Q2 2022 Bank of Montreal Earnings Call
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This conference is being recorded.
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Please standby your meeting is about to begin.
Be advised that this conference call is being recorded.
Good morning, and welcome to the BMO Financial Group Q2, 2022 earnings release and conference call for May 25th 2022.
Your host for today is it kitchen video. Please go ahead.
Thank you and good morning, we will begin today's 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. Our earnings you'll Hanson from Canadian P&C, Dave Casper from U S. P&C, Dan Barclay from BMO capital markets and that one's kananga from BMO wealth.
Instrument 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.
Also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management measures performance on a reported and adjusted basis and considers supposed to be useful in assessing underlying business performance.
And 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 Daryl. Thank you Christina and good morning, everyone.
We continued to deliver good financial performance this quarter driven by broad based customer loan growth in our North American P&C and wealth businesses.
And solid results in our market sensitive businesses.
Second quarter adjusted earnings per share improved to $3 23 with.
With continued positive operating leverage and strong pre provision pretax earnings growth of 6%.
Year to date <unk> is up 12% driven by strong revenue growth and continued expense management that includes targeted investments for future growth.
With operating leverage of three 3% and an efficiency ratio of 54, 7% year to date, we are delivering on our commitment for positive operating leverage for the year.
This morning, we also announced a dividend increase of six to.
To $1 39 per share an increase of 5% over last quarter and 31% over last year.
We continued to strengthen our capital, including executing the planned equity issuance and are well positioned to support both client driven balance sheet growth and the bank of the West acquisition.
ROE.
It remains our key area of focus guiding our strategic investment decisions as we manage the bank and our businesses for sustained profitable growth.
Year to date ROE was 17, 2% up from the same period last year as we continue to drive initiatives to improve the profitability of our businesses.
These consistent results demonstrate the ongoing value of our advantaged business mix, including strong contribution from our U S segment and the dynamic execution of our purpose driven strategy.
Our strategy is designed to deliver sustained performance through the cycle, including disciplined capital allocation decisions are ongoing investments in talent and technology have delivered resilient performance through the pandemic and we believe will drive sustained performance in a rising rate environment.
The current backdrop presents both risks and opportunities for our customers and for the bank.
In the face of some economic uncertainty our long standing track record of superior risk management through the cycle has proven to be resilient in protecting and growing the bank. It's underpinned by a strong risk culture and consistent risk appetite with a well diversified commercial portfolio that is 85% secured the vast.
The majority of which has a sole or lead customer relationship.
Now with pandemic restrictions largely largely lifted the economy is growing and business businesses and consumers continue to adapt investments in our north American growth strategy and.
And climate transition and in digital advancements position us to capture these opportunities as we support our customers and navigating the changing environment.
As the eighth largest bank and a top five commercial lender in North America, we're uniquely positioned to advise our clients on both sides of the border as the trend to re globalization accelerates.
Supply chain shift North American businesses are investing automating and building back inventories.
With double digit commercial loan growth in both Canada and the U S. This quarter, we're already seeing these dynamics play out.
We further we're further benefiting from ongoing investments to expand our commercial presence to add talent and extend product and digital capabilities that are attracting new clients and strengthening existing relationships.
Our capital markets and commercial banking teams together, our accelerating efforts to successfully partner to deliver world class capital market services to our mid market commercial clients are one client one bank approach is a clear differentiator for existing and prospective clients.
We've also positioned ourselves for the unprecedented investments that will be needed to catalyze climate action and shift to a cleaner energy production.
We're leading key financing activities, leveraging our climate Institute and energy transition teams to be our clients' lead partner in achieving their energy transition goals and our collective ambition for a net zero world.
BMO capital markets is a Canadian leader in sustainable financings <unk>.
Including ranking as the top underwriter of ESG bonds and the number one sustainability structuring agent.
In addition, our agreement with export development, Canada will bring innovative sustainable finance solutions to Canadian exporting businesses and help them transition from carbon intensity of our operations to those that can eliminate or significantly reduce emissions.
And as.
As the market share leader in ESG Etfs in Canada, we continue to expand our innovative suite of products, including our climate focused solution and are also seeing strong flows in our sustainable mutual funds.
We're innovating for the future with an intentional digital first strategy poised to capture the shift to advanced digital experiences. We've laid the groundwork with sustained investments in technology that are driving loyalty efficiency and growth by delivering leading employee and customer experiences that power real financial.
Progress for example, we're continuing to roll out enhancements to our online banking experience in Canada, making it faster and easier to use and we recently ranked first in the insider intelligence, Canada mobile banking emerging features benchmark for 2022.
The ranking reflected the strength of select emerging features offered on the beam on mobile banking App with top marks in the categories of digital money management account management and alerts.
We continue to modernize our technology through cloud for example, we're converting to a proprietary platform to support risk management analytics.
