Q2 2023 Bank of Montreal Earnings Call
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Good morning, and welcome to BMO financial group's Q2, 'twenty 'twenty earnings release and conference call for me 24th 2023. Your host for today is Christine view. 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 Dunn, our Chief Financial Officer, and P. O Shangri La our Chief risk Officer also present to take questions. Today are Ernie Johansen head of BMO, North American personal and business banking and team here G.
Head of BMO commercial banking, Dan Barclay head of BMO capital markets, Delon Kananga hadn't been enough management, and Dave Casper female U S. CEO .
As noted on slide two forward looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties actual results could differ materially from these statements I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management measures performance on a reported and adjusted basis and considers both.
To be useful in assessing underlying business performance.
Carolyn types, and we will be referring to adjusted results in their remarks, unless otherwise noted as reported I will now turn the call over to Darren. Thank you Christina and good morning, everyone.
I'd like to begin by acknowledging the hardship faced by our communities in Alberta impacted by the devastating wildfires that threaten their homes and livelihoods, we're committed to standing alongside our clients and doing our part to make sure that they get the help that they need.
I'd also like to welcome Nadeem Hershey Group head BMO commercial banking, who is joining the call for the first time Nadeem has a long track record of serving our clients, including leadership positions and risk management and commercial banking, where most recently he was co head of the Canadian commercial bank.
Now, let me turn to the quarter.
Against the backdrop of a shifting environment BMO delivered solid performance, including the benefit of a full quarter of results from bank of the west.
Earnings per share were $2 93, and net income was $2 2 billion for the quarter and $4 5 billion year to date.
Yeah.
Second quarter pre provision pre tax earnings were up 7% year over year and grew $6 2 billion year to date.
Our performance reflects the continued strength in our highly diversified business mix with good <unk> growth in our Canadian and U S personal and commercial banking businesses up 8% and 29% year to date, respectively, well, while our wealth and capital markets businesses were impacted by weaker markets and lower client activity.
While credit trends are beginning to normalize from historically low levels as expected credit performance remains strong across our portfolios, reflecting our long standing track record of superior risk management, a culture that is shared by our bank of the west colleagues.
Our CET one ratio of 12, 2% remains very strong even after closing the largest acquisition in Canadian history.
Our ROE for the quarter was 12, 6% while return on tangible common equity improved to 17, 2%.
We also announced a dividend increase of four cents up 6% from last year to $1 47 per share.
Since we spoke last quarter the impact of persistent inflation rising rates are slowing global economy.
Increasing deposit competition on the industry has accelerated we're not immune to these market forces, which are putting pressure on revenue growth and near term operating leverage after.
After delivering five consecutive years of positive operating leverage these factors along with the higher efficiency of bank of the west pre synergies.
Are now expected to result in negative operating leverage this year.
We're focused on resetting our expense outlook in line with the revenue headwinds to regain positive operating leverage and continue the improvement in our efficiency ratio.
My phone will elaborate on this in his remarks, our commitment to positive operating leverage through time remains firm even in this environment.
The last few months have reinforced the importance of a strong foundation and the trust built over time with our stakeholders. Our bank is highly diversified by customer sector, and geography, and we fortified our balance sheet and significantly expanded our customer deposit base with bank of the West liquidity Fund.
<unk> and capital are all well managed and ratios are strong well above both regulatory requirements and internal targets.
The strength and stability of our bank that has delivered resilient performance through economic cycles is being noticed.
We have a differentiated position in the U S market, that's been enhanced with the bank of the west.
As a high performing National U S Bank, we rank in the top 10 of diversified banks with assets over 250 billion.
Our combined U S segment has over $400 billion in assets and offers customers a full range of integrated banking wealth and capital markets products and services with presence in leading markets and digital platforms that extend nationally.
Our clients further benefit from the strength of BMO is 125 trillion dollars North American bank balance sheet investment capacity and the stability of a Canadian bank.
