably in both Canada, the us five to seven basis points below what we would of been pre COVID-19 in terms of our utilization rate that gets better every day.
As the.
Inventory starts to open up.
Our trucking business is particularly strong today, our food business, which has always been a really strong part of BMO continues to do well as our clients learn how to deliver more of the grocery unless of restaurants different packaging, that's a really strong business and the M&A activity continues to build as does.
Our confidence in.
Our leasing and equipment finance business, which is important as the economy picks up.
All of that to say it will grow we expect.
Just as the economy will grow our loan growth will grow throughout the year.
Both.
And of the U S.
Thank you.
Okay.
Thank you.
The next question is from Paul Holden from CIBC. Please go ahead. Your line is open yes. Thanks.
Good morning, continuing on the topic with business.
On this loan growth notice that most of the growth this quarter it looks to have come from the.
Financial services bucket. So just maybe if you can touch on that specifically and if there is sustainable growth in that financial services of homes.
So let me it's Dave.
I think in the U S. This is I think kind of of the beauty.
Of our diversified loan portfolio as I mentioned some of the businesses have done really well and some have not done as well just because there.
There isn't enough inventory of our financial.
One section of our financial services of some very well, it's a 25 year business for US is what I call. Our sponsor services business. So that's a business that provides treasury management interest rate management wealth management as well as short term loans to fund Bridge bridge capital for capital calls.
Yes.
That business just because so many of our clients started additional funds. This year as you would have seen in the as you look around that business has kind of of onetime upbeat. So that was primarily most of the growth there.
It's always sustainable at some level, but we did absolutely have a peak here. So it really kind of gave us a head start on what we think will be a pretty good year.
That is the one part of it. These are just so you know these are investment grade loans very short term.
30 days to 90 days.
That's helpful.
That is that's helpful. Thank you.
Thank you.
The next question from <unk> <unk> National.
Industrial Bank Finance. Please go ahead your line is open.
I'm going to ask a capital question in the play.
Tom you mentioned the.
On the restrictions on.
On distributions of obviously.
Weighing on your or not winning allowing you to build capital.
Hum.
Let's talk about M&A I know I get asked a lot, but just conceptually barrel.
What would you be open to geographically.
You've got your Midwest base.
If there were something that expanded your footprint well beyond that.
Region would you be open to it.
Yes, sure Gabe Thanks for the question.
You're quite right the excess capital is accumulating we don't know when those restrictions will come off but before I get straight to your questions. Let me just say this we've been really consistent on the view that the capital is first for the client why because we're demonstrating if you look at this quarter that when we put it to use for the client it returns for the shareholders.
Secondly.
If there are M&A opportunities, we look carefully at them, but look I think the first thing I'd say is we don't swing at every pitch and I can tell you there are lot of pitches coming across the plate right now, but we're very disciplined as we always have been.
We consider the map, which is the question that youre asking there are opportunities that would be close to home that are synergistic. There are also opportunities that could be more diversified we do prefer North America.
The other places not necessarily exclusively but thats, where our powerhouses in terms of being a north American bank.
And with all of that said, despite the fact that I could point you to lots of great success in terms of the delivery of results from acquisitions look at MNI Transportation Finance G. H F Kgs clearer pool youre seeing all of them come through in this particular quarter. We don't I've said this before we don't feel compelled to expand by acquisition why because we are delivering pretty good.
Results and growth by deploying the capital.
Into our client businesses and remember that M&A isn't always.
Plain vanilla M&A, we consider partnerships as we expand our capabilities look what we've done with Google pay with blend with LPL in U S wealth and so we do we do scratch away at all of these opportunities as we go forward. So look I'll, just wrap where I of rapid before on this question Gabe if the if the right opportunity came along that that struck a chord in the key things we care about.
In terms of culture strategy and financial fit we are there to act, but we don't feel compelled to do it necessarily in the meantime.
Alright, I guess.
No.
Mike you talked about M&A and that was one where you had lots of of expense synergies both of credit marks.
Credit marks on seem to be a big thing these days would you.
The expense synergies would pick that much of a bigger priority or fewer expanding in of new like contiguous states of mostly drifting up out of the U S or anything like that with contiguous states, where there's not as much overlap operationally of the lift synergy with the there'll be opened on something like that of the fit was right. It depends on the circumstance. If it was right when you're in market you have more synergies when you're out of market you may of <unk>.
Synergies, but you have a better diversification and growth story.
And any of that it doesn't mean you have no synergies. So it all depends on the circumstance. Okay. Thank you.