Which makes forecasting loan loss scenarios 10 times faster more integrated and cost effective.
Our people are key to our success and our winning culture early adoption of technology and innovation has given us the ability to attract and retain the talent that will transform banking and create efficiency for modernizing our platforms.
We're actively growing in key technology hubs in Canada, and the U S, including in cities, where the bank of the West has locations.
Bank of the West will further enhance our natural advantages with complementary retail wealth and commercial businesses, our strong sustainable lending team digitally active customer base and dedicated talented employees tie.
Typhoon will provide more detail on our integrated integration planning process and the revenue synergies that our combined businesses are expected to deliver.
As we continue to grow the bank, we're steadfast in our purpose driven commitments to a thriving economy, a sustainable future and an inclusive society. We're proud to have been recognized by the Ethisphere Institute as one of the world's most ethical companies for the fifth.
<unk> year.
This quarter, we announced a $5 billion commitment to support women business owners in Canada, recognizing the impact they have on our communities and the importance of helping them access to capital they need to grow their businesses and through them our economy.
To conclude we have a proven dynamic purpose driven strategy for growth that is underpinned by superior risk management and robust capital and we're well positioned to deliver sustained performance in any environment I'll now turn it over to typhoon.
Thank you Darryl good morning, and thank you for joining us.
My comments will start on slide 10.
Second quarter reported EPS was $7 13, and net income was $4 8 billion adjusting.
Adjusting items this quarter are similar to last quarter and include revenue of $3 6 billion pretax from fair value management activities related to the acquisition of bank of the west to mitigate the impact of higher interest rates on the expected goodwill in capital at closing.
The details of adjusting items are shown on slide 36, the remainder of my comments will focus on adjusted results.
On an adjusted basis EPS was $3 23.
And net income was $2 2 billion up from $2 1 billion last year, driven by strong pre provision pretax earnings of $2 9 billion up 6%, reflecting good year over year revenue growth across our diversified businesses and disciplined dynamic expense management.
Efficiency improved to 55, 6% and return on equity was 15, 7%.
Total PCL was $50 million and Pat will speak to these in his remarks.
Moving to the balance sheet on slide 11 average loans were up 9% year over year and 3% quarter over quarter.
Business and government loans increased 10% year over year or 13%, excluding the impact of declining balances in our non Canadian energy portfolio and deconsolidation of our customer securitization vehicle, reflecting strong commercial loan growth in Canada and the U S.
Consumer balances were up 9% from the prior year, reflecting strong growth in our Canadian P&C and wealth businesses.
Average customer deposits were up 7% year over year with growth across all operating groups.
Looking ahead, we expect continued strong loan growth in our P&C businesses in the high single digits on a year over year basis, reflecting strong diversified pipelines.
Turning to slide 12, net interest income was up 9% from last year and up 12% on an ex trading basis with growth across all operating groups.
Adjusted net interest margin ex trading was up five basis points from the prior quarter, reflecting the impact of rising rates declining excess liquidity levels, and lower low yielding assets and capital markets.
On a sequential basis margin was down two basis points in Canadian P&C and up one basis point and U S P&C, reflecting higher deposit margins offset by lower loan margins and loans growing faster than deposits.
In the second half of the year NIM in both our P&C businesses and at the all bank level is expected to widen given the rising rate environment.
Moving to our interest rate sensitivity on slide 13.
Overall, our interest rate risk management approach has worked very well protecting our NIM into low rate environment and now we remain well positioned for a rising rate environment.
100 basis point rate shock is expected to benefit net interest income by $635 million over the next 12 months.
Although still early in the rate hike cycle to date, our deposit pricing and stability has tracked in line with or better than our model assumptions.
If deposit betas are 10% lower than what we have assumed then the benefit under a 100 basis point rate increase would be higher by approximately $50 million.
Turning to slide 14.
Noninterest revenue net of CPB CCP B was down 3% from the prior year and down 9% on an ex trading basis, primarily due to the impact of divestitures and lower underwriting and advisory fees given market conditions.
Sequentially net non interest revenue was down 11% or 9% ex trading primarily due to lower underwriting and advisory fees lending fees and securities gains.
Moving to slide 15.
Expenses were up 2% from the prior year, we delivered positive operating leverage of one 8%. This quarter as we continue to reinvest savings from divestitures into targeted areas to drive revenue growth, including sales force expansion and technology.
Sequentially expenses were down 5%, primarily due to lower employee related costs driven by stock based compensation for employees eligible to retire that our expense in the first quarter of each year and the seasonality of benefits.
As well as the impact of three fewer days in the current quarter.
As we look ahead the moderation in our year over year expense growth is expected to continue into the second half of the year, including the impact of rising compensation expenses and.
And after delivering positive operating leverage for eight quarters in a row, we continue to expect positive operating leverage for the year.
Moving to slide 16.
