Q2 2021 Bank of Montreal Earnings Call
This conference is being recorded so it's called for homes that don't go as you see.
Please standby your meeting is about to begin.
And advised that this conference call is being recorded.
And welcome to the of BMO Financial group's Q2, 2021 earnings release and conference call for May 26, 2021.
Your host for today is Ms. Christine <unk> head of Investor Relations Ms. O'neill. Please go ahead.
Thank you and good morning, welcome to BMO second quarter 2021 results presentation, we will begin the call with remarks from Darryl White Bmo's CEO, followed by Typhoon season, and our Chief Financial Officer, and Pat Cronin, Our Chief Risk Officer also present to take questions. Today are Ernie Johansen from Canadian P&C cash flow from you.
And with P&C, and Berkeley from BMO capital markets, and Joanna Rotenberg from BMO wealth management.
As noted on slide 2 forward looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties actual results could differ materially from these statements I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management management measures performance on a reported and adjusted basis and considers supposed to be useful.
And assessing underlying business performance and Daryl.
Daryl and typhoon will be referring to adjusted results in their remarks, unless otherwise noted as reported and with that I will turn the call over to Darren. Thank you Christina and good morning, everyone.
It has been over a year of since the onset of the coronavirus pandemic, which has brought challenges. Unlike any we've faced before and that will have impacts for some time to come.
But as we transition to recovery there are more hopeful signs every day.
We're proud to have supported our customers and communities as they navigate the day disruption and uncertainty of the pandemic and with them. We have grown stronger underpinned by our purpose driven strategy and the culture that will help drive of sustainable and inclusive of recovery.
We continue to deliver on our commitments with sustained consistent financial performance.
Today, we announced another quarter of very strong results with adjusted net income of $2.1 billion and earnings per share of $3.13 up from $3.6 last quarter.
Each of our operating groups continues to perform very well with continued strength and our market sensitive businesses as well as good growth and our P&C businesses. Despite record low interest on interest rates.
For the first half of the year adjusted pre provision pretax earnings of $5.5 billion increased 27% revs.
Revenue grew 11% and expenses continued to be well managed up 1% year to date with strong overall operating leverage of 9.8%.
Our credit quality remains very strong with low and paired provisions again this quarter and a modest recovery of performing loan provisions, reflecting both the resilience of our customers and our differentiated approach to risk management.
Our return on equity increased again, this quarter to $16, 7% above our midterm target, while our capital position continues to strengthen with of CET 1 ratio of 13%.
We're on a continuous path to building a strong and even more competitive bank digitally enabled future ready with leading efficiency improvement customer loyalty and profitability and our steadfast commitment to the communities we serve.
Our progress is evident and our financial performance, which confirms the effectiveness of our strategy and ability to support millions of clients and new ways.
Compared to the first quarter of 2020 efficiency has continued to improve down 370 basis points to 56, 6%, reflecting our commitment to managing expenses, while investing for future revenue growth.
We're committed to continue to improve efficiency over time, even 1 expense growth reflects our strong revenue performance.
We continue to outperform on credit.
And we have $2.8 billion of allowances against performing loans, well above our base case expectations for future losses.
Over the same period return on equity increased 320 basis points with each of our businesses achieving higher levels of earnings and our O E.
Our capital position.
It has never been stronger with our CET, 1 ratio up 160 basis points positioning us well for growth and the eventual relaxing of constraints on returning capital to shareholders.
We're taking actions to optimize capital and resource allocation.
You've seen that reflected and a range of recent decisions such as the sale of our EMEA of asset management business, our private banking business, and Hong Kong, and Singapore, and the wind down of our non Canadian energy portfolio. These actions further strength in the earnings power of the bank and together they are expected to improve efficiency by approximately 60 basis.
Points ROE by 30 basis points and capital by 80 basis points and they enable reinvestment and our core businesses and North America.
We've achieved these results while adapting to the changes and challenges of the last year and with the economic recovery set to accelerate through this year and 2022, we've never been better positioned to continue to grow with our customers.
Substantial fiscal stimulus pent up demand and elevated household savings are expected to strength and economic activity this year and next.
Business confidence is much improved on Monday, the U S National Association of business economists matched our forecast, calling for 6.5% U S real GDP growth and 2021, the strongest expansion and 37 years.
And among consumers this week, the Bloomberg Nanos Canadian confidence index hit its highest point recorded since they started pulling and 2000 and hate with Canadian real GDP expected to grow 6% as vaccine rollouts accelerate.
Here, we're building capabilities and continuing to invest and our businesses for growth with a digital strategy first our bank is been driving digital transformation for more than a decade and and the last 12 months of the pace has meaningfully accelerated.
And this quarter, we launched automated digital enrollment of solution that quickly and seamlessly enrolls customers into a commonly used mobile banking feature of first for a major Canadian financial institution.
We're accelerating our strong digital sales performance driven by continued deployment of marketing market, leading capabilities and offers while continuing to ship service transactions to digital allowing our employees to focus on advice and sales.
And our leading treasury payment solutions business wire payments are now processed on a single North American platform, 95% without human intervention, resulting in improved speed and less risk for error and a better experience for our customers and our employees.
And wealth management, we launched advice direct premiums of new offering designed for our self directed clients with more complex needs. This hybrid solution combines the strong technology of our digital advice engine with human support and planning when it's needed.