Thank you. The next question from Lamar peso Caremark Securities. Your line is open.
So apologies if this has been discussed I was just Sally joining the call here, maybe you could could you unpack the 17 basis point increase in U S margins and maybe offer an outlook for the balance of the year I think if I heard you correctly. It sounds like backing out the PPP, it's still up 11 basis points sequentially, which is very strong and even when I look back on your sub pack.
It's above pre pandemic levels.
So.
This is Dave and Typhoon and I are here, if it's specifically to the U S. Yes. It was of.
Good quarter about a third of that was the PPP, which typhoon mentioned.
In the quarter.
Third of it was just really a very strong.
Market positioning on our on our loans on our deposits. We have we have the ability to over time.
Manage our NIM in a way that reflects the fact that we really have great relationships with our clients. Most of them are lead or sole bank and a third of it of the 17 is really kind of some onetime things.
Fees of can amortize when a loan gets paid off things like that so I'll turn it to typhoon as well for more of a general comment on NIM, but that risk that's the U S specific yeah. Thanks, Dave.
Dave gave you a pretty good picture, which also across the bank there is.
A lot of focus on loan spreads and that speaks both to the U S side of the business lending business as well as the Canadian side of the lending business and that shows up in our NIM progress I mean, one early observation as you know on incoming CFO. When you look at the last few quarters on.
There is.
Marketable stability in our NIM.
All of then NIM is within one basis points over the past three or four quarters or so so kudos goes to the team they've done a very good job.
Hedging as well as managing both sides of the balance sheet last quarter, we gave up about eight basis points in earning asset yields, but we clawed back seven basis points on deposit. So there is there is an equal amount of focus to make sure that our NIM.
Days in a very stable manner in this highly liquid low rate environment and my comments about.
The rest of the year.
Takes its cues from what we have done and what we are doing to protect against.
On a contraction that applies.
To both sides of the border and our lending business.
Great. Thank you.
Thank you next question John Aiken from Barclays. Your line is open.
Good morning on pack a couple of quick questions for you.
Don't want this line of questioning to lead you to believe that I'm questioning the strong credit results just trying to figure out of couple of things when we take a look at the consumer delinquencies. The 90 plus days I think it's page.
24 of the sub pack.
Actually seeing an increase in terms of the delinquency on the residential mortgages on the U S side is that just just symptomatic of the declining relief that's being provided by the governments or is there something else going on there that I'm not aware of.
No.
Principally it and I think youll see its coming up from a relatively no net low number in prior quarters. So it's a little bit of the deferral of expiry rolling through you know we're at in the absolute scheme of things. They are all pretty small numbers on that portfolio, but.
That's what's really happening, it's just a little bit of of higher delinquency is deferrals and.
Thanks, Pat on the follow on if I, if I may when we take a look at the geographic mix of the impaired loans over the last couple of quarters, we've seen of shifting away from the U S and more towards Canada.
Granted.
This is probably being driven by the economic realities, we're seeing in the two regions is it something that you would expect to see continue given the disparity of the vaccine rollout or should we start to see this normalize over over the next couple of quarters.
Yes, there's a lot of things going on underneath there John from the other thing that you'll probably notice as you know we had a very large decline in impaired loan formations out of oil and gas and those have typically almost entirely come out of the U S. For the past few quarters. So that's going to shift the mix right. There by a fair bit and then as you noted the difference and the.
In the trajectory of the economies of slightly different you can see that in our MD&A disclosure of our outlook for the U S is a little bit better. So that's driving a little bit and then theres a slightly disproportionate impact coming from the COVID-19 impacted sectors, we have slightly higher balances in some of the more impacted sectors in Canada versus the U S on those tend to be.
Lumpy, particularly in the commercial portfolio, so that's driving a little bit of it from quarter to quarter, but in terms of outlook going forward I would expect to see impairment formation and impairment on PCL on a fairly steady to lower in both markets.
Great. Thanks for the color of pad.
Thank you.
The next question is from many Robyn from Scotia Bank. Please go ahead. Your line is open.
Hi, Good morning, just going back to capital just wondering.
As a management team how you square on speeds moratorium on buybacks with what Youre seeing.
In your results frankly, the recovery, albeit small is still there and the continued build in CET one how do those two things makes sense to you.
I'm curious about that.
Yes, Thanks, Benny it's Darryl.
Austria has been pretty consistent in their view that there.
And I'm paraphrasing naturally, but their view that they will look harder at easing those restrictions.
