Q4 2021 Bank of Montreal Earnings Call
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Good morning, and welcome to the BMO financial group's Q4 2021 earnings.
Conference call.
2021 your host for today is Christine view. Please go ahead.
Thank you and good morning, welcome to be most fourth quarter 2021 results presentation. We will begin the call with remarks from Darryl White Bmo's CEO, followed by Typhoon, Susan 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 you.
S. P N C. Dan Barclay from BMO capital markets and gallons kananga 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'd 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 choose that are supposed to be useful in assessing underlying business performance Merrill Lynch Hi, soon we'll be referring to adjusted results in their remarks, unless otherwise noted as reported and with that I'll turn the call over to Gerald Thank you Christine and good.
Morning, everyone.
The execution of our purpose driven strategy and our diversified business mix continues to drive strong and consistent financial performance today, we announced earnings per share of $3.33 for the quarter and $12.96 for the year.
We also announced a dividend increase of 25% to $1 33 per share and our intention to repurchase up to 22 5 million shares.
Our robust earnings very strong credit quality M. CET, one ratio of 13, 7% position us well for continued growth and shareholder returns.
We've taken targeted actions that build on the economic recovery and as a result, we delivered well balanced performance this year.
Pre provision pretax earnings of $11 2 billion were up an industry, leading 19% for the year with double digit growth in each operating group.
Operating leverage was also industry, leading at 6% at.
At the same time, we've invested in sales capacity marketing and award winning digital capabilities that are attracted new customers and delivered a world class experience.
At our Investor day in the fall of 2018, we set forward bold commitments that built on our strong foundation to accelerate growth and further strengthen our competitive position.
And we have delivered.
Operating leverages averaged three 2% over the last three years and we improved our efficiency ratio by 540 basis points since 2018 to 56, 5%.
Earnings contribution from our high growth U S segment increased to 38% this year.
We have we've achieved average EPS growth of 18, 2% over the last three years driven by average P. P. P T growth of over 11% and strong credit performance.
How we've achieved these results is critical each of our businesses, our repositioned for stronger profitability.
Focused expense management and resource allocation initiatives that began before the pandemic were critical to improving our overall efficiency and returns.
We've taken targeted actions to scale back businesses, where we were not positioned for long term growth, enabling us to invest further in our leading an integrated north American platform.
In line with our commitments, we held expenses flat for the last two years, excluding higher performance based compensation. This year, while we continued to invest strategically.
We have momentum and strategies in place to do more we're recommitting to our midterm performance objectives, including delivering positive operating leverage going forward.
With an above target return on equity of 16, 7% our bank is stronger more competitive and is creating real value for our shareholders.
I want to recognize our talented people who are driving these achievements. They are highly engaged and highly aligned team with a winning culture and an ambition to deliver the best service and advice to help our customers make real financial progress.
Looking ahead to 2022, the Canadian and U S economies have shown remarkable resilience and are expected to experience strong GDP growth, we're closely monitoring the impact of supply and labor shortages and energy prices in both countries, which may continue to lead to higher inflation and.
Higher interest rates.
With this backdrop I'm confident that we will build on the key strengths, which include our purpose driven strategy, our diversified business mix, our strong U S presence and our leading digital capabilities.
Strong consistent financial performance enables the bank to invest in improving the wellbeing of our employees our customers and our communities, we're acting with purpose and urgency on our long standing commitments to support a thriving economy a sustainable future.
And an inclusive society.
We continue to stand by our customers and challenging times for those affected by the tragic events in British Columbia, we're offering relief programs and community support.
This year, we launched several programs aimed at breaking down barriers faced by minority businesses communities and families, including BMO empower and the U S where we have deployed over 2 billion of our $5 billion five year commitment.
In Canada, we mobilized almost $1 billion towards our $12 billion commitment to finance affordable housing.
Building on our climate ambition, we're advancing our commitment to serve our clients serve as our clients lead partner in the transition to a net zero world.
Our energy transition group provides knowledge tools and support including research from Bmo's climate Institute as well as innovative.
Sustainable financing solutions for our clients this.
This year, we joined the net zero banking alliance supporting collaborative approaches between the public and private sectors to reach the goal of net zero by 2050.
BMO is consistently recognized as a global leader in sustainability and this year, we're proud to be one of only five Canadian companies included in the Dow Jones sustainability World Index.
Turning to our businesses Canadian P&C continues to deliver leading performance with strong customer loyalty, leading ppt of growth and improved efficiency.
Introduction of innovative retail products, including our visa equipped eclipse reward card and fan family bundled checking account plans easier mobile adoption and expanded sales force are bringing new customers to BMO and driving market share gains in key areas of focus including personal loans retail deposits and credit cards.
Rising levels of consumer spending and business investment are expected to support future growth.
Our strong commercial banking franchise on both sides of the border continues to add more customers and deepen relationships. We've added over $25 billion in commercial deposits. This year supported by our leading integrated North American Treasury and payment solutions platform.
Loan growth continues to gain momentum and is poised to accelerate as the economy grows and supply chain issues ease.
BMO wealth management continues to be a key driver of our growth strategy with leading <unk> growth and a return on equity of 25%.
Our advisors and private bankers are delivering highly personalized best in class client experience with record high loyalty scores and we continue to enhance the value of our digital advice offerings, including BMO Investor line and advice direct.
The completion of the sale of our EMEA asset management businesses in early November Repositions us for growth in North America and supports further investment in 2022.
BMO capital markets continued to elevate performance. This year also showing leading ppt growth and a return on equity of 19%.
