Q3 2021 Bank of Montreal Earnings Call
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Good morning, and welcome to the BMO financial group's Q3, 2021 earnings release and conference call for August 24th 2021.
Your host for today is this is Christine <unk> head of Investor Relations. Mr. Gilles. Please go ahead.
Thank you and good morning, welcome to third quarter 2021 results presentation, we will begin the call with remarks from Darryl White Bmo's CEO followed by typhoon.
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, Dan Barclay from BMO capital markets, and Joanna Rotenberg from BMO wealth management.
As noted on slide two 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 measures performance on a reported and adjusted basis and considers supposed to be useful in a.
Assessing underlying business performance Geralyn typhoon will be referring to adjusted results in their remarks, unless otherwise noted as reported and now I'll turn the call over to Gerald Thank you Christina and good morning, everyone.
Operating momentum across our diversified businesses and the execution of our purpose driven strategy continue to drive strong and consistent financial performance today, We announced net income of $2.3 billion and earnings per share of $3.44 up from $3.13 last quarter.
The key drivers of our very strong performance reflect the execution of our purpose driven strategy and our consistent over time number one an advantaged and diversified business mix well positioned for growth through a focus on customer loyalty and consistent investment in digital.
These product innovation and customer facing employees, delivering leading financial advice number two targeted actions to improve efficiency and returns and drive long term profitability number three differentiated risk management and capital allocation driving consistent Craig.
Performance and increasing flexibility for capital deployment.
And number four our steadfast commitment to support the financial well being of our customers and communities through the economic recovery and beyond.
Our consistent financial performance allows us to continue to build on our long standing commitment to support a sustainable future a thriving economy and an inclusive society.
We're acting with purpose and urgency.
This quarter, we announced a 10 year 12 billion dollar financing commitment towards breaking down barriers to affordable housing in Canada, and supporting the aspiration that all Canadians have a home they can afford that meets their needs.
In support of mental health, we've extended our Lifeworks wellness assistance program to Canadian business banking clients across Canada at no additional cost.
We're focused on removing barriers to economic inclusion.
With a new dedicated segment in the U S, providing access to safe and affordable financial products and services for communities historically underserved by financial institutions, including the bank on certified BMO Harris Smart account.
We're also continuing to advance our significant body of work to address the impact of climate change this quarter BMO capital markets announced the creation of a dedicated energy transition group to provide knowledge tools and support to clients and their pursuit of energy transition opportunities.
Our commitment to building a sustainable future were again recognized in the corporate Knights ranking of Canada's best 50, corporate citizens ranked first among Canadian banks, we received top quartile scores and clean investment board gender diversity executive diversity as well as clean revenue.
Turning now to our financial performance on a year to date basis, we delivered adjusted pre provision pretax earnings of $8.5 billion, an increase of 21% from last year with revenue up 10% and strong operating leverage of seven 3%.
We continue to be disciplined in our approach to expense management to drive efficiency improvements at.
At the same time, we're making targeted investments to position our business for growth, including in marketing sales force and technology.
Even with those investments year to date expenses are up just 3% and have declined 1% after excluding higher performance based costs.
At our Investor day in 2018, we set an efficiency ratio target of 58% or better by 2021.
We reached that goal a year early.
And we've made further progress this year with year to date efficiency of 56, 2%.
We remain focused on delivering positive operating leverage going forward, including the benefit from strategic actions, we've taken to optimize capital and resource allocation.
Our credit quality remains very strong with low impaired provisions again this quarter.
Return on equity this quarter was 17, 6% and is also above target and our capital position continues to strengthen with a CET one ratio of 13, 4% positioning us well for growth and the eventual relaxing of constraints on returning capital to shareholders.
The economy and our customers have shown remarkable resilience to an evolving landscape of pandemic related restrictions.
With those now lifting and vaccination rates continuing to climb the Canadian and U S economies remain poised for the strongest growth in decades. Despite.
Uncertainty around the emergence of variance of the virus and ongoing supply chain and labor issues GDP in Canada is expected to grow 6% this year and four 5% in 2022 and in the U S..6% this year and 4% in 2022.
We're already seeing consumer activity, increasing with pent up demand and savings driving higher credit card spend.
Small businesses are coming back and commercial lending is beginning to grow as typhoon will discuss.
We're embracing the future as a digital first bank with a strong technology foundation built to navigate change and lead in loyalty profitability and efficiency improvement.
Digital isn't just a channel at BMO, it's the way we operate every part of the business with leading cloud data and AI capabilities user friendly tools and common platforms for better faster service.
Engaging in productive partnerships is accelerating our digital transformation. This quarter, we selected AWS as our strategic cloud provider to further modernize banking platforms and build digital financial service applications.
In addition in the U S. We're expanding our relationship with financial Technology leader.
With a major multiyear modernization program that accelerates mobile digital solutions supporting continued.
Continued growth across U S markets.
We're also working with lively and an industry, leading health savings accounts or solutions provider in the U S to bring a modern and personalized HSA experience to customers, providing them with financial tools to tackle rising health care costs.
We continue to deploy a series of market, leading capabilities and offers while shifting service transactions to digital allowing our employees to focus on advice and sales.
With a balance sheet approaching a trillion dollars, we're continuing to build an integrated scale advantage across our north American platform.
Which brings me to our U S segment, which continues to be a driver of earnings growth contributing 39% of total bank earnings year to date.