These are examples of investments driving strong and resilient performance across our operating groups.
Our flagship Canadian P&C business delivered year to date revenue growth of 5% strong operating leverage and ppt of growth of 11% with ROE improving to 26, 8%.
Performance was supported by continued strong mortgage growth and a resumption of commercial lending growth.
And U S. P&C ppt of growth was also strong up 22% year to date with revenue growth of 6% and effectively managed expenses our efficiency ratio improved to 48, 6% and rose to 16, 4%.
We're continuing to add clients and deepen relationships with strong growth and commercial deposits and core retail checking balances with lending expected to accelerate as the economy expands and supply chain issues ease.
And BMO wealth management, we had a strong PPP T growth of 53% year to date revenue grew 714% and traditional wealth was strong growth and client assets online broker revenue and mutual fund revenue where sales year to date are more than double all of fiscal 2020.
These results were complemented by record client loyalty scores and Canadian and U S private wealth businesses.
We're refocusing the business for North American growth investing in key areas of competitive strength and private wealth and digital investing and Canadian asset management that we expect will continue.
To contribute strongly to the bank's growth.
BMO capital markets continues to be a source of diversified earnings to the overall bank and had another very strong quarter, delivering very strong year to date ppt of growth of 72% and ROE of 11, 9%.
Results reflect strong and diverse revenue performance and both global markets and investment and corporate banking and the benefit of actions we've taken over the past few years to further strengthen and reposition the business for sustained performance with new capabilities deeper relationships and improved efficiency and returns.
Our overall U S segment is a key driver of earnings growth contributing 40% of total bank earnings year to date pre provision pre tax earnings were up 46% with an efficiency ratio of 55%.
And our integrated approach brings the full value and scale of BMO to our north American customers, leveraging our top tier commercial lending market position, leading deposit share and core footprint and a growing strategically focused capital markets and private wealth management presence.
We're leveraging our strong and consistent financial performance for the benefit of our customers and to support of sustainable and inclusive of recovery. We continue to facilitate access to a number of programs for those customers that continue to be impacted by the pandemic to bridge bridge them to and eventual full reopening of the economy.
We're addressing key barriers faced by minorities, including targeting financing for women and minority owned businesses and supporting community reinvestment through programs, such as BMO and power and our announced $10 million donation to create the new Rush BMO Institute for health equity and Chicago.
Building on our long standing commitment to a sustainable future and support for the Paris climate agreement. This quarter, we declared our ambition to be our clients' lead partner in the transition to a net zero of world and created the BMO climate Institute to drive insights and enhance climate resilience.
So while the impacts of the pandemic are not yet fully behind us the North American economy is poised for a strong recovery through 2021 and into 2022, and we will continue to help our customers make real financial progress, we have operating momentum and our businesses differentiated risk management.
And flexibility for capital deployment.
I'm confident that we've never been better positioned for the opportunities ahead, I'll now turn it over to typhoon to talk about the second quarter financial results.
Thank you Daryl and good morning, and thank you for joining US I will start my comments on slide 12.
Performance this quarter was solid with strong adjusted pre provision pretax earnings and positive operating leverage and continued momentum across each of our businesses.
Second quarter reported EPS was $1.91 and.
And net income was $1.3 billion.
Adjusted EPS was $3.13 and adjusted net income was $2.1 billion up from the low levels of the prior year and up 3% from a strong first quarter.
Second quarter adjusted return on equity was 16, 7% up from 15, 8% last quarter and the efficiency ratio was 56, 6%.
Adjusting items. This quarter include impacts of divestitures that total $772 million after tax comprising of $747 million write down of goodwill related to the announced sale of our EMEA and asset management business, a $22 million after tax.
Gain from the sale of our private banking business and Hong Kong and Singapore.
And $47 million after tax divestiture related costs for both transactions and adjusting items are shown on slide 35.
Net revenue was $6.3 billion up 16% from last year with good growth across each of our businesses and continued strength and our capital markets and wealth businesses.
Expenses were up 3% from last year and flat quarter over quarter.
Revenue and expenses and this quarter includes certain notable items that combined did not significantly impact net income.
These included elevated card revenue, reflecting nonrecurring items and Canadian P&C illegal provision and wealth management and higher expenses related to real estate management.
Credit results were very strong the total provision for credit losses was $60 million compared with $156 million last quarter and included a recovery of the provision for performing loans of $95 million Pat will speak to these and his remarks.
Moving to the balance sheet on slide 13 average loans were down 4% year over year or 1%, excluding the impact of the weaker U S. Dollar.
And due to last year's elevated commercial line utilization rates and decline and the non Canadian energy portfolio, while consumer loans increased use of strong mortgage growth and Canadian P&C.
Compared to last quarter loans were relatively stable with commercial loans in both P&C business is up 2% and continued good mortgage growth, while balances and capital markets declined.
Average customer deposits were up 15% year over year and up 1% on a linked quarter basis, reflecting the highly liquid corporate and consumer balance sheets.
Looking ahead, we expect loan growth to steadily increase from Canada supported by growth in both personal and commercial loans and the U S. We expect loan growth to ramp up past and near term supply chain and low inventory challenges.
Moving to slide 14 and for capital.
Our capital position strength and further this quarter the common equity tier 1 ratio was 13% up 60 basis points from 12, 4% and the first quarter predominantly reflecting the impact of strong internal capital generation and lower risk weighted assets.