Our capital position continued to strengthen with a common equity tier one ratio of 16% up 190 basis points from the prior quarter.
As shown on the slide the increase largely reflects the impact of the common share issuance and management of fair value changes related to the bank of the West acquisition.
As well as strong internal capital generation.
The cumulative impact of the fair value management actions of 90 basis points is expected to be offset by higher goodwill on closing relative to our assumptions at announcement.
Source currency risk weighted assets were higher reflecting growth in our lending businesses.
And the impact of the Basel III capital floor adjustments in the quarter.
Before moving to the operating groups a quick update on the back of the West acquisition shown on slide 17.
We look forward to closing the transaction by calendar year end and our teams are making good progress in preparing for a successful integration.
While we shared our cost synergy targets at announcement in December .
Since then we have been working to identify revenue synergy opportunities across our businesses.
The opportunities identified reflect leveraging BMO strengths and a larger very attractive footprint.
Including our digital first and relationship based approach.
And an expanded product and service offering for our combined client base.
Based on our initial expectations, we expect to be able to achieve pre provision pre tax synergy opportunities in the range of $450 million to $550 million over the next three to five years.
With approximately 60% of that driven by our commercial and capital markets and 40% by our personal and wealth businesses.
We are on track against the assumptions announced in December including capital generation and expense synergies.
Moving to the operating groups and starting on slide 18.
Canadian P&C delivered net income of $941 million, reflecting pre provision pretax earnings growth of 11%.
Revenue was up 11% from the prior year.
Higher net interest income reflected good balanced growth and stable margins.
While noninterest revenue increased across most categories, reflecting higher customer activity.
Expenses were up 11%, reflecting investments in the sales force and in technology with year over year growth expected to moderate in the second half of the year.
Average loans were up 10% from last year, driven by continued strength in residential mortgage lending.
And 13% commercial loan growth.
Deposits were up 7% year over year and flat sequentially.
Moving to U S. P&C on slide 19, my comments here will speak to the U S dollar performance.
Net income was $465 million up 7% from the prior year with 5% growth in pre provision pretax earnings.
Revenue was up 5% from last year, reflecting good growth in net interest income.
Expenses were also up 5%, primarily due to higher employee costs and technology investments.
On the balance sheet, excluding PPP loans average loans were up 13% from the prior year, including strong commercial loan growth of 14%.
Average deposits increased 4% year over year and declined modestly from last quarter.
Moving to slide 20 wealth management net income was $315 million down from $329 million last year traditional wealth net income was $248 million with good underlying revenue growth of 5%, excluding the impact of divestitures, reflecting higher net interest income from <unk>.
Drawing deposit and loan growth and higher average client assets, partially offset by lower online brokerage brokerage transaction revenue compared to last year.
<unk> net income was $67 million, reflecting more favorable market movements this quarter.
Expenses were down 9% due to the impact of divestitures, partially offset by investments in the business.
Turning to slide 21, BMO capital markets net income was $453 million compared to $565 million in the prior year.
Revenues increased from last year with investment and corporate banking revenue up 3%, primarily due to higher corporate banking related revenue, partially offset by lower underwriting and advisory revenue.
Global markets revenue increased 1%.
Revenues, both in global markets and Incb declined from the record levels in the first quarter.
Reflective of the market environment expenses were up 11%, mainly due to investments in the business, including higher technology and talent costs.
Turning now to slide 22 for corporate services.
Corporate services' net loss was $111 million compared to a net loss of $120 million in the prior year.
To conclude we continue to deliver good operating performance across our diversified.
And expect the dynamic management of the business in a changing economic environment will continue to serve our shareholders well and deliver long term growth.
And with that I will turn it over to Pat.
Thank you typhoon and good morning, everyone.
We were very pleased with our risk performance again this quarter and saw continued improvement across many of our key portfolio metrics.
This strong performance reflects the combination of disciplined risk origination from prior periods and strong risk management disciplines through time.
Starting on slide 27, the total provision for credit losses was $50 million or four basis points up from a recovery of $99 million or negative eight basis points last quarter.
Impaired provisions for the quarter were $120 million or 10 basis points and while this was up from very low impaired provisions of $86 million or seven basis points in Q1 and.
Impaired provisions remain well below pre COVID-19 levels.
Similar to last quarter, the strong impaired loan performance is due to low formations and low delinquency rates.
We recorded a release on the provision for performing loans of $70 million. This quarter, we did recognize the potential for economic headwinds by increasing the weighting of our adverse scenario as well as reducing parts of our economic outlook in our base case scenario.
This was offset by positive credit migration again, this quarter as well as a reduction in the judgment, we have been applying specific to COVID-19 related uncertainty.
Given the strong credit profile of our current portfolio and our forecast for impaired losses, we remain comfortable that our $229 billion of performing loan allowances provides adequate provisioning against loan losses in the coming year.