Pre provision pretax earnings were up 34% year to date with an efficiency ratio of 55, 2%.
We're a leader in the Midwest and growing nationally with over 50% of revenue coming from outside our Midwest footprint.
Our integrated approach brings the full value and scale of BMO to our north American customers as.
As the fastest growing part of the bank with an accretive efficiency and comparable Roe.
The opportunities to continue to expand share and grow our significant.
On a year to date basis, each of our businesses delivered strong <unk> growth and positive operating leverage our.
Our flagship Canadian P&C business is delivering pure leading performance year to date <unk> growth of 14% was supported by continued strong consumer balanced growth across mortgages checking and saving products and diversified commercial lending growth.
We continued to strengthen core digital experience capabilities and drive top tier digital sales, helping more customers make real financial progress.
And U S. P&C ppt was up 18% year to date.
We've shown strong growth in commercial deposits and core retail checking balances and are continuing to see momentum in commercial pipelines and expect lending to accelerate as the economy expands and supply chain issues ease.
This quarter, we added new commercial banking offices in Denver, and Orlando, expanding our operations in areas with strong demographic and economic indicators and we're continuing to add clients and deepen relationships.
And BMO wealth management, we had a very strong quarter PPD growth was 36% year to date, we're delivering best in class experience with mutual fund sales year to date more than four times all of last year and leading ETF flows.
We're investing in key areas of competitive strength in private wealth Canadian asset management and digital investing.
This quarter BMO Investor line introduced enhancements that elevate and personalize our clients' digital trading experience and we began offering commission free trading for more than 80, Etfs further enabling self directed investors to build well diversified portfolios.
BMO capital markets is an important source of diversified earnings to the overall bank and had another strong quarter delivering year to date <unk> growth of 36%.
Investment in corporate banking had a second consecutive quarter of record revenue and a robust M&A environment and year to date was ranked number one in the Canadian equity capital markets League tables.
Global markets continued to perform very well and normalizing market conditions, the deliberate actions and investments we've made in the business over the past few years have strengthened and repositioned us for sustained performance.
To conclude we believe our commitment to support a sustainable future a thriving economy and an inclusive society and our financial performance are inextricably linked.
Supporting our customers our communities and our employees is how BMO will continue to drive long term shareholder value.
I'll now turn it over to typhoon to talk about the third quarter financial results.
Thank you Darryl good morning, and thank you for joining us I will start my comments on slide 11.
Third quarter reported EPS was $3.41 and net income was $2.2 billion. Adjusted EPS was $3.44, and adjusted net income was two points 3 billion up from $1.3 billion last year, driven by strong revenue growth improved efficiency.
Lower provisions.
<unk> earnings increased 9%.
Third quarter adjusted return on equity was very strong at 17, 6% up from nine 6% in the prior year.
And the efficiency ratio improved to 55, 7%.
Our strong performance has enabled us to continue to invest for future growth this quarter, while maintaining positive operating leverage.
Adjusting items. This quarter include expenses of $18 million after tax from the impact over the divestitures offset by a partial reversal of restructuring charges recorded in the fourth quarter of 2019 relates to severance of $18 million. After tax adjusting items are shown on slide 34.
Net revenue was $6.6 billion up 10% from last year with good growth across each of our operating groups.
<unk> increased 8% from last year, mainly reflecting higher performance based compensation.
Efficiency improved to 55, 7%.
Operating leverage was positive two 1%.
This quarter, we had a total recovery of credit losses of $70 million, which included a 71 million provision for credit losses on impaired loans, and a $141 million recovery and the provision for performing loans.
We will speak to these in his remarks.
Moving to the balance sheet on slide 12.
Average loans were down 3% year over year and flat, excluding the impact of the weaker U S. Dollar.
Business and government loans declined due to lower utilization rates and the continued wind down of the non Canadian energy portfolio, while consumer loans increased due to strong mortgage growth in Canadian P&C.
As a more recent indicators of accelerating loan growth period end loan balances are showing momentum and were up 3% compared to last quarter.
Average customer deposits were up 5% year over year and up 1% on a linked quarter basis, reflecting the highly liquid corporate and consumer balance sheets.
Looking ahead as the economic recovery takes place, we expect loan growth to accelerate averaging in the mid single digits in both our P&C businesses.
Moving to slide 13 for capsule.
Our capital position continued to strengthen this quarter common equity tier one ratio was 13, 4% up 40 basis points from 13% in the second quarter.
Dominantly, reflecting the impacts of very strong internal capital generation.
Source currency risk weighted assets.
Modest Lee higher quarter over quarter as business growth and an increase in market risk driven by the unwinding of Osophy temporary reduction in distress far multiplier were largely offset by positive asset quality changes.
We expect our regulatory capital ratios to continue to grow given the constraints on capital management actions.
Turning to slide 14, net interest income was relatively flat from last year and up 7% on an ex trading basis, driven by earning asset growth and higher NIM.
Total bank net interest margin ex trading was up two basis points from the prior quarter, reflecting the impact of interest rate risk hedging investment and funding activities in treasury.
On a sequential basis margin was down modestly in both P&C businesses.
In Canada, the decline was due to lower loan and deposit margins, while in the U S. The impact of lower deposit margins was partially offset by the benefits of accelerated TTP revenue from loan forgiveness.
Moving to our interest rate sensitivity on slide 15.
As shown on the slide a 100 basis point rate shock is expected to benefit net interest income by over $360 million over the next 12 months two thirds driven by short rate impacts.