When they see clear evidence of emergence from the pandemic and so I'm not going to comment on the appropriateness of that view I'll just tell you that they've been very consistent in it all the way through including their public commentary.
In the meantime.
You see what's happening with our with our balance sheet and with the with the sector. Overall, so I think I'm just I'm just going to leave it there we're not we're not building a business plan on the expectation that on.
<unk> releases of the restrictions on any particular day, they've been clear that the virus will drive that outcome of the vaccinations will drive that outcome and when it does we'll be prepared.
Thanks for that just on following up on that I mean, they'll decide what they decide but in terms of that.
Sort of the.
Idea of seeing a clear recovery.
Would you subscribe to the view that we are seeing a clear recovery here.
That would be a correct statement from your perspective.
Yes look I am not of health expert, but from an economic perspective. The answer is yes, I made my comments earlier I standby them I think we're going to have a very strong recovery as we go through the year.
We're of health expert I'd, probably start talking about the risk of variance and the like getting in the way of what Ive, just said, but assuming continued progress on vaccinations and containment of the virus I absolutely think we are in for a very strong recovery in North America.
Thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning. My question is just on on capital markets. Obviously, another exceptional fiscal quarter wondering if you can kind of maybe offer.
What youre kind of seeing so far on this fiscal quarter in terms of pipeline and if theres any differences.
Within the U S or Canadian markets.
Thanks Scott.
Gratifying for us to see the choices, we've made in portfolio and investments really start to pay off this quarter and I anticipate that to continue on as we look forward.
Assuming we continue to have constructive market conditions.
My expectation is that this type of performance will continue.
We're benefiting obviously from our geographic diversity.
The investments we've made particularly in the U S over the last few years and what they brought to the table as we go forward and to your question, what we've seen month to date.
On the new physical is consistent with the first quarter.
Alright, Thank you very much.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Just a quick follow up on that last question on than another one.
Would you say that theres been a structural change.
In capital markets that would leave.
Lee results of this high on.
On a go forward basis or is it very much just a reflection of.
Of the activity, we've seen in both Canada and the U S.
I think it's two points on that so one is the portfolio of choices. We've made investments we've made over time.
Adding real value to the platform, so with them without kind of the pandemic fiscal and monetary stimulus that we've seen.
Secondarily, when we look forward to where we're making new investments.
I'm anticipating those will have similar type return expectations. So think about the expense management, we've been doing some of the portfolio of choices. Those are all driving toward higher long term performance I wouldn't say there isn't some market benefit from the monetary and fiscal stimulus.
But I think based on my expectations that will be there for a while.
Okay follow up question then for Pat.
Yep.
Why haven't we seen lot more losses in the affected sectors now I understand it some of it relates to just good underwriting decisions on the loans were made.
What's your take on why things have been so so surprisingly good even in those sectors.
Yeah, I mean, I'll start I think I have to start we're aware of with the comment you made it really is sound underwriting practices at the beginning we typically don't lend to people that can't weather storms.
And we do a lot of sensitivity analysis, when we lend to people looking at stress cases like this on and so to some extent, we're not that surprised obviously in some of the very impacted sectors.
I think what surprised us at least is the ability for those clients to weather the storm through a couple of things one maximizing the of the revenue. That's available you think about restaurants as of as a great example.
Within the confines of the Lockdowns.
Whether it's minimal occupancy or take out and delivery they've managed to cobble together, what looks like to us at least breakeven revenue then theyre extremely tightly managing expenses and then theyre getting some relief from government support whether thats wage subsidies the new House GAAP program will certainly help with that.
And then they're tapping into liquidity that they had on hand.
And we're seeing that in the hotel sector.
Certainly seeing and in some pockets of retail clients are just adapting to the new reality and know Dave touched on this a little bit as well, but figuring out ways to operate within the confines of Lockdowns and I wouldn't argue that theyre thriving by any stretch, but we're seeing real stability and in some cases improvement in credit metrics.
As they figure out ways to weather the storm and that's leading to a fairly low loss rates on our loss rate on hotels in the last 12 months is $5 million restaurants, it's $12 million. So.
Notwithstanding impairment and stress from a lot of clients and.
Working with our bankers really closely are figuring out the right flexibility that they need and then the right things they need to do on their side to manage through the storm.
Thank you.
Thank you.
Next question, Doug Young Theres, All bank capital market Day Youre line is open.
Hi, Good morning, maybe sticking with you Pat just on the release on I think on your comments you talked about the improved thats ally and on the positive credit migration led to the release, but then you also mentioned that you had a modest increase in adverse scenario of wait why why would you have a modest increase in adverse scenario of wait can you talk a bit of boat.
