Q1 2022 Bank of Montreal Earnings Call
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Good morning, and welcome to BMO Financial group's Q1, 2020 earnings release and conference call for March 'twenty 'twenty.
Your host for today is Christine.
Christine Please go ahead.
Thank you and good morning, we will begin the call today with remarks from Darryl White Bmo's.
So I'll, let by Typhoon, our Chief Financial Officer, and Pat Cronin, Our Chief Risk Officer also present to take questions are Ernie Johansen from Canadian P&C, Dave Casper from U S P&C, Dan Barclay from BMO capital markets.
From BMO wealth management.
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 remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management measures performance on a reported and an adjusted basis and considers both to be useful in assessing underlying business performance, Daryl and I will.
We will be referring to adjusted results in their remarks, unless otherwise noted as reported and with that I'll turn the call over to Darryl.
Thank you Christine and good morning, everyone.
Before I begin I want to acknowledge the humanitarian crisis, taking place in Ukraine.
The news of Russia's invasion of Ukraine, and war in Europe impacts us, all but particularly to citizens of Ukraine, and the citizens of Russia, and Ukrainians around the world, including here in Canada.
At BMO, we stand with our Ukrainian and Russian employees customers and members of our community in this time of need.
To help support global aid efforts BMO has committed $200000 to the Canadian Red crosses Ukrainians humanitarian crisis appeal.
And we are accepting donations on behalf of the Red Cross at BMO branches across Canada.
Turning to our Q1 results.
Today, we announced another quarter of very strong performance as we continue to build on our operating momentum.
To start the year.
First quarter adjusted earnings per share of $3.89 were up 27% from last year with pre provision pretax earnings of $3 3 billion, which increased 18%.
Results were driven by strong performance in Canadian and U S. P N C, including double digit commercial loan growth on both sides of the border continued strength in BMO capital markets as well as good underlying performance in wealth management.
Our growth is underpinned by our consistent risk and underwriting practices.
And continued strong credit quality.
We're executing well on our strategic plan and the targeted investments, we're making across our businesses in sales capacity and marketing and an award winning digital capabilities are contributing to our stronger revenue growth up 12% this quarter.
Expenses remain well managed up 2%, excluding higher performance driven compensation as we are reinvesting the savings from the exit of lower return businesses.
At the same time we.
We delivered strong operating leverage of four 8% and improved efficiency by 250 basis points over the last year to 53, 8% supporting an Roe.
Protein 19%.
And we remain committed to delivering positive operating leverage for the year.
We continue to strengthen our capital position with a CET one ratio of 14, 1%, which positions us well for continued customer driven balance sheet growth and the acquisition of the bank of the west.
Turning to our businesses and.
In Canadian P&C investments, we've been making in key customer facing roles innovative products and enhanced digital experiences positioned us well for the rebound in consumer activity, we're gaining share across core product categories, and delivering sustained leading performance with double digit P. P. P T growth of 19%.
This quarter strong Roe and improved efficiency.
U S. P&C also had strong results with P. P. P. T up 12% continued positive operating leverage and ROE of 19, 5%.
We had strong growth in commercial banking on both sides of the border with balances up 10% in Canada and 14% in the U S. Excluding PPP loan pay downs with almost half of that growth driven by new clients.
In the U S. We continue to grow our national presence, including recently expanded operations in the high growth, Florida market, where our teams provide clients access to bmo's full array of financial services and industry expertise.
These expansion markets are now contributing approximately 25% of new client growth.
BMO wealth management is key to our growth strategy and we continue to have good underlying performance and traditional wealth.
This quarter, we completed the sale of our EMEA and U S asset management businesses and are well underway and repositioning wells to grow in North America investing in advisors and private bankers delivering best in class client experience.
As a result of our innovation and relentless client focus we've been leading the Canadian ETF industry and net new sales for the past 11 years with an expanded with with an expanded suite of award winning products.
BMO capital markets had record P. P. P. T of over 900 million up 30% from a strong quarter last year, demonstrating the diversification and strength of our North American platform.
We continue to benefit from investments to reposition our business, including enhanced operational efficiency and risk management and we're now operating at a run rate well above where we were two years ago.
We continue to accelerate our growth taking the top spot in Canadian E. C. M in 2021, and in Q1 and in M&A this quarter as well.
Performance across our businesses is supported by the execution of our digital first strategy, we're consistent investments are driving loyalty growth and efficiency.
Continuously modernizing technology building advanced capabilities, and leveraging data and analytics to enhance the customer and employee experience. One. Great example that brings this to life is BMO business Express our industry, leading business on boarding platform, which has exceeded $2 billion in authorizations supporting over 33.
Businesses with rapid access to capital in addition to reducing the onboarding process from days to minutes.
A single system architecture supports the business customers on both sides of the U S and Canada border.
