Q1 2023 Bank of Montreal Earnings Call
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This conference is being recorded so it goes to the house at all or would you see.
Please standby your meeting is about to begin.
Be advised that this conference call is being recorded.
Good morning, and welcome to the BMO Financial Group Q1, 2023 earnings release and conference call for February 28 to 2023.
So today is Christian view. Please go ahead.
And good morning, we will begin the call with remarks from Darryl White Bmo's CEO , followed by Typhoon to then our Chief Financial Officer, and Piyush Agro all our chief risk Officer also present to take questions of our group heads or any johansen from Canadian P&C, Dave Casper from U S P&C, Dan Barclay from BMO capital markets and <unk>.
Command goes 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 result 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 otherwise noted as reported I will now turn the call over to Daryl. Thank you Christine and good morning, everyone.
We had a very good start to the year with record revenue adjusted earnings per share of $3 22.
And net income of $2 3 billion for the first quarter.
The benefit of our balanced and well diversified business model was front and center again this quarter with record revenue in PPG in our P&C businesses and significantly improving momentum in BMO capital markets.
The strategic investments, we've been making in talent and technology are driving good growth in each of our businesses.
Risk remains well managed with strong performance across our portfolios.
Each of our operating groups delivered return on equity above 15%, even with the higher regulatory capital levels.
Our P&C businesses continued to deliver positive operating leverage while negative operating leverage at the all bank level. This quarter reflected the particularly strong revenue performance and capital markets in Q1 last year as well as the impact of investments we've made over the past year to drive growth.
We expect expense growth to moderate through this year with continued momentum in revenue.
We remain committed to delivering positive full year operating leverage on a BMO standalone basis as we have for the last five years.
While the macroeconomic environment remains uncertain, we are well situated to win in any environment with inflation still at high levels, we expect rates to remain elevated slowing the economy in the near term.
Real GDP in both Canada, and the U S is expected to rise only modestly this year and we expect central banks to hold off from reducing policy rates until 2024.
We've made deliberate strategic choices to change the shape of our business and further strengthen our performance. We've continued to bolster our capital position in light of the new regulatory capital requirements, while supporting customer growth and we expect our CET one ratio to be above 11, 5% in the second quarter now that the bank of the west.
The acquisition is closed.
The completion of our acquisition of the bank of the West on February 1st is a historic moment for BMO and the natural next step in our North American growth strategy.
We've exit we're excited to welcome thousands of new employees, and one 8 million customers. So the BMO family as we come together with a shared vision to drive progress for our customers and communities.
I personally spent a lot of time in market and the energy level and enthusiasm of the teams and the customers Ive met is palpable.
Together, we double our U S footprint means.
Meaningfully expand our scale and solidify <unk> position as a leading North American bank.
We are now a top 10 bank in the United States with a top five position in multiple msas.
We've expanded our premium commercial banking franchise, which also ranks in the top five in North America, adding complementary verticals and talented bankers in areas like agriculture, food and beverage and wine.
Adding new expertise in technology and healthcare banking.
Our enhanced presence is further argument augmented by a national strategy that extends across the country with digital retail and payments platforms that serve customers across all 50 states as well as a leading national specialty businesses, such as transportation and equipment finance leasing RV marine and asset based lending.
Name a few.
Our one client and north South integration enables our teams to support clients with our differentiated cross border expertise as well as wealth and capital markets capabilities.
We're taking this opportunity to fully unify our brand, bringing the strength of BMO to new and existing markets and communities.
Over many years our U S segment has been a key contributor to the growth of our business and our success with a strong foundation and a long track record of combining organic growth with highly successful acquisitions.
Through effective integration strong leadership and our focus on building client relationships, we've delivered consistent market share great gains across our businesses.
We've steadily increased the contribution from the U S significantly improved ROE and efficiency to be accretive to the overall bank all underpinned by superior risk management.
The closing this month follows a year of collaboration that positioned us to hit the ground running in fact, we executed our first one client transaction on February one and I'm, just 28 days, we've already delivered on opportunities across our combined teams to deepen client relationships and expand product offerings.
And the momentum is building.
Yeah.
Once fully cost synergies, we expect the U S to contribute approximately 45% to the bank's earnings on a pro forma basis up from 27% five years ago, which helps fundamentally increase the size and the performance of the bank overall.
By the end of 2025, we anticipate that the bank of the West acquisition will add over $2 billion U S and run rate pre provision pre tax earnings to BMO.
Turning back to our Q1 results in our operating groups.
In Canadian P&C revenue and <unk> were both up 9% this quarter with strong consumer and commercial loan growth and deposit growth driving market share gains our performance reflect strategic investments over the last few years and the expansion of our sales teams and technology that have improved our sales to service ratio.
Delivering top tier digital sales and drove customer acquisition.