We expect our regulatory capital ratios to continue to grow under the current constraints on capital management actions.
Turning to slide 15, net interest income was down 2% from last year on both of reported and ex trading basis.
Total bank net interest margin ex trading was up 1 basis point from the prior quarter as higher loan spreads offset lower deposit spreads.
And our P&C business, both on the U S and Canada margin was stable.
And Canada, the benefit of higher prepayment fees was offset by lower deposit margins and changes in mix and in the U S. The benefit of higher loan spreads and accelerated fee income on PPP loans was offset by lower deposit margins.
We expect our consolidated NIM to be relatively stable during the remainder of the year and net interest income to remain roughly flat year over year.
Yeah, and see Nims are expected to decline due to the impact of lower long term rates rolling in and the expectation for loan growth exceeding deposit growth.
Lower prepayment fees expected to put pressure on Canadian P&C NIM, while U S. P&C NIM is expected to still be supported by PPP fees next quarter offsetting some pressure from deposits spreads and mix through the remainder of the year.
Moving on to Slide 16, we provided additional information on our interest rate sensitivity.
As shown on the slide a 100 basis point rate shock is expected to benefit net interest income by approximately $300 million over the next 12 months 2 thirds driven by short rate impacts the impact will be higher if we retain the excess deposits that are currently on our balance sheet.
The impact of of 25 basis point increase and short term rates would add approximately $100 million through revenue over the next 12 months.
The higher second year of benefit to rising rates would be primarily driven by reinvestment of capital and deposits at higher yields.
Turning to slide 17.
Non interest revenue net of <unk> was up 3% from the prior quarter, primarily driven by strong underwriting and advisory fees as well as higher card revenue, partially due to nonrecurring items and mutual fund revenue.
Year over year comparison, and noninterest revenue benefited from last year's challenging market conditions.
Although market conditions may cause some period to period volatility overall items that benefit from reopening of economies are well very well positioned to see more growth.
Moving to slide 18.
Expenses were flat quarter over quarter, as lower employee related costs, including the impact of fewer days and the current quarter were offset by higher marketing and technology related costs.
Expenses were up year over year, reflecting higher performance based compensation and technology related costs, offset by lower salaries and travel and business development spend.
Efficiency was 56, 6% and operating leverage was strong at 13, 1%.
Full year expenses should remain well managed and any incremental increase over last year predominantly will be driven by performance based compensation due to significant revenue growth.
Moving to the operating groups and starting on Slide 19, Canadian P&C net income was $765 million up from $363 million last year, reflecting pre provision pretax earnings growth of 19%.
Revenue was up 9% from the prior year and up 2% from last quarter.
Expenses were flat to last year.
And up 2% from last quarter.
Operating leverage was strong and efficiency was $5.45, 4%.
Average loans were up 3% from last year and up 2% quarter over quarter.
Deposit growth continued to be strong up 13% year over year.
The provision for credit losses was $141 million.
Moving to U S. P&C on slide 'twenty My comments here will speak to the U S dollar performance.
Net income of $439 million compared to $253 million and the prior year.
The strong results this quarter reflect 19% pre provision pre tax growth and strong operating leverage.
Revenue was up 4% from last year, reflecting growth in both net interest income and non interest revenue down 1% from last quarter due to fewer days.
Net interest margin was flat sequentially.
Expenses were down 8% from last year, driven by lower technology, and employee related costs and up from last quarter, including the impact of technology costs.
Operating leverage was strong at 12% and efficiency ratio was 49, 2%.
On the balance sheet average commercial loans were stable year over year and up 2% quarter over quarter.
Personal lending balances declined year over year average deposit growth continues to be strong up 18%.
There was a net recovery of $19 million and the provision for credit losses.
Moving to slide 21 wealth management had very good results with net income of $353 million traditional wealth net income was strong at $303 million, reflecting higher revenue due to growth and client assets and stronger global markets.
Insurance net income was $50 million compared to a loss of $16 million a year ago.
Expenses were up 6% from last year due to higher revenue based costs.
Assets under management and assets under administration, both increased 13%.
Turning to slide 22.
BMO capital markets had another strong quarter with net income of $570 million global markets revenue increased driven by higher trading and new debt and equity issuances.
Higher revenue and investment and corporate banking was driven by strong underwriting activity and net securities gains and the quarter.
Expenses were up 10%, reflecting mostly higher performance based costs, partially offset by lower operating costs and down 5% sequentially.
There was a recovery and the provision for credit losses of $55 million.
Turning now to slide 23 for corporate services.
The net loss was $140 million compared to a net loss of $82 million last year.
To conclude performance this quarter demonstrates the benefits of our diversified business model.
Our continued focus on efficiency and strategic investments position us well for further growth and profitability.
And with that I will turn it over to Pat.
Thank you typhoon and good morning, everyone.
As Daryl indicated we were pleased with our risk performance this quarter, where we saw a continued improvement and most of our key risk metrics from our strong first quarter results.
In terms of credit performance, both impaired and performing loan loss provisions showed a third consecutive quarter of improvement underscoring our cautious optimism that we are turning the corner on the financial stress from the pandemic.
Starting on slide 25, the total provision for credit losses was $60 million or 5 basis points down from $156 million or 14 basis points last quarter.
Impaired provisions for the quarter were $155 million or 13 basis points down from $215 million at 19 basis points, and the first quarter and well below pre COVID-19 levels.