The impact of a 25 basis point increase in short term rates would add over $100 million to revenue over the next 12 months.
The higher second year benefit to rising rates would be primarily driven by reinvestment of capsule and deposits at higher yields.
Sensitivities assume no benefit to rising rates from surge deposits and the benefit to revenue would be significantly higher if we retain these deposits.
Turning to slide 16.
Noninterest revenue net of CCP B was up 6% from the prior quarter and up 3% on an ex trading basis, primarily driven by higher gains on investments in our operating groups and in corporate services, partially offset by lower securities commissions and fees.
Year over year, noninterest revenue increased 24%, reflecting a rebound in markets and customer activity, including higher gains on investments underwriting and advisory teams mutual fund revenue and card revenue.
Although we may see quarter to quarter volatility in some of our noninterest revenue lines. We are very pleased with the underlying strength and future growth capacity across all fee generating businesses.
Moving to slide 17 expenses were up 2% quarter over quarter, primarily driven by performance based compensation.
More days in the current quarter and the impact of higher head counts and client base and sales roles.
Expenses were up 8% year over year, reflecting higher performance based compensation technology related costs and advertising spend.
On a year to date basis.
And excluding the impact of increased variable compensation, reflecting stronger performance.
<unk> declined one 2%.
While we achieved a sub 56% efficiency ratio. This quarter, we have continued to invest in our company to modernize our technology and to grow our revenue generating capabilities, including sales capacity.
As we look ahead, we see very good growth opportunities in all our businesses and our confidence that while opportunistically investing for growth, we will achieve positive operating leverage as a result of strategic actions to optimize efficiency and highly focused expense management.
Moving to the operating groups and starting on slide 18.
Canadian P&C net income was $815 million up from $319 million last year.
<unk> pre provision pretax earnings growth of 19%.
Revenue was strong and up 14% from the prior year with good growth in both net interest income and noninterest revenue.
Noninterest revenue increased across most categories, including gains on investments in our commercial business and card related revenue, reflecting higher customer activity.
Expenses were up 9%, reflecting investments in the business, including client facing and sales roles.
Marketing and technology spend.
Operating leverage was five 4% and efficiency ratio.
46, 7%.
Average loans were up 5% from last year and up 3% from the prior quarter, reflecting continued strength in residential lending and 2% growth in commercial loans.
Deposits were up 7% year over year, reflecting continued strong growth in core retail accounts offset by lower term deposits.
Our vision for credit losses was $94 million.
Moving to U S. P&C on slide 19, my comments here will speak to the U S dollar performance.
Net income of $453 million compared to $199 million in the prior year.
The strong results reflects 12% growth in pre provision pre tax earnings and positive operating leverage of four 8%.
Revenue was up 7% from last year, reflecting growth in both net interest income and noninterest revenue expenses.
Expenses were well managed up 2% from last year and efficiency improved to 53%.
On the balance sheet, although average consumer and commercial loans were down 1% year over year, excluding the impact of PPP loans period end loan balances were up 3% from the prior quarter, which is likely a signal for stronger loan growth in coming quarters.
Average deposits increased 5% year over year, there was a total recovery of credit losses of $49 million.
Moving to slide 'twenty wealth management had very strong results with net income of $406 million up 16% from the prior year.
Traditional wealth net income was $333 million up 19%, reflecting higher revenue due to growth in client assets, including stronger global markets.
Insurance net income was $73 million up 5% from the prior year.
Expenses were up 10% from last year due to higher revenue based costs and investments in the business.
Assets under management and assets under administration, both increased from the prior year due to stronger global markets.
Turning to slide 21.
Emo capital markets had another strong quarter with net income of $564 million up 30% from the prior year.
Investment in corporate banking had record performance with revenue up 29% driven by higher underwriting revenue and gains on investments.
Although markets revenue declined reflecting a moderating market environments.
Our results demonstrate the benefits of diversification and growing revenues.
Expenses were up 12% driven by higher performance based costs operating leverage was negative 9% this quarter, but positive 11% year to date.
There was a total recovery of credit losses of $94 million.
Turning now to slide 22 for corporate services. The net loss was $52 million compared to a net loss of $117 million last year.
To conclude we have operating momentum across our businesses, our strong balance sheet and capital position and are opportunistically investing in our businesses to capture market share and deliver continued long term growth and an improving economic environment.
I am confident in our ability to scale resource allocation for future growth, while maintaining positive operating leverage which will be a key success factor.
And with that I will turn it over to Pat.
Thank you typhoon and good morning, everyone.
We were pleased with our risk performance this quarter we.
We saw continued positive momentum across many of our key risk metrics and a fourth consecutive quarter of improvement in our credit risk profile, reflecting the steady economic improvement we've seen throughout this fiscal year and the strong risk management disciplines across the bank.
Starting on slide 24, the total provision for credit losses was a release of $70 million or negative six basis points.
Down from $60 million or five basis points last quarter.
Impaired provisions for the quarter were $71 million or six basis points down from $155 million or 13 basis points in the second quarter and well below pre COVID-19 levels.
Similar to last quarter, the strong impaired loan performance is due to very low formations.
We are very pleased with these results, but do expect impaired provisions to return to more normal levels over time.
We recognize the release on the provision for performing loans of $141 million. This quarter, which was mainly the result of an improving economic outlook and positive credit migration.
