Q2 2021 Bank of Montreal Earnings Call
Yes.
Please standby your meeting is about to begin.
Be advised that this conference call is being recorded.
Morning, and welcome to the of BMO Financial group's Q2, 2021 earnings release and conference call from 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 of 2021 results presentation. We will begin the call with remarks from Darryl White Bmo's CEO, followed by Typhoon Zone, our Chief Financial Officer, and Pat Cronin, Our Chief Risk Officer also present to take questions. Today are Ernie Johansen from Canadian P&C, Dave Casper from.
U S P&C, Denver Klee 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 manage it management measures performance on a reported and adjusted basis and considers supposed to be useful.
In assessing underlying business performance, Daryl and typhoon will be referring to adjusted results in their remarks, unless otherwise noted as reported with that I will turn the call over to Daryl. Thank you Christina and good morning, everyone.
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 in our market sensitive businesses as well as good growth in our P&C businesses, despite record low interest or interest rates.
For the first half of the year adjusted pre provision pre tax earnings of $5.5 billion increased 27%.
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 impaired 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 the 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 a steadfast commitment to the communities we serve.
Our progress is evident in our financial performance, which confirms the effectiveness of our strategy and ability to support millions of clients in 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 when 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 OE.
Our capital position.
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 in a range of recent decisions such as the sale of our EMEA of asset management business, our private banking business in 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.
Of this points of ROE by 30 basis points and capital by 80 basis points and they enable reinvestment in our core businesses in 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 in economic activity. This year of 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 in 2021, the strongest expansion and 37 years at.
And among consumers this week, the Bloomberg Nanos Canadian confidence index hit its highest point recorded since they started pulling in 2008 with Canadian real GDP expected to grow 6% as vaccine rollouts accelerate.
Here, we're building capabilities and continuing to invest in our businesses for growth with the digital strategy first our bank is been driving digital transformation for more than a decade and in the last 12 months the pace has meaningfully accelerated.
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 less risk for error and a better experience for our customers and our employees.
In wealth management, we launched advice direct premiums a 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 in 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 14% in traditional wealth with strong growth in 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 in Canadian and U S private wealth businesses.
We're refocusing the business for North American growth investing in key areas of competitive strength in 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%.
The results reflect strong and diverse revenue performance in both global markets and investment in 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%.
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 in 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 an 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, empower 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 in our businesses differentiated risk management and <unk>.
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.
The performance this quarter was solid with strong adjusted pre provision pretax earnings 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 level of in the prior year and up 3% from our 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%.
The 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 of asset management business, a $22 million after <unk>.
<unk> gain from the sale of our private banking business in Hong Kong and Singapore.
And $47 million after tax divestiture related costs for both transactions.
The 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 in our capital markets and wealth businesses.
Expenses were up 3% from last year and flat quarter over quarter.
Revenue and expenses in the quarter include certain notable items that combined did not significantly impact net income.
These included elevated card revenue, reflecting nonrecurring items in Canadian P&C illegal provision in 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 in 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 due to last year's elevated commercial line utilization rates and decline in the non Canadian energy portfolio, while consumer loans increase.
Due to the strong mortgage growth in 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 in 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 in the U S. We expect loan growth to ramp up past, the near term supply chain and low inventory challenges.
Moving to slide 14 for capital.
The capital position strength and further this quarter the.
The common equity tier 1 ratio was 13% up 60 basis points from 12, 4% in 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.
In our P&C business, both in the U S and Canada margin was stable.
In 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.
P&C Nims are expected to decline due to the impact of lower long term rates rolling in <unk>.
And the expectation for loan growth exceeding deposit growth.
Lower prepayment fees expected to put pressure on.
The 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 deposit 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 in short term rates would add approximately 100 million to revenue over the next 12 months.
The higher second year of benefit to rising rates would be primarily driven by the 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 cards revenue, partially due to nonrecurring items and mutual fund revenue.
Year over year comparison in 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 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 in 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.
The efficiency was 56, 6% and operating leverage was strong at 13, 1%.
Full year expenses should remain well managed any incremental the 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.
And up 2% from last quarter.
Operating leverage was strong inefficiency was 545, 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 in 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.
The 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 in 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 in 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 of new debt and equity issuances.
Higher revenue in the investment in corporate banking was driven by strong underwriting activity and net securities gains in the quarter.
Expenses were up 10%, reflecting mostly higher performance based costs, partially offset by lower operating costs are down 5% sequentially.
