Q4 2022 Bank of Montreal Earnings Call
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Please standby your meeting is about to begin please be advised that this conference is being recorded good morning, and welcome that BMO financial group's Q4, 2022 earnings release and conference call for December 1st 2020 to your host for today is Christine deal. 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 Ketsana, our Chief Financial Officer, and P. O I grow while 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 and Delon command.
From BMO wealth management as noted on slide two forward looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties actual results could differ materially from these statements I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management measures performance on a reported and adjusted basis.
And considers both to be useful in assessing underlying business performance, Daryl and typhoon will be referring to adjusted results in their remarks, unless noted otherwise noted as reported and with that I'll turn the call over to Joe.
Thank you Christina and good morning, everyone.
Today, we announced adjusted earnings per share of $3.04 for the fourth quarter closing out another strong year, where we delivered record net income of $9 billion and EPS of $13 23.
This year, we continued to execute on our strategy to strengthen and grow each of our diversified businesses to deliver sustained performance.
Of note, including 2022, we've achieved consistent pre provision pretax earnings growth and met our commitment to positive operating leverage in each of the last five years.
Over that period, our efficiency ratio has improved by over 600 basis points to 55, 8% and we remain committed to delivering positive operating leverage and efficiency improvement going forward.
We've achieved these consistent results against a rapidly changing economic backdrop that included the worst health challenge of our time and a wide range of interest rate and market conditions.
For 2022 P. P. P. T was up 7% building on 19% growth last year and operating leverage was one 3% as we increased our investment in our business to drive revenue growth and absorbed the higher impact of inflation.
Return on equity of 15, 2% this year remains above our midterm target, even while building capital through the year in advance of the acquisition.
Our proven track record of dynamically managing our business and maintaining our strategic focus to deliver a resilient operating and credit performance through market cycles. It gives me confidence that we are built to sustain performance in any environment.
Turning to our operating group performance. This year, we continue to benefit from our balanced and well diversified business model.
Investments, we've made in our flagship North American personal and commercial business.
Banking businesses together with the benefit from rising interest rates drove strong revenue growth that more than offset lower results in our market sensitive businesses.
In Canadian P&C P. P. P. T was up 15% this year with an efficiency ratio below 45% as we continued to strengthen and invest in our flagship retail and commercial banking franchise.
We've expanded our sales force and equip them with digital tools that support them in developing full customer relationships.
We offer highly competitive suite of products and features that help customers make real financial progress, including BMO insights.
Savings amplifier account same day grace as well as BMO visa eclipse offering flexible rewards on everyday purchases combined with our award winning marketing and digital capabilities. These have led to strong customer acquisition, adding nearly 200000 core net new customers. This year.
U S. P&C had its strongest year on record with PPP tee up 16%, reflecting robust revenue growth and a strong operating leverage in commercial banking, we continue to expand and strengthened our presence in attractive markets, such as Florida and Texas.
We've added new functionality to our leading treasury and payment solutions platform, including enhancing the on boarding experience and digitizing billing, resulting in significant time savings for customers and employees.
In addition, we maintained our number two deposit share across our core branch footprint and we've expanded access and reduced fees for underserved customer groups.
With a return on equity of 18% and an efficiency ratio of 48%, we have the foundation and momentum to execute the next step in our North American growth strategy building, a leading U S Regional bank together with bank of the West.
We expect the transaction to close in the first quarter of calendar 2023. Upon closing, we will significantly increase our U S footprint, providing access to major new markets and offering improved convenience and capabilities across our national customer base.
And BMO wealth management, we've made significant progress in transforming our north American platform over the past several years divesting of lower return businesses and positioning us to leverage our strengths and accelerate future growth.
Despite challenging markets in 2022, we delivered underlying revenue growth for the year, reflecting strategic investments in talent technology modernization and expanded investment capabilities that resulted in a record year for net new asset growth.
BMO capital markets diversified businesses delivered resilient performance in a difficult environment with $2 3 billion in PPG. This year, we have maintained pure leading market share in M&A in Canada and strengthened our position in key categories in the U S building, a strong foundation that will enable <unk>.
Accelerating growth as market conditions improve.
Our competitive performance in 2022 was driven by our leading winning culture and an empowered team aligned to achieving our strategic priorities with.
We've elevated our focus on one client leadership, bringing the full suite of Bmo's products services and advice to our clients and further strengthening collaboration and partnership across businesses. For example over 80% of new Investor line clients have a prior retail banking relationship with us.
We've also enhanced product and coverage models.
Holistically serve our clients commercial banking capital markets and wealth management needs together.
We've also made significant progress advancing our digital first approach aimed at enhancing employee and customer experiences to drive revenue and efficiency, we've invested across our businesses to modernize technology expand the use of cloud and employ data driven analytics for example.
And Canadian P&C, we're delivering open banking solutions that enable commercial clients to integrate their banking and accounts payable and receivable systems through innovative partnerships, such as <unk> and zero.
We've enhanced our online banking platforms driving loyalty through improved functionality and growth through market, leading digital sales with over 90% of service transactions completed through self serve channels. Our frontline employees are able to focus on delivering leading advice when our customers need it most.
As evidence of our progress we received the highest customer satisfaction ranking in the J D power 2022, Canada retail banking advice satisfaction study and our Canadian mobile banking App was recognized as the overall leader in the Q4 2022 Forrester digital experience review for Canadian mobile.