Turning to the impaired loan credit performance and the operating groups, we saw low loss provisions across all business segments again this quarter.
In Canadian personal and business banking impaired loan losses were $79 million flat relative to Q1.
U S personal and business banking business had impaired loan losses of $1 million down from $4 million in the prior quarter.
Consistent with prior quarters strong credit performance across our <unk> businesses was driven by low delinquency and insolvency rates.
And our commercial and corporate businesses. We also saw strong credit performance in Canadian commercial we've reported impaired loan provisions of $7 million down from $21 million last quarter.
Our U S commercial business had impaired loan provisions of $34 million up from a net recovery unimpaired loans of $1 million last quarter.
Our capital markets business also had strong impaired loan credit performance this quarter with impaired loan losses of $1 million.
On slide 29 impaired formations were low again this quarter at $333 million, leading to a gross impaired loan balance of $2 1 billion or 41 basis points.
Both formations and gross impaired loan rates continue to be well below pre COVID-19 levels.
Despite some challenging market conditions trading risk performance was good again this quarter with one last day as you can see on slide 31.
Despite continued volatile markets our trading risk performance. So far in Q3 has been consistent with Q2.
In terms of the outlook, while the pandemic is not over the economic impacts continue to diminish which along with our strong credit performance makes us confident that we can manage through current or emerging headwinds with that said our base case economic forecast is for continued economic growth and showed that transpire.
There remains modest room for continued releases of the performing loan provision.
As I have previously guided 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 given that the current portfolio credit metrics remain quite strong I would expect that normalization to start towards the end of this year or into fiscal 2023.
During the past two years, we have continued to strengthen our risk management capabilities, including automated and data driven risk mitigation and management processes.
In the face of macroeconomic and geopolitical risks these capabilities together with our strong current risk profile strong liquidity and capital levels are well diversified portfolio and an adequate allowance. We're confident that we can continue to both manage future risk and support future growth.
I will now turn the call back to the operator for the question and answer portion of the call.
Thank you.
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The first question is from Ebrahim <unk> from Bank of America. Please go ahead. Your line is now open.
Good morning.
Yes.
Typhoon one you mentioned margin expansion in both P&C and cause.
<unk> Bank, if you could quantify that a little bit for us and then.
In particular, just talk to us a little about U S.
In terms of.
Is there any subset of the growth that you've seen in the last couple of years, we expect deposit outflows and just how do you expect the behavior of deposits since you mentioned about deposit betas, but.
Given just the magnitude of what it takes what you're going to see in the U S and in the second and the third quarters, just give us a trajectory of AUC, how quickly do think deposits begin to reprice and how.
How are you thinking about just a risk of deposit outflows on the back of that.
Thanks for the question, Brian So I'll start with the latter part of your question and I'll come back to the NIM question in terms of deposits.
The outflows as well as deposit pricing.
We are pretty much on target on model.
Patients in this environment.
Have been expecting first deposit growth to slow down and then starting in the U S.
We're expecting to see outflows as both rates are increasing.
Still seeing.
Opportunities that our clients have to them.
Placed the money elsewhere in their commercial businesses as well as in personal banking.
So you can see the numbers on a quarter over quarter basis.
Deposit growth either slowed down flat or some some declines in the U S very much in line with what we expected.
I suspect that as.
The central banks continue to aggressively increase interest rates deposit betas are going to move up.
And.
It's difficult to necessarily.
Move the dial all the way to the end and say, whether they will end up higher than the last rate cycle, but it is likely that they will end up higher than the rate cycle based on what we see today.
But in terms of our numbers what guided us when we said we see a NIM expansion.
Into the second half over the year and I will extend that also into 'twenty 2023.
All of it is in line with what we have modeled.
I do expect NIM to meaningfully expand from here in Q3 and in Q4.
We may see something close to what we have seen this quarter in our ex trading NIM, which was five basis points in the next couple of quarters.
And then based on.
The rate increases that we were expecting I think we will continue to see the expansion into 2023, which when you put it all together with our guidance of high single digit loan growth this year.
Potentially moving into even next year that bodes very well for net interest income growth, we had 9% growth here year over year. This quarter, you should see that number to remain very strong for the rest of the year as well as 2023.
Got it and just one follow up.
So I understand the hedging to mitigate the goodwill impact of deal flows does.
Goodwill also imply that the approaches accounting earnings will be higher than you expected as a result, the EPS accretion.
Add that to be meaningfully higher than what we announced or am I missing something no everything else equal.
The higher rate Mark will move.
Move more into the future quarters after we close the transaction.
Can you quantify how much higher would that be in snake things were right at quarter end of the DS notes like audience well.
Yep.
Assuming that we have a $3 $5 billion.
Pick up this quarter on top of about $500 million last quarter.
Assuming that basically is the change.