Given the relatively strong consensus economic outlook and our specific forecast for impaired losses in the year ahead, we remain comfortable that our $2.7 billion of performing loan allowances provides more than adequate provisioning against loan losses in the coming year.
Turning to the impaired loan credit performance and the operating groups, we saw unusually low loss provisions across most business segments.
In Canadian P&C consumer impaired loan losses were $86 million down four basis points from the prior quarter and in U S. P&C the consumer business had a net recovery unimpaired loans of $2 million.
This strong credit performance across our consumer businesses was driven by low delinquency rates and insolvencies as well as strong recoveries, particularly in auto lending.
In our commercial and corporate businesses, we saw excellent credit performance in Canadian commercial we reported impaired loan provisions of $15 million down significantly from $54 million last quarter.
Our U S commercial business had a net recovery unimpaired loans of $7 million.
The decline in provisions was driven by very low formations and low loss rate on those formations.
Our capital markets business also had excellent credit performance this quarter with a net recovery of $19 million. This performance was also driven by very low formations and additionally, good recoveries on prior visit reservations, particularly in oil and gas.
On slide 26 impaired formations at $390 million continue to be very low relative to prior quarters.
Gross impaired loans declined by $570 million to 51 basis points and are now consistent with pre COVID-19 levels.
In the appendix, 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 have had quite modest impaired loan losses to date.
In addition, we are seeing early signs of credit improvement in these segments with net positive credit migration this quarter and almost all of the sectors highlighted.
And as you can see on slide 28, 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 four quarters.
While uncertainty remains in terms of the future path of the pandemic and variance of concern.
Assuming economic strength continues in line with consensus estimates, we would expect further releases from our performing provision in the coming quarters.
We expect impaired loan losses to normalize from the very low levels of this quarter and expect the impaired loss rate to be in the low twenties in terms of basis points over the next year or so.
However, given the strength of current conditions, we may see the next quarter or two with impaired losses below that level.
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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The first question is from Ebrahim.
Two the Walla please.
Please go ahead from Bank of America. Your line is open.
Good morning.
I guess.
Typhoon.
If we could just start with.
The net interest margin.
I get the consolidated margin still went up sequentially, but talk to us in terms of your expectations, both in Canada and the U S. P&C, if we don't get a major lift in interest rates, where the margins are headed for both these segments and if you have the contribution from the PPP fees to U S. NII for the third quarter.
Sure.
Thanks for the question Hey, Brian first let me state that.
Thank the Treasury team has done a great job over the past four to six quarters in navigating these challenging times and our margin actually.
As to show it.
Very healthy picture with the expansion of two basis points this quarter and ex trading margins.
As I look at the environment clearly clearly there are some puts and takes.
The yield curve has flattened.
Level of rates is low, but despite that we've been able to manage the interest rates.
Sensitivities are very appropriately.
I think.
The impact of excess liquidity has been neutral so far this year. So as we look forward into the next three or four or five quarters as loan growth picks up and we start consuming excess liquidity that should be a tailwind, which should help us against the <unk>.
Continued headwinds related with the yield curve.
But in general I don't expect any clips I think we will continue to manage our NIM with a target of stability.
There may be some quarterly fluctuations PPP is one of those we benefited as you remember two basis points from PPP in the second quarter, probably another two basis points or so in the third quarter.
And.
As PPP loans have accelerated their exit through the forgiveness process.
They see a little bit of a dip in support in the fourth quarter in the U S. But they will pick up again in the second in the first half of next year, because now you're getting into the second wave of PPP loans that were originated.
In 2021, so it gives and takes are in general we expect relative stability with some continued headwinds as normal in this environment.
I will turn it over to Dave in R&D to make comments about our NIM in their business with respect to deposit and loan space.
It's Dave I couldn't add much to what you said typhoon will you're right, we'll have a little bit of a headwind in the U S. P&C.
In the fourth quarter pick up back in the next year and I.
I agree with everything you said.
Yes.
To add to that.
Again, the focus is on on how we are growing loans and loan growth over deposit will have that impact on our NIM.
Nothing further to add.
Okay. If I could just follow up on that and maybe this is for Dave.
Dave When you mentioned, the 2% period end loan growth ex PPP.
David If you could just give us some color around intra quarter I'd like we heard from a lot of U S banks talking about loan balances inflicting in June July is that consistent with what you saw it in is that the momentum building or have you seen a slowdown because of the uptick in delta and some of the additional supply chain disruptions we've seen in the last few.
Weeks.
So.
I think your comments, mostly for the U S but I.
I would say in most cases, they apply to Canada as well. So we were 3% up point of a point ex PPP and that was generally throughout the throughout the quarter.
And that's despite all the things you mentioned, despite a really significant supply chain issues and labor issues.
We're still up 3% point over point.
Both in Canada, and the U S. That's despite <unk>.
Frankly, what I.
What I thought would have been better by now which is still 10 points difference in our utilization between the pre COVID-19 and today and that comes in all of our working capital businesses, whether it's asset based lending or our floor plan financing their trucks and trailers. So all of that's still on the come.
And we were still up 3% point or a point so through all of the headwinds.
This team has done really well and I'll tell you what it really is beyond.
Anything we've talked about before client acquisition throughout.
The pandemic has been very strong in Canada, and the U S. Our teams have.
<unk> been in front of customers, whether it's face to face which is starting in the in some cases certainly but on teams all the time and client acquisition has been remarkably consistent and strong with really good pipeline. So.