We're advantageously positioned within a small number of large banks in the U S that have sufficient size scale and a full range of capabilities, including our premium top five north American commercial banking franchise, a one client approach and a north south business model. Unlike any other bank.
We believe that this will contribute to outsized gains in customer and deposit acquisition as customers seek to partner with banks, who are willing and able to support them through the cycle.
Since the market disruption in early March leveraging our leading north American Treasury and payment solutions and enhanced digital out Onboarding capabilities. We've opened several thousand new commercial deposit accounts and continued to add retail customers across our expanded U S footprint.
Our U S segment has been a key contributor to our growth and success over time with a long track record of combining organic growth was successful acquisitions.
The contribution of bank of the west to be most performance is in line with our expectations, adding 10% to bmo's pre provision pre tax earnings in the first quarter and we are on track to increase that contribution as our run rate expense and revenue synergies come through.
We're well prepared and on track to convert systems and branding over the labor day weekend.
I remain confident that by the end of 2025 bank of the West acquisition will add over U S $2 billion and run rate pre provision pretax earnings as I discussed with you last quarter.
This quarter. We also continued to make progress on our strategic priorities to continue building a digitally enabled bank enhancing customer loyalty and being our clients lead partner in the climate transition benefiting from the investments we've made in technology marketing and sales force expansion.
We continue to support newcomers to Canada launching industry, leading digital pre arrival account opening capabilities through our expanded new start program the.
The combination of digital transformation and helping customers make real financial progress was recognized by Celent with two model Bank Awards.
Earlier this month, we announced the approval of our acquisition of the air miles reward program and opportunity to reinvigorate one of Canada's largest and most celebrated loyalty programs.
We're helping customers address the challenges of climate change through thought leadership leadership, such as our participation in the U N convened nature target setting working group as well as the launch of our greener future financing program to help agriculture businesses build future ready climate resilient operations.
And BMO wealth management, even in a challenging market environment, our focus on client advice and product innovation is bringing net new clients and assets to BMO, including our continued leadership in ETF flows and an improved mutual fund market share.
BMO capital markets continued to perform well despite muted client activity with record results in M&A and in our digital and liquid trading businesses, reflecting the benefits of our diversified business model.
All that we do is guided by our purpose to boldly grow the good in business and life and underpinned by our core values. We continue to be acknowledged for our ethical business practices recognized for the sixth consecutive year as one of the world's most ethical companies by the Ethisphere Institute the only bank in Canada.
To receive this award since its inception in 2007.
Our resilient and tested strategy is designed to deliver sustained performance through the cycle as.
As we move towards finalizing the integration of bank of the West we're equally focused on continuing to drive performance in all of our businesses and are uniquely situated to offer integrated North American banking wealth and capital markets products, and leading digital experiences that differentiate us from our competitors and drive long term value.
For our shareholders.
I'll now turn it over to typhoon.
Thank you Darryl good morning, and thank you for joining us.
I will start on slide 10 second quarter reported EPS was $1 30, and net income was $1 $1 billion adjusted.
Adjusting items are shown on slide 40 and include bank of the West acquisition related impacts for the initial provision for credit losses on performing loans and integration costs, which decreased net income by $517 million and $545 million respectively.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $2 93.
And net income was $2 $2 billion up 1% from last year, including a $230 million contribution from bank of the west excluding.
Excluding the addition of bank of the West net income declined due to higher Pcl's revenue increased 3% and <unk> declined 4%, reflecting good growth in net interest income from our P&C businesses offset by weaker results in wealth and capital markets due to continued muted market.
Environment.
Total PCL was $318 million, including a $75 million provision for performing loans compared with a total provision of $50 million in the prior year.
As usual I'll speak to these in his remarks.
Turning to slide 11.
The acquisition of bank of the West contributed $230 million to net income $1 $1 billion to revenue and 70 $755 million to expenses.
Results this quarter have come in line with our internal expectations.