Our team ranked number one in Canadian equity capital markets League tables, and played a continued leadership role in M&A advising on several landmark transactions.
We've been we've been steadily growing our presence in the United States three years ago, our combined U S businesses were contributing 28% of the bank's earnings with strong growth, but an efficiency ratio above the overall bank today contribution has increased to 38% with it.
Efficiency ratio that is accretive at 55, 8% and an increased return on equity of 15, 8%.
We've expanded integrated and repositioned our operations with retail commercial and wealth and capital markets presence in 26 States 13 national specialty commercial businesses and a digital banking platform with deposit taking capabilities in all 50 states.
Now with over 50% of revenues from outside the Midwest, we've never been better positioned for growth as the economy rebounds in 'twenty to 2022 and beyond.
BMO is future ready.
Our digital first strategy is built for speed efficiency and scale responding to the growth in demand for banking services that meet our customers where they are our.
Our significant investments in key technology partnerships enables us to provide customers with simple digital and personalized experiences that put them in control.
Yeah for US digital isn't just a channel it's the way we operate in every part of the business driving loyalty growth and efficiency freeing up more time for employees to do what they do best give expert advice.
We're recognized for our innovation through capabilities like BMO insights, which has delivered over 100 million personalized insights and alerts to help customers better manage their finances.
We're a leader in digital retail sales with more than one third of sales in Canada, and one quarter in the U S coming through our digital platforms.
To conclude we remain optimistic about the economic recovery and have a robust plan in place to build on our momentum capitalizing on the ongoing investments to drive growth, while continuing to deliver positive operating leverage.
We're committed to growing the good championing and inclusive recovery for our customers employees and communities and delivering long term shareholder value.
I'll now turn it over to typhoon to talk about the financial results and share some details on our outlook.
Thank you Daryl and good morning, and thank you for joining us.
My comments will focus on the fourth quarter results and start on slide 12.
Fourth quarter reported EPS was $3.23 and net income was $2 $2 billion.
Adjusting items. This quarter include expenses of $52 million after tax related to the impact of divestitures.
Details of adjusting items for the quarter and the year are shown on slide 37.
The remainder of my comments will focus on adjusted results.
EPS was $3 33, and net income was $2 $2 billion up from one $6 billion from last year, driven by strong revenue growth across our businesses and continued strong credit performance, partially offset by higher expenses.
Return on equity was strong at 16, 5% up from 12, 6% in the prior year.
Net revenue was $6 $5 billion up 8% from last year with growth across each of our operating groups.
Expenses increased 6% efficiency was 57, 4%.
Operating leverage was positive across each of our operating groups and positive two 4% overall.
This quarter, we had a recovery in the provision for credit losses of $126 million and Pat will speak to these in his remarks.
Moving to the balance sheet on slide 13 average loans were up 3% year over year and up 5%, excluding the impact of the weaker U S. Dollar.
Business and government loans increased 2%, reflecting growth in our P&C businesses, partially offset by lower balances in BMO capital markets, including the declining non Canadian energy portfolio that we began winding down last year.
Additionally, on a period end basis balances were impacted by the deconsolidation of our customer securitization vehicle in the U S, which reduced loans by approximately $4 billion and has no impact on revenue.
Average customer deposits were up 7% year over year, and 3% on a linked quarter basis, reflecting the highly liquid corporate and consumer balance sheets.
Turning to slide 14, net interest income was up 6% from last year and up 7% on an ex trading basis, primarily driven by volume growth in Canadian P&C.
Total bank net interest margin ex trading was relatively stable from the prior quarter.
On a sequential basis margin was up one basis point in Canadian P&C and down three basis points in U S. P&C, reflecting changes in balance sheet mix, primarily loan growth, partially offset by PPP loan payoffs.
Moving to our interest rate sensitivity on slide 15.
As shown on this slide a 100 basis point rate shock is expected to benefit net interest income by $384 million over the next 12 months.
The impact of a 25 basis point increase in short term rates would add approximately $95 million to revenue over the next 12 months.
These sensitivities assume no benefit to rising rates from surge deposits and the benefits to revenue would be significantly higher if we retain these deposits.
Turning to slide 16 non.
Noninterest revenue net of CCP B was up 11% from the prior year and up 16% on an ex trading basis with increases across most categories.
Sequentially noninterest revenue net of CCTV was down 11% and down 4% on an ex trading basis, reflecting lower underwriting and advisory fees net insurance revenue and lower gains on investments.
Moving.
To slide 17 expenses were up 6% from the prior year and up 2% quarter over quarter.
Year over year expense growth reflected higher investment spend including for marketing sales force and technology and higher performance based compensation.
For the full year, excluding the impact of increased variable compensation, reflecting stronger performance expenses were flat, reflecting ongoing efficiency initiatives.
Moving to slide 18.
Our capital position continued to strengthen with a common equity tier one ratio of 13, 7% up 30 basis points from the prior quarter, reflecting the impact of very strong internal capital generation.
Source currency risk weighted assets were higher quarter over quarter as business growth an increase in market risk were partially offset by positive asset quality changes.
We increased our first quarter dividend by 27 and.
$2 33, and expect to return to our historical trend of reviewing the dividend every other quarter.
We also intend to establish a new NCI be to initiate share repurchases.
The current strength of our capital position provides us with significant opportunity both to increase distribution of capital to shareholders.
And grow our business.
Moving to the operating groups and starting on slide 19.
Adrian P&C net income was $921 million up from $648 million last year, reflecting pre provision pretax earnings growth of 16%.