I'd say, we're at the front end of that and feeling really good about it.
Got it thank you.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Your line is open.
Maybe going back to typhoon on the intra.
Interest rate sensitivity on slide 15 can you remind us why you have more leverage.
On an increase in short term rates on the U S side relative to Canada and is it Dan is there anything on the Canadian side, where you can reposition to think about our exposure on that.
Yes, it's really related to that's a great question, it's really related to deposit income.
Opposition in the U S and the.
The betas in the U S tend to be a little bit higher.
So that's driving the difference between Canada and the U S.
And we.
We will continue we actually have given the fact that we are now expecting better loan growth into 'twenty two both in Canada.
And the U S. As we exit the excess excess liquidity, we are very focused on growing the transactional deposit balances in Canada to support that long ago, which could potentially slightly.
Change the sensitivity.
Maybe a little bit more closer to the U S rates, but nonetheless in the U S. You always have the impact of higher competition for.
For deposits that I think will preserve somewhat of a difference between the two countries.
Okay, great. Thank you very much.
Thank you.
Next question is from many Robyn from Scotia Capital. Please go ahead. Your line is open.
Hi, good morning, Daryl operating leverage of seven 3% a year to date.
The question is can you have too much of a good thing, meaning we know all banks are focused on fintech threat technology.
Needs continued to only grow and as you look at that operating leverage what gives you confidence that youre not missing an opportunity to accelerate investment in the business.
We'll put up good operating leverage, but you know definitely scope to have even greater operating leverage below that $7 three year to date level, yes, Manny. Thanks for the question as you know.
We began our journey on operating leverage a couple of years ago. So it's not a result of anything we did in any particular quarter. This year, but it's the acceleration of a lot of actions that we've been taking.
For some time, you're right seven 3% year to date over 2% for the quarter were proud of those numbers and we are you are hearing us here recommit to positive operating leverage as we go forward.
I would remind you that I've said before within the quarters that have gone by we've got lots of expense items that go up and we've got lots of them to go down what you see of course is the net and that's a function of how we're repositioning the next spend within the bank and we're making real investments in those places that are going up if you look at the quarter in question.
Expenses that are a little higher than they have been in the previous quarters. Some of that in fact, a good deal of it is performance based comp, but also we accelerated some investments in marketing in frontline sales force in technology, So that we could hit 2022.
Running is at work and with all that despite all that we still delivered the 2% operating leverage so I think I think we're on the right track. We don't feel many like there are places around the opportunities that are there are good opportunities that are that are starved, we're feeding those opportunities, where we think they can deliver long term value and at the same time, we're able to deliver the shareholders operate.
Leverage so we think theres more to come from from what you've seen so far.
Thanks, and just a clarification in terms of reiterating the outlook for positive operating leverage but can that change on a quarter to quarter basis, meaning as you look to Q4 could could we have negative operating leverage quarter, given how strong the year to date has been yes. So look as you know.
No we don't give specific guidance on any particular quarter, but I'm reiterating the view that will have positive operating leverage on the horizon going forward, because we have any particular quarter, whether its crew Q4, or otherwise where it's not positive I suppose.
But we won't we won't we won't commit to anything other than positive over the course of the coming quarters at this point in time.
Fair enough. Thank you.
Thank you.
Next question is from Gabriel discern from National Bank Financial. Please go ahead, good morning, sticking with the barrel there.
Your bank based on my numbers consensus.
Below with the smoke you know one of the lowest with Opdivo with the dividend payout ratio in the group wondering what we should expect if and when ostby remove the restrictions currently in place or are we going to go to.
Modest or moderate dividend increases like a more.
Steady pace or could we see some larger catch up.
Increases.
If and when Christmas caveat thrown my statement.
Yeah. So thanks for the question Gabe.
I think what you should look for us.
I said at our annual meeting we've taken our dividend record pretty seriously for the better part of 200 years. So we're going to continue that first and foremost.
The payout ratio that we respected and targeted pre COVID-19 is one that I think will target as we get to that day that you are talking about when we have restrictions lifted.
So the priority really for us in terms of the excess capital as we will look to getting our payout ratio.
Back to where it was probably fairly quickly if I had to guess.
Then we'll look at other means of returning capital for through dividend increases over the course of the ensuing quarters and then of course, even with that as you will have calculated there'll be lots leftover for for other things as well, including buybacks thats kind of the order of priority for us.
That's it for me Thanks Darryl.
Thank you Dave.
Thank you.
The next question is from John Aiken from Barclays. Please go ahead. Your line is open.
Good morning, just looking at the reported AUM growth sequentially in the quarter. There was a comment in the report to shareholders talking about the bank of Canada Provincial bond purchase program.
Any of that having being a bit of a headwind can you give us a sense of what the size of that was in terms of the AUM and what the revenue contribution was.
Hi, there this.
This is Joanna I would say overall de minimus, well, while it impacted our AUM that provincial bond purchase program and winding down has had very minimal impact on our financials.
Thanks for confirming that you want to.
Thank you.
The next question is from Mario but does go from TD Securities. Please go ahead. Your line is open.
Good morning.
Daryl can we go back to the expense question for a moment a few years ago, well actually not few years in 2020.
There was a fairly big gap between TD, sorry, bmo's efficiency ratio and that of the average of the big six and that GAAP has been essentially eliminated now and the reason why that's interesting to me is.
BMO was the efficiency ratio has been higher had been higher than the group's four.