On closing, we recognized purchase accounting fair value marks on back of the west slows in deposits and discounts on securities on our balance sheet, which accretive to net interest income.
As previously disclosed to manage the exposure to the impact of higher interest rates on capital from changes in the fair value of the assets and liabilities of bank of the west between the announcement and closing of the acquisition we entered into interest rate swaps that resulted in cumulative mark to Mark.
Gains of $5 $7 billion.
These swaps were largely offset from an interest rate risk perspective through the purchase of a portfolio of matched duration U S treasuries and other balance sheet instruments.
On closing the swaps were unwound and replaced with hedges, which in effect crystallize the unrealized loss position on our balance sheet. The amortization of the fair value hedge is reflected as interest expense.
The net impact of these two items increased back of the west net interest income in the quarter by $103 million and was recorded in corporate services.
Going forward, we expect this discrete benefit to reduce as the legacy bank of the West Securities portfolio is managed within the overall bank and replaced within our underlying earnings.
Plans remain on track to complete systems conversion and brand unification on Labor day weekend.
We remain confident in achieving the previously announced 670 million U S dollar expense synergies to be fully executed by the start of the second quarter in 2020 for the same timeline that we guided to at announcements.
Overall, we are very pleased with what we have seen during the first quarter post closing and excited about our opportunities associated with our expanded U S presence.
Moving to the balance sheet on slide 12 average loan growth was 28% year over year, and 14% quarter over quarter back over the west added $79 billion to loan balances in the current quarter.
On a constant currency basis underlying business and government loans increased 11% from the prior year with good growth across all operating groups and consumer loans increased 8%, reflecting diversified growth in Canadian P&C and wealth.
Average customer deposits increased 25% year over year, and 16% sequentially, including $86 billion from bank of the west.
On an underlying basis deposits were up 8% year over year and flat quarter over quarter.
On slide 13, we provide a view of deposit trends in our Canadian and U S P&C and wealth businesses.
In Canada strong balance sheet growth continues which reflects our continued success in capturing market share in our personal and business banking business.
Within retail deposits, we do see ongoing migration to term deposits as customers seek higher returns given the significant rise in interest rates.
In the U S. Our underlying deposit levels remained well diversified and above pre pandemic levels.
Although we are not immune to the impact of quantitative tightening and rate competition from money market funds on bank deposits Bmo's size instability continues to be an attractive offer for our clients.
Our digital deposit platform in personal banking is now supported with a larger retail branch base as a result of the bank of the West acquisition.
And our advanced Treasury management platform capabilities position us well in this environment.
We expect to see a return to sequential growth in the second half of the year as we continue to optimize our pricing strategy balancing growth and returns.
Turning to slide 14 on our next trading basis net interest income was up 36% and net interest margin was up 15 basis points from prior year, driven by the bank of the west strong balance sheet growth and margin expansion in the underlying businesses.
Year over year growth was partly offset by the impact of risk transfer transactions and higher low yielding assets for liquidity purposes.
Net interest margin was up nine basis points from last quarter.
The acquisition and net purchase accounting accretion benefit added 15 basis points and four basis points, respectively, while corporate services reduced the margin by eight basis points, mostly due to lower earnings on equity held in advance of closing the acquisition.
In Canadian P&C NIM remained stable as higher loan margins were offset by lower deposit spreads and the changing deposit mix, reflecting continued flows into term deposits.
And U S P&C margins widened by five four basis points sequentially due to a five basis point benefit from bank of the west as well as wider loan margins and other favorable impacts in the quarter, partially offset by lower deposit margins, reflecting competitive pricing.
With the transitory impacts of pre and post close balance sheet movements behind us, which generated more quarterly volatility in our margin, especially in corporate during the first two quarters of this year, we expect our margin to remain relatively stable during the second half of the year.
Moving to our interest rate sensitivity on slide 15.