There was a recovery in the provision for credit losses of $55 million.
Turning now to slide 23 of our 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 continued improvement in most of our key risk metrics from our strong first quarter results in.
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 in the first quarter and well below pre COVID-19 levels. The.
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 an 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 the loan losses in the coming year.
Turning to the impaired loan credit performance and the operating groups, we saw unusually low loss provisions and several of our business segments in Canadian.
In P&C consumer loan losses were $100 million up.
Up 2 basis points from low levels in the prior quarter.
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.
In 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.
In U S. Commercial we reported impaired loan provisions of $3 million. The decline in 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 in 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 in 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 in 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 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 the 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 in.
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 in the last 3 quarters, and we expect credit losses through fiscal 2021 to remain manageable.
In terms of the performing provision while uncertainty remains in terms of the future path of the pandemic, assuming vaccination progresses in our key markets and we continued to see a reduction in 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 2022, our expectation is that impaired loan losses will normalize and average in the range of low <unk> 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.
We'll now take questions from the telephone lines. If you have the question and you are using a speakerphone. Please lift your handset before making your selection. If you have a question. Please press star 1 on your devices keypad.
You may gain some of your question at any time by pressing star 2.
The star 1 at this time, if you have a question that would be a brief pause from all participants with just a couple of questions. We thank you for your patience.
Our first question is from Ebrahim Gonnella suite of Bank of America. Please go ahead.
Good morning.
I guess just the first question around commercial loan growth I heard you say I think borgata Linda if we can talk about expectations for the pick up you did actually have commercial loan growth quarter over quarter per quarter, both in Canada, and the U S. Just talk to us in terms of what's the are you hearing from the U S banks, there's a lot of liquidity impact.
Also being on the borrower demand 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.
I'll pick up in non demand.
So hey, Ram, it's Dave Casper, let me.
Try to give you a sense so when we talk to our clients and this would be pretty similar on both sides of the border.
The demand for their products is really quite strong and we're seeing that really across.
All of our industries regions.
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 they're really not borrowing today. So the.
They come over the we get their operating business, but they're not they're not borrowing today.
So the M&A activity continues to be high.
And I would 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 2 of the inventory pipelines are basically clock across the borders now labor issues are real they really are real and there are.
Very few of our clients that are having issues there.
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 to your questions.
Loan growth as you pointed out was actually sequentially up both in Canada and the use of this quarter and I expect it will continue to grow.
During the quarters, but.
None of the 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 the 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 than.
Than I ever was in terms of over the next.
2 years, including the next 2 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're both growing.
I'm just.
Reflecting the optimism of our clients.
And.
The outlines some of the headwinds, but those will go away.
So let me stop there and see if I've.
Answered your questions appropriately.
Yeah.
David just 1 thing to add onto that like pre pandemic, we did see BMO in 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 to 7 years.
I think we will continue in the U S to take advantage of the white space. We have the industry's we cover the geographies that we cover that we continue to grow and I would expect that just as we have in the past.
We'll be peer leading in our loan growth over the next couple of years.
In the equity and really more important the loan growth client acquisition growth.
Got it and what does the BBB balance if you have that at the end of the quarter.
In the U S.
Around $4 billion I think.
Average loans on average were about $4 billion.
And the remaining fees tied to that the do you expect to accrue as they get forgiven.
I think we've basically accrued about half of the fees.
That arent that we've received we've accrued about half of the rest of will come in through the next couple of quarters and into next year I think it's around in the 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 all flow.
The 1 question is from Paul Holden from CIBC. Please go ahead.
Good morning, So first I just wanted to ask a quick question on clarification you.
You mentioned you.
The NII to be roughly flat year over year, just wanted to clarify if that's the the full year 2021 of the back half of the year full year 'twenty, 1 compared to full year..2 line. Thank you. Thank you for that clarification okay.
So my next question is just regarding the net NIM sensitivity table you provided in the slide deck, there which is.
That's very helpful and really highlights the upside you have in the U S business. Just wondering true knowledge is there anything different about the most Canadian business that.
Perhaps make it any more or less rate sensitive than peers.
Domestically.
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 deposit sensitivities in the U S. The pictures of it different.
But I don't think that necessarily.
To my knowledge that there are significant differences in Canada.
The between us.
And in the 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 in that number it's more it's more relates to how we invest those balances.
Got it okay. Thank you.
Thank you.
Following question is from many Goldman from Scotiabank. Please go ahead.
Hi, good morning.