Personalized digital services like these drive above market growth with business banking balances up 15%.
And create efficiency.
Freeing up valuable time for our colleagues to provide one on one financial advice.
We're also making significant process on our cloud modernization journey to enhance scalability and security, while driving innovation and efficiency. For example, we recently migrated our transportation finance business to the AWS cloud leading to annual cost savings of $10 million U S and enabling profound changes and how.
Our business operates competes and creates value for our customers.
Turning to our U S segment, we've been executing against our proven strategy to steadily deliver growth and grow our presence both organically and by building on key acquisitions.
Performance remained strong contributing 39% of the bank's total earnings with an efficiency ratio of 53, 9% and a return on equity of over 18% in the quarter both right in line with the overall bank.
You announced bank of the West acquisition will meaningfully increase our scale and growth potential of our already high performing U S segment when it closes.
As we laid out in December bank of the West is a well run well performing bank with a competitive position in leading U S markets complementary to our own including a highly attractive California market.
Their businesses are also highly complementary, 60% commercial and 40% retail and we see significant opportunities to grow together.
Integration planning is well underway and we remain highly confident in achieving the identified cost synergies, we talked to you about last quarter.
We continue to expect the acquisition to close by the end of calendar 2022, and look forward to welcoming the bank of the west employees and customers to BMO.
Our purpose driven strategy is achieving strong financial performance that enables the bank to invest in improving the wellbeing of our employees customers and communities.
This quarter, we launched business within reach the BMO for Black entrepreneurs lending program.
Committing $100 million in loans to help black led businesses start up scale up and grow.
And later today, we'll be announcing new expanded support for women entrepreneurs.
Recently, we became the first Canadian company to announce that we will join the breakthrough energy catalyst.
Whose mandate to accelerate clean technologies and climate solutions critical to getting the world to net zero carbon emissions strongly aligns with bmo's commitment to mobilizing capital for a sustainable future.
Next week, we'll be publishing our annual sustainability reporting which will include the 2021 BMO climate report.
In recognition of our leadership, we were named to corporate Knights 2022, Global 100, most sustainable corporations in the world.
As the most sustainable bank in North America for the third year in a row.
Looking forward, while the current environment clearly poses a number of macro risks and uncertainties high risk high levels of household savings and demand is supportive of continued good GDP growth in Canada, and the United States, our clients have proven their resilience throughout the pandemic and we continue to support.
Art them, and navigating challenges, including supply chain disruptions and higher inflation.
With our diversified and advantaged business mix and our strong operating momentum we are very well positioned to perform in any environment I'll now turn it over to typhoon <unk>.
Thank you Darryl good morning, and thank you for joining US my comments will start on slide 12.
First quarter reported EPS was $4 43, and net income was $2 9 billion.
On an adjusted basis EPS was $3.89 and.
Net income was $2 6 billion up from 2 billion last year, driven by record revenue of $7 1 billion up 12%.
Expenses increased 7% impacted by higher performance based compensation in line with strong revenue growth.
The divestiture of our asset management business in EMEA.
And the U S. This quarter and our private banking business in Hong Kong, and Singapore last year reduced total bank revenue by approximately 2.5% and expenses by 4% with a nominal impact on net income.
We have now delivered double digit P. P. P T growth for five quarters in a row with particularly strong performance in our P&C and capital markets businesses.
Credit continues to be benign.
This quarter, we had a recovery in the provision for credit losses of $99 million Pat will speak to these in his remarks.
Before getting into the details of the performance in the quarter.
Take a moment to go through the adjusting items related to the announced acquisition of <unk>.
The west on slide 13.
Under purchase accounting the difference between the purchase price for bank of the West and the fair value of its assets and liabilities at close is recorded as goodwill.
Since goodwill is deducted from capital.
Changes in fair value relative to the assumptions that announcements will impact our capital ratios at close.
The fair value of fixed rate loans securities and deposits is largely dependent on interest rates.
Rates rise the fair value declines and goodwill increases however.
However, the fair value of floating rate assets and liabilities and non maturity deposits.
I wanted for at par, providing no natural offsets.
Between now and closing of the acquisition, we are taking actions to proactively manage the exposure to capital from changes in the fair value with the goal of creating an economic and risk neutral outcome.
As part of these fair value management actions, we entered into interest rate swaps that rise in value as interest rates rise.
Resulting in mark to market gains and higher capital to offset the impact of the higher goodwill.
Since the swaps create an exposure to interest rate risk, we purchased a portfolio of match duration U S treasuries to maintain a risk neutral position.
As shown in the illustrative example on this slide together these transactions aimed to mitigate the impact of interest rate changes on the fair value goodwill and the equity needed at close.
In addition, this structure also allows us to maintain the accretion projections that we shared with you in December .
The associated revenue impact from the management activities are treated as adjusting items and the impact to our Q1 results is shown on slide 14.