Revenue was very strong and up 13% from the prior year with double digit growth in both net interest income and noninterest revenue.
Higher net interest income reflected good volume growth, while noninterest revenue increased across most categories, including higher credit card related revenue and investment gains in our commercial business.
Expenses were up 10%, reflecting growth oriented investments, including employee related costs and investments in technology.
Average loans were up 8% from last year and up 2% from the prior quarter, reflecting continued strength in residential lending and commercial loan growth deposits were up 7% year over year.
Moving to U S. P&C on slide 'twenty My comments here will speak to the U S dollar performance.
Net income was $412 million compared to $254 million in the prior year.
The strong results reflect double digit growth in pre provision pretax earnings.
Revenue was up 9% from last year, reflecting good growth in both net interest income and noninterest revenues.
Expenses were up 6%, primarily due to higher employee and marketing costs.
On the balance sheet average loans were up 3% and up 7%, excluding the impact of PPP loans.
Compared to last quarter period end loans, excluding PPP were up 3%.
<unk> loans continue to pay down with approximately $1 billion remaining as of October 31.
Average deposits increased 7% year over year.
Moving to slide 21 wealth management had good results with net income of $373 million up from 14% from the prior year.
Traditional wealth net income was $322 million up 24%, reflecting higher revenue due to growth in client assets, including the benefit from stronger global markets.
Insurance net income was $51 million compared to $67 million in the prior year.
Expenses were up 9%, mainly due to higher revenue based costs and investments in the business.
Turning to slide 22, BMO capital markets had a strong quarter with net income of $541 million up 40% from the prior year.
Investment in corporate banking revenue was up 25% driven by strong advisory and underwriting revenue and higher gains on investments.
Global markets revenue declined reflecting the market environment.
Expenses were up 1%.
Turning now to slide 23 for corporate services.
Net loss was $127 million compared to a net loss of $86 million last year.
To conclude we had strong operating performance in the fourth quarter and for the year, we exceeded each of our financial objectives, demonstrating the benefits of our diversified business mix and active management of the business through the cycle.
Looking ahead to 2022, we expect the economic environment to remain robust and revenues to benefit from increasing consumer and corporate activity.
We also expect market conditions to be constructive for continued strength in market driven fee income.
Average loan growth in our P&C businesses, excluding the PPP loans in the U S is expected to continue to accelerate and reach high single digits on a year over year basis.
We expect total bank NIM ex trading to remain relatively stable with upside if rates trend higher and if short rates rise faster during the year.
The sale of our EMEA asset management business, which is which closed in November will not have immaterial impact on our net income while improving our CET one ratio by approximately 30 basis points and supports BMO strategic goal to enhance shareholder returns through more optimal capital and resource.
Allocation.
The transaction is expected to reduce total bank revenue by approximately 2% and expenses three 5% next year.
Overall, we expect our total expenses to remain flat again for the year as we reinvest for growth.
Because of the ramp up in our growth oriented investments in the second half of 2021, the year over year quarterly expense growth trend is expected to decline each quarter after the first quarter.
We continue to make progress on our strategic priorities and are opportunistically investing in our businesses to deliver continued long term growth and an improving economic environment, while maintaining our commitment to achieve positive operating leverage for the year.
And with that I will turn it over to Pat.
Thank you typhoon and good morning, everyone.
We had very strong risk performance this fiscal year with sequential quarterly improvement across many of our portfolio metrics and our overall credit profile.
That strong risk performance, which continued in Q4 reflects the steady economic recovery during the year and the strong risk management discipline across the bank.
Starting on slide 25, the total provision for credit losses was $20 million or zero basis points in fiscal 2021.
Notable decline from the elevated losses in the prior year and.
Impaired provisions for the year were $525 million or 11 basis points down 66% from prior year.
We recognized a release of $505 million from the performing loan provision in fiscal 2021 or 36% of the performing provision billed during the pandemic in fiscal 2020.
Turning now to the current quarter on Slide 26, Q4 was another strong quarter and consistent with a strong year in terms of credit performance. Many of our key risk metrics returned to levels equal to or better than pre pandemic.
That was reflected in the total provision for credit losses, which was a recovery of $126 million compared with a recovery of $70 million last quarter.
Impaired provisions for the quarter were $84 million or seven basis points up slightly from $71 million or six basis points in the third quarter and well below pre COVID-19 levels.
Similar to last quarter, the strong impaired loan performance is due to very low formations.
We recognize the release on the provision for performing loans of $210 million. This quarter, which was mainly the result of an improving economic outlook and positive credit migration again, this quarter, partially offset by loan growth.
We do recognize the potential for issues like new Covid variance supply chain challenges or inflation to affect future credit performance. However, the strong current condition of our credit portfolios and the measured approach, we've taken to performing provision releases positions us well to either whether those issues or <unk>.
<unk>, releasing our performing loan provisions should the economy progressed in line with current consensus forecasts.
Turning to the impaired loan credit performance and the operating groups, we saw low loss provisions across most business segments again this quarter.
In Canadian P&C consumer impaired loan losses were $67 million down five basis points from the prior quarter and in U S. P&C consumer impaired losses were $6 million.
This strong credit performance across our consumer businesses was driven by low delinquency rates and insolvencies.
In our commercial and corporate businesses. We also saw strong credit performance in Canadian commercial we reported an impaired loan provision of $22 million up slightly from $15 million last quarter.
Our U S commercial business had a $1 million net recovery unimpaired loans, its second consecutive quarter of net recovery unimpaired loans are.