The strong impaired loan loss performance is due to the low rate of new impaired formations, while recoveries were consistent with prior quarters.
We are pleased with the results, but do expect impaired provisions to return to more normal levels over time.
We recognize the release on performing loans of $95 million this quarter, which was the result of positive credit migration and and improving economic outlook.
We now have approximately $2.8 billion of performing loan allowances and based on our expectation of 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 loans credit performance and the operating groups, we saw unusually low loss provisions and several of our business segments.
And Canadian P&C consumer loan losses were $100 million up 2 basis points from low levels and the prior quarter and.
And U S P&C consumer losses were $3 million.
Down significantly from last quarter. In addition, delinquency rates improved in both Canada and the United States.
And our commercial and corporate businesses, we've seen similarly, encouraging credit performance driven largely by our U S segment, where we posted a third quarter of low impaired provisions and.
And U S. Commercial we reported impaired loan provisions of $3 million the decline and provisions was driven by very low formations this quarter very little new reservations and modest recoveries.
Canadian commercial also had good credit performance this quarter with $54 million of impaired loan losses down from 58 million and the prior quarter.
Our capital markets business had excellent credit performance this quarter with a net recovery of $6 million down significantly from the Q1 provision of $45 million. The decline was driven by zero impaired formations this quarter and our capital markets business.
On slide 27 impaired formations at $425 million declined 36% from last quarter and are at the lowest levels in recent years.
We saw significant improvements and some sectors that have been particularly stressed over the past year, such as oil and gas, where we recorded zero of formations this quarter and.
And in our sector is highly impacted by Covid were formations were quite modest.
Gross impaired loans declined by $442 million to 65 basis points, continuing the trend towards pre COVID-19 levels that we've seen over the past few quarters.
On slide 29, we provide an overview of those sectors, where we have seen COVID-19 related impacts on credit quality.
These segments make up less than 5% of our portfolio and notwithstanding the stress our impaired loan losses across these segments have been quite modest relative to formations to date, reflecting strong origination practices and loan structures. We continue to closely monitor the segments, particularly given the prolonged lockdowns and <unk>.
Canada.
And finally as you see on slide 30, there were no trading loss days this quarter.
In terms of the outlook, we remain cautiously optimistic given the solid credit performance, we've seen and the last 3 quarters, and we expect credit losses through fiscal 2020.1 to remain manageable.
In terms of the performing provision while uncertainty remains in terms of the future path of the pandemic, assuming vaccination progresses, and our key markets and we continued to see a reduction and Covid cases, we would expect further releases from our performing provision in the coming quarters.
In terms of impaired loan losses, given the strength of current credit conditions and the near term economic outlook. We may see the next few quarters continue with low credit losses looking.
Looking into fiscal 2020.2 our expectation is that impaired loan losses will normalize and average in the range of low twenty's in terms of basis points.
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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Our first question is from Ebrahim <unk> from the <unk>.
Bank of America.
Please go ahead.
Good morning.
I guess just the first question around commercial loan growth I heard you say I think our board gathered and typhoon and talk about expectations for pick up you did actually have commercial loan growth of quarter over quarter on quarter, both in Canada, and the U S. Just talk to us in terms of what you're hearing from the U S Bank says a lot of liquidity impact also.
And also being on borrower demand and so it give us a sense of timing of in both regions. When you see commercial loan growth picking up and do you expect Canada to be stronger than the U S. As we see a.
And I'll pick up on loan demand.
So hey, Ram, it's Dave Casper, let me.
And have tried to give you a sense. So when we talk to our clients and this would be pretty similar on both sides of the border.
Demand for their products is really quite strong and.
And we're seeing that really across.
All of our industries regions.
And our pipelines are up across the board. They are back to pre pandemic levels. We continue on both sides of the border to add a lot of new clients, but it's part of your point many of those clients, while we give them authorizations for credit and they're really not borrowing today so the risk.
And they come over they we get their operating business.
They're not they're not borrowing today.
So the M&A activity continues to be high.
And I should say enthusiasm on both sides of the border for growth continues to be high the headwinds, which Daryl and typhoon of both covered or are real and those are because of inventory pipelines are basically clock across the borders now labor issues are real they really are real and there are.
And of our clients and are having issues there and.
And theres product delays and there is price increases so all of that is kind of the backdrop to here's the answer I think for your questions.
Loan growth as you pointed out was actually sequentially up both in Canada, and the use of this quarter and.
And I expect it will continue to grow.
During the quarters, but you know 1 of them.
Modest pace I think by the fourth quarter, we will start to be back to loan growth is starting to see what we've seen in the past with a modest increase year over year.
I think where my enthusiasm last year, we were pretty optimistic that we would have loan growth by the end of this year and I continue to believe that I'm more optimistic now.
And then I ever was in terms of over the next.
2 years, including the next few quarters, so it's going to get better.
Economy is coming back I don't think Canada is going to be necessarily any faster than the U S.
But they are both growing and.
And.
I'm, just reflecting the optimism of our clients.
And I've I've already outlined some of the headwinds, but those will go away.
So let me stop there and see if I've answered your questions appropriately.
Yeah.
That was held for David just 1 thing to add onto that like pre pandemic, we did see BMO and the U S. You've talked a lot about white space and market share opportunities should we expect you to outperform if and when commercial loan growth for the industry. The bonds given the market share opportunities you've had maybe over the last 5 for 7 years.