Great sensitivity for the quarter has decreased quarter over quarter with the addition of back of the West's longer duration assets and reduction of short term liquidity balances that we held in preparation for the acquisition close our risk metrics now reflect a relatively neutral position consistent with our strategy and we believe that we are well positioned.
<unk> or the current environment.
Moving to slide 16.
Excluding the impact of bank of the West and the stronger U S. Dollar expenses increased 6% from last year driven by the follow through impact of targeted investments last year, including sales force expansion technology and marketing as well as inflation.
In addition, we incurred certain one time expenses during the quarter, including legal provisions and severance, which added approximately $80 million or 2% of our expense growth.
Sequentially expenses declined 5% due to the impacts of seasonal items in the first quarter and fewer days in the current quarter.
The impact of the acquisition and slower revenue growth have resulted in negative operating leverage for the quarter and year to date.
We expect that expense growth will continue to moderate and our operating leverage and efficiency will improve in the second half of the year as most of the follow through impact of last year's expense increases are behind us.
While weakness in the revenue environment may persist in the near term we have identified additional discrete expense management actions focusing on the entire expense base with a targeted reduction in our efficiency ratio.
Dynamic expense management positive operating leverage and improving our relative efficiency ratio continues to be management's priority focus.
These actions in addition to our confidence in meeting the targeted cost synergies at bank of the West are expected to result in meaningful positive operating leverage in 2024.
Our capital position remains very strong with a common equity tier one ratio of 12, 2%.
The bank of the West acquisition reduced the ratio by 680 basis points, partially offset by internal capital generation shares issued under the dividend reinvestment plan and the benefit from the implementation of the first phase of Basel III reforms this quarter.
Lower source currency <unk>, primarily reflected the elimination of the capital floor in the quarter.
Our current capital position, which now exceeds our pre COVID-19 level. After closing the largest bag was acquisition in our history complementing the strength of our balance sheet and gives us a distinct competitive advantage.
We remain confident that our CET one ratio will remain above 12% for the remainder of the fiscal year.
Moving to the operating groups and starting on slide 18.
Canadian P&C delivered net income of $864 million down 8% from the prior year due to higher provision for credit losses with strong pre provision pretax earnings growth of 7%.
Revenue was up 7% from the prior year.
Net interest income increased 12%, reflecting strong balanced growth and higher margins.
Expenses were up 6%, reflecting investments in the business, including sales force expansion and technology and higher salaries and remained relatively flat quarter over quarter in line with the broader trends in our consolidated results.
Loans were up 10% with 9% growth in residential mortgage lending and 12% in commercial loans.
Deposits increased 13% year over year, and 3% sequentially across both retail and commercial businesses with strong growth in term deposits.
Moving to U S P&C on slide 19.
Comments here will speak to the U S dollar performance.
Net income was $638 million up 37% due to the contribution from bank of the west which added $163 million in the current quarter.
Underlying results were up 2% driven by pre provision pretax earnings growth of 11%, partially offset by higher provisions for credit losses, compared with a recovery in the prior year.
Revenue was up 9%, excluding bank of the west, reflecting a 14% increase in net interest income due to higher margins and loan balances, partly offset by a decline in noninterest revenue.
Excluding bank of the West expenses increased 7% due to higher employee and operating costs and were down 1% quarter over quarter.
On the balance sheet back over the west added $55 billion to both loans and deposits.
Underlying loans grew 3% from the prior year and declined 3% quarter over quarter, primarily in commercial.
Underlying deposits declined 5% year over year and 2% sequentially.
Moving to slide 20.
BMO wealth management net income was $285 million down from $315 million last year.
The back of the West added $26 million in the current quarter.
Wealth and asset management, net income was $222 million compared with $248 million in the prior year.
Contributions from bank of the West and growth in net interest income and new client assets were more than offset by weaker global markets lower online brokerage transactions and higher expenses.
Insurance net income was $663 million compared with $67 million in the prior year.