Our capital markets business had excellent impaired loan credit performance this quarter with a net recovery of $9 million.
Its third consecutive quarter of net recovery unimpaired loans.
This performance was also driven mainly by very low formations.
On slide 28 impaired formations were 2200 $95 million and gross impaired loans declined by $261 million to 46 basis points, both formations and gross impaired loan rates are below pre COVID-19 levels and low compared to our last decade of performance.
In terms of the outlook, we remain cautiously optimistic given the solid credit performance, we've seen in the last year and assuming economic growth continues in line with consensus estimates, we would expect further measured releases from our performing provision in the coming quarters.
As I said last quarter, we do expect our impaired PCL rate to drift slowly back up to a level more consistent with our pre pandemic experience, which was consistently high teens to low twenties in terms of basis points.
While it's difficult to predict the timing of when that level will be reached based on what we're seeing today I would expect the next quarter or two to remain low and then that normalization to start in the second half of the year and continue through fiscal 2023.
I will now turn the call back to the operator for the question and answer portion of this call.
Thank you.
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Our first question is from Gabrielle Zhou Shane from National Bank Financial. Please go ahead.
Good morning, everybody a securities.
Securities gains I know it was a pretty big topic of discussion last quarter probably merits.
Question this quarter as well so on the year, you had $600 million or so of.
<unk> gains.
How much of that was in the Canadian P&C segment.
From a co investment activity stuff and more importantly, where do you think that.
Trending in 2022.
Good morning, Gabriel This is typhoon. Thanks for the question as we reminded you last time.
This is not really a single business line for us, but then as you referred to it's embedded in our Canadian P&C and our capital markets. All so there's an investment in the U S related to community Reinvestment Act.
Again as a reminder, this is really based on our client relationships our investments along alongside of our clients in different private equity funds and Midmarket funds.
And.
It really goes back to it we have a long history in this business and obviously the current market environment is helping us as well in terms of the splits are.
Between the Canadian.
In P&C, you SPN I'm, sorry, the corporate section and.
The capital markets more of this is in the capital markets business.
And not in for this year.
You know about maybe 25% or so was in the Canadian P&C business and.
A larger portion comes.
From our capital markets business.
And I think in terms of where it goes next year, we gave you some.
Thoughts around what we expect we expect the markets to remain robust and as such.
We would expect this line item to remain robust for 2022, okay.
While I have you the expense.
It was a lot of guide.
Guidance type stuff with Oh, there I appreciate that but.
Did I hear you correctly expense growth will be flat in 2022.
And then would that be a byproduct of the.
In EMEA our business.
Business sale largely.
Obviously the cost controls.
What is this.
I didn't catch any PPP our guidance in all of this with mid to high single digit would be the the goal.
But yes, we are guiding for flat expenses in 2022 on top of flat expenses ex.
Variable compensation this year so.
This is now based.
Based on our focus on expense management.
It is to keep expenses flat. It does include the impact of the EMEA sale, Okay in terms of ppt growth.
We gave some guidance on NIM, we gave some guidance on loan growth and again with the expectation that we have a robust market driven fees.
Expect our P. P P T to be in the mid single digit type area.
Thank you and.
End of the year. Thank.
Thank you.
Thank you all following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, Good morning, just first on capital I mean, it looks like positive credit migration, which you mentioned in your comments also.
Had a decent impact on the set one ratio and calculate the quality improvements over the last five quarters out at about 86 basis points to the set one ratio I'm. Just curious is this all positive migration and what else would be in there or any additional color and is there more to go I guess is what I'm trying to go.
On this.
Hey, Doug It's Pat I'll start and then maybe typhoon can jump in but yeah.
You're pretty much at the nail and had its primarily credit quality coming from positive credit migration, we've seen net positive credit migration across the portfolio for the last five quarters in a row.
Some quarters more than others, but the last few have been particularly strong it's been really broad based and of late coming increasingly from the sectors that were hit from Covid and in fact, when I look across the wholesale portfolio at least we've actually migrated all the way back on average back to where we were pre COVID-19. So most of the neg.
Migration you would've seen through fiscal 'twenty has now come back its not equal across every sector have more or obviously, but on average the portfolio has round trips back to about a net and they are a net neutral position from a credit migration perspective, yeah, and the only thing I would add is as strong earnings. This year, obviously have supported capital growth, we at 44 basis.
And so of internal capital generation on top of I think last quarter. It was in the high 40. So.
Strong earnings had been a big big impact on our capital ratio.
And so I am a little slow here, but the the EMEA sales 30 basis points, that's not in the <unk>.
One ratio now is that correct.
In Q1, it's not that's correct yeah, you should see that most likely in the first quarter.
Okay, and so that I guess.
Daryl.
You said, one ratios over 14% I guess, if I pro forma with the EMEA.
Is the target and the focus for what looks like substantial excess capital you put in and CIB and that looks like it's larger than your peers to put in.
M&A has been something you've talked about in the past.
You seem pretty bullish on commercial loan growth can you prioritize how do you think about putting that capital to work.
Yeah sure sure Doug I'll I'll give you a crack at it I mean, there is a framework that we use it's consistent with what I've talked about in the past. The first use of our capital is for our clients and it's for organic growth and we've got an optimistic outlook on the demand for that as we go through 2022, but as you pointed out there's a lot of excess capital left after probably left.
After you consider that first bucket of demand I.
I think you saw we have returned a fair bit of capital today through the dividend as well as the and CIB, which I think it's interesting. Some of you I think we will we'll say youre, leading on dividend increases and you're leading on N CIB and some of you will say well you've got a lot of capital why didn't you give more and I get that.