Change in the rate Mark itself all of that money.
Would be creating back to income.
The rate Mark will be higher by that much.
Got it so that it comes to the life of those loans.
Alright, thanks for taking my questions.
Thank you.
The next question is from many Grauman from Scotia Capital. Please go ahead. Your line is now open.
Hi, Good morning, just a question on bank of the West Bank mergers in the U S are facing more scrutiny I think you've got the hearings scheduled for July .
Wondering is it reasonable to expect a delay or a here for the deal close.
And why or why not.
My name is Daryl we don't expect a delay I would say to you everything that we thought might happen over the course of the year when we announced the transaction on the 20th of December is basically playing out according to expectations, including our capital raise including the submission to various regulators, including the process as we see at the meeting that you're referring to.
And July is a public meeting that's not a hearing it's normal course that was expected as well so.
So as we sit here today, we don't really have any of it's kind of boring for you I know, but we really don't have any update relative to what we've said before things are playing out as we expect it to.
As we expected them to and our best guests remains exactly what we said when we announced the transaction, which is that we would close towards the end of the calendar year.
Got it got boring boring is good all considered but just a question on capital pardon me as it relates to the deal when.
When you announced the deal you talked about 11% or higher.
Given how.
The World has developed since then should we be thinking about the higher part as being more operational know how are you thinking about capital.
Closed many I'll give you my sense and typhoon might want to complement here.
We did say that we said that we expected based on our models at the time that the first quarter post closing, we would be at 11% or higher as we look at the developments over the five months that have followed and we look at our models going forward. We standby that in fact, if anything we might be a little bit ahead of that by some of the capital actions, including the equity issuance, which was a little higher.
And then we went out for.
And when we look at where we are at closing and then post closing down 11% as I said, we standby it in fact it could be.
It could be a little better than that it could be 11, 5% in the first quarter or something like that type of thing would you add to that yeah, I mean, but those aren't just going back to your question. They really don't relate to necessarily our worldview.
The World will look like at the time, that's just where we see our capital ratios to be low.
Looking at the movements today, so we have not necessarily increase our capital target management target at this point.
So just to clarify if you were at 11% you'd be comfortable with that the regulators would be comfortable with that as far as you understand it yes, that'd be our expectation today.
Okay. Thank you.
Thank you.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Your line is now open.
Thank you.
Going to the bank of the West theme or update type thing you talked about.
P. A 452 $550 million over the next three to five years.
But Marshall and first of all I assume that it's all been towards the incremental revenue and is that cumulative.
He is kind of already talked about the expected cost synergies within the transaction.
Yeah. So this is Scott.
It is net revenue synergies. So there was going to be some expenses associated with it but this is a net number that we are projecting and we are projecting that to be a run rate increase.
After three to five years, so it's not necessarily over a five year period of time, a cumulative number when we get to towards the end of that time period, we expect to add net revenues between $450 million to $500 million $550 million and just one more comment as you can appreciate.
Because of legal restrictions, we don't have full access to their client information and data. Our teams have done a lot of work around our products compared to their products their markets et cetera. So this is actually a very good perspective on you know the uptick in our performance as we expect but.
I have to say that I am optimistic that.
Once we actually get full access to their client base. This number has potentially more room on the upside.
Okay, and the 40% personal involved was that more weighted to the ladder in terms of wealth management, you said, it's about even actually to be honest with you, it's even between personal banking and wealth management.
Okay. Thank you very much.
Thank you.
The next question is from <unk>.
As Shane from National Bank Financial. Please go ahead. Your line is now open.
Super Cool.
Yes.
I just want to follow up on your comment there. It sounds like you might be expecting in 11, and 11, 5% post close core tier one ratio.
You know, it's a surprising I guess, considering the backdrop I mean, it's a lot different than what we had in December of course are U.
We've all got our estimates for internal capital generation or are you anticipating to.
Some you know.
Our strategy is out of your back pocket like securitization activity or portfolio sales or anything of that nature.
So anticipating getting there or even better than 11%.
In normal course.
Yeah, So gabe.
Sure of course, correct, if I Miss communicated earlier I think I heard you say that that's different from what we expected three months ago.
Be clear that is exactly what we expected three months ago five months ago, when we announced the transaction. So the message. We're trying to give you today is that we are not we are unchanged and our perspective of the capital outcome post the transaction after the first quarter and the only tweak I would make to that is if anything a little bit more capital based on where the models have come in in the outlook that we've got.
So and as far as actions are concerned the second part of your question.
Continuing along in the normal course, the balance sheets are being absorbed in the way that we expected them to and the customer behavior is what it is as you see the loan growth we completed the equity issuance. The drip is in places you know when it's coming in a little bit stronger than we had modeled so all told it round trips to basically what we had expected all along if not a little.
Better that's the message we're trying to leave you with.
Maybe I misheard, it but I missed that.