Also on the subject of rate sensitive you talked when you talked about how the rate sensitive sensitivity can go higher.
If you're able to retain the excess deposits that you've built over the pandemic 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.
We retained all of the balances of modeling exercise basically then the sensitivity.
Could be 70% to 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.
Number that is quite sensitive to the assumptions around the retention of those deposits.
That's helpful and then maybe as a follow up just on the business side.
If you Couldnt kind of try and highlight what are you doing on the business side to try and retain those deposits.
We're particularly 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.
Do you 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.
You've done in the past, we always seem to retain more.
As clients need to use them for borrowing the 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 in short term and will will retain those.
We're continue 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 take over on many on the on the retail side I'll start with the you asked the firsthand you Canada.
On the U S side as you know we've been acquiring deposits across 50 states in the U S and are committed to continuing to maintain good relationships and those growth engines for deposit.
Shifting our focus away and this is the 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 acquire more new customers for those.
Key relationships that start with the checking and the savings account and you'll see that that growth happening in Canada in our retail deposit share 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.
Of the economy open 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 deposit, but as I've said as the acquired more new customers and we anticipate that that the surge deposits that we've acquired will be slower writing off than 1 had imagined.
2 months ago. That's the initially what we're seeing as the economies are slower to ramp up the consumer spending.
Really really of good news story on both sides of the of the border on the retail side.
Thank you.
Thank you.
Following question is from Doug Young.
Our day in capital markets. Please go ahead.
Hi, Good morning, I guess this question is for Pat.
Just trying to think of credit here and but if I go preach.
Your average coverage ratio for performing loans was I think around 32 basis points in fiscal 2018 in 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 changes are you just going to be.
More conservative or what would be of reasonable timeframe. 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.
First of all in terms of the timing for getting down or timing of releases, it's really going to depend you know of.
On primarily how we see lockdowns easing, particularly in Canada, and then of commensurate reduction in stress for those borrowers that are uniquely impacted by by the Lockdowns and then we'd like to see an easing of some of the health issues that are that.
That are percolating in certainly in countries like India that may have a larger impact on the global economy, and then some stability in 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 you know a.
A lot on the mix of the book and some things we might provision higher for versus others. So it depends a lot on how some of the sectors grow as well as the product mix within the consumer business and then I would expect us to remain slightly elevated versus our historic levels. Because now we obviously have a new.
Stress events to consider when we think about you know what the tail of loan losses could be as we move forward.
It'll take some time to go back down my gut is probably over the course of the next 12 to 18 months, we'll see a reduction to something that's more stable and it looks like it will 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 the 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 in the card business.
In general Thank you, yes, so let me ask the yes, let me answer the question and then I'll turn it over to Ernie about what she is seeing.
Doug as I said there were 3.
Notable items during the quarter altogether. They didn't have any impact on net income of 1 of them was in card fees.
In terms of sort of the trend expectations.
What I would suggest is that.
In a quarter or 2 as well.
Consumer spend activity.
Picks up and.
The card swipes continue to go up.
We would expect to grow into this number.
Away from the the <unk>.
Onetime 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 I will turn it over to you on that topic.
Thanks, Typhoon and thanks for the question Doug.
If I look at size of the card related revenue, obviously elevated this quarter as you've mentioned that.
That line typically has a couple of items in there that move around timing of the reward costs is 1 of the actual consumer spending that occurred that occurs through that as I look for.
In the past month or so what we're seeing is is the return back to I would say pre pandemic levels of spending and its just in the recent in the in the past month or so that we're returning back to 2019 numbers and that's good to see overall, we're seeing it in a couple of categories as you can imagine historically in the.
<unk> you saw growth of 3 home Reno gardening kind of category at their peak and above normal levels and now we're starting to see the return to travel.
We're seeing that across hotel travel industry and so that's really a good indication of what we're gonna be facing in the in the next little while the kids 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 going to be seeing.
<unk> and strengthening.
The repayment I spent I've seen that even now on card credit card acquisition, and we're really pleased with our launch of our of our new vs that cliffs products are performing extremely well in terms of acquisition growth.
It would appear that the payments businesses is getting back up to where it was the pre pandemic. So we're really pleased with that performance.
Okay. Thank you.
Hum.
Thank you. Our following question is from Gabriel the Shane from National Bank Financial. Please go ahead.
Good morning of a quick 1 on the prepayment income and then a follow up.
In Canada, you have them.
Can you tell if you have maybe more of a strategy to encourage prepayment activity in the north.