I think we will continue in the U S to take advantage of the white space, we have the industry's recover the geographies that we cover that we continue to grow and I would expect that just says we have and the past we will be pure leaving and our loan growth over the next couple of years and equity and really more important and loan growth.
Client acquisition growth.
Got it and what does the BBB balance if you have that at the end of the quarter.
And the U S a.
Around 4 billion and I think.
Average loans on average were about $4 billion.
And the remaining fees tied to that do you expect to accrue as they get forgiven.
I think we've basically accrued about half of the fees.
And that arent that we've received we've accrued about half and the rest of will come in through the next couple of quarters and into next year I think it's around and U S dollars of around $100 million.
Typhoon is can correct me, if that's not close yes.
Got it thanks for taking my questions.
Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.
Good morning, So first I just wanted to ask a quick question on clarification to food and you mentioned.
Do you expect NII to be roughly flat year over year, just wanted to clarify if that's for the full year 'twenty 'twenty 1 on the back half of the year for.
And year 'twenty, 1 compared to full year 'twenty. Thank you. Thank you for that clarification okay.
So my next question is just regarding the net NIM sensitivity table you provided on the slide deck, there which is.
It's very helpful and really highlights the upside you have in the U S business. Just wondering true knowledge is there anything different about be most Canadian business that.
And would perhaps make it any more or less rate sensitive than peers.
And domestically.
And I don't think so I think it's really I mean, the contrast that you see between the U S and the Canadian side is more related to.
The deposits sensitivities and the U S. The pictures of it different.
But I don't think that necessarily.
To my knowledge that there are of significant differences in Canada.
And between Us and.
And and to peers.
And some of the.
Obviously, we continue to also.
Invest enroll both of our deposits and equity.
On a periodic basis and you may see some quarter over quarter changes in that and that number its more its more relates to how we invest those balances.
Okay. Thank you.
Thank you.
Following question is from many Grumman from Scotia Bank. Please go ahead.
Hi, good morning.
Also on the subject of frequency of you touched on you talked about a hell of the rate sensitive sensitivity can go higher.
And if you're able to retain the excess deposits that you've built over the pandemic and I'm just wondering.
How much upside is there what's your expectation there as you look at it now.
So many of them if we assume.
That.
And we retain all of the balances of modeling exercise basically there.
And then the sensitivity.
Could be.
70, 80% higher than what we are showing up here, but we don't want to do that as we.
Expect those balances to eventually leave the banking system. So thats sort of is the range that I can give you.
It is it is a.
Number that is quite sensitive to the assumptions around retention of those deposits.
That's helpful and then maybe as a follow up just on the business side, but.
If you couldn't kind of try and highlight what are you doing on the business side to try and retain those deposits and is there particular different Canada versus the U S. I'm, just trying to get a sense of of.
How you can make those deposits stickier, how realistic that is to expect that some of those deposits.
Day.
It's Dave I'll talk a little bit about the commercial side.
I think the reality is we we are viewed as a pretty safe place to put excess deposits combined with a very good place to actually have your operating accounts. So during this pandemic. We benefited on both sides, we will retain more than probably what the model suggests at least compared to what.
We've done in the past, we always seem to retain more of.
And as clients need to use them for borrowing and obviously they'll come down, but we have a lot of clients.
Just don't borrow and we will keep a fair amount of money and short term and will will retain those.
And we're continuing what we're really doing is we're always competitive but today.
We don't have to be that competitive to keep these rates and keep these balances and that's basically the same on both sides of the border that would be the essence of the commercial strategy.
Ernie.
<unk> done a great job on the on the retail side as well.
Great. Thanks, Dave I'll I'll take over on many on the on the retail side and I'll start with of you asked first and you Canada on.
On the U S side as you know we've been acquiring deposits across 50 states and the U S and are committed to continuing to maintain good relationships and those growth engines for deposits.
Shifting our focus and a way and this is of North American statement away from the broker term CD market and have been really focusing on our customer base and on on checking and savings growth on both sides of the border we have been accelerating our initiatives to digitize that process and acquire more new customers for those.
Key relationships that start with of checking and savings account and you'll see that that growth happening in Canada, and our retail deposit share and movement and as well as our continued investment in marketing campaigns for growth. So we're really pleased with those relationships and find that those deposits as you can imagine are sticky and as we see.
And the economy opened there may be a little bit of softening as in as consumers start spending on both sides of the border. We will see a decrease in those deposits, but as I've said as we acquire more new customers and we anticipate that that the surge deposits that we've acquired will be slower running off and then 1 could imagine.
Few months ago. That's initially what we're seeing as the economies are slower.
Ramp up of consumer spending.
Really really of good news story on both sides of the other border on the retail side.
Thank you.
Thank you.
Following question is from Doug Young.
All day and capital markets. Please go ahead.
Hi, Good morning, I guess this question's for pod.
Just trying to think of credit here and I mean, if I go preach Ah well your average coverage ratio for performing loans, and so I think around 32 basis points and fiscal 18 and fiscal 19, and what I'm trying to get at is there any reason why you can't revert back to this level call. It over the next few years is there has been structural change.
And you're just going to be.
More conservative or what would be of reasonable timeframe and if you're confident in your book what would be of reasonable timeframe for getting back to that level.
Oh, great. Thanks for the question Doug.