Environment, and they've gotten different not necessarily your messaging.
It's consistent despite that change.
Okay, no about expenses and typhoon I believe I heard you.
Recommitting to lower expense growth rate in the second half because I've got the.
Q4, you were guiding to.
Flat expense growth for the full year Q1, you bumped that up to 1.5% now you're not changing that.
This quarter, we had.
2% expense growth a bit above that variable comp, but nothing.
On the wage inflation side that might actually not just the metrics from this growth a bit higher than what we thought three months ago.
Yes. Thanks.
Question Gabe.
No.
Just to.
Set up the environment. So obviously as I said this was the eighth quarter in a row that we delivered positive operating leverage and we are committing to that I mean, it may not be every quarter, but that's our commitment.
Over a reasonable period of time, we did have 2% quarter over quarter.
Increase my comments about the second half.
<unk>, a more moderate expense growth into the second half of this year relates to the fact that.
When we started ramping up our investments in technology and sales force that happened more in the second half of last year. So therefore, we knew that the first half of this year was going to be a bit more challenging and now going into the third and fourth quarters.
You should see similar numbers that you saw from US this quarter that 2% type of number relatively more modest expense growth.
In that number I should say that last week, we did announce.
His salary adjustments for our employees between levels, two and the level of seven three.
3%.
We are seeing more inflation on the salary side and we.
We made that adjustment last week my.
My outlook does include.
The impact of that increase which is an incremental amounts.
Two hour discussion back in February as you reminded us we did guide to about a one 5% year over year expense increase excluding.
Performance based compensation with this increase we're now going to take our expense outlook year over year, excluding the impact of performance.
Performance based comp to about two 5% because that's sort of is the incremental amount.
We are seeing more movement in salaries.
But at the same time, we maintain our commitment to positive operating leverage we're spending a lot of time internally.
<unk>, the magnitude and returns to our investments and will ensure that.
As we watch the revenue environment, we dynamically manage our expenses accordingly, and still achieve that positive operating leverage okay, but one of my 5% to 9% now.
Alright, thank you.
Thank you.
The next question is from Doug Young from Digital Bank capital markets. Please go ahead. Your line is now open.
Thank you good morning, just U S banking.
Like there was a sequential slowdown in commercial loan growth and I do get that it'd probably bounces around a bit so maybe there is nothing.
In there, but I'm just I'm curious as to what Youre seeing and then what the pipeline is telling you.
From a loan growth perspective over the coming year, and maybe you can kind of sprinkle in just in terms of utilization rates, where they stand today, and where you expect them to kind of migrate to.
Sure This is Dave.
Actually in our commercial business in the U S. We had almost three.
3% quarter over quarter loan growth on the commercial side, so very positive there and.
Most of the 14% if you exclude X P. P P.
Year over year, so really strong and it continues to be strong and it's strong across both geographies and our sectors.
Particularly there's been an inventory build which has increased our utilization.
And that's despite very very low utilization in one of our businesses two of our businesses our truck financing in our auto financing overall, though utilization continues to go up as clients build their inventory and to see a pretty positive near term future for the back half of the year. So I would not characterize it as slowing down.
I would say, it's continuing to go up and the last thing I'd say about this is really over the last eight.
Eight quarters.
Had one quarter, where we've actually lower loan growth and that does not that's including the PPP.
So we've continued to build throughout this entire period, adding new customers growing geographically, adding to our sectors. So I'd say, it's really really positive but.
Tell me if I didn't answer your question completely if you've got any follow up.
No as well given the macro backdrop, we get lots of questions. On you know what is going to happen with commercial loan growth and it just doesn't feel like you are.
In your discussions and your comments and you're kind of talking to clients constantly and if there is any real change in the outlook is that a fair characterization I'd say a couple of things. So there is certainly more uncertainty given some of the continued issues that we all know about supply chain inflation, but the day.
<unk> for the clients' products still is outstripping supply. So there is still growing there is trying to they're trying to keep up.
And the other part of it is there is continues to be both in Canada, and the U S more movement to onshore and less reliance on.
Foreign sourcing.
More capital expenditure to improve productivity through our manufacturing businesses and still have growth.
I think the North American market U S and Canada is going to continue to be pretty positive.
I don't know economically if theres a downturn, that's obviously going to impact us but.
In the near term, we really don't hear that from our clients, they're still trying to grow and catch up in some cases in terms of still lower inventories.
And then while I have you just the sequential decline in non interest revenue in the U S.
Can you break that out a little bit like I think I'm, assuming that's a result of lower investment gains.
Or.
Can you talk a little bit more about that sure sure.
It's not investment gains at all there are no investment gains in our P&C business. They never are those.
That's mostly a Canadian.
Canadian issue. So the issue, though is in our first quarter and really particularly in December we had very very strong syndication gains and thats as you recall at the end of the last year a lot of transactions trying to get done before calendar year end, so that hit us in the first quarter and we were up probably 15 or 20.