Relatedly like what.
What is the size of these revenue has been over the past couple of quarters.
It's Ernie.
I think you're referring to prepayment on mortgage.
Okay. Thanks, Thanks of the clarification.
It's an interesting question, obviously consumers are taking advantage of the lower interest rate environment to refinance we're also seeing consolidation of lending. So the only looking at how do they consolidate into the home equity line, but.
Terms of the prepayment this will be of phenomena that continues as he of low interest rates do.
Do you anticipate it to diminish I think over the coming months you will see that just adds more consumers have taken advantage of that who were interested in taking advantage of pre payments have done so.
And then also as we as we as the as we go forward we're bit of fee 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.
With the size of been of these revenues over the past couple of quarters I don't have that off handling of probably come back to you with that Oh.
Proportion of the.
Gartner that'd.
That'd be great.
Then for whoever it maybe maybe Pat.
Business hubs as well of the inflation topic is of course, the top of mind everywhere.
Are you thinking of boat.
The numbers that we've been seeing lately.
Both of them are positive and the negative because of good the suppressed demand of people delay their decisions when buying decisions when prices are moving so fast.
<unk>.
But it does help I guess from a credit risk standpoint on the Ltvs on the on what's on the books already.
Mumbling here, but the if you can give me a sense of how youre 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 the others specifically to the inflation that you're seeing in home prices.
You are correct.
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.
The weighted home prices may exaggerate ltvs and so we're taking our risk management practices on housing is dynamic anyway, and so through the cycle as prices change we adjust our practices.
And we're routing more mortgages to manual adjudication, 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 the the borrower's ability to pay not the house price and so to the extent we're satisfied with that.
Then we're comfortable from a risk perspective, and then broadly 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 in the event of a higher interest rates, but then we stress test of the portfolio broadly and 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 the within the earnings power.
And of anybody else on the.
Business growth, but well actually I was that could be part of the.
Stuff like the like are you seeing any commercial borrowers are the input costs are based on these oh 1 of the.
The prices that are soaring and.
And that might be squeezing the margins are you seeing any of that at all.
<unk> definitely seen definitely seen the.
Some input costs across the board.
At this point.
I don't think of any exceptions. Most of this is getting passed on and its expected which is clearly if this continues we will have some inflationary.
And the pressures, but right now our COO.
Customers need to get the inventory.
From there.
They are paying for it and.
It will it will likely get passed on I don't see big margin pressures.
And maybe just 1 follow on to that certainly from a risk perspective, we're not seeing it driving widescale stress in the in the portfolio you would normally you start to see that show up in negative credit migration and in fact for the second quarter in 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 in terms of negative migration.
Thank you.
Thank you.
Following question is from Nomura per song.
From call Mark Securities. Please go ahead.
Alright, My first question is on the the.
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 the sensitivities change from quarter to quarter, I guess, where I'm going with this since day 1 of the big Downfalls.
On the structural interest rate sensitivity tables that all of the banks provide in their annual reports of MBNA is is that it changes so much from quarter to quarter and it's only really relevant for a specific point in time some of the sensitivities. If this interest rate sensitivity table is subject to similar levels of volatility 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.
These are clearly.
As of the date that they are run and they are published.
There will be quarter over quarter changes in the and changes in this number depending upon the actions that we would be taking during that quarter. So that clearly will.
We'll have an impact on the sensitivity.
At points in time.
May decide to invest the larger portion of the liquidity that we are in 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.
Of the numbers without necessarily adding deposit 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.
Yes.
<unk>.
Challenges in comparing quarter over quarter numbers, but there will be some changes depending upon.
Management actions.
And also movement in the.
The yield curve that that occurs so these are natural factors.
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 just wondering if I could get some thoughts on the impact of the more stringent qualifying rates.
Our 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 the.
The higher qualifying rates and then we can see here a.
A bit of a slowdown in coming quarters, maybe just some thoughts on that.
It's Ernie I'll take that 1.
There will be some impact as a result of that increased.
The stress test the he said the.
The impact will be probably about 5% to 10 per cent Max from the from the perspective of impacted borrowers that said there are ways in which they can.
If we find a lower price house and being able to either.
The 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 price in that case. So overall, there will be some sort of moderation to the extent of our being able to say what of exactly that's going to be.
It's difficult to say, but we can assume just given what we're seeing right now.
You know kind of housing prices and sales that there will be some moderation that would be our expectation over the next little while but it will still remain a fairly robust mortgage market in Canada for.
