Q4 2022 Bank of Montreal Earnings Call
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This conference is being recorded so it's going to stay home if they told US you see.
Please standby your meeting is about to begin please be advised that this conference is being recorded good morning, and welcome to that'd be more financial groups Q4, 2022 earnings release and conference call for December 1st 2022.
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 to Jordan, Our Chief Financial Officer, and Pierre Shangri-la, 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 Delek.
Kananga from BMO wealth management.
On slide to 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.
Assessing underlying business performance.
Lynn Tyson 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 condition.
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 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 P. P. P T 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 onboarding 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 the 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.
PON closing, we will significantly increase our U S footprint, providing access to major new market 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, a 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 P. P. P. T. This year, we've 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 acts.
Celebrated 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.
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.
In 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 pissed Pan 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 forest or digital experience review for Canadian mobile.
Banking apps with the highest score in six areas.
In support of our ambition to be our clients' lead partner and a transition to a net zero world, we're leading the way with innovative advice and solutions.
Through the BMO Climate Institute, where bill 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 supportive of Justin's 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 and 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'm confident that guided by our purpose driven strategy, we are uniquely positioned to deliver consistent financial performance overtime.
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 take phone 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.
Net income was $4 $5 billion adjusting 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.
As we disclosed we also recorded a legal provision which decreased net income by $846 million.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $3.04 and net income was $2 $1 billion down from $2 $2 billion last year as pre provision pretax earnings growth of 7%.
It's 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 Peugeot.
As usual I'll 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.
Yeah.
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 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 'twenty 'twenty three 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 the past 12 months use of changing deposit mix and rising deposit betas.
Okay.
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 declined 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 improvements, 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 back 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 capsule F 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 announcement.
We remain well positioned to close the back of the restaurants action, which we expect will be later this quarter.
Yeah.
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 margin.
NIM increased three basis points from last year due to higher deposit margins.
Six basis points declined sequentially reflected loan growth exceeding deposit growth tighter loan margins and a shift to lower spread deposits, which more than offset higher deposit margins.
We expect an eminent 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 and 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.
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 period gets largely offset in net interest income.
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.
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 expectation.
Moving to slide 17, BMO wealth management net income was $298 million down from $349 million last year.
Wealth and asset management net income was $221 million down $17 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 investment and corporate banking was up 23% down to higher corporate back.
Down due to higher corporate banking revenue and lower markdowns on loan commitment 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 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.
Typhoon 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 in.
In fact provisions, whether you have a $502 million or 10 basis points compared to 11 basis points in 2021.
We recognize the 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.
And the second part of the year, we started building provisions on performing loans.
Shifting 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 Q.
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 or 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 remain 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 formation.
Retail embedded losses of $117 million in Canadian P&C, and $10 million and U S. P&C.
The modest increase and embed BCS it's consistent with the underlying measures such as a modestly increasing delinquency rate and some unsecured products, which remain well below pre pandemic levels in.
In our corporate and commercial businesses, we reported impaired loan provisions of $25 million and Canadian commercial $37 million in U S commercial and $5 million in cabinet in the market.
And while up from last quarter did represent a graduate of normalization that we had been expecting with no systemic concerns.
Moving to slide 23.
The provision for credit losses, and performing zones was $34 million this quarter.
The weaker economic outlook and portfolio growth.
Largely offset by continued reduction in pandemic uncertainty.
Portfolio credit improvement, including the benefit of risk transfer transactions this quarter.
Given the strong credit profile of our current portfolio and our own forecast for Mpeg losses.
We remain comfortable that our $2 $5 billion of performing loan allowances provides adequate provisioning against his own losses.
And to put that into perspective, there's $2 5 billion dollar provides coverage of 44 basis points over our gross performing loans compared with a coverage of 36 basis points.
For the pandemic.
On slide 24 impaired formations were $499 million and gross impaired loans were flat relative to previous quarter.
Both formation and the gross impaired loan rates are still below pre COVID-19 levels and a loaf come back to our last decade of performance.
Turning to our mortgage portfolio.
Delinquency rates remained 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 as well 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 or a new one.
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 disciplined.