That process behind that.
Sure I.
I guess first of all I wouldn't read a lot into the release. This quarter. You know we had a modest increase last quarter. This is to some extent fine tuning what is a fairly adequate provision, but really the dynamic this quarter and I suspect next quarter as well is we're clearly seeing positive economic improvement going on over from <unk>.
On a quarter.
And that plus fairly clear evidence of that you can see them share across all of the disclosure with credit quality improvement in the underlying borrowers. So those two things would actually have contributed to a fairly large released this quarter, but as of as as.
As our risk team, we have to weigh that against what we saw is rising uncertainty about a potential adverse case, it's not our base case, but of potential adverse case that includes potentially slower rollout of our vaccine.
That tips those borrowers that are barely hanging on entered into delinquency or of a worst case, where virus variants push us back into <unk>.
Situation that looks more like last March.
Again, those are on our base case, but the risk of those felt higher to us quarter over quarter, particularly as we saw variance start to emerge and so we thought it's better to balance the optimism coming out of the economic environment against that uncertainty at least for this quarter.
And then as we get more information over the next 30 60 90 days, we will weigh that exact same equation up again.
And just a quick follow up if we look at the end of Q4.
You did give a number if all your ACL is performing as sales were in stage one what.
What do your ECL would be for performing loans is that a good indicator of what we should anticipate the impaired PCL to be through fiscal 'twenty, one or is there puts and takes that kind of make that not as relevant when we're thinking about that yes. There are puts and takes that are probably a little bit too detailed to get into on this call I would say, that's probably that would be an overestimation at this point of.
But we think losses are going to be for the next 12 months.
Fair enough okay. Thank you.
The next question Mike was that of its from Credit Suisse Securities. Your line is open.
Good morning, just a follow up with Pat on the PCL and I'm looking at the Canadian P&C segment specifically.
Looks like a very small recovery and what I'm wondering kind of sort of square that with how the economy has progressed since last quarter. You were three months ago, we would not have been expecting the severity of of Lockdowns coming back the way they have and I'm just wondering with like even when I look at the GDP base case assumptions that youre, putting through your expected.
Losses. Your base case is a lot lower now for GDP growth assets.
'twenty one specifically so I'm just wondering maybe I'm looking at the role of factors here. It seems like it's not just GDP, obviously, but what would have driven that to not.
Result in at least some.
Provisions be added on the performing portfolio.
Sorry, your question widen we add more performing provision for the Canadian P&C portfolio, Yes, just just looking at it sequentially like like where we were a quarter ago and the Lockdowns that came about which we would not of known about at that time.
I'm wondering why they would not have been some addition here it looks a lot of a.
A lot of companies in Canada are probably in worse shape today than they might of been three months ago, just given the lockdowns.
Yeah, I think if you look at our economic outlook disclosure in the MD&A, you'll see generally speaking across a couple of of several of the metrics that at that outlook actually improved quarter over quarter and so the.
Performing provision is much more of an indication of the next 12 to 18 months not what is actually happening in the minute and so our outlook for Canada got better with respect of housing prices and to some extent of employment and that's really what drives the majority of our of the outlook certainly for <unk>.
Sumer M D.
And the underlying fundamentals and with respect of credit quality also were fairly stable on that book quarter over quarter. So notwithstanding what you might be seeing in the spot environment.
Delinquencies are relatively stable quarter over quarter, and certainly consistent with what we were seeing pre COVID-19. So of credit quality of the book wouldn't suggest that there was an increase in the provision that was necessary.
Okay. That's helpful. Thank you.
Thank you I will now turn the call back to Mr. Darryl White.
Okay. Thank you operator, and thank you all for your questions I'm going to wrap up with four quick summary themes for today number one today's results were clearly very strong they reflect many of the benefits that are flowing from the strategic actions to strengthen the earnings power of the bank number two we have moved to the bar significantly on our expense and.
Efficiency commitments and we have strategies in place to do even more number three credit quick quality as you heard today remains a differentiator for us as it has for decades and number four we have strong momentum clear potential across our businesses as the environment continues to evolve with our advantage mix that is ready for more.
Especially with the acceleration on the backdrop of the economy that we've talked about today I'm pretty confident in the continued execution of our strategy to drive the leading performance that we've now demonstrated to you in successive quarters I want to thank all of you for participating in today's call and we look forward to speaking to you again in May.
Thank you. The conference has now ended please disconnect your lines at this time and.
We thank you for your participation.
Yeah.
Yeah.