For sure over the next of Awhile.
Great. Thank you.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, So I thought if we could go back to your guidance on net interest income for the year being flat.
Given the comments on the apparent momentum in your loans commercial and also on the retail side I was a little surprised by that.
I will also put the surprising in the context of the move we've seen in the U S..5 year on the Canadian 5 year in the quarter. So maybe what I'm getting at here is assuming the loan growth remains good and perhaps even the accelerates as the.
<unk> suggested.
Where will the margins come in because that's the only other explanation.
Or are you pointing us the lower margins in Canada, and the U S or lower margins outside of the domestic P&C franchise.
Yeah 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.
We are still below those that are coming off from prior investments all of the either out of equity rolls or deposit roles. So that's still isn't a phenomenon 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 that we are not necessarily seeing much growth in credit cards, which has higher spreads. So thats also playing a role both in the U S as well as in.
In Canada.
The composition of the loan portfolio is slightly changing until personal borrowing including credit cards picks up which has higher spreads. So.
Theres nothing really <unk>.
The unique about the guidance.
And if we end up seeing.
The stronger average loan growth in the second half over the year than what we were anticipating than you would see of pickup.
NII.
So I think in general.
The guidance is.
Pretty much in line with both what's happening.
On NIM as well as in.
Sort of the composition of the loan portfolio.
Can you talk with the final 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 see how the BMO doesn't grow the NII.
Just like the number of zone. They just don't add up NII grew.
Grows year over year, if youre and if your margin the slot in the I don't know its a sort of of the mathematical truism.
Maybe there's something we can take offline because I just don't I don't follow your guidance very well.
Now it probably goes back to sort of the yield on earning assets that is changing a little bit but.
Again, we kind of if we can discuss I guess.
We're giving you of guidance as we see it today, but is there an upside there may be some upside to the guidance depending up on how the second half of those okay.
A different type of question then the FX fees just looked really good this quarter was there anything special in there or was that I'm not referring to FX trading I'm talking about the FX fees non trading and they were just very good this quarter.
Was that just really good client activity in the quarter or was there something else to that.
Yes, there is nothing unique in that line item in terms of any quarterly 1 time impacts of <unk> client activity.
Thank you.
Thank you.
Last question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning.
On the couple of markets that obviously very solid in the quarter could you offer us any kind.
The guidance that you see you know over the net.
Next few quarters in terms of DCM, ECM or or M&A advisory activity.
That's great well thanks for the question.
Honestly very satisfied with the quarter.
Great to see the investments that we've made in 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.
<unk> clients.
As we look forward I think we'll continue to see the benefit of the investments we've made across the platform, particularly in the U S.
<unk> seen the strong results we've had year to date, we expect those to continue on as we go.
Our pipelines remain very strong M&A in particular has been building and growing and we had a very strong quarter in equities and in leveraged finance.
The M&A activity continuing to pick up over the balance of the year. We will continue to see strong revenue growth. There I think will also benefit as we look forward to the portfolio of choices we've made.
In terms of what we've been doing driving our cost structure.
Down you saw our efficiency ratio was less than 55% year to date and I think we'll continue on that benefit.
And then I think we'll also continue to have a benefit of the strong credit environment that we've experienced.
And that's going to continue on so all in all of our.
Strong performance, we expect coming into the balance of the year.
Great and maybe just lastly for all for Daryl just on the capital side got asked gets us that 1 ratio of 13% pro forma.
With the with the asset management sales so assuming the loss he does lift restrictions later this year.
At this point today, what are your kind of capital priorities.
M&A.
Yeah.
Yes. 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 in the call. We've been able to do that and increasingly profitable returns 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.
The possible that'll be the the regulator's decision, but when it is you.
You would expect us to be active there.
Absent being active on the M&A front and on the M&A front I will go back to of framing I think I've given before.
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.
The good muscle I would say in terms of the success that we've had in 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 the swing at every pitch there are lots of pitches, but lots of the men and the dirt.
If you see us active it'll be because we landed something that meets both 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.
I like that analogy, thanks, a lot.
Thank you that concludes the question and answer session I would now like to turn the meeting back over to Mr. White.
Okay. Thank you all of you for your question, let me wrap up quickly here with 4 key summary 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 mid term 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 of 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 4 our purpose driven strategy is delivering consistent performance the strong momentum in the clear potential to cross.
All of our businesses the advantaged business mix is ready for more of especially with an 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 beyond. 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.
Yeah.