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.
So while we are pleased with the low impact losses. This quarter, we do expect our embed PCL rate to gradually move towards a pre pandemic experience through fiscal 'twenty three in the range of high teens to low twenties in terms of basis points.
I will now turn the call back to the operator for the <unk>.
Q&A portion of this call.
Thank you.
We will now take questions from the telephone lines. If you have a question on using a speaker phone. Please lift your handset before making a selection. If you have a question. Please press star one on your devices keypad.
So the question. Please press star cute please.
Please press star one at this time, if you have a question there'll be a brief pause.
Thank you for your patience.
And your first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Hey, good morning.
I had a question around just our commercial customer base, one give us a sense maybe.
Oh these gasoline if you're on the line I don't know how 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 you mentioned vehicles and GDP growth next year in that backdrop really seen no demand coming from and are there areas, where the bank is 19 lending. Thank you.
Abraham Thanks for the question, it's Darryl Davis on the line. So Dave why don't you give it a start and if I have anything to add.
Sure.
A great question and of course 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 our rates have been so.
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 weakened and I would expect that would probably continue into the new year to some extent as we move into more of a recessionary period.
And I think that.
Correspond would probably we had very strong loan growth. This year are very 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 rough.
Aldo 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 I'm, probably a less and less in loan growth next year, and lastly, just to kind of put up.
Spend an awful lot of time in the last so.
A couple of months they are old myself, Dan Barclay tell everyone spending time with our with our clients.
There's still optimism, there's still lots of good things going out there, but there's definitely a little bit less optimism than there was a year ago, just as a way through all of the dynamics going on in 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 then maybe they will happen before that.
The only thing I would add is Abraham is when I listen to Dave that 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 slowing down in our 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 are.
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 in there.
I tend to have good performance through time, and we tend to go where they go that's what I think you should expect.
And then just one quick follow up.
So what I'm trying to think about interconnectedness between banks and Nonbanks.
Did you see particularly for the system most would be more in terms of banks to like leverage to the nonbank entities.
Yeah.
It's a it's a perpetual question isn't it Abraham I wouldn't say that I'm seeing that risk enhance the if if I heard you right I apologize if I missed the question, but as far as the interconnectedness I think he said between the banks and the non bank I Wouldnt see and I'll turn to appeal shares studies. This question pretty carefully himself on both sides of the border I wouldn't say that.
In the current environment, there's a 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 it did a quarter or two ago would you add anything to us.
I'll, just say that the proof is and if you look at the last one or two quarters are there hasn't been a shortage of events that have happened in the market and we've always come out very well. So the interconnectedness wireless data rather contained Abraham and I think our banks like us.
We have a very good risk discipline in how we manage our client explosion, which client comes in so again within this non bank space, you've got a wide variety of clients and I know some have been in the news, but we've actually come out very well so I actually feel very good about the target market. The client base, we have and the structures, we have with them. So I wouldn't.
Highlight any areas of concern in the space yet.
Thank you.
Thank you. The next question is from many grauman from Scotiabank. Please go ahead.
Hi, good morning.
Question on capital Typhoon, where do you see your CET one ratio on deal closer thing because the west if you could give us an update on that.
Yeah sure I mean, our our capital expectations really have not changed since our last year, when we announced the transaction.
We still expect to be at 11 11 or above.
Starting Q2 post closing the transaction.
So that that picture has stayed the same for the past four quarters.
And you know 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.
And so do you or would you feel comfortable being closer to 11 on deal close is that still something that is is acceptable to you.
Yeah.
Yeah, we were 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're saying no to because of considerate RWD considerations that you would otherwise see yesterday.
Look I mean, if we had very strong loan growth during the quarter, obviously that shouldn't 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.
Yeah.
Yeah, maybe if I can just oh good morning, if I can just follow up on the set one ratio yeah, Alex again.
And I know, you're you're saying at or above in Q2, but if the deal closes in Q1 I would assume at the end of Q1, you can be below 11%.
Is that a fair assumption like AR, and then there'll be an above 11% just over there.
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 you know we will move up about 11% in the second quarter.