In Q1 higher interest rates resulted in mark to market gains of $517 million recorded in trading revenue.
We recorded 45 million of net interest income on the treasuries.
The after tax impact was $413 million, which increased our capital ratio by 13 basis points.
We have also entered into foreign exchange forward contracts to mitigate changes in the Canadian dollar equivalent of the purchase price on close.
These qualify as accounting hedges with changes in the fair value of the contracts recorded in other comprehensive income until the close of the transaction.
Upon close the foreign exchange gain or loss recorded in accumulated other comprehensive income will be recorded as an adjustment to goodwill.
Details of the adjusting items for the quarter are shown on slide 37, which include impact related to the divestiture of the asset management business.
The remainder of my comments will focus on adjusted results.
Moving to the balance sheet on slide 15 average loans were up 7% year over year and 3% quarter over quarter.
Business and government loans increased 8% year over year, and 6% quarter over quarter, excluding the impact of the continued wind down of our non Canadian energy portfolio.
And the consolidation of our customer securitization vehicle, reflecting strong commercial loan growth in our P&C businesses.
Consumer balances were up 9% from prior year, reflecting growth across our P&C and wealth businesses.
Average customer deposits were up 8% year over year with growth across all operating groups.
Average loan growth in our P&C business is accelerating.
Excluding PPP loans in the U S loan growth is expected to average in the high single digits on a year over year basis.
Turning to slide 16, net interest income was up 11% from last year and up 10% on an ex trading basis, primarily driven by balanced growth in our P&C and wealth businesses.
Total bank net interest margin ex trading was up two basis points from the prior quarter.
On a sequential basis margin was up five basis points in Canadian P&C due to higher loan spreads and higher mortgage prepayment fees.
In the U S. P&C margin was up three basis points also reflecting higher loan spreads.
We expect total bank NIM ex trading.
<unk> modestly in the second half of the year.
Yeah.
Moving to our interest rate sensitivity on slide 17.
As shown on this slide a 100 basis point rate shock is expected to benefit net interest income by $540 million over the next 12 months.
The impact of a 25 basis point increase in short term rates would add 124 million to revenue over the next 12 months.
Our modeled sensitivity increased from last quarter due to updated assumptions on the behavior of pandemic related deposit growth and includes approximately $160 million benefit assuming that a portion of surge deposits remained stable as rates rise.
Turning to slide 18.
Noninterest revenue net of C. C. P. B was up 12% from the prior year and up 16% on an ex trading ex divestitures basis.
Most categories have increased including particularly strong underwriting and advisory fees.
Sequentially net noninterest revenue was up 15% or 7% ex trading and ex divestitures.
Trading noninterest revenue was particularly strong reflecting higher equity's interest rate and foreign exchange revenue driven by higher client activity.
Moving to slide 19.
Excluding higher performance based compensation expenses were up 2% from the prior year with targeted investments in sales force technology, and marketing, partially offset by the impact of divestitures.
Quarter over quarter expense growth of 3% was driven by higher employee related costs due to stock based compensation for employees eligible to retire and seasonality of benefits that is recognized in the first quarter each year, which together added approximately $235 million this quarter.
We plan to continue investing in our sales force expansion as well as technology and Digitization projects.
As Darryl mentioned these disciplined and strategic investments have helped fuel our revenue growth and created efficiency gains in our businesses.
In Canadian P&C, our investments in digital data and analytics are driving top tier digital sales that represents close to twice our brand share.
Enabling our customers to transact more digitally including through our new global money transfer solution creates capacity for our branches and call centers to focus on advice.
Combined with the expansion of sales roles, including mortgage specialists financial planners and personal and commercial bankers. These investments are leading to market share gains across key relationship products strong revenue growth, averaging 13% over the last three or four quarters and efficiency that is now below that.
Your average.
We are achieving similar results across our U S P&C wealth and capital markets businesses.
With a constructive economic backgrounds and building on our recent success, we plan to continue to reinvest for growth.
We estimate that the combined impact of these investments and some inflationary pressures on compensation will result in full year expense growth of approximately one to one 5% excluding the impact of performance based compensation and including the full impact of divestitures.
Since we began increasing our investments in the second half of last year the year over year expense growth should be lower in the second half of this year compared to the first half.
We continue to expect positive operating leverage for the year.
Moving to slide 20.
Our capital position continued to strengthen with a common equity tier one ratio of 14, 1% up 40 basis points from the prior quarter, reflecting strong internal capital generation the sale of our asset management business and the impact of actions related to the management of fair value changes.
That I mentioned.
So let's go on to the risk weighted assets were higher reflecting strong growth in our commercial lending businesses.
We now have $10 $3 billion in excess capital to our 11% target and continue to project.
<unk> the same capital generation and issuance estimates that we shared with you at the time of the acquisition announcements or bank of the West in December .