Banking apps with the highest score in six areas.
Yeah.
In support of our ambition to be our clients' lead partner and have transitioned to a net zero world, we're leading the way with innovative advice and solutions.
Through the BMO climate Institute, where build we're bridging the science policy and economics of climate change and supporting our clients as they adopt and scale climate solutions.
BMO capital markets ranks as the number one sustainability structuring agent in Canada, and the announced acquisition of radical group, which is expected to close later today will add to our leadership in carbon credit development capabilities.
Our progress in support of adjust and sustainable economy was recognized at Cop 27, as the top ranked financial institutions globally.
By the World Benchmarking Alliance's, new global sustainability benchmark.
As we look ahead to 2023, the macro environment remains uncertain with inflation and higher interest rates expected to slow the economy in the near term.
Real GDP growth in both Canada, and the U S is expected to be close to zero and we expect interest rates to peak by the end of the first calendar quarter.
With lowering rates starting in January of 2024.
At BMO will continue to dynamically manage our capital and resources just as we have through the last 205 years to grow our businesses and support our customers.
So looking forward 2023 brings tremendous opportunities to expand our reach strengthen our businesses and deliver long term value for our shareholders both organically and through the addition of the bank of the West.
As we continue to grow our diverse client base, we have more opportunities than ever to support our financial progress for our customers and communities.
I am confident that guided by our purpose driven strategy, we are uniquely positioned to deliver consistent financial performance over time.
I'm proud to be part of a highly engaged empowered and aligned team BMO and I. Thank our employees for your dedication to providing exceptional service to our valued clients I'll now turn it over to typhoon for more details on our financial results for the quarter.
Thank you Darryl.
Before.
Okay.
Okay.
My comments will start on slide nine.
Fourth quarter reported EPS was $6 51.
And net income was $4 $5 billion.
<unk> items are shown on slide 44 and include the impact of fair value management activities related to the acquisition of bank of the West, which this quarter increased net income by $3 $3 billion. As previously disclosed we also recorded a legal provision which decreased net income by 800.
$46 million.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $3 four and net income was $2 $1 billion down from $2 $2 billion last year as pre provision pretax earnings growth of 7% was more than offset by higher provision for credit losses, compared with a recovery in the fourth quarter of last year.
Performance in our P&C businesses continue to be very strong with year over year pre provision pretax earnings growth of 13% in Canada and 33% in the U S. As continued strong loan growth and margin expansion helped grow revenues at double digits.
The muted market environment lowered results in capital markets as well as in wealth management.
Total revenue was up 7% year over year, reflecting strong growth in net interest income, partially offset by lower fee income and securities gains as well as the impact of divestitures.
Total PCL was $226 million, including a $34 million provision for performing loans compared with a total recovery of $126 million in the prior year.
Ph will speak to these in his remarks.
Moving to the balance sheet on slide 10 loan growth was 17% year over year and 6% quarter over quarter.
On a constant currency basis business and government loans increased 17% from the prior year with strong growth across all operating groups.
Consumer balances were up 9%, reflecting diversified growth in the P&C businesses and in wealth.
Average customer deposits increased 8% year over year, and 4% sequentially as we remain focused on growing our core deposit base.
Looking ahead, we expect full year loan growth to be in the high single digit range, reflecting strong diversified pipelines and matching similar growth rates in deposits.
Turning to slide 11, net interest income was up 18% and up 27% on an ex trading basis from last year and up 7% quarter over quarter, driven by a strong balance sheet growth and margin expansion.
Net interest margin ex trading was up 20 basis points from last year and three basis points from last quarter due to a higher rate environment, partly offset by growth in lower yielding assets.
During the quarter the increase in loan yields continue to outpace the increase in cost of customer deposits.
In fiscal year 2023 based on the forward curves in Canada, and the U S. We expect high single digit NIM expansion compared to full year 2022 based on expanded deposit margins and higher long term rates.
As we are approaching the end of this rate cycle, our NIM expansion in the next 12 months will be more moderate than in the past 12 months due to changing deposit mix and rising deposit betas.
Moving to our interest rate sensitivity on slide 12.
A 100 basis point rate shock is expected to benefit net interest income by $499 million over the next 12 months, including the impact of higher capital base pre bank of the West closing.
We expect our asset sensitivity to decline post closing, while coinciding with the anticipated end of the current rate cycle.
To date deposit betas have outperformed our expectations.
And we expect them to move higher for future rate hikes.
Moving to slide 13.
On a full year basis expenses were in line with our expectations up 4% from the prior year or up 2%, excluding the impact of the stronger U S dollar and higher performance based compensation.
Lower expenses related to the divested businesses were reinvested in targeted areas to drive revenue growth and efficiency improvement, including in Salesforce expansion and technology.
We delivered positive operating leverage for the year of one 3% and improved our efficiency ratio by 70 basis points.
We expect to deliver positive operating leverage again next year.
Moving to slide 14.
Our capital position remains strong with a common equity tier one ratio of 16, 7%.
Excluding the benefit from fair value changes related to the bank of the West transaction net of the legal provision. The CET one ratio increased 37 basis points from the combined impact of strong internal capital generation and common shares issued under the drip.
Shall we offset by growth in risk weighted assets.