To that Doug I would say, we use our guiding principles effectively around capital and we think about.
Building shareholder value through time, we think about keeping both strong capital levels and returning.
Strong capital and returns through time, we think about the client franchise and we recognize that the.
Our strong balance sheet gives us the optionality, which creates strategic value through time. So it's it's all in the balanced Doug we put all of those things in and we think that the return of capital that we've announced today is pretty substantial and it also provides us with the flexibility that that I've just talked about we build up that capacity over a long period of time.
And you don't necessarily return it in an instant but you give as much as you think is appropriate in the moment and that's the place that we've come to and I'm pretty comfortable with the landing spot.
I appreciate it thank you.
Thank you.
<unk> question is from Hey, Bryan Habana from Bank of America. Please go ahead.
Hey, good morning.
I guess just following up on your expense comments that on flat expenses year over year, a lot of discussion that own inflation wage pressures.
I'll just address that a little bit flow to us in terms of when you think about the expense outlook being flat in 'twenty two.
How does how are inflationary cost impacting you or what are they and commit to have any sort of cost savings and what are you assuming for capital markets revenue venue as part of the guidance. Thank you.
Sure.
Turn it over the capital market side, Suzanne, but let me address the the expense question, Yes, I mean, we obviously are aware of the market conditions. We continue to monitor both the markets as well as our numbers with respect to the impact of inflation.
And in our plans, we do take into account potential upside.
Upside on the inflation rates are at the moment I cant there is really we're not necessarily absorbing significant impact on our numbers. Currently we will continue to watch throughout the year and we will give you updates if the inflation numbers exceed what we have in mind for the year at.
At the moment I don't believe that it's necessarily going to have a huge impact because we also have.
Other expense management actions that we can take to to neutralize any potential impact of higher unexpected inflation.
Dan on the revenue cycle capital markets sure.
I think this year was a it was very gratifying for the capital markets business to see.
The choices that we've made over last few years really pay off.
Whether that's in technology portfolio choice acquisitions and investments.
And really has a opportunity that is reset in the business as we look at it as.
As we focus out in 'twenty, two obviously, we believe there's going to be constructive markets throughout the year.
Continue to make investments to look for market share growth pipelines are very very strong momentum coming into the beginning of the year is exceptional.
And so when we look out over the year and I think we'll do it through <unk>.
We're expecting continued performance like we saw in 'twenty one.
And that would be in the low six to mid six range for capital markets go forward.
Got it and just as a separate question if I could give us some color around our strong loan growth outlook, what it seems like in Canada and the U S.
How much of that is in <unk>.
Bent on supply chains, improving versus just market share gains via hiring et cetera.
I should like to have on that and what Youre seeing if there are any particular areas within the economy, that's driving loan growth seal as you think about maybe the first half of next year.
So this is Dave.
So we haven't seen any real pickup in the AR and the issues you've talked about it and yet we've had good loan growth.
Still have supply chain issues, we think those will get better over the years. So our loan growth to date has been new customers a really good mix.
And continuing to expand both in Canada, and the U S. So next year, we do think that there will be I think over the year.
Supply chain improvements, which will be a good tailwind for us remember too we have one of our big businesses are financing those dealers, both auto dealers and truck dealers that's been a real negative for the last.
Probably five or six quarters, so, it's probably cost us 2% of growth and there will be a time I think it will be sometime in 2022, when there's actually cars and trucks.
On the dealers' lots and that's a real positive for us when that happens.
But meanwhile, we're not waiting for that we continue to see good growth. The economy. At this point is still positive our clients are still growing they are trying to keep up with their trying to get the supply back to keep up with the demand but in fact, they are doing that but they're just not catching up yet theres still backlogs, there and our backlogs.
Canada and the U S are very very strong just as Dan said.
The momentum is very very positive pipelines are up over last year and a quarter over quarter and we are going into new geographies of the U S. So I think I'm pretty positive. Despite some of the issues that we've seen I think those will work their way through and we're going to continue to work our way through that as well so that helps.
That is helpful and do you have anything on the deposit side you had the partnership with Google with Google pulling out of debt does that change what you were thinking digitally in terms of deposit growth in the U S.
Is there any thanks for the question Tony.
Good morning, as we've been doing for a while now we've been acquiring deposits in 50 states and we continue to do that we have had record success.
In the U S on acquiring checking accounts and savings accounts digitally so.
With the Google exit or not having that partnership working continuing to build our capabilities and we continue to gather deposits. So we are on course to continue to grow our deposit business and in the U S, particularly as the lending improves as well, we'll be funding that off because the retail deposit growth.
<unk> gone ahead and are very pleased with our growth overall as we continue to operate digitally in that market.
Got it thanks for taking my questions.
Thank you. Our following question is from Paul Holden from Ci.
Please go ahead.
Good morning, So a couple of follow up questions on those those recent topics. So first one on.
On the supply chain constraints, so that that.
About 2% impact you gave for the inventory financing for auto and truck is interesting maybe you can give us some more holistic perspective across all your clients sort of ballpark, how impactful this supply chain constraints.
So let me just make sure you understand what I was talking about so a decent chunk of our business is in the dealer finance business.
5% or so.
That has been down and Thats causes thats been down a lot and that's cost us probably 2% overall with loan growth and that will come back as the as the cars and trucks start filling up on our lives across the board though.
The supply chain impacts as well as labor have been very significant.
<unk> continued to be issues in yet on both sides of the border our clients have really worked through those and actually in remarkable ways, they've and that's helped US in terms of for example equipment finance there are more companies that are building up their automation.