Moving to the operating groups and starting on slide 21.
Gideon P&C delivered record net income of $1 billion, reflecting pre provision pretax earnings growth of 19%.
Revenue was up 15% from the prior year.
Higher net interest income reflected good balanced growth, while higher noninterest revenue across all categories reflects higher customer activity.
Expenses were up 9%, reflecting investments in the sales force and in technology.
Average loans were up 9% from last year, reflecting continued strength in residential mortgage lending and 10% commercial loan growth.
Deposits were up 7% year over year.
Moving to U S P&C on slide 22.
My comments here will speak to the U S dollar performance.
Net income was 537 million compared to 456 million in the prior year with 12% growth in pre provision pretax earnings.
Revenue was up 9% from last year, reflecting good growth in both net interest income and noninterest revenue.
Expenses were up 5%, primarily due to higher employee costs.
On the balance sheet exclude.
Excluding PPP loans average loans were up 12% from the prior year on a periodic basis commercial loans. Excluding P. P. P were up 10% from the prior quarter.
Average deposits increased 7% year over year.
Moving to slide 23.
Wealth management net income was $316 million down from $344 million last year, reflecting the impact of divestitures, which reduced net income growth by 3%.
As well as lower insurance income.
Traditional wealth net income was $262 million with good underlying revenue growth of 12%, including strong organic growth in client assets offset by the impact of divestitures.
Expenses were down 2%.
Turning to slide 24.
BMO capital markets had a record quarter with net income of $712 million.
47% from the prior year.
Investment in corporate banking revenue was up 41% driven by strong advisory and underwriting revenue, reflecting strong M&A activity.
Global markets revenue increased 14%, reflecting elevated client activity.
Expenses were up 18%, mainly due to higher performance based compensation and technology spend.
Turning now to slide 25 for corporate services.
Corporate services' net loss was $130 million compared to a net loss of $126 million in the prior year.
To conclude we had a very strong operator with a strong operating performance, resulting in record quarterly revenues and net income to start the year.
The results demonstrate the benefits of our diversified business mix the investments, we've been making to deliver long term growth and active management of the business through the cycle.
And with that I will turn it over to Pat.
Thank you typhoon and good morning, everyone.
We were pleased with our risk performance again this quarter with many of our key risk metrics, continuing at levels equal to or better than pre pandemic.
Strong performance reflects the combination of disciplined risk origination from prior periods.
<unk> risk management disciplines through time.
Solid economic environment and the markets we serve.
Starting on slide 27, the total recovery of the provision for credit losses was $99 million or negative eight basis points down from a recovery of $126 million or negative <unk> 11 basis points last quarter.
Impaired provisions for the quarter were $86 million or seven basis points.
That compared to Q4 and remain well below pre COVID-19 levels.
Similar to last quarter strong impaired loan performance is due to low formations and delinquency rates.
We are pleased with these results, but do you expect impaired provisions to return to more normal levels over time.
We recognized a relief on the provision for performing loans of $185 million this quarter that reflected reduced uncertainty around future credit conditions and positive credit migration, partially offset by balance growth and slight changes in the economic outlook due to omicron.
Given the consensus for continued economic strength and our specific forecast for impaired losses in the year ahead, we remain comfortable that our $2 $3 billion of performing loan allowances provides ample provisioning against the loan losses in the coming year.
Turning to the impaired loan credit performance and the operating groups, we saw unusually low loss provisions across most business segments.
In Canadian P&C personal and business banking impaired loan losses were $79 million flat relative to Q4.
The U S personal and business banking business had impaired loan losses of $4 million down from $6 million in the prior quarter.
The strong credit performance across our personal and business banking loan portfolios was driven primarily by low delinquency rates.
In our commercial and corporate businesses. We also saw strong credit performance in Canadian commercial we reported impaired loan provisions of $21 million up from very low levels of $12 million last quarter.
Our U S commercial business had a net recovery unimpaired loans of $1 million. This very strong performance in U S. Commercial again this quarter was driven by very low formations and a low loss rate on those formations.
Our capital markets business had excellent impaired loan credit performance this quarter with a net recovery of $16 million its fourth consecutive quarter of net recovery unimpaired loans.
This performance was also driven by very low formations and additionally by reversals in the oil and gas sector.
On slide 29 impaired formations were $462 million this quarter, leading to a gross impaired loan balance of $2 $2 billion or 44 basis points.
Both formations and gross impaired loan rates continue to be below pre COVID-19 levels.
And as you can see on slide 31, there were no trading loss days this quarter and that trend has continued so far in Q2, including through the events of last week.
Given the geopolitical events of last week I would also note that we have no direct credit exposure to Russia, or Ukraine, and as a result of the Russian invasion, there should not be a factor in our PCL in the coming quarters.
In terms of the outlook, we remain cautiously optimistic given the solid credit performance, we've seen in the last year.