And maybe just to follow on isn't.
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 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.
You know for the past four or five years, you know 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 are these tools and and and we continue.
To leverage these capabilities and the knowledge base that we have Oh sure. If you want to comment on that more yeah.
Yeah, I would just say that you know as part of good risk discipline.
So a good bank, but it's probably as a result too many of these risks dynamic practices. So you don't sell syndication synthetic tranche, whereas all of these are just part of like the way we've been actively using them and as we get into the weaker economic cycles. You know, it's a good base.
If you think about your portfolio and dynamically manage the good part of this also is on the other side we have investors.
Putting pools of capital today, and so there's a mutual dialogue all this happening and so I think this is active risk management that continues and will continue through 'twenty three.
Yeah.
Great and then just a second question just quickly on the NIM I think he is and I apologize if I missed it but does some some indication of what Directionally, where do you think it will go with the all bank level can you talk a bit a bit more about how it would happen and for that Canada in Canada, and the U S and whether it would be.
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 ways. 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.
And the two countries are displaying a little bit of different dynamics in Canada are there were three factors this quarter that 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 bas spread and in a rising rate environment always in the quarter that had happened you know pressures, but we expect you know 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 name in Canada.
And for the broader NIM now I'm looking at the dynamics.
I suspect that <unk>.
As the rate cycle matures and the increased expansion in NIM will slowly.
Yeah, we'll we'll 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 for the question as well.
The notion for us on R&D, and it's 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 cool for us and that's been our focus and you'll see that continuing into next year as type things that we will see an expansion in next year it will be focused on.
Our core deposit growth as well as our term deposit and that as that type two mentioned, we're going to see that prime tpa moderate in fiscal 'twenty, three and expect as we expect the pace of interest rate increases.
Just slow down and that will support obviously, our lending business as we go forward, we don't see much taking place around our mortgage prepayments, which had any negative impact obviously this quarter and then as well just that mix you know, sometimes it's lumpy quarter to quarter, but our commitment on strong.
Core deposit growth and we've been doing that this year you know we've had record levels of customer acquisition and growth in our core portfolio overall and now I will talk about the personal business in particular in Canada, what we see is a shift yet into our term products as customers migrate.
From either the equity markets into our our term business or they're migrating from their everyday savings account into term are to maximize longer term earnings, but what we're also seeing in our business is a full replacement of the share than what we had shifted out of our checking and savings accounts, we've actually replaced and that's very.
Positive for us going forward.
Continue to sustain and we've had flat everyday banking growth that I can use that terminology, which is important as you see that shift out of 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 and just a final comment on the year and we got it.
Drunk or financing.
Canada, and we see that momentum carrying forward into next year.
Very close I'm, just clarify type when you say double digit is that off Q4.
Yes, it's off Q4.
Thank you.
Thank you the.
The next question San Gabriel <unk> from National Bank Financial Please go ahead.
Yeah.
Good morning, just to clarify the timing of the bank of the West coast, but you're quite.
You know I do.
Come across I mean.
Your your peer kind of pushed us back a little bit.
So their deals with it.
Yeah, I I gave I didn't see what they had to say I can only speak to ours, where we're saying first quarter of 2023.
At first our fiscal quarter or 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 a lot.
Now for the capital.
Capital position.
You know I looked at the our they'll be already in place.
I thought with the loan growth.
On commercial we.
We would be a bigger number there, but you know for both base and points to a.
Closer to one times something from from RW waves.
Oh, you're usually.
One is up into the 40.
Where are you, particularly active in the credit risk transfer transactions this quarter or is there. Another explanation no I believe 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 it sounds like.
No the cost of these transactions compare very well with respect to cost of equity in general.
And then the last one.
I was just going to say that gave it as part of these restaurants was overtime.
I actually positive for the bank because it frees up capital and so as you're learning piece from clients you actually get 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 then just the last one there are I'm looking at your wholesale loan.
27 of the supplement.
The total balances up.
Somebody 1 billion year over year or about a quarter that is from a non bank lender.
Cancel services category.
Tell me whats in that.
Yeah.
Yes.
You're looking at though the overall loan book.