Or more companies that are bringing factories and equipment back onshore.
To deal with some of the supply chain issues that they have when they when they import.
And there is no specific I would say across the board.
We've seen that be an impact and I do see slight improvements in some of the sectors over time. There is a reduction in terms of the number of ships and containers that are sitting out in the ports in California, It's still high but it's getting better and I think that will continue during the year.
Which I think is why we think there'll be.
To pick up.
That's what we're hearing from our clients Nobody's a super static about how quickly it will happen, but I think all of our clear most of our clients across industries.
That's going to get better in 2022, I'm going to jump on this I'm going to jump on this as well its Darryl speaking Paul to see if I can help you.
With an overlay.
It's a tough call the question, you're asking but when you look at the commercial franchises and our and our capital markets clients and we cut through.
Both the data and the anecdotes and the work that we're doing with all of them.
I'd say relative to a couple of months ago, what Youre hearing from Dave just now is the beginning of the easing of the supply chain constraints like remember when when you've got the simultaneous demand shock and supply shock. It creates a pretty immediate problem that doesn't get resolved immediately but as you look at the.
The the various tools that are being used to address it both from natural markets to intervention to government support to trying to get some of those ships to go through the Panama canal onto the east coast and get the ports on the East coast working faster its really hard Paul, but if I'm a betting man coupling that with the stories that we've got.
From our clients as we are starting to see a little bit of easing I don't think we're going to be having this conversation a year from now.
Okay. That's helpful. Maybe I will ask for one specific data point, if I can is kind of where youre sitting at in the U S. Specifically on.
Commercial line of credit utilization do you have an update there.
Yeah sure. So let me point out in the U S.
This quarter, we had 2% quarter over quarter growth.
And if you extract out the PPP was 4%.
So youre seeing really good momentum and we really have not seen any increase in our utilization.
That's a combination of new clients growing.
A good mix of businesses that we weren't in in terms of geography, a couple of years ago as we grow in the south and the west.
But it isn't.
This is a good news and the bad news, but it isn't because we've had a big increase in our utilization at all and when we do that.
That's a positive tailwind for us.
Got it and then last question I have for you is.
With respect to.
The deposit growth, what you've already seen historically and what you are.
What your outlook is going forward, which is also positive.
And what that means for the disclosed interest rate sensitivity, you provide right, which doesn't really give benefit for funding mix change and that could be very impactful as you know in terms of NIM sensitivity.
I'm, particularly relative to your prior funding mix. So wondering if you can quantify what it might mean at all or at least characterize it for us.
Cool.
Sure. This is typhoon I'll I'll take that question as you noted it's clearly deposits have stayed around much longer than any of us had expected and our expectation is that you know we gave you some numbers on one on page.
Page 15, I think on the interest rate sensitivity slide.
The disclosed.
The disclosed numbers that we have here, it's 384 million four plus $195 million for plus 25 would be significantly higher if we keep actually the surge deposits on our balance sheet that 384 million dollar number can easily be doubled.
And with respect to if only to short term rates move we have actually a footnote here as you can see you would assume that for example in the first 25 rate move you would be able to keep.
Most if not all of those deposits so that would add a $135 million $30 million of benefits to our NII. So as you noted that there is significant upside in these numbers.
That's great. Thank you.
Thank you. Following question is from many groman from Scotiabank. Please go ahead.
Hi, Good morning question Don.
Housing market with or actually a housing policy, we're hearing policymakers talk more about.
In the Canadian housing market, which is the whole with investors.
It sounds like there might be some more rule changes coming down the line.
One specifically related to your launch and I'm wondering.
What's your perspective is on that so are we going to see real changes from what you expect the impact to be on your business.
Typically relates to good luck in particular.
Yeah. Thanks, Thanks, Ernie and so obviously, we're very supportive of the initiatives that are going to continue to stabilize that the mortgage market keep it healthy and strong and in Canada, and we work closely with the regulators asked in particular on these topics and as they come up with new developments and new insights and policies, we work with them.
Accordingly.
As things emerge in this file will continue to stay abreast of it our HELOC book as you probably know it is small relative to that to the rest of our portfolio, but we continue to monitor it and we'll adjust accordingly to ensure that our customers are able to get financing for houses and renovations accordingly, so nothing to report here yet.
And then just to follow up on Mali is do you expect will changes can happen is that your understanding that we're likely to see some rule changes in the mortgage market. It.
At this point too early to tell them that we're waiting.
Okay and then just.
Also on the policy front.
Zero.
We're waiting for details on our bank tax and recovery dividend, how much that weighs on your capital return decision.
How big of an impact does that have very little money.
At the end of the day it has an impact.
Some of the proposals come through on earnings, but in the scheme of things, it's pretty minor and didn't come into play as we thought about our capital returned very much at all.
Thanks, Tom.
Yeah.
Thank you. Our following question is from Nigel D'souza from flavors just investment research. Please go ahead.
Thank you good morning, I had a follow up question.
You are on.
Deposit.
We've seen deposits remained persistently elevated.
I was wondering if you had a sense of what sorry.
Neighbors could actually lead to a more accelerated deposit cuomo or do you think you'll actually get back to the pre pandemic loan to deposit ratio or do you think welcoming a regime, where that loan to deposit ratio remained lower than before.
I think what we have seen it as a very good question and it's the one that we actually think about quite a bit what we have seen after every crisis is that elevated level of liquidity remaining on corporate balance sheets as well as household balance sheets.
And as such I I.