I would say you know first of all in terms of the timing for getting down or timing of releases, it's really going to depend on primarily how we see lockdowns easing and particularly in Canada, and then of commensurate reduction and stress for those borrowers that are uniquely impacted by by the Lockdowns and then we'd like to see and easing of some of.
The health issues at our and that are percolating and certainly in countries like India.
And they have a larger impact on the global economy, and then some stability and Canadian housing prices would probably be another trigger for us to start to release in terms of where we get back down to it really depends and you know a lot on the mix of the book and then some.
On things, we might provision higher for versus other so it depends a lot on how some of the sectors grow them as well as the product mix within the consumer business and then you know I would expect us to remain slightly elevated versus our historic levels.
And because now we obviously have a new stress event and to consider when we think about you know what the tail of loan losses could be as we move forward. So it'll take some time to go back down My God is probably over the course of the next 12 to 18 months, we will see a reduction to something that's more stable and and it'll slight it'll probably settle slightly above.
Where it's been pre COVID-19.
Okay. That's that's helpful. And then just on card fees I mean, it was mentioned there was a non recurring item what I'm trying to get an idea of just the trending of card fees and and so I don't know if you can quantify what the nonrecurring item was that we can kind of look at card fees, excluding that and can you talk a bit about what youre seeing and the card business in gen.
Thank you, yes, so let me ask let me answer the question and I'll turn it over to Ernie about what she is seeing and.
And Doug as I said there were 3.
Notable items during the quarter altogether, they didn't have any impact on net income and 1 of them was and card fees.
In terms of sort of the trend expectations.
What I would suggest is that.
And a quarter or 2 as you know consumer spend activity.
Picks up and.
Card swipes continue to go up.
We would expect to grow into this number.
Away from that.
1 time impact this quarter. So that's how I would look into.
Sort of modeling that line item.
And in terms of what are you seeing already and I will turn it over to you on that topic.
Thanks, Typhoon and thanks for the question Doug.
And if I look at size of card related revenue, obviously elevated this quarter and as you've mentioned and that.
That line typically has a couple of items and there that and move around timing of reward costs is 1 of the actual consumer spending that occurred that occurs through that and.
And I look for AR and.
And the past month or so what we're seeing is ease of return back to I would say pre pandemic levels of spending and it's just been a recent and in the past month or so that will return back to 2019 numbers and that's good to see overall, we're seeing it and a couple of categories as you can imagine historically and the pen.
And you saw.
3 home Reno, and gardening and kind of category at their peak and above normal levels and now were.
Starting to see that return to travel and we're seeing that of cross hotels.
Travel industry and so that's really a good indication of what we're gonna be facing and the and the next little while which is as consumers are more confident about the about the pandemic situation get vaccinated.
We're seeing that spend growth. So I would anticipate that we're gonna be seeing stronger and strengthening our consumer payments and I've seen that even now on card credit card acquisition.
Really pleased with our launch of our of our new visa Eclipse products are performing extremely well in terms of acquisition growth and Italy.
Fear that the payments businesses is getting back up to where it was pre pandemic. So we're really pleased with that performance.
Okay. Thank you.
Thank you. Our following question is from Gabriel <unk> from National Bank Financial. Please go ahead.
Good morning, and have a quick 1 on the prepayment income and then a follow up.
And in Canada do you have a can.
Can you tell if you have to look maybe you're more of a strategy to encourage prepayment activity and the.
Relatedly like what what is the size of these revenue and it's been over the past couple of quarters.
And is there any all of I think you are referring to prepayment on mortgage.
Okay. Thanks for the clarification and it's an interesting question, obviously consumers are taking advantage of of lower interest rate environment to refinance and we're also seeing consolidation of lending so really looking at how do they consolidate into home equity lines, but in terms of the pre.
This will be of phenomena that continues as he of low interest rates and do anticipate it to diminish I think and over the coming months you will see that just adds more consumers have taken advantage of that who were interested and taking advantage of pre payments have done and so and then also as we as we as he as we go.
Forward, we're going to see increased spend if I can use that terminology.
And that will also be helping our overall lending growth versus the pre cash prepayment.
Prepayment fees that Youre speaking of.
For the rest of the size of been on lease revenues over the past couple of quarters I don't have that off hand, and you'll probably come back to you with that as a proportion of our partner for.
That'd be great and then for whoever it maybe maybe Pat.
And business heads as well of the inflation topic is of course, the top of mind everywhere. How are you thinking of boat you know the numbers we've been seeing lately.
From a positive and a negative sense because it could the suppressed demand of people delay their decisions when buying decisions on when prices are moving so fast and up.
But it does help I guess from a credit risk standpoint on the Ltvs on on what's on the book and already.
And mumbling here, but and she can give me a sense of how you're thinking about the inflationary story of these days and how are you preparing for good or bad things.
Sure maybe I'll start, it's Pat and then I'll turn it to others and specifically to the inflation that you're seeing and home prices.
You are correct, you know with our existing homeowners that that has the effect of actually improving LTV. So that's of credit positive. We are looking very carefully at existing originations there elevated home prices may exaggerate ltvs and so we're taking our risk management practices on house.
<unk> R is dynamic anyway, and so through the cycle of as prices change, we adjust our practices.
And you know, we're routing more and mortgages to manual adjudication, and particularly where we're looking at areas, where we've seen rapid house price appreciation just to make sure that we're comfortable but ultimately our mortgages and loans are 2 of them the borrower's ability to pay not the house price.