While uncertainty remains related to the pandemic and potential headwinds such as inflation and supply chain concerns and geopolitical tensions.
Assuming economic growth continues in line with consensus estimates, we would expect further measured releases from our performing provision.
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 protect the timing of when that level will be reached based on what we're seeing today I would expect 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 the call.
Thank you.
I will take questions from the telephone lines. If you have a question and you are using a speaker phone. Please lift your handset before making your selection.
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Please press star one at this time, if you have a question that would be a brief pause while participants, but just a couple questions. We thank you for your patience.
Our first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Good morning.
Good morning, everyone.
Just a quick question around your outlook for the margin.
For the back half I think you mentioned that it should.
Truly see expansion modest expansion in the back half of 'twenty two.
Just talk to us one in terms of or what you're baking in in terms of fleet types.
Think about both the Canadian and the U S segment margins and then when you think about the deposit franchise today.
Any differences that are meaningful today versus back in 2016 when rates were going up.
That would lead you to have a lower deposit beta back compared to back then ex bank of the west.
Yeah, Brian in terms of the rate outlook are the number of increases and the timing of increases we typically use market expectations, obviously, they're a little bit different than the last couple of days based on the Ukrainian crisis, but up until last week the market was expecting about four increases.
Probably maybe you know.
Depending upon the day, both in the U S and in Canada, the last one probably.
At the very end of the year, which would make a big difference. So that was the underlying assumption, we always update that in our in our modeling in.
In terms of the different businesses P&C businesses, a couple of items. If you were looking at individual nims.
We need to keep in mind that in the U S. A we had a very strong P. P. P contribution last year.
And given the fact that we're down to about half a billion dollars.
This year, we will not have the same so on a year over year basis are we will feel the impact of that and against that we have expanding loan spreads the both businesses in Canada and the U S have done a very good job in maintaining pricing discipline as you can see in this quarter's numbers.
But you know given the fact that P. P. P is going to have a fairly large impact I would expect in the U S somewhat of a down drift in NIM.
And in Canada, again, we've done a great job in maintaining spreads.
You may see some lower impact from mortgage prepayment rates and then in both on both sides just remember as loan growth is picking up.
And exceeding deposit growth that by itself is going to have some.
Some negative impact on individual business Nims, which in turn is actually a good thing from the consolidated perspective, because we were using existing cash to fund loan growth. So that will help consolidated NIM and that was the basis for our for in our forecast that it will be expanding through the second half over here.
Sure.
What was the year over year.
Klein, but you should see sequential expansion ex PPP going from here.
Are you if you're talking about consolidated yes, you should see year over year expanding them into second half of the year.
Got it and just one quick follow up on capital markets I know that that'll you've talked about structures such as the changes with gay G are satisfied clear pool, but PPD extremely strong just well if you don't mind remind us. If this is how we should think about the run rate or was this an unusually strong quarter, even relative to what you've seen over the last year.
Yeah, Ebrahim I'll start and I'll actually ask Dan to pipe in on this question because it's you know it's an important one.
Markets are are and have been constructive I think we've performed relatively well as compared to peers, even in those constructive market to your question on where do we go from here I think what's really important to remember is that this isn't the business we had.
Going into the pandemic, we have invested in it with some of the features that you've just summarized we've also focused the business more tightly and we really do have a new expectation for the run rate going forward why did I understand you to come in on the on the question more particularly.
Sure. Thanks Carolyn.
If it ever came with it had great investments and then it's very rewarding to see that performance come.
The performance over the last quarter in the last year has been very diversified across many of our businesses.
Quarter to quarter, there's some variability, but what we've seen is just outstanding performance from most if not all of our businesses as we go.
We've had the opportunity through the cycle to invest in technology and people are.
New products, new clients and so we're reaping the benefit of that as we go.
As I mentioned last quarter, we see guidance.
Or P. DVT as we look forward in the mid six hundreds maybe even high six hundreds.
As we go forward are those dynamics continue to play out.
We go we continue to invest we continue to build our businesses.
And so I'm looking at the long term to continue to see a.
Positive growth and positive outlook for the business.
Thank you.
Thank you. Our following question is from Scott Chan from Canaccord Genuity. Please go ahead.
Oh good morning.
So you talked about like a lot of modernizing.
Projected I think Guy you just talked about in the capital market side and I was just wondering just an update in terms of if you're spending more on projects now versus pre pandemic I'm basically looking just for outlook over the next 12 to 18 months on that on that front.
Yeah.
So Scott this is typhoon as I mentioned.
<unk> on the results that we are seeing from our.
Investments over the past 456 quarters, both in technology and in sales force.
We will continue to invest in technology investments have resulted both in helping us grow revenues and take market share as well as create efficiencies in our businesses and the results are fairly self evident and we will continue those expenses are built into my guidance of one to one 5%.