As long as I can remember a decade or more and then in the last couple of years or last 18 months or so that GAAP has vanished.
Expect a lot of it relates to the actions that management has taken a lot relates to the environment. So what I'm getting at here is as you look forward do you now expect could be model to be sort of in line with the group efficiency ratio have those structural reasons for the difference in <unk>.
<unk> efficiency ratio that we've discussed in the past and those don't always below now is it appropriate to think of BMO has an average efficiency ratio bank and not one that would be five or 600 basis points higher as we've seen in the past.
Okay. Thanks, Thanks, Mario Firstly, thank you for acknowledging the progress we take it very seriously I don't say that facetiously, it's very important to us we committed to it in the timeline that you talked about.
We believe we are delivering on it in fact ahead of target Youre question is a good one.
How do we think about it and where do we go from here.
Look we have.
We have we have made progress on this particular metric.
More than the average of our peers, maybe more than any of our peers.
Calculate that but I do I will say I don't think we're done yet because if you. If you look at where we are.
We would still have some catch up to do relative to the average of our peers and we still think there's opportunity to do that.
How more of what we've been doing we had a hard look as you know at.
At every expense line item in the place and realized that there were places we could do things better we could do things with partners better than we were doing them ourselves.
And we took a pretty hard look at the portfolio as well. So you saw some of the portfolio shifts over the last couple of years those werent driven by.
So social issues, they werent driven by an appetite for a particular geography.
<unk> necessarily they were driven by returns and they were driven by our views on our ability to drive efficiency and some of the returns from those decisions you know what I would highlight in particular, the exit of the gam businesses outside of north outside of Canada.
The returns as far as efficiency gains are concerned we published the pro forma on those before they're not in our numbers yet so they come.
Next year as well so I think we've got more more room to go from where we are and what's our destination. Ultimately we told all of you that we would get to 58% in 2021, we did that a year earlier here. We are around 56 year to date and I don't see why we can't take another point or two off that as we drive into the next couple of years.
Does that mean, it's unlikely that we will see that the GAAP emerge again that this is real this is more permanent than.
It's a permanent improvement that having a having a GAAP Mario to our peer group on efficiency and ROE I would point out as well.
Now that we're through 17% on the ROE is not part of our business plan got it let me let me go to another related sort of.
Unrelated question that relates to the Treasury business.
And I am focused specifically on securities gains the numbers have been.
Very high over the last few quarters just.
Just to remind you it's been over $100 million in this quarter nearly $200 million in securities gains.
Looking back a few quarters that that's a pretty big number we talked about what's driving the material securities gains.
Is it just the <unk>.
Change in interest rates or what asset classes and what segments are we seeing these big securities gains on bulk.
Sorry, I'll take that this is typhoon.
So despite the fact that.
In our disclosures those are characterized securities gains there is clearly more than just the investment portfolio and these gains are especially the last three or four quarters have really not been related to our investment portfolio and they are very much related to valuation increases.
And investments that we make in our businesses.
In this type of an environment that line item will always even pre COVID-19.
It showed positive results they are very much.
Parts of our business with our clients and pieces of broader relationships both in the commercial business as well as in the capital markets business.
And this quarter that line item does not have any.
Any significant securities gains as defined.
By the investment portfolio at all of these are all business related investments and I will turn it over to Dave and Dan for further comments related to their business with their clients.
Thanks, Typhoon, it's Dave Yeah.
So the business that would have attracted some of the investment gains and it's been consistent and the P&C, Canada for for a long time.
These are small investments, we make with our clients largely supporting growth we've been doing this for a long time, but this year it's been.
Good gains.
Some are real realizations, but many of them are just mark to market.
It's been a business. We've had this has been a pretty good year, but we've had these on and off for many years.
Sample.
Yeah, and consistent with what Dave said, our portfolio very similar most of this is in the investments we've made alongside our clients.
As they've had mark to market gains, it's nothing in terms of an individual security or an individual business, it's actually across the portfolio.
And the mark to market gains or what because rates of decline does that logic or is there something else to it.
No increase in the valuation of the investment Yeah, I would say, it's more tied to equity than to interest rates.
Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead. Your line is open.
Good morning.
I just wanted to follow up with respect to your outlook for commercial loan growth. So I appreciate your.
I'm expecting it to accelerate to roughly mid single digits, just wondering how the excess deposits and liquidity situation sort of factors in to that equation.
Is it a matter of you know if these excess deposits burn off and maybe we can get to a higher rate or really just trying to understand to what extent it is tampering loan growth potential.
Yes, it's Dave well it definitely is having an impact certainly in capital expenditures as a as a lot of our clients are growing their capex.
Where they have cash they are using those so that would have an impact and that will continue but I think overriding that is there really is a strong demand we've talked about the utilization that hasn't even come back yet, but business demand has gone up it will be.
I expect the loan growth as I said I think I said at the beginning of this year, while we were in the midst of Covid that I thought year over year, we would have or at the end of the fourth quarter, we would have.
Mid single digit growth.
I think that's actually going to be better than.
Probably go out longer into next year. So I think it's really strong it will be impacted by.
Clients, drawing down on their cash but.
Many of our clients are already starting to borrow more.
Okay.
Second question is on the capital markets business, I think everyone's kind of trying to figure out what normal might look like not just for BMO, obviously for the banks more broadly you've been putting up very strong.
For the last year, plus so any help with kind of what you would view as sort of a normalized.