Just yesterday, we announced an exclusive partnership with immigration Dot CA, a leading provider of immigration resources and essential tools aimed at helping newcomers establish their financial life in Canada.
This partnership complements our existing new start and smart progress programs to help customers make real financial progress and support a smooth transition.
And U S. P&C PBT was up 12% over last year as we continued to gain momentum in customer growth and satisfaction.
We've introduced several new automated solutions and commercial banking to improve efficiency and deliver best in class client and employee experiences.
And in partnership with blend we introduced a fully digitized mortgage refinancing process booth.
Boosting convenience for customers.
And BMO wealth management, while lower markets reduced revenue compared to last year, our ongoing investments in talent and technology are delivering strong growth in new client assets were driving progress for our clients by investing in innovation such as the launch of BMO investor lines ESG insights tool that helps investors, making <unk>.
Decisions that align with their strategies and with their values.
For the 12th consecutive year, we were number one in net ETF inflows and received the most awards of any ETF provider at this year's annual fund data awards, reflecting our leadership in delivering strong risk adjusted performance for our investors.
BMO capital markets diversified businesses displayed growing momentum with the second highest quarter of revenue ever and ppt of $636 million the.
The investments we've made in areas like expanding our U S rates business, adding radicals carbon credit an emissions trading capabilities and expanding electronic trading through clear pool are addressing real client needs and contributing to the growth that we need now and for the future.
Clear pool is a good example of how we're building on acquisitions, having expanded into Europe within the last year, while tripling BMO is electronic trading revenue.
In addition to our financial progress we're continuously advancing our purpose commitments and are consistently recognized as a global leader in sustainable business practices and financing activities.
I want to recognize the incredible contribution by Bmo's employees. This year, who during our employee giving campaign rally together to contribute over $31 million to the United way and thousands of other community organizations across North America, our new BMO record.
This culture of community, giving is equally embedded in the culture of our new colleagues at bank of the West and I look forward to the good that we will be able to grow together.
As we all look forward to a successful integration we are equally focused on continuing to drive performance in all our businesses. We're starting this year from a position of strength.
My confidence in our future has never been higher I'll now turn it over to the typhoon.
Thank you Daryl and good morning, and thank you for joining us.
My comments will start on slide 10.
First quarter EPS was <unk> 30, and net income was $247 million.
<unk> items are shown on slide 37 and include the impact of fair value management activities related to the acquisition of bank of the West, which this quarter decreased net income by $1 $5 billion as well as a $371 million tax provision related to the tax measures enacted by.
The Canadian government.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $3 and 22.
Net income was $2 3 billion.
Down from $2 $6 billion last year.
Total revenue increased 3% year over year, reflecting strong growth in net interest income, partially offset by lower fee income and securities gains.
<unk> were up 9% year over year reflective of investments made in sales force expansion and technology in 2022, and the impact of compensation increases for our employees during last year.
<unk> was lower year over year, and up 6% sequentially or up 14%, excluding the impact of seasonal expenses recorded in every first quarter.
Performance in our P&C businesses continued continue to be very strong with year over year pre provision pretax earnings growth of 9% in Canada and 12% in the U S driven by continued loan growth and margin expansion.
Capital markets performed well with strong quarter over quarter revenue growth and wealth management results were lower reflecting the continued muted market environment.
Total PCL was $217 million, including a $21 million provision for performing loans compared with a total recovery of $99 million in the prior year.
<unk> will speak to these in his remarks.
Moving to the balance sheet on slide 11 loan growth was 15% year over year and 2% quarter over quarter.
On a constant currency basis business and government loans increased 15% 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 2% sequentially as we remain focused on growing our core deposit base.
Looking ahead, we expect full year average loan growth to be in the mid to high single digit range, reflecting strong diversified pipelines and matching similar growth rates in deposits.
Turning to slide 12, net interest income on an ex trading basis was up 21% from last year, driven by strong balanced growth and margin expansion.
Net interest margin ex trading was up 11 basis points from last year and down seven basis points from last quarter.
There was temporary volatility this quarter related to the balance sheet positioning ahead of the closing of the acquisition.
Higher net margins in our P&C and wealth management businesses raised our NIM by two basis points quarter over quarter.
In Canadian P&C higher deposit and loan spreads were partially offset by deposit mix, reflecting strong growth in term deposits.
And U S P&C, where our margin widened by 43 basis points year over year higher deposit spreads were partially offset by lower loan spreads higher risk transfer costs and the impact from changes in product mix.
Offsetting these increases were two temporary items in the current quarter that lowered our quarterly NIM by four basis points first higher cash balances ahead of the closing of the bank of the West transaction and second temporary deposit interest expense in capital markets that was fully offset.
In other noninterest income with no impact to total revenue.