Hence growth year over year.
Okay. Thank you very much sure.
Thank you. Our following question is from many Goldman from Scotiabank. Please go ahead.
Hi, Good morning, if I look at the capital market segment average loans down one 5% quarter over quarter, that's different than what we're seeing across peers and I'm wondering what's driving that are declined sequentially.
So from my understanding here.
I'm glad to take them.
I was just going to note that in that number. Many there are two mm two items. One is the continued.
Decline in our non Canadian energy portfolio in the second one is the deconsolidation of the customer securitization program.
Program that happened at the last day of the year last year. So therefore at the quarter over quarter comparisons will reflect both of them.
And if you X those out what would you say that underlying sequential loan growth.
For those items.
For capital markets I don't have that right in front of me, but we will get back to you on that Mike.
I think something that you want typhoon.
It's it's simply roughly 5% quarter over quarter in our core loan growth.
Sounds good and then maybe just more broadly on the subject of loan growth I think there's a little bit of discussion.
Last quarter, but if we look at commercial loan growth.
You know what we're seeing is a very strong numbers. It doesn't look like supply chain issues are having an impact on those numbers. So I'm wondering why we're not seeing that come through and are there specific portfolio still where were if you dig in you actually see that that impact and and I'm curious about that.
Yeah.
So Manny this is Dave.
The supply chain issues are real and they are still there and despite those we have had on both the in both Canada and the U S really strong loan growth as Darrel mentioned it.
In his comments.
The loan growth in the U S. This quarter.
Was almost half related to new business. So that means we're out continuing to grow.
And throughout the pandemic, we've done that and back to your question our utilization in our core diversified businesses in the U S.
Is still well below where it was.
Pre pandemic, so had that utilization than at the same level as pre pandemic, our loan growth would have been probably more 75% existing clients and 25% new so there is still.
And tapped.
Utilization that will come back and it's specifically in some of our businesses like our floor plan business for autos or floor plan for trucks are asset based lending business, which continues to grow.
But still is not a where.
Where we would expect it to be when the supply chain issues.
Subside, which by the way I don't see necessarily happening in the next quarter or two I think this is still.
An area, where we have.
Issues in and despite that we've had good loan growth hopefully that helps and it gives you a little more color.
Yes, I mean, so you're saying, there's still upside to loan commercial loan growth and you know I believe there is as the supply chain.
Issues workout now obviously demand over time, we will have some impact, but there's definitely clearly in our auto business for one there is still a very few cars on the lot that we finance and at some point that the supply demand.
We will reverse itself and there'll be more there.
Thanks, so much.
Thank you.
The following question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning.
Going back to the discussion on loan growth. This question applies to both commercial and retail.
I think one of the common questions, we're starting to hear us.
Impact from higher interest rates on loan demand so.
It'd be great to hear your thoughts there again, both on commercial and retail in terms of how higher rates might impact demand.
So this is Dave I'll start and then I'll.
Pick up I would say, it's going to have some effect, but not a significant impact.
For most of our clients are they hedge themselves on the rate increases whether it's our real estate business our diversified.
And the the rate increases that we're forecasting a we don't think will have a significant impact.
Impact on the loan demand in the in the near term so Ernie.
Thanks, David.
The lending business and the retail side I'll start with mortgages, we still.
I believe that there'll be a strong mortgage market, particularly in Canada over the next little while slightly lower than we've seen over the past year.
But it's certainly going to be a market, that's growing with immigration and some upside on some housing start.
We're prepared for that growth in terms of our investments we've made in our mortgage specialists, our sales teams to be able to capture our share of that Oh growth. As we continue forward I think about unsecured lending, we're starting to see a little bit of rebound on that as that as consumers get back into the marketplace.
And our credit cards would be starting off with consumer spending there we're seeing the retail spend come up we'll see the revolving balances take a little bit of time, but outstandings are have been improving this year. For example, Canadian P&C, we were seeing about 9% year over year growth and well continue to see that that change into revolving door.
As some of the surplus deposits.
Overall, I'm feeling confident that we'll be in a in a growth position and not in lending on the retail side.
Okay, and then sort of related question on going back to something.
Another analyst asked earlier on the call is just regarding the.
Posit betas, and I guess, particularly in the U S.
If you can give us some updated thoughts on how you're thinking about deposit retention and a raising rising rate environment and how much that might have two disclosed Ah NII sensitivities.
So.
I mentioned them.
We have changed our modeling assumptions with respect to net interest rates sensitivity.
I used to tell this audience that.
Our numbers are prior to this quarter did not include any retention assumption about the surge deposits, but we knew that we were going to retain a portion of them. So we now are actually including a portion of the deposits that we think we are going to retain and therefore, our asset sensitivity has increased.
In terms of betas.
At the moment I don't think that necessarily we are thinking that betas in this cycle are going to be significantly different than the previous cycle.