Source currency risk weighted assets were higher reflecting growth in our commercial lending businesses, which was largely offset by capital management actions.
As discussed previously the cumulative incremental capital of 150 basis points generated by the fair value management actions. Since announcement last December is expected to be offset by higher goodwill on closing due to the impact of changes in interest rates since the announcements.
We remain well positioned to close the bank of the West transaction, which we expect will be later this quarter.
Moving to the operating groups and starting on slide 15.
Canadian P&C delivered net income of 917 million.
Down from $933 million in the prior year.
Strong pre provision pretax earnings growth of 13% was more than offset by higher provisions for credit losses.
Revenue was up 11% from the prior year net interest income increased 15%, reflecting strong balanced growth and higher margins.
NIM increased three basis points from last year due to higher deposit margins.
The six basis points decline sequentially reflected loan growth exceeding deposit growth tighter loan margins and a shift of lower spread deposits, which more than offset higher deposit margins.
We expect the NIM in our Canadian P&C business to expand in 2023 relative to our Q4 margin.
Expenses were up 8% with continued investment in the business, including sales force expansion and in technology at higher salaries.
Average loans were up 12% with 12% growth in residential mortgage lending and 18% in commercial loans.
Deposits increased 9% year over year, and 3% sequentially with strong growth in time deposits.
Yeah.
Moving to U S. P&C on slide 16, my comments here will speak to the U S dollar performance.
Net income was $489 million up 19% with very strong pre provision pretax earnings growth of 33%.
Revenue was up 18% with 26% growth in net interest income due to strong loan growth and margin expansion.
The decline in noninterest revenue was mainly due to lower operating lease revenue and commercial deposit fees, which during higher interest rates higher interest rate periods gets largely offset in net interest income.
Okay.
Expenses increased 4% due to higher employee costs and technology investments.
NIM increased 42 basis points from last year, and 18 basis points sequentially predominantly due to higher deposit margins. We expect continued NIM expansion, but at a more moderate pace as deposit betas increase.
On the balance sheet average loans were up 14% from the prior year, reflecting very strong commercial growth.
Average deposits declined 3% over year over year, and 2% from last quarter in line with our expectations.
Moving to slide 17, BMO wealth management net income was $298 million down from $349 million last year welfare.
Wealth and asset management net income was $221 million down.
Down $70 million as growth in net interest income and new client assets were more than offset by divestitures and weaker global markets.
Insurance net income was $77 million compared with $58 million in the prior year.
Expenses were down 9%, mainly due to the impact of divestitures, partially offset by investments in the business.
Turning to slide 18, BMO capital markets net income was $363 million compared to $536 million in the prior year, reflecting the impact of the ongoing weakness in the market environment, but up 35% quarter over quarter.
Compared with the prior quarter revenue in investment and corporate banking was up 23% down to higher corporate back.
Down due to higher corporate banking revenue and lower markdowns on loan commitments and global markets was up 4% on higher client activity.
Expenses were up 19% due to higher technology investments and higher employee related costs.
Turning now to slide 19, corporate services net loss was $104 million compared to $107 million in the prior year.
To conclude our overall results for the quarter and the full year were strong and continue to demonstrate the advantage of our well balanced diversified business mix. We continue to focus on managing our company dynamically to continue growing profitably.
Looking ahead to 2023, we expect the economic environment to remain challenging in the near term with continued increases in interest rates slowing growth and volatility in markets.
We expect loan and customer deposit growth in the mid to high single digits on a year over year basis, and total bank NIM ex trading to expand during the year as interest rates continue to rise.
Overall, we expect the pace of expense growth to continue to slow while sustaining investments in key growth areas at.
At the same time, we will be maintaining our commitment to achieve positive operating leverage for the year.
And with that I will turn it over to Piyush.
Thank you Tiffany and good morning, everyone.
We had strong risk performance this fiscal year supported by the steady economic recovery during the first half of the and a strong risk management discipline across the bank.
Starting on slide 21 for the fiscal year, the total provision for credit losses was $313 million or six basis points.
Embed provisions, whether you have a $502 million or 10 basis points compared to 11 basis points in 2021.
We recognized a release of $189 million from the performing loan provision this year largely due to the economic recovery and reduce uncertainty from the pandemic on credit conditions in the first half of the year.
And the second part of the year, we started building provisions on performing loans, reflecting the weaker economic environment.
Gross impaired loans decreased to 2 billion, a 35 basis points compared to 46 basis points a year ago.
Turning now to the current quarter and slide 22.
Despite headwinds from inflation and interest rates Q4 was another strong quarter in terms of credit performance.
Total provision for credit losses was $226 million compared with a provision of $136 million last quarter.
Provisions for the quarter were $192 million of 14 basis points up from $104 million or eight basis points in the third quarter.
Although our impaired provisions for credit losses were up from very low levels in Q3, they remained lower than pre COVID-19 levels.
Similar to last quarter, the strong impaired loan performance is due to low formations and low loss rates on those formations.
Retail impaired losses of $117 million in Canadian P&C, and $10 million and U S. P&C.
The modest increase in embedded PCM is consistent with the underlying measures such as a modestly increasing delinquency rate in some unsecured products, which remain well below pre pandemic levels in our corporate and commercial businesses, we reported impaired loan provisions of $25 million.