A discreet permanent increase in liquid assets for regulatory liquidity requirements lowered our margin by two basis points.
Other factors during the quarter included a one basis by one basis point for the impact of risk transfer transactions quarter over quarter.
The year over year expansion in our NIM has been a major driver of our <unk> growth in our P&C businesses and as we move beyond the temporary factors over the next couple of quarters, we expect the BMO standalone NIM to resume expanding during the second half of the year as deposit spreads begin to stabilize.
With the addition of bank of the West balance sheet, we expect a widening NIM to be a core relative strength for BMO.
Post closing, we expect our NIM to widened by approximately 10 basis points for both the second quarter.
And the full year.
Moving to our interest rate sensitivity on slide 13, a 100 basis point rate shock is expected to benefit net interest income by $542 million over the next 12 months.
Rate sensitivity for the quarter is elevated.
Short term liquidity was elevated for the bank of the West closing, we will provide an update on combined sensitivity, including bank of the West next quarter, but overall, we believe we are well positioned for the current environment.
Moving to slide 14 expense.
Expenses were up 9% from the prior year.
We're up 6%, excluding the impact of the stronger U S dollar and higher performance based compensation, mainly reflecting the follow through impact of targeted investments during the last year, including sales force expansion technology and marketing as well as inflation rather than added expenses this quarter.
These investments have been disciplined and strategic and have helped fuel our revenue growth and created efficiency gains in our business.
Expenses were down 1% sequentially, excluding the impact of stock based compensation for employees eligible to retire and seasonality of benefits that is recognized in the first quarter of each year, which together approximated $260 million this quarter.
Our commitment to positive operating leverage continues to drive our dynamic management actions.
Coming into this year as you can see in our quarter over quarter trends with the capacity that we have in place our incremental investment needs have moderated.
As a result with a follow through impact of last year's investments subsiding. After the second quarter, we expect our year over year expense growth to moderate in the second half of the year.
Moving to slide 15.
Our capital position remains strong with a common equity tier one ratio of 18, 2%.
Excluding the impact of the management of fair value changes related to the bank of the West transaction. The CET one ratio increased approximately 180 basis points due to our common share issuance strong internal capital generation.
And a reduction in risk weighted assets, partially offset by the onetime impact of the tax measures.
Source currency risk weighted assets were lower mainly reflecting the benefit from risk transfer transactions model updates and changes in book quality.
Synthetic risk transfer transactions this quarter added approximately 35 basis points to our CET, one ratio compared to last quarter.
The cumulative incremental capital of 120 basis points generated by the fair value management actions since announcements last December will be offset by higher goodwill at closing.
As discussed previously we remain confident that our CET one ratio will remain above 11, 5% in Q2 and continue to build to 12% by the end of the fiscal year.
Turning to slide 16.
We updated our assumptions regarding the acquisition of back over the west excluding purchase accounting impacts, which will be finalized before the end of the second quarter.
Announcements, we expected the transaction to be 10% accretive to fiscal 2024, or 8%, excluding transient items related to purchase accounting.
Based on our internal plan, we expect accretion in 2024, excluding transit items to be approximately 7%. The reduction is in part due to stronger BMO Standalone performance.
And a revised back of the worst outlook, mainly reflecting the impact of the later than anticipated closing in conversion dates.
We continue to expect the future benefit from annualized expense synergies to be approximately 670 million U S dollars.
And initiatives to be fully executed by the end of the first year. After closing, which is now the start of the second quarter of 2024 with the realization of those savings building over the next 12 months.
Merger and integration costs, which are excluded from adjusted net income.
Now estimated to be one 5 billion.
Billion U S dollars and the expectation that they will be fully incurred by the end of the second year after close.
As Daryl said, we are very optimistic about our future growth with bank of the west leading to a very meaningful PPP.
<unk> lift.
Moving to the operating groups and starting on Slide 17, Canadian P&C delivered net income of $980 million down 2% from the prior year due to higher provisions for credit losses with strong pre provision pretax earnings growth of 9%.
Revenue was up 9% from the prior year net interest income increased 14%, reflecting strong balanced growth and higher margins.
Expenses were up 9%, reflecting investments in the business, including sales force expansion and in technology and higher salaries and decreased 1% sequentially.
Average loans were up 12% with 11% growth in residential mortgage lending.
And 16% in commercial loans.
<unk> increased 11% year over year, and 3% sequentially with strong growth in term deposits.
Moving to U S. P&C on slide 18, my comments here will speak to the U S dollar performance.
Net income was $521 million down 3% due to higher provisions for credit losses with strong pre provision pretax earnings growth of 12%.
Revenue was up 12% with 22% growth in net interest income due to strong loan growth and margin expansion of 43 basis points year over year.