Yeah.
Our financials you know obviously is a very macro taxonomy and so within that you've got lots of subcategories, if I break it up between exposures. We will have two banks two broker dealers or other investment companies and you also have sponsored lending companies private equity and others.
And each of these carry a different risk profile a we've obviously 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.
Dan.
It's more plain vanilla, that's a big number whenever they jumped out I just want to know what's in there and get a better understanding of it.
You know.
The category with a bunch of other ones now and they're all well managed at all within our limits are concentrations of all that is good so I wouldn't add anything that's significant.
Okay. Thank you and have a good day.
Yeah.
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 there's any disclosure that would help us.
Quantify the size of that program and the potential earnings impact.
Yeah, Paul It will come through both depending upon the transaction.
But we don't have current disclosures and that <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.
That'd be helpful. Thank you.
And then second question.
Is with respect to our credit.
And utilization I guess, particularly on commercial.
And 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 and our potential.
I would've thought if you will from customers on a repay down the hall on the on those credit lines why don't we have Dave and Dan help you with that question Paul.
Yeah I.
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 had good growth when I mentioned earlier, our auto dealer business.
It has actually started to return you'll probably see that theres more cars on the lot not yet where it was.
Pre pandemic, that's that's actually.
It helps us increase our standards and increase the utilization.
Other areas asset based lending.
And that's particularly around now and this will start to slow down as a company's gear up to the holiday season.
So nothing then that will come down over time, but nothing outside the normal.
What would you would have expected.
We'll move to Dan on the capital market side.
Yeah, and I think our experiences were still below pre pandemic on utilization is up a little bit the last couple of quarters, but nothing that I would say is concerning you know a percent or so and then I think the more robust opening of the markets is good for everybody. So it's a it's a good outcome.
Okay got it I'll leave it there thank you.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Hi, Sam.
That to me is the strong sequential our mortgage growth.
Relative to peers, obviously, we're seeing a slow down across the industry.
Can you maybe talk to us about what your.
I'm seeing in terms of mortgage spreads in one of your peers suggested that.
Relative to historical levels and if that is true in the gross profit.
Profit on the unprofitable, maybe talking about the value proposition that can't get taking market share in mortgages. At this time, perhaps is something around franchising and cross selling opportunities any color there would be helpful and then.
Maybe if I missed it but did you talk about the outlook for mortgage growth looking.
Looking forward in 2023 and domestic.
Sure. Thanks, Ernie I will like to 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.
This is a business 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 I'm talking to customers and seeking out more in mortgages more business for us, which in turn brings in new customers to our franchise that then we actually.
<unk> thousand 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 end up being what our primary customer and that is really a fuel for our overall growth whether it be a positive credit card business et cetera, we've been successful over there.
Past as we've been retooling that 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 and in terms of the market right now as you can imagine with the prime.
It can save a little challenging he is a very competitive market places all of our competitors aren't looking as we are offering new customer growth, where it is profitable and at the total relationship I have with respect to get extremely profitable mortgage customers with other products that are bank are phenomenally more often think profitable then.
And a single service customer so our focus is around quality growth long term customer relationships and bring new customers into the franchise moving forward I mean, we think we've seen some slowdown in the housing market.
Or anything yet.
The play at market, our strategy is to be at market and our proprietary market businesses, So well run where the where the market got everything keeps pace in that direction.
Hopefully that answers your question Yeah. That's helpful. And then maybe if I could switch gears over to Dave Casper and commercial loan growth one of the things we've seen coming out of the pandemic is that female was able to maintain above market rates of commercial loans, particularly in the U S.
Mind as to what drove that outperformance versus your peers and then secondly are those 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 bolt on geographically in some of our specialties.
I've talked about some of the specialties and Darryl mentioned in some other geography, whether it's Florida, whether it's Texas, whether its expanding just we have a very strong franchise.
Frankly.
An excellent record of getting referrals from existing customers.
That will continue.
And I'm, particularly excited.
As we move into the.
New year, what's going to happen with that bank of the west colleagues.
These franchises together they'll both be better we will expand geographically will expand through our <unk>.
Existing specialties into the West coast.