My current expectation is that the loan to deposit ratio.
We'll.
Compared to normalized levels.
We'll probably remain a bit lower than prior periods, what will probably drive the deposits out of the balance sheet is clearly investment opportunities both on the corporate side.
And then as if depending upon market moves and depending up on interest rate moves you may see some.
Some outflows on the household side, but at the moment, we are not seeing any signs of that theres still sticking around and.
Our expectation is that it will be a much longer period before we see significant signs of outflows on deposits. We obviously.
Utilizing any excess deposits.
Fund, our loan growth, which as we guided you we expect to reach high single high single digits next year.
Okay. That's helpful and if I could switch to another topic on how you think about credit risk with the emergence of the new variance.
COVID-19 based on your experience during the pandemic has.
Has that changed your approach to how you think about credit risk.
Migrated loans across different stages in their first nine for example are you going to look at the impact more on a regional basis for the U S business now or do you still think of it as a macro variables that drive quite a lot of small one.
Yeah. Thanks for the question Nigel It's Pat I would say at this point.
Haven't made adjustments to our process for calculating the allowance we as you know we have an extremely robust.
Process that served us well for for many quarters now and so we ran that exact same process this quarter, where things like that start to come in really more in the overlays.
And so as you can imagine you know overlays are still.
A more meaningful part of the allowance than they would have been pre COVID-19 and so and that's largely reflecting that uncertainty around things like new variance and the potential for increased restrictions. So that's largely factoring into the overlays at this point and as we see that uncertainty start to decline and some of the.
Unique impacts that the pandemic has had on particular sectors. You can expect to see that overlay start to come down and that's you know that's our base case assumption over the course of the next couple of quarters, which is why we've been guiding to further releases on the performing provision.
Okay. Appreciate the color. Thanks.
Thank you. Our following question is from Nomura parish sauce.
Cormack Securities.
Yes.
Thank you.
Mainly for Typhoon I, just wanted to come back to.
The discussion on expenses for 2022.
Based on the questions. We've heard so far it's fair to suggest that flat expenses as a strong guidance off.
It wasn't an outsized expense growth year for 2021, particularly in the context of peers are talking about cost inflation. The resumption of some expense growth categories. They collapsed during COVID-19 and also accelerated tech spend so how do I gain confidence that BMO is making the appropriate investments in.
Growth initiatives to remain competitive not just for 2022, I'm talking like 235 years out.
Yes.
Thanks for the question, we are quite confidence that we are making all the growth oriented investments into our company. When you look at for example in our P&C businesses in our capital markets and in our wealth management the growth in our sales force.
The hiring that we actually during the second half of 'twenty, one have executed and to a certain extent continued hiring and in addition to that 7% to 8% growth in our technology line would indicate that we are making all the right investments and we have grown our marketing spend I think almost 50% compared to <unk>.
Last year's fourth quarter. So this is really result of the ability to maintain discipline on expenses as a result of previous efficiency initiatives that we have executed and a continued focus on making sure that every dollar spend in the company as a productive spend.
Towards growth and savings in areas, where we actually have the ability to introduce technology or digitization and creating more efficient processes.
So this is not this.
This is not a sign that we are under investing I would argue that we actually have accelerated our investments over the last two years into growth oriented projects.
Projects in the company.
Great. Thank you that's it for me.
Thank you. Our following question is from Darko <unk> from RBC. Please go ahead.
Hi, good morning, everybody I'm going to go right back.
<unk>.
Discussion a little bit if I think of you removing three 5%.
The expenses because of the sale.
Of your of your EMEA business.
And then think about normal course merit increases for your staff and inflation.
Should exceed three 5% for next year. So I believe you talked one absolutely whats what underlying all of this is if youre going to continue spending on tech and people.
There must be some cost.
Removal.
Going on next year and it must be significant.
And so I'm just wondering.
What what's lingering from the restructuring what what kind of cost removal I mean typically.
Historically banks have said, yes, we're moving about $200 million of the cost base or whatever.
When I think of your expense base and the possibility of continued hiring people on the ground Tech people.
And so on.
I can envision a world where.
Base expenses would be up next year, 6%.
So that must mean that somewhere in there you're removing a significant chunk of your expense base can you give me any color on.
On what expenses are expected to be driven down to make up for all the investment that youre talking about yeah, absolutely first of all as you noted the.
The impact of the EMEA sales.
3.5% type number is an important number because excluding that our expenses would have gone up by three 5%. So in addition to that there is still going to be efficiencies in the way we utilize our real estate there was going to be efficiencies in the way we create.
Create a process improvements in our middle office and back office functions.
In our <unk> business, there is a significant effort going on converting service personnel into Salesforce. So there is a number of individual actions that we're taking including efforts.
Efforts to create a more efficient technology production environment, we all.
We are making.
Very.
Impactful choices on the Labor force and and how we utilize our current labor force. So there is not one single item.
That would impact the numbers, but it is a collection.
Of continued expense reduction initiatives that we are taking.
To be able to actually guide to a year over year flat expense guidance.
Okay I appreciate that and I. Thank you very much for that I guess, it's just curious that peers don't seem to be able to do this.
And I guess it runs the question and I'm a modeler on behalf the model up to 2023.
Is this something that you can continually do or is there at some point.
And acceleration of expense spend.
As we get beyond this year or do you see initiatives that can bleed all the way into 2023, and I'm asking you a lot I realize that but but.
That's I think the concern that I have is I can model very flat.
Expenses ex variable comp.
What can I do that for more than one year.