The decline in noninterest revenue was mainly due to commercial deposit fees, which during higher interest rate periods is largely offset in net interest income as well as lower operating lease revenues.
Expenses increased 11% due to higher employee costs and technology investments.
And remained relatively flat sequentially.
On the balance sheet average loans were up 10% from the prior year, reflecting very strong commercial growth of 11% average deposits declined 4% year over year and increased 1% from last quarter.
Moving to slide 19, BMO wealth management net income was $278 million down.
Down from $316 million last year.
Wealth and asset management net income was $208 million down $54 million as growth in net interest income and new client assets were more than offset by weaker global markets and lower online brokerage transactions.
Insurance net income was $17 million compared with $54 million in the prior year.
Expenses were up 4%, mainly due to the impact of investments made in the business in fiscal 2022.
Turning to slide 12 BMO.
BMO capital markets net income was $510 million compared to a particularly strong $712 million in the prior year pre.
Pre provision pretax earnings were $636 million.
Up 43% quarter over quarter, reflecting good performance in the current market environment.
Compared with the prior quarter revenue in investment and corporate banking was up 12% due to higher corporate banking revenue and investment banking activity and global markets was up 29% on higher client activity.
Expenses were up 5% due to higher operating costs and continued investments in the business, partially offset by lower employee related costs.
Turning now to slide 21.
Services net loss was $195 million compared to $132 million in the prior year.
Net losses in corporate services will continue to be higher than our normal range for the next quarter or two due to the moving parts associated with the bank of the west transaction, including the impact of the prior buildup of excess capital that is now being deployed in the business post closing.
We expect corporate earnings to normalize towards the end of the year.
To conclude we.
We had a very good we had very good operating performance with record quarterly revenues to start the year. The results demonstrate the advantage of our well balanced diversified business mix, which will now be meaningfully enhanced with the addition of bank of the west starting this quarter.
Overall, we continue to focus on managing our company dynamically with a keen focus on continuous efficiency improvements while investing for growth our larger presence in the U S significantly enhances our opportunities to grow while leveraging our existing platform for more optimal resource allocation.
I will now turn it over to Piyush. Thank.
Thank you typhoon and good morning, everyone.
We are pleased with our risk performance this quarter key portfolio metrics remained strong despite rising rates and continued high inflation.
This quarter's performance continues to reflect strong risk management discipline across the bank.
Starting on slide 23, the total provision for credit losses was $217 million of 15 basis points down $9 million or one basis point from prior quarter.
Impaired provisions for the quarter were $196 million or 14 basis points flat to the fourth quarter.
The strong impaired loan performance is due to lower formations, which continued to be below pre pandemic levels.
We do expect impact provisions to return to more normal levels over time.
Moving to slide 24.
$21 million provision for credit losses on performing loans reflected increased uncertainty and credit conditions and growth in certain portfolios largely offset by portfolio credit improvement, including benefits from the risk transfer transactions, we remain comfortable that our $2 5 billion.
As a performing loan allowances provides good loss coverage.
To the impaired loan credit performance in the operating groups.
Retail impaired loan losses of $135 million in Canadian P&C and $13 million in USB NC.
The quarter over quarter increase in Mbank BCS is consistent with the expected normalization trend in delinquency rates and unsecured consumer loans and credit cards, which should remain below pre pandemic levels.
For real estate secured lending we continue to view the risk from higher rates as modest given our high credit quality borrower base and low Ltvs as you can see on slide 27, the riskier segment renewing over the next 12 months is nominal given our portfolio quality.
In our commercial and corporate businesses we.
We saw strong credit performance and.
In Canadian commercial we reported impaired loan provisions of $19 million or seven basis points down three basis points from last quarter.
Our U S commercial business had impaired loan provisions of $35 million or 11 basis points also down one basis point from last quarter.
Our capital markets business had a net recovery of $3 million driven by zero, new formations this quarter and some modest reversals.
Despite the rising rates and inflation on wholesale credit quality remained strong and embed rates below pre pandemic levels.
On slide 25 bank wide impaired formations were $521 million and gross impaired loans balance was $2 billion or 36 basis points.
Both formations and gross impaired loan rates continued to be well below pre pandemic levels.
Looking ahead, the coming quarter PCL will have a one time adjustment for bank of the west opening allowance.
And in terms of overall impact bcl, including the bank of the rest of the owned portfolio, we expect embedded loss rates to trend in the high teens to low 20 basis points, which is in line with our combined pre pandemic experience.
To conclude we.
We are well positioned to manage current and emerging risks given the quality of our portfolio high allowance coverage and strong risk management capabilities I will now turn the call back to the operator for the Q&A portion of this call.
Thank you.
We will now take questions from the telephone lines.
If you have a question on you are using a speaker phone. Please just the handset before making his election.
If you have a question. Please press star one on your telephone keypad.