I've seen some.
Some assumptions that would disclose by U S banks that indicate that they are expecting lower betas are now we have not made to necessarily that particular adjustment. Our betas are based on products and they reflect the sensitivities, whether it's on the commercial side or the retail side.
All of the deposits that we actually have the ability to model.
I would say that the.
The range of the beta assumptions, both I would say in Canada and in the U S.
Our are very appropriate I would say, maybe a little bit.
On the conservative side, but I think given the potential steepness of the rate increases it is worth maintaining a relatively conservative approach here.
Got it thank you and I'll leave it there.
Yeah.
Thank you.
Our following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, Good morning, I think typhoon you mentioned in your.
Our remarks on Nims that Canadian mortgage spreads was a positive 10 Nims in Canada, which I think is a bit different than what we've heard from others. So I'm just hoping to get a clarification of that and just to get more detail in terms of what you're seeing from a loan yield perspective and in the mortgage market in Canada.
Yeah, Doug it's if there any I'll I'll take that question as you look at our NIM. We're seeing you know some very strong performance across the various elements and one of those is the prepayment of mortgages and you think about it as Canadians are consumers. We're looking at interest rate, taking an opportunity to be able to see that casts their mortgage.
And taking advantage of that that's that's part of our growth, but there's also been some strong pricing capabilities across our lending business and also our deposit.
Growth as well in that.
As I think about that prepayment that will come down over time, just simply as rates a level out and consumers have already made those choices.
As we think about the PNC NIM going forward, we will see a little bit of downward pressure, but anticipate as rates go up at the backend and have an impact on NIM, we might see a little bit of a downward in a little bit of an increase in the fourth quarter. That's how we're thinking about our NIM.
Okay. So that was more related to the prepayment that have you disclosed what the prepayment it might be in your disclosure, but I apologize if it is but have you disclosed what the prepayment impact was in the quarter.
I don't believe we have.
Okay.
And then second just on the set one ratio when I look at your capital supplement it looked like the methodology and policy changes. There's some changes that happened on the a or b side that was I guess, a negative impact and then there were some positive changes that happen from again to methodology and policy perspective on a standardized.
I was just hoping to get a little color as to you was that just related to the fair value adjustments or changes in the hedges related to the bank of the west stores, there's some methodology and policy updates that went through on the calculation this quarter.
Hi, it's Pat maybe I'll just jump in on that one.
It's really a function of our model approval for a chunk of the portfolio that was previously based on standardized that relates to the MNI portfolio. We acquired so that's been on standardized for awhile and during the quarter. We received approval to move that to a IRB. So that's why you see that that movement.
How long is that net impact because I can calculate the net positive impact that that had.
In terms of the R. W.
On the set one ratio.
It's it's positive I don't have the number in front of me, but it was a mild positive.
And is there anything else that's happening from a standardized to a or B I don't know I forget what's left but is there anything else that could occur through the rest of this year that would would be a positive impact our movement from standardized to ERP.
Yeah. There I mean, we always are looking at our at our models. There's nothing in the pipeline at the moment nothing imminent for the next quarter or so that I would put in the material category.
Okay, great. Thanks.
Yeah.
Thank you.
<unk> question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, if I could take you do your domestic retail segment.
So Canadian P&C.
Specifically the other income.
I appreciate that we're seeing a lot of growth there year over year and it's been going on now for four straight quarters now I think I understand that a lot of that just relates to.
How challenging it was last year in 2021, when we saw that come off but it just seems to me like that growth is running well.
Well above what I would have expected and again I'm afraid to your noninterest revenue.
Noninterest income in domestic retail is there anything in there.
That's outside your sort of normal fee income categories, what I'm getting at is things like where there any real estate sales like the gains on which would be recorded in that line or is this mostly just lending fees really kicking in how would you describe the strong pace of growth.
Yeah. If there are any I'll take that question. So as I look at that line. There. So overall, if you look at PMT Canada's revenue growth really strong knee nor in.
In the neuro align in particular as your Frac.
Two we are looking at really broad based growth across all the categories. So if you think about mutual funds consumer activity fees or are there a big portion of this is the return of credit card spend into that into that that number as well and so it's a very balanced.
Growth, we obviously think that that will come down a little bit over the next little while because its a year over year factor with the credit card growth and see a more normalized as we go forward and in that number as you recall there are investment gains in in that number as well that we include but again it was a broad based this year this quarter I should.
Mix across all of those elements of just general good strong business performance.
And those investment gains those are the ones that relate to what co investing with your with your accounts with your customers.
Yeah, its Dave that's what those would be and those are I guess, if you annualize that are modestly.
Modestly higher than they might have been last year, but this is a lumpy business. So it's nothing that's.
Outside of what we would expect.
Okay. So when I look at growth in that line of it's been like 21 28, 26% this quarter and these are all year over year.