In Canadian commercial $37 million in U S commercial and $5 million in capital markets.
And while up from last quarter represent a gradual normalization that we have been expecting with no systemic concerns.
Moving to slide 23, the provision for credit losses on performing loans was $34 million this quarter, reflecting the weaker economic outlook and portfolio growth largely offset by continued reduction in pandemic uncertainty and portfolio credit improvement, including the benefit of risks.
<unk> transactions this quarter.
Given the strong credit profile of our current portfolio and our own forecast for impaired losses.
We remain comfortable that our $2 $5 billion of performing loan allowances provides adequate provisioning against loan losses.
And to put that into perspective. This $2 5 billion provides coverage of 44 basis points over our gross performing loans compared with a coverage of 36 basis points before the pandemic.
On slide 24 impaired formations were $499 million and gross impaired loans were flat relative to previous quarter.
Both formations and gross impaired loan rates are still below pre COVID-19 levels and a low come back to our last decade of performance.
Turning to our mortgage portfolio.
Our delinquency rates remain very strong.
On slide 26.
You can see that over the coming year, only 12% of our portfolio is maturing and off that a very small portion is of the overall credit quality.
We are proactively reaching out to customers, who we think are most likely to have future challenges at renewal and we have had a positive customer response to this outreach and they have not been any observable increase in delinquency at mortgage renewal.
Over the past several months I've had a chance to review our portfolio and underwriting standards and see for myself the high quality of the portfolio overall, the robust structures and underwriting practices as well as the strong risk management capabilities and discipline.
The sound Foundation will serve us in good stead as consumers and businesses adapt to the impact of high inflation and interest rate increases, while the macroeconomic environment and geopolitical situation remains uncertain.
While we are pleased with the low impaired losses. This quarter, we do expect our embedded PCL rate to gradually move towards a pre pandemic experience through fiscal 'twenty three in the range of high teens to low <unk> in terms of basis points.
I will now turn the call back to the operator for the Q&A portion of this call.
Thank you.
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For your patience.
And your first question is from Ebrahim, Pune wallet from Bank of America. Please go ahead.
Had a question around just.
Commercial customer base, one give us a sense maybe.
Dave gasoline if you are on the line.
How is the commercial borrowers are holding up in piece of the higher interest rates and secondly, just a sense of where the demand is coming from I think that'll you mentioned zero percent GDP growth next year in that backdrop.
Where are you seeing new demand coming from and other areas, where the bank is tightening lending. Thank you Dave.
Thanks for the question as Darryl Davis on the line. So Dave why don't you give it a start and if I have anything to add.
Sure.
Great question.
The first part of it.
The clients, both in Canada, and the U S are holding up quite well.
Their capital bases are strong probably stronger than pre pandemic rates have been.
So far kind of a modest impact it will impact some more than others, but in many cases, our borrowers have interest rate protection.
The demand.
Across our businesses and I'm talking about the demand our customers see.
Is probably dropping a little bit as the economy weakens and I would expect that to probably continue into the new year to some extent as we move into more of a.
Recessionary period.
And I think that correspond with probably we had very strong loan growth this year.
Strong in terms of client acquisition as well as.
Large increases in some of our businesses that are revolving.
For example, as asset based lending or our auto dealers, where they built that up but I expect that to diminish a little bit next year.
Still good growth still good client acquisition, but overall.
Probably a less and less in loan growth next year, and then lastly, just to kind of put up.
An awful lot of time in the last Ah.
A couple of months, Daryl myself, Dan Barclay Dell, everyone spending time with our with our clients. They are still optimism there's still lots of good things went out there, but there's definitely a little bit less optimism than there was a year ago, just as a wade through all of the dynamics going on.
Both the U S and Canada. The health is strong I feel very good about our broad based growth.
And the momentum continues to be very good on both sides of the border and adding the right kinds of clients that will be good clients. Both for commercial wealth capital markets, where we really have done a great job I think of.
Putting all of the businesses together as we think about our clients. That's the long answer I Hope I gave you a good start and maybe Darryl happen before that.
Yeah. The only thing I would add Abraham is when I listen to Dave.
I agree with all that in I would say you should think about it in the category of what you might naturally expect to happen, we do see a little bit of a slowing down in the client base, we do not see a slamming the brakes.
The consequence of that as we come from a pretty healthy position. The book is healthy the momentum is good.
We turned in this business outperformed the market in most environments and I would expect that we will do the same going forward next year, you probably wont see the loan growth next year that you saw this year, but you're still going to see loan growth because the customers that we select tend to be the good ones.
And they tend to have good performance through time, and we tend to go where they go that's what I think you should expect.
Just one quick follow up.
Chatting about interconnected between banks and non banks.
Any risk that you see particularly well the system also be more in terms of providing leverage to the nonbank entities.
Yeah.
Yeah.
It's a perpetual question isn't it ebrahim I wouldn't say that I am seeing that risk enhance.
If I heard you right I apologize if I missed the question, but as far as the interconnectedness I think you said between the banks and the non banks I wouldn't see an alternative <unk> studies. This question pretty carefully himself on both sides of the border I wouldn't say that in the current environment. There is a.
Pronounced difference I don't see an enhanced risk we always monitor it we look at the trends in the market, but I don't see something today that is concerning me a lot more than a data quarter or two ago would you add anything.