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Please press star two.
Please press star one at this time, if you have any questions there will be a brief pause while the participants right. Just a quick question. Thank you for your patience.
The first question is from Ebrahim <unk> from Bank of America. Please go ahead. Your line is now open.
Hey, good morning.
Yes.
Maybe just starting on the expenses, maybe think about adjusted expense growth, 9% year over year.
I am sorry, if I missed any specific guidance, but I heard you say it should moderate from you just talked to our consultants I think you can put some numbers around what you expect.
Maybe in the back half of the year of our full year 2003 that we should expect ex bank of the west impact.
Sure. Thanks for the question Ebrahim.
The expense growth year over year, excluding the impact of foreign exchange was 7% and excluding the impact of higher performance based comp it was 6%.
As you know we have a firm commitment to positive operating leverage and coming into the year.
The investments that the speed up investments that we've made in the business last year has slowed down because we do we have created the capacity that we need to meet our growth targets.
As such and then you can look at the quarter over quarter change, which was actually down <unk>.
Excluding the seasonal uptick so as we look ahead.
We see maybe another quarter of these types of expense growth numbers, because we will be lapping last year's expense trends and once we cross into the second half of the year I expect on average youre going to see a three 4% drop in our year over year expense growth, which then gives us the ability to.
Continue to commit to a positive operating leverage for the year.
Understood and I guess.
Bank of the West expense savings I believe you mentioned, 95% savings by 'twenty.
Before but should we should.
We get to that point.
End of fiscal year 'twenty three in terms of once you do the systems conversion on anybody buy.
By the end of October you should have most of the savings and the number that we talked about the $1 24.
Hey, Brian .
Let me remind you then would we announced the transaction, we said that we will capture 100% over the expense synergies within the first 12 months following the closing date.
And we intend to do the same still but now that the closing date has moved to February one from the original assumption.
<unk>.
Of three months before that when we announced the transaction. It just shifted the date of the full capture we intend to enter the second quarter of 24 with a run rate and with 100% of the cost savings just exactly the same that we.
We announced back last December .
Got it and just one last one on <unk>.
Deal related to Typhoon you mentioned getting more liquidity.
Doug of two basis points on the margin this quarter anything we should be mindful of in terms of capital that's been happening.
Liquidity requirements.
The beam that you may have.
Well managed.
No I think there is no.
On NIM.
No impact from capital stress testing there were a total of four basis points of.
Temporary factors one of them relates to the buildup in liquidity and one of them is in our capital markets business, which is fully compensated in the.
<unk> liquidity.
The permanent two basis points liquidity was just related to our normal update of our deposit modeling assumptions and we just happen to have updated them this quarter, which has changed the liquidity.
Liquid asset balance on our balance sheet, but none of this relates to.
Any capital stress tests.
But nothing around the treatment of the U S entity changes meaningfully worse deal.
Hi.
Yes. This is not no no.
Thanks for taking my questions.
Thank you.
The next question is from many grom on from Scotiabank. Please go ahead. Your line is now open.
Hi, good morning.
Just a numbers question on capital.
Apologies if I missed it.
To quantify the impact on the Basel III update for Q2.
Is going to be for you.
So we are obviously finalizing.
The results of the transition this quarter.
I think overall as we mentioned I believe last quarter, there is going to be a benefit.
And that benefit potentially could be 35 to 40 basis points for the quarter.
Okay.
And then Daryl I just wanted to make sure I heard you correctly.
In terms of the guidance for bank of the West.
125 did you talk about.
<unk> billion in pre tax pre provision.
Earnings benefit is that the right number that I have.
You got it you got it right many and I'll just clarify for you by the end of 'twenty five and I think this is an important point.
Trying to remind everybody that when we have the full benefit of the company on a standalone basis, plus the cost synergies that typhoon has just reminded us all of plus you may recall. Many in Q2 of last year, we announced a range of revenue synergies, which we said take a little longer to get to.
But I've got to tell you in the early days of owning the asset my confidence level has gone up on those revenue synergies.
You get to $2 billion of Ppt, and I'll remind you that those are U S dollars.
So to us.
Round numbers to illustrated for you you've got $1 billion of Standalone Ppt, you've got 670 of cost savings and then if you take the low end of the revenue synergy range that we presented in Q2 of last year, you got a little over $2 billion.
Yes.
So I rounded it to two.
Which if you compare that to our current run rate for the total company at BMO, that's roughly a 20% lift in the ppt power of the company by the time, we get to the end of 'twenty five.
Okay, Great. Yes, you answered my questions allow me having to ask them. So thank you.
Youre welcome.
Thank you.
The next question is from Doug Young from <unk> Capital markets. Please go ahead. Your line is now open.
Hi, Good morning, Tiffany I think you talked a bit about corporate.