When the gains on co investing with your with your accounts subside or returned to normal presumably they will.
Uh huh.
I guess, what I'm getting at is how much of those really added to that revenue line.
Well I.
I don't have it right in front of me, but those go as we said they go up and down it's been a part of our business over the last 10 years, so you've seen us over a long period of time, but as you but to your point I mean these are oftentimes. These are fair market value gains. So if the market would go.
Go down you could have a decline offset against when the when the one investment is sold but it's really it's pretty hard to predict but it's not a core part of our business, but it's an important part and is there to support the growth in our commercial business.
They worry about the same as last quarter. So it's really a quarter over quarter, we didn't see much.
Much of an increase relative to last year's first quarter. They were only up about $10 million. Yeah. They just have such a flattering effect on the domestic retail numbers and and we've seen this with other banks in the past when when gains of this nature go away. It obviously doesn't look that that that's what I think it's just it would be helpful to understand how.
All important these are so we're not surprised going forward yeah.
We agree I mean, it is our total noninterest income are I think are in Canadian P&C last year was $2 $2 billion. This line item was just a little over $100 million.
Maybe one for Daryl.
I found that very helpful that slide where you show that the equity raise doesn't change.
Regardless of how the fair value changes unfold. So that was helpful. But maybe going one step further is there a scenario where.
The equity raise could be materially lower than what you've contemplated or maybe even zero does that is that conceivable.
Yes, it's a good question Mario It is it is it conceivable sure.
The way I'm, not predicting that by the way, but I'm answering your question is it conceivable.
Yeah, I mean, it's conceivable what would have to be true for that to occur for example relative to what we have modeled we end up with less organic R. W. A deployment into the marketplace and more see generating income and bank of the West does the same and we end up in a position where our CET one ratio takes care of.
[noise] itself, and we don't need to top it up with the equity offering.
The opposite could be true we could go any other direction and we could need a little bit more as we sit here today, we did that work both on the hedge as well as on our business as usual forecasting to give you. The point of view that we've given you today, which is the assumptions. We made a couple of months ago, We announced the transaction stand today, we don't have an updated point of view, because we check our math and it still is the same but.
To answer your question could it move is it conceivable sure. It is but that things would have to change relative to our outlook and do you have a timing outlook on the equity ratio.
No look we said at the time of the acquisition announcement that a it was a year or so estimates to close its less than 3% of our market cap, we have had to investors.
Some interest and say to us that they're there.
And we're ready so it will just take it all into consideration and we will take the time that we think is best for our shareholders Mario I don't have a better uptake than that at this point.
Yeah.
Thank you.
Our last question is from Gabriel Deschaine from National Bank Financial. Please go ahead.
Hi, good morning, Thanks for the you know rate sensitivity disclosure change there, but I have a question about the surge deposits like have you ever can you quantify you know the deposit base against which were valley reading, an additional benefit in and like how how do you define.
This surge deposit.
Typically you know we define surge deposits as the net increase in the deposit base since the beginning of the Covid environment.
And the change that we've made.
In our modeling.
Really took only about maybe a third of those and moved it into.
The more non rate sensitive categories. So it was not a big chunk of it.
So.
The total increase since the pandemic started.
And a third of that amount is considered or no. Just remember along the way we have continued to make investment decisions. So I'm talking about basically what remains out of that.
And you know, it's not a big number Gabriel it's probably I would say in the teens in terms of billions of dollars. So it.
It was it was not a huge number alright.
Alright, and just to clarify on the on this fair value and hedging kind of.
Offset.
But you.
You will see fluctuations in their core tier one ratio, there's an important timing difference there we should be aware of I think anyway, but you'll see fluctuations in the core tier one ratio until you close when you have gains or losses on the swaps, but then the goodwill adjustment of the offset of clothes, whether that's up or down like they are moving up.
That's correct right that is correct. The the actions are designed to maintain the CET one ratio at closing, okay, but it's important for investors to know that you will.
Not to panic, if rates go down and your core tier one ratio goes down because there's an offset at the end of the line, yes, that's precisely why the hedges in place got it okay.
Alright, I Gotta go to another call now thank you.
Thank you I would now like to turn the meeting back over to Mr. White.
Go ahead. Thank you operator, I'll be quick as I am respectful of the fact that you won't have to go to another call. So I will conclude with a very quick comment on the key themes number one our results for the first quarter are very strong in fact that pure leading ROE EPS growth and operating leverage are all above our midterm targets number two we're strategically investing as you've heard to deliver.
<unk> and efficiency number three our superior risk management and prudent credit quality remains a differentiator and we believe it will continue to be and number four we've got strong momentum and an advantaged business mix, it's positioned for growth and performance in any environment. So with that thank you all for participating in today's call. We look forward to speaking to you again in May.
Thank you.
France has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.