And so to the extent we're satisfied with that you know then we're comfortable from a risk perspective, and then broadly you know we are stress testing our loan portfolios against higher interest rates.
Generally speaking, we do that anyway as you know for sure for consumer as well as commercial border, whereas when we originate we stress test against higher interest rates anyway to make sure that they're that they can sustain the.
The level of borrowing and the advent of a higher interest rates, but then we stress test of the portfolio broadly and you know this will evolve over time for sure, but what we're seeing right now is the stress that could be caused by inflation is definitely manageable within our within the earnings power.
And of anybody else on the.
Business growth, but well actually I was going to be part of the.
And stuff like like are you seeing any commercial borrowers or input cost are based on these oh all of the commodity prices that are soaring and you know and that might be squeezing. The emergence of are you seeing any of that at all.
<unk> definitely seen we've definitely seen.
Some input cost across the board.
At this point.
With a I don't think of any exceptions. Most of this is getting passed on and its expected which is clearly a if this continues we will have some.
And any pressures, but right now.
Customers need to get the inventory mhm.
They're they're paying for it and.
And it will it will likely get passed on and I don't see big margin pressures.
And maybe maybe just 1 follow on to that and certainly from a risk perspective, we're not seeing it driving widescale stress and the in the portfolio you would normally start to see that show up and negative credit migration and in fact for the second quarter and a row, we've had some pretty healthy positive credit migration across the wholesale book so.
It's obviously as Dave said, it's not it's not immune but we're not seeing it show up broad based and in terms of negative migration.
Thank you.
Thank you.
Following question is from Nomura per song from <unk>.
Securities. Please go ahead.
Alright, and my first question is on the interest.
Interest rate sensitivity disclosure of first of all thanks for providing that I think it's useful.
I'm just wondering if you could just answer just a high level question, how much could be sensitivities change from quarter to quarter, I guess, where I'm going with this is that 1 of the big Downfalls.
On the structural interest rate sensitivity tables that all of the banks provide and their annual reports and M D and as that it changes so much from quarter to quarter and it's only really relevant for a specific point in time sort of a sensitivity as if this interest rate sensitivity table is subject of similar levels of volatility and it comes at a little bit yes.
Less useful for me. So I'm just wondering if you could offer some comments on that.
Very good question.
Clearly.
As of the date that they are run and they are published.
There will be quarter over quarter changes and this and changes and this number depending upon the actions that we would be taking during that quarter. So that clearly will have an impact on the sensitivity.
At points in time, we may decide to invest a larger portion of the liquidity that we are and which takes away. The remaining sensitivity on those balances. We may have different hedging policies, depending upon our perspectives that we execute during the quarter.
The reason why we decided to give you.
The numbers without necessarily adding deposits liquidity for example that I mentioned, which would have shown a higher sensitivity. This is partially due to that reason because we did not want to sort of.
Yes.
Create a chat.
Challenges and comparing quarter over quarter numbers, but there will be some changes depending upon our rate management.
Management actions.
And also movement and the.
The yield curve that that occurs.
So these aren't and natural factors and not.
Not necessarily related to any structural changes.
And sort of the underlying unhedged balance sheet.
Alright. Thank you and then just maybe if I can squeeze another 1 in here and just wondering if I could get some thoughts on the impact of the more stringent qualifying rates are for domestic mortgages do you think that some of the really strong growth. We saw this quarter just being pulled forward to get ahead of the higher.
Qualifying rates and then we can see a.
A bit of a slow down in coming quarters, maybe just some thoughts on that.
It's Ernie Els and I'll take that 1 and there will be some impact as a result of that increased and it wasn't called this distressed assets. He said.
And the impact will be you know probably about 5% to 10 per cent Max from up from the perspective of impacted borrowers and that said there are ways in which they can you know obviously find on lower price house and being able to either find more equity somewhere from from parents and gifting and all of those sorts of good things.
So it's very difficult to understand what the full impact will be they may actually just end up these consumers going to a lower priced house and in that case. So overall, there will be some sort of moderation to the extent of being able to say what of exactly and that's going to be it's difficult to say, but we can see them just given what we're seeing right now and.
And you know kind of housing prices and sales and there will be some moderation that would be our expectation for the next little while but it will still remain on a fairly robust mortgage market and in Canada and.
For sure over the next of Awhile.
Great. Thank you.
Thank you for.
On a linked question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, so and so and if we could go back to your guidance on net interest income for the year being flat.
Given the comments on <unk> and the apparent momentum in your loans commercial and <unk> and also on the retail side I was a little surprised on that.
I will also for the surprising and the context of the move we've seen in the U S..5 year on the Canadian 5 year and the quarter. So maybe what I'm getting at here is assuming the loan growth remains good and perhaps even accelerate says as Dave suggested.
Where will the margins come in because that's the only other explanation.
Why are you pointing us to lower margins in Canada, and the U S or lower margins outside of the domestic P&C franchise.
Yeah and again another good question, partially if you go back to slide 16.
We are expecting NIM to be relatively flat.
And that's partially as a result of the right side of that slide where the reinvestment yields currently.
And are still below those that are coming off from prior investments of either our equity rolls or deposits roles. So that's still isn't phenomenon and that continues to put some pressure on nims in terms of year over year comparisons.