I mean, I would just say that the proof is and if you look at the last one or two quarters there.
There hasnt been a shortage of events that have happened in the market and we've always come out very well. So the interconnectedness wireless that is well contained Abraham and I think banks like us.
Which have a very good risk discipline in how we manage our client exposure, which client comes in so again within this non bank space, you've got a wide variety of clients and I know, it's only been in the news, but we've actually come out very well so I actually feel very good about the target market decline base, we have and the structure that we have with them. So I <unk>.
Wouldn't highlight any area of concern.
This space yet.
That's helpful. Thank you.
Thank you. The next question is from many Rodman from Scotiabank. Please go ahead hi.
Good morning, a question on capital.
Where do you see your CET one ratio on deal close of bank of the West If you could give us an update on that.
Yes, sure I mean, our capital expectations.
Really have not changed since last year, when we announced the transaction, we still expect to be out of our 11 11 or above.
Starting Q2 post closing the transaction.
So that picture has stayed the same for the past four quarters.
And obviously it will continue to build from there.
And we feel pretty good about how we've been able to position ourselves for the closing.
So Darryl would you feel comfortable being closer to 11 on deal close is that still something that is is acceptable to you.
Yeah.
Yes.
We're very consistent in our positioning here, we believe today, what we believe the last quarter. When you asked this question that will be in the range that typhoon <unk> talked about in the answer to your question is yes.
Okay, and then maybe just a follow up in terms of how you're managing capital in the lead up to this deal closing and just a question of.
Is there anything different in how you're managing capital and specifically.
Are there certain types of business that you are saying no to because of considerate RWD considerations that you would otherwise see that's too.
Look I mean, we had very strong loan growth during the quarter, obviously that should be a proof that we are still.
Doing all of the business with our clients that we have.
Thank you.
Thank you. The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Yes, maybe if I can just oh good morning, if I could just follow up on the set one ratio Daryl or Turkmen.
And I know youre, saying at or above in Q2, but if the deal closes in Q1 I would assume at the end of Q1, you could be below 11%.
Is that a fair assumption.
And then building above 11% just so there is.
Just wanted to clarify the message there.
Yeah, I mean, the comment that I made we typically have referred to always the quarter following the closing quarter.
We could fall below 11% at closing if it closes earlier than the second quarter, but we.
We will move up above 11% in the second quarter.
And maybe just a follow on.
Is there stuff that you're doing I know youre growing the loan book is there other things that youre doing behind the scenes to kind of free up capital in terms of getting rid of blocks of business or a securitization anything else.
0.2.
Yes, and as you probably know and we've talked about this a little bit over the past two or three quarters with our investors.
For the past four or five years, we have been users of some of these risk transfer transactions, we're pretty good at it we're pretty knowledgeable and this year. It was not much different than past years and the way we have used these.
These tools and and we continue to leverage these capabilities and the knowledge base that we have piyush. If you want to comment on that more.
Yes, I would just say that you know as part of good risk discipline.
Good Bank was probably as a result, many of these risks dynamic practices. So they don't sell syndications enteric transfers. All of these are just part of October Kate we've been actively using them and as we get into the weaker economic cycles. It's a good place.
Think about your portfolio and dynamically manage the good part of this also is on the other side, we have investors who up.
Putting pools of capital to play and so there is a mutual dialogue always happening and so I think this.
This is active risk management that continues and will continue through 'twenty three.
Great and then just a second question just quickly on the Nims.
I think you gave and I apologize.
<unk>, if I missed it but does some some indication of Directionally, where do you think it will go with the all bank level can you talk a bit a bit more about.
About how it would have.
All of that Canada in Canada, and the U S and whether it would be more so upfront front end loaded or back end loaded any color would be helpful. Thank you sure absolutely I think we feel very good about our NIM not only this quarter, but probably more importantly, looking into next year.
And I suspect that we will continue on a relative basis to outperform just because we have done over the past two two and a half years I have guided for a high single digit year over year NIM expansion.
And you have seen the numbers I mean in the U S. We have very strong NIM expansion.
In the two countries are displaying a little bit of different dynamics in Canada. There were three factors this quarter.
Sort of played a role one of them was a very strong loan growth over deposit growth so that by itself.
Had almost like a five basis point type of impact.
And mortgage prepayments had a couple of basis points, and then prime VA spreads in a rising rate environment always in the quarter that it happens pressures, but we expect our NIM in Canada to expand I'll actually turn it over to Ernie for comments on the business side.
I suspect that.
Over the next couple of quarters, we will probably see almost a double digit expansion in our NIM in Canada.
And for the broader NIM now looking at the dynamics.
I suspect that as the rate cycle matures.
The increase the expansion in NIM will slowly.
We will be smaller in the second half of the year compared to the first half.
But over to Ernie for comments from the business side.
Thanks Typhoon Thanks for the question as well.
The notion for us on our NIM is really around having a strong NIM performance and I think we've had that over the course of this year. Our strong growth on deposit has been really key for us and that's been a focus and youll see that continuing into next year as typhoon instead, we'll see NIM expansion in next year it will be focused on.
Obviously, our core deposit growth as well as our term deposit and that as the Typhoon mentioned, we're going to see that prime TBA moderate in fiscal 'twenty, three and expect as we expect the pace of interest rate increases to just slow down and that will support obviously, our lending business. As you go forward, we don't see.