Losses being elevated this quarter and expect it to be elevated I guess in Q2 as well can you talk a bit about what.
Causing that elevation.
The unusual items or can you quantify anything there.
Yes, so I have to tell you that both the quarter preceding a transaction of this size that we are.
Executing and the quarter after the transaction, we will have some noise coming into the quarter. We obviously, we're sitting on.
A good amount of capital there were some transactional costs that were running through.
The corporate section.
And so nothing really unusual going through.
But that noise will probably last a couple of quarters here before.
Towards the end of the year, we sort of go back to our Reg.
Regular.
Regular pieces just to remember this quarter. There's also the impact of the seasonal expenses in the early to <unk> expense.
Expenses relative to last quarter, so nothing really fundamentally big numbers, but a number of small items impacting the trends again I suspect that we will start normalizing trends.
Once we go through the second quarter into the second half.
Okay, and then just second on Nims I think in the U S. NIM discussion that was talked about loan margins declining in the U S. Can you can you elaborate a little bit about what you're seeing what's driving that and then the synthetic risk transfer I think you talked about that having a point.
Or to have negative impact is there more of that to anticipate as.
Well thank you.
Yes, let me take the synthetic and then I'll turn it over to Dave for comments on the U S. Yes.
Yes so.
This quarter on a quarter over quarter basis, our NIM was negatively impacted by one basis points due to.
The increase.
The level of risk transfer transactions.
As we look forward.
We don't anticipate the activity levels.
To be high enough to impact future quarterly NIM progress.
I mean, I think we will always continue to manage our capital as efficiently, but sitting here today.
I suspect that the incremental impact this year will be less and then today.
Yes.
So the NIM for the for the year in P&C U S was up 43 basis points. So, we're really happy with that and that sticks.
And Thats really a result of a very solid diversified deposit base across both our business and the commercial business.
Business.
The decrease in the loan spread is.
More than offset by the deposit side.
That's pretty expected and at times like this with interest rates going up so nothing significant there probably a little bit of just mixed in terms of the.
Higher higher rate loans, probably we haven't grown as much those would be the riskier, but nothing significant and I expect the NIM to continue to be pretty strong given the deposit base. We havent just I'll throw in it's going to only get better in terms of overall NIM for the bank when we add.
Very solid and consistent type of deposit business will get with bank of the west.
I appreciate it thank you.
Thank you.
Yes.
The next question is from Paul Holden from CIBC. Please go ahead. Your line is now open.
Yes. Thank you good morning.
First question is related to the loan growth guidance of mid to high single digits. I believe the guidance last year was last year as of last quarter was for high single digit. So I think just a little bit of a down shift and maybe you can.
Clarify if I'm correct on that one and then if there is a change what's driving the change in outlook.
Yeah in general I'll make a comment about the broader loan trends I think we obviously you have seen very strong growth.
Last year and year over year numbers are very strong and we continue we have the capacity to continue and these numbers are all obviously standalone BMO numbers not including.
The impact of <unk>.
Bank of the West.
And I think in general and Dave can comment on some of the commercial aspects and Ernie can comment on the consumer side.
We're mindful of the environment and providing you a brief.
<unk> will update for what we see today, so Dave any comments, yes, I think the guidance. We gave you is the same obviously the economy is slowing a little bit we're not slowing but the economy is and to that extent.
It depends on where we go but so far we've seen we've seen.
Modest moderation just given the economy.
Some of our businesses are doing even better are businesses that are tied to inventory builds like our auto floor plan business is up.
Asset based lending businesses up.
Where we'd see some modest decline more in the U S probably than Canada would be real estate, where pipelines just aren't as strong, but we continue to be pretty bullish very bullish long term in terms of where our loan growth has been consistently outpace the peers as we've added new clients. So I expect that to continue.
Thank you.
And then second one is just looking at the bank of the West lied.
You show the deposits the deposit expectation today versus prior so 72 billion versus prior.
Six 5% decline in I guess, there is a run off in deposits and U S banking, but probably outpaced the broader industry. So wondering if there is an explanation there on the on the.
Materiality of the decline.
It's in line with what we see overall and in the U S banking.
And obviously, we now have the opportunity to work more closely with our new colleagues at bank of the West and maybe Ernie can comment on what she sees in terms of the deposit outlook for the company.
Yeah on the U S side.
But specific to your question what we're seeing obviously is now the start as some of the surge deposits, leaving the everyday banking kind of checking and savings. So that that is a norm and youre seeing migration into higher higher rate, but as I said.
Jeff back and say what were thinking about for the U S. In terms of our entire deposit taking.
That core stability that we've always had in our existing BMO franchise that deposit plus digital very steady sticky deposits long term relationships with mass affluent customers.
Now, we're adding as we've said numerous times today, our bank of the west and that really doubles, our footprint now where 1000 branches across.