Normalized run rate given the investments you've made in the business in the last couple of years would be would be helpful.
Yeah, It's Dan here. So I think first off it's been very satisfying to see the investments that we've made and the repositioning that we didn't pay off.
And I think that's driving a very.
A large chunk of that.
Outperformance in particular, if you think about the investments we made in the U S over the last 10 years.
Bringing those to fruition, we're really seeing those now operate at scale and deliver the results that we expected.
When we look forward, we're continuing to make investments, where we can get the client acquisition product expansion.
The ability to grab more market share, particularly in the U S. Some places in Canada Oh.
All with the goal of creating a more sustainable revenues and more diversity.
Crossed our line.
Obviously, we have exposure to market behaviors and I wouldn't say, we can predict that.
With.
Intense accuracy over the long term, but what I can say is that we're going to continue to deliver positive operating results positive operating leverage as we look forward and continuing to drive.
Stable performance in the business.
So theres no revenue or P. T. P P sort of forecast that you'd want to share with us in terms of what you view as a normalized run rate.
Uh huh.
I think at this stage, we're watching that we obviously have pieces of the business, where we've made investments that we're making gains and then we have others, where we have exposure to market normalizing.
At this stage I wouldn't push forward, our PBT target per se.
<unk> got to a new normal and a new baseline.
As we look forward and we're going to continue to benefit from.
If you think about volatility of the marketplace, that's an asset for us.
It also serves as a diversity to the rest of the bank.
A really strong the rest of the bank is working through it and when the rest of the bank starts to really grow will moderate a little bit.
Got it okay. Thank you.
Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead. Your line is open.
Alright, Thank you and good morning, I'm looking at your supplemental page 11.
The very personal line item.
I'm interested in a couple of things here first and foremost.
How much of that $264 million.
He is coming from the 995.
<unk>.
Mr line sort of.
A direct brokerage SEC.
Second question related to that is what's your early read.
On the situation now that you've had a competitor go to zero.
What would be your intention and then the third and last question with respect to that line item is I keep seeing these commercials.
I'm, saying that the fees are the low fees are making a difference.
What about also.
The.
The full service part of the of your business, which is relatively big are you seeing any any pressures there.
To also lower fees. Thank you.
Yeah.
Okay.
Hi, This is Joanna thanks for your question.
Starting from the beginning <unk> overall, we're really satisfied with our wealth results overall I think they they represent.
Strong diversified operating performance and that includes across our businesses and across our categories.
Comment specifically about the online brokerage revenues again, very very happy with our brokerage results. They continue to deliver strong flank Brexit we've seen about two five times, our pre pandemic rates of client growth and we want to see that and we're seeing it by the way across.
Both our self directed business as well as our digital advice business, which is an important and growing part of our business.
We are of course are always monitoring and changing our offering to make sure we deliver the best experience for our clients and value to them.
And for US that includes actions that we've taken which includes the zero trading commissions on our popular ETF, which has been very well received I.
I would say from a line item perspective, just getting into the trading Commission revenue, we don't specifically disclose trading commission revenue, but.
But it's not a material part of our revenues I would say online brokerage fees represents today in terms of wealth net revenues are about 2% or a little bit left that's less than 1% of our bank revenue. So not a material line item to us, but we're going to continue to evolve and enhance our platform.
One of the areas that we are focused on is growing our digital advice business is an important and growing category overall and today between advice direct as well as smartphone we.
It represented a third of that category and we intend to grow that area as it relates to the full service brokerage we've seen strong growth there strong growth both in terms of the full service brokerage business yields youll have a naturally together with the rest of the category moved around a little bit but have generally held.
Particular in recent quarters as equity markets have strengthened we've seen great growth in that business and that would include both on a standalone basis as well as in connection to the broader BMO are offering and that would include partnerships, including commercial.
Well as working together across our banking portfolio. So continue to see strong client demand there.
Full service brokerage and the advice for delivery and expect that to continue.
Maybe just a quick follow up to that.
Is it is it important.
Or maybe asking it a different way.
Another competitor were to go to zero or would that be.
The move that sort of pushes you towards absolutely following.
<unk>.
Or is there some other consideration.
I would say, we're always going to be evaluating our offering and that includes obviously evaluating what are what are customers looking for how do they how do they value different parts of our platform and of course, the competitive activity and external activity will influence that I wouldn't say those are hard fast rule in and we continue to grow our business and and we will continue to expand our.
Offering this as a business we want to support.
Great. Thank you.
Okay.
Thank you. The next question is from Lamar peso from <unk> Securities. Please go ahead. Your line is open.
Yeah. Thanks, So I just want to follow up on the answer to.
To Marios question.
Investment gains it sounds like you're suggesting some normalization in that.
And therefore, moving forward should I interpret that correctly are or can they remain elevated for the next couple of years and anything you guys can give us in terms of outlook for that and to help us along with our modeling would be very helpful.
Sure I'll take this this is tyson.
You look at this year for example, we had $102 million in Q1 hundred 11 in Q2.198 in Q3.
Going to be some volatility because sometimes you received the financials related to these entities in certain periods, which are going to cause an uptick.
But overall I think in this environment you should continue to expect.
These numbers too.
<unk> healthy.
They always be $200 million, we will not.
Predict that or I wouldn't suggest that you model it but on average this year, we clearly have been above $100 million.
Unfortunately, it's a little bit difficult to predict exactly on a quarterly basis how.
These numbers will move around.
Yeah.