Taking place around our mortgage prepayments, which had any negative impact obviously to us this quarter and then as well just that mix you know, sometimes it's lumpy quarter to quarter, but our commitment on strong core.
Core deposit growth is key and we've been doing that this year you know we've had record levels of customer acquisition and growth in the core portfolio overall and now I will talk about the personal business in particular in Canada. What we seen is a shift yes into our term products as customers migrate.
From either the equity markets, our into our our term business or they're migrating from their everyday savings account into term.
To maximize longer term earnings, but what we're also seeing in our business is a full replacement of the shift so what we have shifted out of our checking and savings account, we've actually replaced and that's very positive for us going forward to continue to sustain and we've had flat everyday banking growth that I can use that terminology, which is.
Important is you see the shift out to term, we're replacing it with good quality deposits not only from our existing customers are brand new customers from from the street. So we're encouraged about the growth going forward and just a final comment on the year and we've got a strong performance in P&C, Canada and <unk>.
We see that momentum carrying forward into next year.
So I'm just clarify type when you say double digit is that off Q4.
Yes, it's off Q4, okay.
Alright, thank you.
Thank you. The next question is from Gabriel <unk> from National Bank Financial. Please go ahead.
Good morning.
Just to clarify the timing of the bank of the West close we still expect Q2 to 23, even though I didn't come across any shift.
Youre kind of pushed it back a little bit.
Today.
Yes, I gave I didn't see what they had to say I can only speak to ours, we're saying first quarter of 2023 and is it first fiscal quarter first calendar quarter, we don't know, but that's a pretty tight range. So as I think about it today were sort of rounding third base and everything is occurring the way we thought it would occur. So I think you can think about it in that in that range, it's pretty.
Pretty tight and pretty soon.
Got it thanks.
Now for the.
Capital position.
You know I looked at the <unk> inflation.
I thought with the loan growth, especially in commercial that we would see a bigger number there but.
Basis points of core tier one consumption from from RW wave.
Usually you know.
<unk> up into the 40 <unk>.
Where are you, particularly active in the credit risk transfer transactions this quarter or is there another explanation there.
We were we had a number of credit risk transfer transactions over the past 90 to 120 days that.
Have actually had an impact on the net net growth numbers in our WMA.
And is there a big revenue.
Given those activities.
No the cost of these transactions compare very well with respect to cost of equity in general.
Alright, and then last one sorry.
Sure.
I just wanted to say that gave you that as part of these restaurants was over time. These are acts.
The positive for the bank because it frees up capital and so as Youre, earning fees from clients you actually they've got to redeploy capital at the current market price across different areas. So from a risk management. It's a win for the bank. It's a win on the net revenue overtime. So I consider these very positive.
And just a last one there I'm looking at your wholesale.
Uh huh.
Page 27 of the supplement.
The total balances up 16, 7 billion year over year about a quarter that is from the non bank financial services category can you tell me what's in that.
Yeah.
Looking at.
The overall loan book.
Yeah.
Our financials, obviously is a very macro taxonomy and so within that you've got lots of subcategories. So if I break it up between exposures. We will have two banks two broker dealers other investment companies and you also have sponsored lending companies private equity and others.
And each of these carry a different risk profile.
We've obviously the customers we've had for a very long time the value structure the different forms of lending in those.
And so we feel good about the quality of the loans and the performance across each one of these.
I don't know if you're referring to some things which was in the news recently, but I'd just say no.
Then.
It's more plain vanilla, that's a big number.
I just want to know whats in there and get a better understanding of it so you know.
These are both categories. You mentioned those are ones now and Theyre all weather managed at all within our limits.
Concentrations of all of that is good so I wouldn't add anything that's significant.
Okay. Thank you and have a good day.
Yes.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning, I want to go back to the credit risk transfer transactions and just want to better understand.
How that comes through the P&L, if it doesn't have a big impact on revenue is.
Is it flowing through the expense line like there must be some kind of cost associated with it. So just wondering where we can see that and if theres any disclosure that would help us.
Quantify the size of that program and the potential earnings impact, yes, Paul It will come through both depending upon the transaction, we did but we don't have current disclosures.
<unk> laid out for you, but let us take that back and see if we can provide a bit more clarity on how those transactions impact our income statement.
Alright, that'd be helpful. Thank you.
And then second question.
With respect to.
Credit line utilization I guess, particularly on commercial.
Corporate customers is it kind of back to pre pandemic type levels above below and is there any kind of potential headwind there with the debt capital markets now opening back up in a potential <unk>.
<unk> out of that if you will from customers on our re paydown on the on those credit lines why don't we have Dave and Dan help you with that question Paul.
Yeah.
I think on the commercial side, it's really it's not quite back to pre pandemic, but it's in a couple of areas, where we've had good growth when I mentioned earlier, our auto dealer business.
Has actually started to return Youll, probably see that there is more cars on the lot not yet where it was pre pandemic that's actually.
It helped us increase our standards and increase the utilization.
Other areas as asset based lending.
Particularly around now and this will start to slow down as the company's gear up for the holiday season that that builds up and then that will come down over time, but nothing outside the normal.
Everything.
Back to the past I'll pass it over to Dan on the capital market side, yes.
Yeah, and I think our experiences we are still below pre pandemic on utilization is up a little bit the last couple of quarters, but nothing that I would say is concerning a percent or so.