The momentum that we have right now I just feel so good about it it's 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 as I mentioned earlier, our ability to.
Cross sell into the commercial into our capital markets business and our wealth business.
Those those businesses, referring back into commercial.
It's a very very positive story.
Okay.
Okay. So it sounds like you think you can kind of continue to outpace your your kind of U S Bank peers.
Well I expect I expect will continue to grow new client and one of the key parts of our business is the clients were growing almost 90% of those existing and our new our either our sole where we're the sole bank.
We're the lead bank and that's where the actual profitability comes from just is there any you talked about in her business.
So the lead bank.
You're not gonna have to fight over all 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 conflicts Dave's are 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 sole or lead that is a very deliberate and unique strategy for us we've talked about that for years is build a premium franchise in commercial banking.
In Canada, and the U S. When you put them together.
The.
Fourth fifth largest commercial bank on the continent that has important advantages because the fragmented market in the United States that you're you're you're 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 or borrow more is very important. So that's a very deliberate strategy and it couldn't 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 that the 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 them.
Thank you.
Yeah.
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 your capital expectations around the bank of the West haven't changed from a.
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 to 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 what made this outlook change from last quarter. So sorry, Mario if we if we are lead you to believe anything is closed we didn't communicate very well I'm sorry anything has changed I should say, we didn't communicate very well nothing's changed I think we'd be pretty consist.
So 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 that's 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 and you're now well not now but your message was that it was post close.
The quarter off with it.
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 the things.
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. E.
Density starts to increase as the economy slows do you do you does that worry you in any way.
Yeah, 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 you know is a primarily is how the regulators think about capital and.
Instead of outside of 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 our 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 in the environment that we are going into those will be the factors that collectively will inform us about where we should establish our.
Management capsule levels, and we should we will share those updates with you as time goes by.
So putting it all together then where you sit today.
And I know this is gonna sound blend, but there would be a very very modest risk of a capital raise to get this deal done.
That's true.
To get the deal done.
Okay.
Yeah to get the deal done to support your capital ratio over the next few quarters. Its unlikely there would be another capital raise and I ask it bluntly that way because that that was exactly the speculation that I was hearing Johnson corner 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, you know for the transaction and we feel that our capital ratios are appropriate.
Okay. Thank you.
Thank you.
The next question is from Q whole Kim from Credit Suisse. Please go ahead.
Hi, good morning, and thanks for taking my question.
Firstly on the cards growth.
Growth was very strong in Canada quarter or.
Just wondering if you can comment on what you're seeing on the on the revolving balances and and how you think about cards growth next year and if that's a meaningful kind of.
A contributor to your or to your margin outlook next year. Thanks.
Thanks.
I'll answer the question on our cards 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 very effective our products that are relevant for our Canadian team for all the answers.
I have had record that you know 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 or 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 and right now they will over the course of next year that will in fact improve our overall.
It is performing well.
We're starting to see a nice pick up in our overall business model, whether it would be a number of customers we have their spend and their engagement level and spending in a variety of category and then also we're seeing some improvement in our overall AR balances. The other thing to note is just recently, we launched a interesting product against our car.
Which will help again I again encourage our customers to continue to do the prudent thing around their finances and it's it's a it's a.
A little bit like a buy now pay later, but it's smarter option called taste smart, which allows our customers again to be able to do some small and lending on their credit card. So overall I'd say the performance is strong will continue and that would be supportive of our overall revenue growth next year in the personal business and also the NIM as you rightly pointed out but to a lesser.
Extent, just given the size of the balances in salt.
Thank you that's it for me.
Thank you.
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 Hum on the preferred shares the dividend.
<unk> expense in the quarter interest expense in the quarter was that there was a lot higher lots for anything with $77 million versus 47 can you remind me your activities in the quarter and if there's any upcoming activities.
You know us and.
Is this a good run rate going forward.
Yeah, 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 it at the start at the border.
It was in September I think.
Okay. Thank you.
Thank you this conclude.
<unk> and answer session I'd like to turn the call over to Mike.
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 P. P. P. T 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's set to perform in any environment I'm 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.