32 states, where we're going to be consistently driving stable growth with the primary customer relationships and that's key to US then on top of that.
I've referenced this before we are a digital deposit taking capability at <unk>.
Third part of our strategy and that runs across the entire 50 states and that is something that drive.
Growth in terms of out of footprint acceleration and really something that provides us as an overall bank with a very sustainable model, great capacity to ebb and flow in terms of our deposit growth and I think a competitive advantage for us. So that's what we're going to be leveraging going forward.
And as we look across the next few months youre going to see us grow further in our deposit taking from our digital channels.
I'll leave it there thank you.
Thank you.
The next question is from Gabrielle does Shane from National Bank Financial. Please go ahead. Your line is now open.
I want to follow up on that one actually both on loans and deposits for bank of the west.
The lower numbers versus what you had there are announcements are.
As that declines factored at all in the reduce the accretion expectations because it doesn't sound like it sounded like that's mostly related to the timing of expense synergies, yes, yes. The current balance sheet and the current business outlook is included in our update so so if deposit.
<unk> balances with declines accelerate we could potentially revisit this issue.
<unk> always revisit when things change.
How you update your financial outlook at this point with what we know this is our current expectation.
Okay.
<unk> credit risk transfers on the Q4 call I wanted to ask you about that again 35 basis point benefit thanks for quantifying that by the way.
That equates to about <unk>.
Over $1 billion of.
Equity our core tier one capital.
These things boost your capital ratios, obviously, but what's the cost.
Put your ROE against the 1 billion too.
Capital, we're looking at around $150 million earnings you said it compares favorably to that probably a lower figure, but maybe you can help clarify these are very efficient transactions.
You know we've been executing these for the past four or five years. So we have quite an experience we estimate.
Sure Adam costs of these transactions over a lifetime somewhere between 8%, 9%. So these are very good transactions.
To optimize our returns for our shareholders and continue to support growth on our on our balance sheet. This is part of how we manage.
They have always been part of that <unk> I don't know if you want to make comments on your end I think I would just add as we've said before it's also a very active risk management tools that banks should employ among many other so bottom creating capacity for new business that youre not seeing right now because it is going to come in through NIM and other earnings over time.
In terms of managing portfolio concentration risks in this environment. So I think in the <unk>.
Collective suite of things we are doing this as a very efficient way in terms of managing our portfolio and at a capital cost that's acceptable to us.
Fair enough.
Russ knowledge.
There was a benefit just want to clarify the car, so 8% to 9% or whatever.
Equity number I can associated with.
<unk>.
Improvement right.
That's correct that's correct.
Alright.
Have a good rest of the week. Thank you.
Under.
Thank you.
The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
I may have missed comments you offered on what the all bank margin will look like.
Bank of the West because there was another call going on well, while your call was happening.
Did you offer any outlook on the all bank margin, including bank of the West, Yes, I did I said that.
Starting in Q2, and my comment apply to Q2 as well as the remainder of the year there should be about a 10 basis point.
<unk> two our margin once we include back over to West, Yes, That's all bank X trading is that right.
That is correct, Okay, and then one other thing I want to thank you for slide on page 34 of your presentation. This is precisely the way I wish every bank would show.
They are funding costs, but funding costs and loan margins, but it also of course creates a lot of questions too.
One thing I like doing when I look at slides like this is just comparing the change in the loan spread relative to the change in the deposit customer deposit costs.
What's clear from looking at this is.
There was asset sensitivity early on meaning the assets are repricing faster than the cost of customer deposits, but that is that is almost certainly changed.
One quarter to the in the last few quarters. So what we're seeing now is that deposit costs are in theory, the horizon not theory, but actually rising faster than loan the loan yields is that a trend you expect to continue and if so what it really tell us that the margin expansion story is now over.
Okay. So good question I will relate to complement on this slide to our IR group.
In terms of the change in the pace of.
Asset repricing versus deposit re pricing we are at the later stages of this rate cycle. So this is a very natural.
Result of the timing.
And what we as we look ahead.
You start actually focusing on the other side of the rate cycle and you want to make sure that you are protecting the downside while you continue to benefit, especially from normalizing loan spreads because as rates move up loan spreads tend to come under pressure.
Now we are as we look ahead to the last two.
Two to three quarters of the year.
Our expecting loan spreads to slowly normalize and we are also expecting this migration from transaction accounts to term deposits to also normalize we probably have another quarter or two with these moves, but what will help our NIM and we're not yet declaring that we're <unk>.
The peak in R&M, we are still expecting some expansion in the second half of the year based on what I said.
While we keep an eye on the downside.
Yeah.
That's helpful. Thank you.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead. Your line is now open.
Thanks, I appreciate the guidance on the all bank NIM, that's very helpful.