And then I think the more robust opening of the markets is good for everybody. So that's a it's a good outcome.
Okay got it I'll leave it there thank you.
Thank you.
Question is from Lamar Prasad from <unk> Securities. Please go ahead.
Alright.
That to me is the strong sequential mortgage growth.
Relative to peers, obviously, we're seeing a slowdown across the industry can.
Can you maybe talk to us about what you are.
I'm seeing in terms of mortgage spreads one of your peers suggested that.
Relative to historical levels, and if that is true and the growth is unprofitable unprofitable maybe talk to us about the value proposition that take it taking market share in mortgages at this time, perhaps it's something around franchising cross selling opportunities any color there would be helpful and then.
Maybe if I missed it but could you talk about the outlook for mortgage growth.
For it in 2023 and domestic.
Sure. Thanks, Omar it's Ernie I will give you a summary of our strategy quickly our approach in the mortgage market is really about expanding customer relationships with existing customers as well as acquiring new customers, we know that mortgage business as a core product at a life stage wane, we can consolidate business.
As with business with with our customers. So we come at it in a couple of ways. We have a very effective mortgage specialist sales team that is out there every day talking to customers and seeking out more mortgages more business for us which in turn brings in new customers to our franchise that then we actually cross.
And if you would use that language built full relationships with them and we're very successful the majority of our customers come in with a mortgage first if I can use that ended up being our primary customers and that is really a fuel for our overall growth whether it be deposits credit card business et cetera, we've been successful over the past.
As we've been retooling that team, our digital capabilities to be able to sell accordingly, including our HELOC business as well and so that's been our focus is really around valuable sustainable customer relationship growth in <unk>.
Terms of the market right now as you can imagine with the prime TDA spread it is a little challenging is a very competitive marketplace as all of our competitors are looking as we are for new customer growth.
Is profitable and at the total relationship.
It is extremely profitable mortgage customers with other products that are bank are phenomenally more.
Obviously profitable than than a single service customer so our focus is around quality growth.
Long term customer relationship built and bringing new customers into the franchise moving forward I mean, we think we see some slowdown in the housing market.
Or anything yet.
Continue to play out in market our strategy is to be at market in our proprietary markets businesses, So well run where the where the market goes and keep pace in that direction.
Hopefully that answers. Your question, yes, that's helpful. And then maybe if I could switch gears over to Dave Casper on commercial loan growth one of the things we've seen coming out of the pandemic is that BMO was able to maintain above market rates of commercial loan growth, particularly in the U S. Could you remind us of what drove that outperformance versus your peers and then secondly, I looked.
Factors still present in the current environment. Thank you.
Well first of all.
We have grown really well in the U S. As we've expanded bolts are geographically in some of our specialties.
I've talked about some of the specialties as Darryl mentioned some of the geography.
It's Florida, whether it's Texas, whether its expanding just we have a very strong franchise and frankly.
We have an excellent record of getting referrals from existing customers.
I expect that will continue.
And I am particularly excited.
As we move into the.
New year, what's going to happen with our bank of the West colleagues. These.
These franchises together they'll both be better we will expand geographically will expand through our.
Existing specialties into the West coast.
Momentum that we have right now I just feel so good about is just going to move into the bank of the west. So Mary I expect continued growth continued growth in our client acquisition, whether it's loans or deposits and.
And as I mentioned earlier, our ability to.
Cross sell into our commercial into our capital markets business and our wealth business.
Those those businesses, referring back into commercial it's a <unk>.
Very very positive story.
Okay. So it sounds like you think you can kind of continue to outpace your kind of U S bank peers kind of fair.
Well I expect.
We will continue to grow new clients and one of the key parts of our business is the clients were growing almost 90% of those are existing and our new our either our sole where we're the sole bank.
Or were the lead bank and Thats, where the actual profitability comes from just is there any you talked about in her business entered the solar the lead bank.
Youre not going to fight overall, the ancillary services and I think that's where we will continue to do well given our offerings.
I appreciate the time Lamar, it's Daryl if I may just conflict Dave's answer.
Answered just now provokes a thought for me, which I think might be helpful. To your question, which is when you think about the franchises.
The the fact that 90% of the clients are solar lead that's a very deliberate and unique strategy for us we've talked about that for years. This builds a premium franchise in commercial banking in.
In Canada, and the U S. When you put them together.
They are the fourth fifth largest commercial bank on the continent that has important advantages because the fragmented market in the United States that Youre questioning Dave on is a really interesting one where we've got a lot of capabilities, therefore relative to hundreds and hundreds of players in that market structure.
Arguably don't and so the share can come there and the ability to have positive client selection as you go through that and add clients. So add capacity through the pandemic and today not just rely on your existing installed base to do more borrow more is very important. So that's a very deliberate strategy and it couldnt come at a better time frankly.
Because here we are about to add the franchise from the bank of the west as well. So I think it's really important to acknowledge the jobs. The teams have done in both personal and commercial but also.
The market structure that we've quite deliberately decided we wanted to take advantage of.
Thank you.
Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning.
And Daryl you both made the point that Youre capital expectations around the bank of the West haven't changed from.
A year ago, when you announced the deal or so.
From the outside looking in it does sound a little different.
What I mean by that is I think last quarter. You said you would expect the CET one ratio will be comfortably above.