In Canada for example, although we are benefiting from mortgage growth, which is elevating our average loans.
Relative to past years, obviously, that's and we are not necessarily seeing much growth and credit cards, which has higher spreads and so that's also playing a role both in the U S as well as and Canada.
Composition of the loan portfolio is slightly changing until you know of personal borrowing including credit card picks up which has higher spread so.
There's nothing really unique.
Unique about the guidance.
And if we end up seeing.
Stronger average loan growth and the second half over the year than what we were anticipating than you would see a pick up and NII.
So I think in general.
And the guidance is.
Pretty much in line with both what's happening.
And on NIM as well as and.
And sort of the composition of the loan portfolio.
And you start to put a finer point on it even if the domestic I'm sorry, rather if the total bank margin is essentially just flat.
Going forward for the remainder of this year.
I can't see how it would be more of it doesn't grow the NII.
And just like the number of cells. They just don't add up NII grew.
Grows year over year, if youre and if your margin of slot and then I don't know of some sort of look and mathematical truism.
And maybe there's something we can take offline because I just don't I don't follow your guidance very well yeah.
Now it probably goes back to sort of for the yield on earning assets that is changing a little bit but.
And again, we kind of if we can discuss I guess.
We're giving you of guidance as we see it today, but is there and upside there may be some upside to the guidance depending up on how the second half lives.
Okay, and then I guess.
And what type of question and then the FX fees just looked really good this quarter was there anything special on there or was that I'm I'm, not referring to FX trading and I'm talking about the FX fees non trading and they were just very good this quarter.
Was that just really good client activity and the quarter or was there something else that.
And Theres nothing unique on in that line item in terms of any quarterly a onetime impacts such as client activity.
Okay. Thank you.
Thank you all of it.
And last question is from Scott Chan from Canaccord Genuity. Please go.
Go ahead.
Good morning, so on the couple of markets that obviously very solid and the quarter could you offer us any kind of guidance that you see you know other than that.
Next few quarters in terms of DCM, and ECM or or M&A advisory activity.
Great well thanks for the question.
Obviously, you're very satisfied with the quarter.
Great to see the investments that we've made and the portfolio adjustments really start to pay off.
I think it also of the demonstration of the diversification of our platform both in terms of product markets and.
And clients.
As we look forward and I think we'll continue to see the benefit of the investments we've made across our platform, particularly in the U S.
And we've seen the strong results we've had year to date, we expect those to continue on as we go on.
Our pipelines remain very strong M&A and particular has been building and growing and we had a very strong quarter and equities and in leveraged finance.
M&A activity continuing to pick up over the balance of the year, we'll continue to see strong revenue growth. There I think will also benefit as we look forward to the portfolio choices we've made.
In terms of what we've been doing driving our cost structure down.
Down you saw our efficiency ratio was less than 55% year to date and I think will continue on on that benefit.
And then I think we'll also continue to have a benefit and a strong credit environment that we've experienced and that's going to continue on and so all in all of <unk>.
Strong performance, we expect coming into the balance of the year.
Great and maybe just losses for all for Daryl just on the capital side got us gets us that 1 ratio of 13% pro forma higher with the other with your asset management and sales so assuming that all she does lift restrictions later this year at this point today, what are your kind of capital priorities, including M&A. Thanks.
Yeah. Thanks for the question George short story unchanged. The first use of our capital is for our clients and devoting it to their benefit and their growth I think we've shown that in the past and expanding environments, where we've been able to grow and take that white space that we talked about earlier and the call. We've been able to do that and increasingly profitable return so that would be priority 1.
And then you're into the tree on deploying it to dividend increases versus buybacks I'm not going to get into the speculative game of when that will be a possible that'll be to the regulator's decision, but when it is you.
You would expect us to be active there are absent being active on the M&A front and on the M&A front I'll go back to of framing I think I've given before.
And I talk about this in terms of tools and discipline.
As far as tools are concerned without question, we've got lots of them. We've got excess capital. We've got operating momentum we've got a great team and we've got.
And good muscle I would say in terms of the success that we've had and the acquisitions. We've made so of tools are great.
But they don't come at the expense of discipline and discipline for us is strategic it's cultural.
And its and its financial and I think I've said before you have to be careful not to swing at every pitch there are lots of pitches, but lots of them on and the dirt. So.
So if you see us active it'll be because we landed something that meets both of the discipline and the tools and if you see us not active it'll be because we haven't found something that goes over the disciplined bar so I'll leave it at that.
And I like that analogy, thanks, a lot.
Thank you that concludes the question and answer session and I'd now like to turn the meeting back over to Mr. White. Okay. Thank you of all of you for your question. Let me wrap up quickly here with for key summary of themes number 1 our results for the first half of the year as I said earlier, clearly very strong with our ROE.
Our EPS growth and our operating leverage all above our midterm targets number 2 we're not stopping there.
We're moving the bar of significantly higher on our expense and our efficiency commitments and we have strategies in place to do more and number 3 our credit quality will remain a differentiator for us as it has for decades and number for our purpose driven strategy is delivering consistent performance the strong momentum and the clear potential.
First of all of our businesses the advantaged business mix is ready for more especially with and accelerating economic backdrop that we're driving into so I'm highly confident that as the economies reopen we're going to continue to accelerate through the next year and be on thank you all for participating in this morning's call. We look forward to speaking to you again in August.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.