Sent in that in that.
Business and Thats the syndication business is very strong for us, but but that's really what the decline was I think are more normalized.
Nerve would be what we hit this quarter there'll be some ups and downs, but.
And we have a lot of other parts of that business, our M&A business, our Treasury management business those are all fee related.
And so I think it's still pretty positive, but that was the one issue its not securities gains, but it is syndication fees in our loan business.
Okay, Great. That's clear thank you very much.
Yes.
Thank you.
The next question is from Paul Holden from CIBC. Please go ahead. Your line is now open.
Thanks. So first question is regarding inflationary.
Borrowing excuse me borrowing cost pressures on commercial clients when we've seen a number of.
Public companies come out with disappointing margin.
Numbers, just wondering if you're seeing any early indications of profit pressures on your customers and then secondly, sort of how are you monitoring for that going forward.
Okay.
It's Pat I'll start and then maybe others can jump in I would say the short answer to your question is no we're not really seeing that yet.
Aye.
In fact, we're seeing in fact, the opposite we're seeing this quarter again, we saw a positive credit migration across the wholesale portfolio and broad based in virtually every sector and that's been a continuation of positive migration that we've seen over the course of the past six quarters in the wholesale business. So the early signs.
In credit migration in terms of credit in terms of impaired formations you would see you would've seen impaired formations extremely low again this quarter and in fact way below pre COVID-19 levels.
And so that's another sign that would suggest that we're not seeing those kinds of things happening now with that said, obviously, we're guiding towards a normalization in rates and I think some of the wage pressure that service cost pressure in energy cost pressure is one of the reasons why we think that normalization will occur, but theres always a lag to that and Thats why were four.
Casting it to happen towards the end of this year and into next year is probably when youll start to see some of those effects, but we don't see a material step function in terms of impact we just see that as a catalyst to get us back to something that feels a bit more normal versus the really abnormally good conditions, we're experiencing right now.
Okay I understand.
I want to go back to the discussion on <unk>.
<unk> and <unk>.
Bank of the west and from a little bit of a different angle I think there is a plausible scenario, where the forward looking indicators could change significantly between now and year end again possible scenario necessarily the absolute scenario, but possible scenario.
What would what would that do for CET, one just from the bank of the West perspective, I understand what it might do to bima.
BMO CET, one, but with the credit with credit reserves, you've built into the acquisition could that absorb higher credit density or you might have to raise more capital to offset that type of.
Scenario.
So Paul.
We only have a couple of quarters here ahead of us. So there's not a lot of time between now and closing yes. As you said things may change conditions may change.
And depend.
Depending upon the analysis at closing those analyses are all performed at closing date the way. They look at closing date, we talked about the fact that.
We have pretty much neutralized the impact of interest rates.
Credit Mark could get bigger we could have a higher second day AR reserve.
If conditions change meaningfully, but I don't expect that to necessarily have a significant impact on our capital ratio.
As we sit here today, we feel actually Daryl said earlier that our capital forecast is actually a little bit ahead of where we thought we were going to be when we announced the transaction back in December . So you know I feel comfortable that.
The numbers that we are looking at.
Are quite adequate even if conditions change a little bit here between now and then.
Okay understood I'll leave it there thank you.
Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
Good morning, So just maybe a quick detailed question.
Those syndication gains that were a little lower in the U S business this quarter.
Or is that reported in your fee income.
Is that just in the line referred to as other revenue.
And I think these Mario yeah.
I see it there. Thank you that's why it was down Okay now more broad question looking at the nature of loan growth.
Commercial real estate construction is still pretty good are in fact, improving again and fairly strong growth to non bank financial services companies I would've thought with the environment changing in Q2 that growth in that area. So financial sponsors and private equity would have started to slow somewhat.
What are you seeing that that's continuing to drive growth in financial services lending non bank.
<unk>.
And the growth in commercial real estate, what what's driving that why is that sort of coming back strong.
Dave you want to take that one.
Sure.
Well the commercial real estate continues to be a very good <unk>.
This for us on both sides of the border.
As you know we're still on both sides of the border pretty significantly underweight in that business vis vis our competitors. So it's gone it's been good growth, but it doesn't.
The impact as much as it would with others as we grow there.
Positive we are still seeing.
Good opportunities I think it will probably slow down in some cases, but on both sides of the border.
Really deep relationships with strong long term.
Real estate clients and I think that will that will still continue although there is certainly some slowdown in some businesses, where we haven't been.
As active so it won't impact us as much as it relates to the financial side I just want to make sure you're clear on that the growth.
And that's mostly in the U S is all in the investment grade side of our business. So it's it's providing capital.
For financial sponsors that are backed by capital calls, it's not the growth that we've seen has been much more modest in what we where we're financing individual portfolio companies.