11% at close and.
Sub 11% at close isn't comfortably above so what I'm curious about is what's changed what made this outlook changed from last quarter, sorry, Mario if we if we lead you to believe anything is closed we didn't communicate very well sorry, anything's changed I should say, we didn't communicate very well nothing's changed I think we've been pretty consistent.
Gently or at least we've tried to pretty consistently say that the ratio would be comfortably above 11, as you say in the first quarter post close. So we continue to look at the calendar and assume that Thats Q2 of this year and we maintain that that's where we'd expect the ratio to be so that's not we're not intending to signal any change at all right so comfortably above.
Maybe the nuance there as I heard at close.
Now I will not now but your message was that it was post close.
The quarter Apple, Yes, it's been always post close Mario correct. Okay. Okay. That's a nuance I didn't pick up on.
The other sort of related question is.
You were clear at some of your peers have been that things are slowing and we could be heading into some kind of recession mild weather or otherwise.
How do you think about your capital ratio being let's say, let's call it a little tight in the near term.
How do you think about your capital ratio how it holds up.
In an environment, where our W. A.
Density starts to increase.
As the economy slows do you do you does that worry you in any way.
Yes, so actually it's a good question.
And our position is and has always been.
Since since I joined the bank that there are three factors that impact the way we manage capital. One clearly is primarily is how the regulators think about capital and that's instead of outside.
Our sphere of influence the second factor is the environment the current environment and the expected environment that always plays a role in the way, we establish management targets and the third factor.
Is a relative capital position to peers. It is very important for us to make sure that we are not an outlier.
And so as we look forward.
And the environment that we are going into those will be the factors that collectively will inform us about where we should establish our mad.
Management capsule levels, and we will share those updates with you as time goes by.
So putting it altogether then where.
Do you sit today and I know this is going to sound blend, but there would be a very very modest risk of a capital raise to get this deal done.
True.
To get the deal done.
Okay.
Yeah to get the deal done to support your capital ratio over the next few quarters, it's unlikely there will be another capital raise and I ask it bluntly that way because that was exactly the speculation that I was hearing jump this quarter not from people that are inside the bank of course, that's the speculation.
I mean, my comments really are involved sort of not just the not the deal, but how we think about capital overall.
As Daryl said and I said.
The transaction, we feel that our capital ratios are appropriate.
Okay. Thank you.
Thank you.
The next question is from <unk> Kim from Credit Suisse. Please go ahead.
Hi, good morning, and thanks for taking my questions.
Just firstly on the cards growth.
The growth was very strong in Canada this quarter.
I'm just wondering if you can comment on what you're seeing on the on the revolving balances and how you think about cards growth next year and if that's a meaningful kind of.
Contributor to your or to your margin outlook next year from that business. Thanks.
Thanks Rahul.
I'll answer the question.
This business has had a strong performance improvement year over year and continues its a function of a number of things.
One is we've recently launched several new and very effective our products that are relevant for Canadians overall.
As a result have had record increases in our acquisition. So we're growing new customers into our franchise cross selling within our existing franchise and then overall, we're benefiting from an improvement in general market conditions on spending so our balances are indeed up.
Our revolve rate as you pointed out revolving balances, they're not up to where they were pre pandemic and we don't expect them to be moving there.
Now they will over the course of next year that will in fact improve our overall business performance, but we're starting to see a nice pick up in our overall business model, whether it be a number of customers we have their spend and their engagement level, they're spending in a variety of category and then also we're seeing some improvement.
In our overall balances the other thing to note is just recently, we launched a interesting new product against our card base, which will help again again encourage our customers to continue to do the prudent thing around their finances, and it's a it's a it's a little bit like a buy now pay later, but it's smarter option called pace smart.
Which allows our customers again to be able to do some small and lending on their credit cards. So overall I'd say the performance is strong will continue and be supportive of our overall revenue growth next year in the personal business and also the NIM as you've rightly pointed out but to a lesser extent just given the size of the balances and involved.
Thank you that's it for me.
Thank you.
And our last question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, everyone I'll keep it to a quick modeling question for typhoon.
On the preferred shares the dividend.
In the expense in the quarter and interest expense in the quarter was.
There is a lot higher than last quarter or anything was $77 million versus 47 can you remind me your activities in the quarter and if there's any upcoming activities that you know us and.
This is a good run rate going forward.
Yes, I think we had a new issuance in the quarter about $1 billion and that impacted the quarter over quarter change in the coupons.
That's the Delta between Q3 and Q4.
What was that at the start of the quarter.
It was in September I think.
Okay. Thank you.
Thank you this conclude.
<unk> and answer session I would like to turn the call over to Darryl White.
Well. Thank you operator, and thank you all for your questions I'll conclude the morning with a few key and important themes.
The year's overall results were very strong with <unk> growth of 7% continued positive operating leverage for the fifth consecutive year, our expenses remain well managed particularly given inflationary pressures we've committed to delivering operating leverage again in 2023, our credit performance remains strong.
We've got significant allowance that enables us to protect and I will say grow the bank.
And we're going forward from a position of strength with an advantaged mix that set to perform in any environment I am confident that our purpose driven strategy will continue to deliver consistent financial performance I want to thank all of you for participating in today's call. We look forward to speaking to you again in the new year.
Thank you.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.