I'm wondering what's the appropriate starting point.
I'm trying to figure out what the appropriate baseline is attack on the additional 10 basis points of margin expansion for Q2 related to bank of the west.
Is that the 179 basis points on your slide 12.
Justin.
Yes, yes, so I'm going to ask you for one more quarter of patients on this question because we want to make sure that we have all the final purchase accounting entries.
Because for me to give you a reference point I do need to know what those adjustments are so if you can just.
Give us another quarter here when we get to the end of the second quarter. When we do our earnings call. We will give you a much more detailed perspective on how to reference going forward what that should be.
Okay and then.
Let me go back to the bank.
West Slide here is the updated accretion estimate.
Just to be clear that doesn't include any additional share issuance in response, obviously DSP announcement right.
Yes. The December issuance. This most recent issuance is not included because that was not related tobacco for the west.
Okay, and then not sure if I heard you correctly in your opening remarks, but I think you had mentioned the reduction in the 2024 accretion estimate was due to the delayed closing of that.
Would that be higher because of the delay closing because we're comparing our full year bank of a lesson in 2024.
Only three quarters for 2023, what am I missing there, yes, so since announced.
Announcements when we made.
The announcement in December of 'twenty, one we assume that the transaction would close 90 days earlier than where it did so we are one quarter behind in terms of the closing date, which then shifts the.
Capture of all the expense savings and we get one quarter in 24, where we actually finalize that captured that's the only change it's a calendar change basically nothing else.
Got you so is it related to the extent that okay. That's it for me.
Many thanks.
Thank you.
The next question is from Joe <unk> Ho Kim from Credit Suisse. Please go ahead. Your line is now open.
Hi, Thanks.
Morning, just a quick one here on your domestic residential mortgage growth.
We've seen some slowdown from your peers, but muscle from BMO.
And the growth was pretty strong this quarter. So just curious.
Whether that growth where that growth is coming from whether that's from the servicing segment.
The customer market or geography, and what's your outlook for growth in that business going forward.
Yes, I'll answer that question, so you're absolutely right our strategy has been to grow at or above market.
For the past I would say 12 months, we've had acquired a significant increase in our sales team and we've been digitizing our mortgage process. So that we're a more effective.
Originator of mortgages that said, we obviously have been benefiting from the fact that you have a pipeline that obviously has a long duration to get through to your balance sheet and thats, what youre seeing coming through right now we're seeing originations down at the same amount that the market is down so you can anticipate.
Our going forward mortgage balances our growth I should say to slow down.
What youre seeing from the market overall no differences in terms of segments. Since we're focused again on very quality customers full share of wallet, bringing the mortgage in bringing the rest of their business and have a primary relationship. So no change change there, but as I said youll see some moderation going into the back half of this year.
The mortgage market has adjusted.
Thank you that's it for me.
Okay.
Thank you.
The next question is from Nigel D'souza from Veritas.
Investment Research. Please go ahead. Your line is now open.
Thank you good morning, I actually had a follow up question along the lines of residential mortgages.
Look at your remaining amortization the portion of mortgages with a negative.
The negative amortization, so I guess these would be fixed payments variable mortgages.
Those mortgages any portion of the increase in the monthly payment being added back.
The outstanding.
Outstanding balance on our mortgage.
Yes.
Hi, Piyush, let me begin and then maybe you can chime in so I think overall.
Our performance in the mortgage book continues to be very solid.
We've obviously looked at various internal measures capacity analysis, and just given the strength of the Canadian customer that customer capacity to pay we feel very good about the future.
I think your question really around payments.
We have gone back as a preemptive measure to several of our customers and as part of the strong relationship it's not.
It's not for us to tell them to pay more now the product allows them to pay as and when they are able to several customers have taken us up and 20% have actually put more money in but we think that the average increase.
The time of renewal.
Absolutely manageable for our customers and in fact, it gives them the optionality because many of them like US do believe rates will come down so when it comes time for renewal.
The big slug for US is three four years out.
Should be in a very healthy position and actually builds customer loyalty.
None of those negative mortgages by the way have hit any regulatory trigger rate. So we feel that we are in a very good position with our customers.
Okay.
Thank you.
We have no further questions registered at this time I would like to turn back the meeting over to that room.
Thank you operator, and thank you all for your questions as you've heard today, we continue to have good momentum in our operations across personal and commercial banking wealth management and capital markets are strong foundation, a relentless focus on execution of our dynamic plan. The addition of the bank of the West combined with our leading winning culture and high.
Performance organization further enhances our long term growth opportunities as I said earlier I've never been more confident that guided by our purpose driven strategy. We are uniquely positioned to deliver sustained and consistent financial performance over time. Thank you for participating in today's call and we look forward to speaking to you again in May.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.