And that business will ebb and flow based on transaction activity.
But I wouldn't want you to assume that that business that's grown as not all the growth is almost all investment grade does that help.
Yes, I wasn't assuming that that was leveraged lending.
Yes.
The high quality stuff, but even that business are there indications that activity with private sponsors or financial sponsors and private equity firms are starting to moderate.
It's a good question Theres still as my partner, Dan Barclay reminds me all the time, there's thought couple of trillion dollars of unused capacity out there.
It's probably slowed down a little bit since year end, but we still see pretty good backlogs and the business in the commercial side is clearly more on the mid market size. So not the mega deals. So in that area that continues to be a strong area and I think actually that we'll get.
Probably more time with sponsors over time, because the multiples and those businesses are a little bit smaller a little bit lower.
So I think it could certainly slow down as activity does but.
I would not.
Not underestimate the ability of our financial sponsor group.
Our clients to continue to invest and do well so but.
It goes up and down and it's at a good point right now.
Okay. Thanks.
Muscle.
Yeah.
Thank you.
Next question is from Lamar per Saad from core Mark Securities. Please go ahead. Your line is now open.
Thanks, I just wanted to circle back to the net revenue synergies on the back of the last of the $4 $15 million to $550 million.
Is that Canadian or U S dollars and how is that expected to kind of add more front end loaded or backend loaded.
In U S dollars.
You know at this point.
Clearly there is going to be a ramp up towards the back end of that time period.
But I think when you get to year three you are going to have.
<unk> portion of that is coming into.
The run rate revenues.
Again as I said, if you can just give us a quarter or two we will give you a more specific perspective on both the timeline as well as the dollars.
Okay. That's fair and I guess, then just to clarify is that just because you mentioned it was a net number so this should be.
Thinking of $5 50, I don't want to beat it to death, but that should be in addition to the I guess 670.
Synergy guidance that you guys offered at the time of the deal is that fair to suggest that is correct.
Okay. That's it for me thanks.
Thank you.
The next question is from Mike or whereas then I think from Stifel. GMP. Please go ahead. Your line is now open.
Hi, Good morning, maybe just a quick question for Pat.
Just looking at the historical performance on the PCL ratio for bank of the West are longer term, obviously, a very different experience than what <unk> reported in the U S business and I'm just wondering when you combine that business I'm not sure. If the book has been.
Sort of a change or will be changed materially to sort of.
Gravitate more toward your comfort level on credit risk, but.
What does that do to your your PCL ratio in a downward scenario, if we do get a recession and maybe it's on a run rate basis is it incrementally positive negative or somewhat neutral.
Yes, thanks for the question Mike.
Actually I don't actually agree that there that their credit history is significantly different from ours when I look at their at their provisioning rate over the course of time.
Actually reasonably consistent with when we look at their credit profile as well both in consumer and wholesale we see it as very consistent with ours and a lot of overlap in terms of the sector exposures and even the weightings of sectors, we see pro forma the weightings that we're gonna have in sectors will be reasonably consistent with what we've got actually right now.
And so we don't anticipate making material changes the only place that they have a slightly different exposure to us is in the RV and marine segment that segment performed differently during the financial crisis. So maybe that's what you're referring to but we like that business as well, we think it's a nice complement to the consumer.
And I think I have to reiterate to the in both the consumer and the wholesale segments. They're starting position is the same as ours, which is a really really strong credit profile, particularly in consumer and so we're not concerned at this point in time with the merger of their risk profile and ours, we see it as very similar.
Complementary and don't anticipate making any material changes and it certainly would not affect my guidance in terms of forward PCL.
Okay. It was actually the financial crisis periods, you were saying that that business is something that you still like and I'm guessing that that.
Yes, the adjudication in that business has changed over time.
Yes, it's hard for me to answer that question. We don't I don't want is typhoon said given some of the legal restrictions, we don't have deep detail on the history of that business, but we know a fair bit about it and we've done a lot of due diligence on the RV and marine portfolio, we like the business and we like their expertise their they've got some really re.
Well developed analytics and so we would anticipate continuing to remain there and would not anticipate it materially affecting our risk profile going forward.
Okay. That's helpful. Thanks, very much for your time.
Thank you that concludes today's question and answer session I would like to turn back the meeting over to Mr. Darrow might well. Thank you operator, and thank you all for your questions I'll conclude very quickly with a few key themes number one we continue to deliver good financial performance in the second quarter number two we're strategically investing to deliver.
Growth and efficiency over time number three our superior risk management remains a differentiator and we believe it will continue to be and number four we have an advantaged business mix is positioned to take advantage of the global trends that I talked about at the beginning of the conference call. So thank you all for participating in today's call and we look forward to speaking to you again in August .
Thank you.
France has now ended please disconnect your lines at this time and we thank you for your participation.