Okay. Thanks. So then my next question is on <unk>.
The domestic retail business I think one of the things that we're seeing with Covid is how important cards growth is to overall profitability not just for being across the group.
Given that the growth growth is perhaps a bit tougher to come by than I had expected in a post pandemic recovery I'm wondering if you could comment on the competitive landscape for cards first and then second with the rise of buy now pay later and increased competition can you talk about the outlook for cards post pandemic both in terms.
Balances and also in profitability.
Thanks is there any I appreciate the question a couple of comments just overall as I frame up cards in the perspective of the P&C, Canada business, which had very strong performance and momentum.
This quarter and consistent with what we've been delivering over the past little Wildcards has been part of that story.
Part of that growth story, and it will continue to be part of that story going forward. We've seen good performance this quarter coming out of our cards business, we're seeing consumers spanned return.
You can imagine and we're seeing it pretty broad based with the exception of travel category. So just to give you a perspective spend this year is about 20% over last year and I always frame. It against 19, because we wanted to kind of get a better look at it and it's an 8% higher than Q3 of 19. So we're seeing the card business return.
That's a function of for US obviously, the breath and offering of our product suite and also the fact that we're seeing some good performance coming out of our recent launch of our visa eclipse product. So the combination of good programs for our customers and offerings broad base based and in and reward. So for example, cashback has been doing.
Extremely well for outdoor eclipse cards have been that's a recognition of where Canadian consumers are looking to find value in in their in their credit card and as I think about the competitive landscape you know I always measure that against our performance that we've had consistent growth year over year quarter over quarter on our cards franchise again, a recognition of the string.
The portfolio in the marketing and the actions that we've been taking buy now pay later it is that is it.
Sting opportunity both on the cards franchise as well as our lending and obviously when we keep a good track of we haven't seen it really pick up in terms of our share.
Share gain yet, but obviously over time that will manifest in and will be participating in some way shape or form in that market. As we go forward. So I would say overall.
Continue to see cards credit cards being a pretty important component of the payment ecosystem in Canada, one that we participate well in and given our dual network capability now and our breath and suite of products that were well positioned for.
Growth, even through the pandemic and and more importantly, coming out of it.
That's overall pretty confident on our future income.
Okay, So just a bit.
Sorry go ahead.
So I think we have I think we're just going to have to hold that off for now and just go to one last question before we wrap the call.
Okay. Thanks.
Yes.
Thank you.
Last question will be from Nigel D'souza from Veritas. Please go ahead. Your line is open.
Thank you good morning, I actually had a follow up on your security gains as well in the quarter and I was wondering if those gains were at all related to debt for equity swaps on workouts double undertaken during the pandemic as it could reevaluation of the equity portion of those are debt for equity swaps.
I wanted to hit undertaken over the last 12 to 18 months or is it something completely unrelated.
Driving those gains.
It's Dan here I'll take that from the capital markets piece, there was a very small amount.
In that the majority was in our equity investments I think theres, a future where some of those debt for equity swaps will see bigger gains in the future for that.
Okay, and if I could just quickly just finish on the potential impact of the delta there and how that could impact your outlook for growth both their credit on the credit side.
Has there been any change on your adverse scenario inputs or any potential management overlay that you might apply depending on how the delta variant plays out and on the growth side.
Mentioned supply chain issues with the Delta variance impacting Asia do you see any of the supply chain issue persisting and perhaps are impacting your commercial growth outlook.
Alright, Thanks for the question Nigel It's Pat I'll take the credit part of it we made no changes to the weighting of our adverse scenario nor the severity you might recall in Q2, we did actually increase the severity of our adverse case and we left that unchanged for this quarter.
If you look at our total performing provision releases. So far we've released about 21% of what we added during fiscal 'twenty. So we think that's a pretty good balance between the momentum that we're seeing in the economy and the really strong credit performance, we're seeing and obviously the uncertainty around delta or other variance that might emerge. So we think we're in a fair.
Lee cautious position should the adverse scenario play out, but if our base case scenario plays out. We obviously think we've got lots of releases still to come.
And just quickly it's Dave on the growth side I would say that certainly has had an impact.
When our comments, we've taken that into consideration and we while we've had significant inventory.
Slow downs in some markets.
That's factored in and I still think that we've got good growth coming ahead.
Got it got it I appreciate the color. Thank you.
Thank you.
That concludes the question and answer portion of the call.
Darryl White.
Okay. Thank you all for your questions. This morning.
Yes.
Sorry, operator, we had quite a bit of feedback.
Yeah.
Yes.
Sure.
How is it now.
It sounds good.
Sounds good so I'm going to take us home I'm going to conclude with four key summary themes that have been consistent for us for the past several quarters first our results for the first three quarters, our strong ROE EPS growth and operating leverage are all above our midterm targets second we delivered on our expense and efficiency commitments and we have strategies in place.
To do more third credit quality remains a differentiator and we believe it will continue to be even as our balance sheet begins to grow again as it is and number four with our business mix, which we think is advantaged, it's primed for ensuring that the economic recovery and the strong momentum we have in our businesses are going to be connected to our highly co.
<unk> views.
Few that are purpose driven strategy will deliver consistent financial performance and.
While we do that we will do our part in enabling an inclusive recovery for our customers and our communities. Thank you all for participating in today's call and we look forward to speaking to you again in December.
Thank you. The conference has now ended please disconnect your lines at this time, we thank you for your participation.