I mean I'm going to jump in here to see if I can help you Darko you are asking a lot and that's fine that's your job our job is to answer it.
A lot of this has has to do with where we came from rate Youll remember the day, where this was this was the bank that was well into the low sixties on our efficiency ratio. We came at that pretty hard the momentum that that creates and all the projects that we launched a few years ago that doesn't stop in an instant you've kind of driven a new ethos of new color.
Her through the place that goes right through the spine of the organization and that will produce ongoing results.
You layer on to that that the flat expense ex variable based variable compensation pardon me.
Year is indeed as you pointed out net of the three 5% pick up that we got from the EMEA. So there you are basically asking if you're going to have an expense growth as a result of labor or otherwise above three 5% where are you going to fund. It. It's a sources and uses conversation right and so we're saying to you. We believe we still have ongoing.
Sources in order to fuel those users and we believe that we can do that without any additional charge by the way I want to be clear on that as I have been on in the past.
And typhoon has outlined some of them and we just continue to challenge ourselves. So we think there's more to do and we don't think we're at the bottom of the barrel by the way. Your question is the right one at what point do we say alright.
We are I don't think you can kind of run this play forever, but what we know is we're not done because we can see a lot of things around us where we can continue to improve on the momentum and then what we do Darko is we we flex that narrative depending on the environment. You saw what we did this year, we were very flat for the first couple of quarters, we saw an opportunity because we could when revenues were.
As good as they were in the last couple of quarters and we invested we invested in technology, we invested in sales force and we invested in marketing and that will give us a leg up we think on the growth outlook for next year. So we're pretty we're pretty dynamic about all of this and I'm very comfortable with the forecast that our CFO is laid out.
Okay, great. Thank you for that color that's helpful for sure.
Youre welcome.
Just real quick follow up on just on loan growth.
Leave it open to anyone to answer this but.
When I look at the commercial.
There are some categories that we are seeing an increase in exposure and I'm not worried about credit, but what I am thinking about is places like commercial real estate and financials.
Where are you bumping up against any sort of internal limits that would limit growth going forward or is that just not a concern at this point.
Darko I can start and maybe others can jump in.
When we think about sector growth. Our main issue is industry concentration and when we have as you can imagine a really detailed and robust process to set sector limits, where we think we need to based on the credit profile of that sector.
And we review that on an ongoing basis not just annually. That's a dynamic conversation that happens through the year a function of current conditions and the opportunity set that's out there but at the current moment, we don't see anything that would that would suggest that we're outsized in any particular sector. So at the moment as a consequence, we don't see any restrictions at least from a re.
Perspective, and a concentration perspective that would cap growth in any sector of this quarter or this year.
Okay, great. Thank you very much.
Thank you just following question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, Thanks, a lot typhoon maybe on the noninterest revenue I noticed that you had trading losses, this quarter and pretty big gains last quarter, and maybe you can remind us what facets impact that and do you manage that for positive gains if we kind of model that out into fiscal 2022.
Okay.
I think I'm struggling a little bit the question I think from a trading point of view you can look at the chart every quarter that we had a couple of minor trading days this quarter, which is normal in the volatility.
And very few for the year and so I don't think there's any dynamic there where we're managing something it's the day to day.
Trading volatility that we have.
Okay.
Moving onto general in your opening remarks, you talked about the.
Sale closing post quarter and you can use proceeds for further investment in your North North American wealth management segment, which has several underlying entities, but he said so I was wondering if you could help me to elaborate on that point, maybe from a segment perspective, and maybe from a geographic perspective in terms of U S.
Canada for us.
Scott This is probably a great place to end it because they'll income anger, our new group head of wealth management is with us in the room and while he was responsible for the quarter because he came into role on the first day of the new fiscal year. He is responsible for the future and he said he's sitting here in the room with a smile on his face so I'm going to ask you to come in and try and help with your quest.
No for sure great. Thanks, a lot. Thanks, a lot Scott and that's the gift that Joanna did give me there's a great opportunity for us to go and a lot of places. So when you look at the numbers year over year. There are some areas we've grown quite quite well this year. So specifically in Canada with our mutual fund platform you can see that that's.
Number two with the epic SaaS versus number five last year you can see that we are also grew very well in our U S wealth management, that's like 60% year over year. So we're going to double down on those areas U S. Wealth, we see huge opportunity for growth down there are Canadian mutual fund platform, we see a huge growth.
Etfs is another area that you've seen we've maintained number two in Etfs and.
And actually this year that's number one in inflows. So we've got a lot of areas that we see continued growth and we're going to continue to invest in those areas, adding to the sales force.
So lots of opportunity in our core businesses.
Does that help.
Thank you.
We have no further questions. So I just thought at this time I would now like to turn the meeting back over to Mr. White. Okay. Thank you operator, and thank you all of you for your questions I'm going to conclude this morning with four key summary themes that we've been consistent on throughout the year and again today number one our results for fiscal 2021 are very strong with leading ppt.
Growth and ROE EPS growth and operating leverage all above our midterm targets number two we have delivered on our expense and efficiency commitments and as you heard today, we have strategies in place to do more number three credit quality remains a differentiator and we believe it will continue to be and number four with our advantaged.
Business mix that is primed for ensuring economic recovery and strong momentum we have in our business I am confident that our purpose driven strategy will deliver consistent financial performance and we will do our part to enable an inclusive recovery for our customers and our communities. Thank you all for participating today enjoy the holiday season, and we look forward to speaking.
To you again in March.
Thank you.
The conference has now ended please disconnect your lines at this time.
Thank you for your participation.