Excluding bank of the West expenses were up 6%, mainly due to the impact of investments made in the business last year and down 2% quarter over quarter.
BMO capital markets net income was $388 million compared to $453 million in the prior year.
Revenues in global markets remained relatively flat as higher foreign exchange and equities trading revenue were offset by lower issuance activity and interest rate trading revenue.
Revenues in investment and corporate banking were up 2%, mainly due to higher corporate banking revenues and advisory fees, partly offset by lower underwriting activity.
Expenses were up 14%, including the impact of the stronger U S dollar higher technology costs, and the legal provision and down 3% quarter over quarter.
Turning now to slide 22, corporate services' net loss was $187 million compared with $111 million in the prior year.
The current quarter reflects lower earnings on the investment of excess capital that is now being deployed in the business, partially offset by the net accretion of purchase accounting fair value marks.
Per my comments earlier on the impact of pre and post closing activities corporate can experience. Some variability following an acquisition of this size, which resulted in higher net losses over the last two quarters compared with our normal range, we expect corporate to normalize in the second half of the year.
To conclude our operating performance this quarter reflects the benefits of our diversified business that is now operating at a larger scale with a strong balance sheet and expanded growth opportunities in North America.
With the benefit of a $1 three trillion dollar balance sheet, the strength of our capital position.
And the scope of our diversified businesses, we are very well positioned in the current evolution of banking industry that favors scale participants.
While we will always focus on long term growth strategies, we are not losing sight of the need to align our operating performance with our long term commitment to positive operating leverage.
I will now turn it over to Peter.
Thank you Tiffany and good morning, everyone.
Our risk performance continued to reflect strong risk management discipline across the bank this quarter, despite market volatility and economic headwinds.
Starting on slide 25.
The total provision for credit losses was $1 billion.
<unk> the initial performing allowance of $705 million related to the bank of the West Chase portfolio.
Adjusting for this one time charge total PCL was $318 million or 20 basis points up five basis points from prior quarter.
Embed provisions for the quarter with $243 million or 16 basis points two basis points up from prior quarter consistent with the expected trend to more normal loss rates.
Moving to slide 26.
Excluding the initial provision for bank of the West.
The 75 million provision for credit losses on performing loans for this quarter reflected portfolio credit migration model changes and economic uncertainty, partially offset by a modest improvement in some macroeconomic variables over the forecast horizon, we remain.
We're comfortable that at $3 $3 billion of performing loan allowances provides good loss coverage over four times coverage on trailing four quarters embedded losses and approximately two times coverage against 2020 losses.
Turning to the impaired loan credit performance in the operating groups.
Canadian retail impaired loan losses was $163 million or 32 basis points up from 26 basis points in Q1.
In U S retail impaired loan losses of about $41 million or 32 basis points up from 24 basis points in the prior quarter.
This PCL increase in retail was due to continued normalization and bought insolvencies and on delinquency rates in unsecured loans and credit cards.
For the residential 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 31, the riskier segment renewing over the next 12 months is nominal given our portfolio quality.
In our commercial and corporate businesses, we continue to see strong credit performance in Canadian commercial impaired loan provisions of about $10 million of four basis points down three basis points from previous quarter.
U S commercial business had embedded on provisions of $25 million or six basis points also down five basis points from last quarter.
Our capital markets business had very strong impact on results as well with embedded losses of one basis point.
The strong impact performance in our corporate and commercial businesses remain below historical averages and given the environment, We do expect corporate and commercial losses to normalize from Jesus always Evans.
On slide 27 bank wide impaired formations at $843 million increased $322 million relative to Q1.
The formation rate remains below our pre pandemic experience.
Gross impaired loan balance was $2 $6 billion or 41 basis points, including an increase of $436 million related to the acquired bank of the west portfolio.
Although slightly up over prior quarter, the gross impaired loan rate continues to be well below pre pandemic levels.
As you see on slide 30, we are providing additional information on our commercial real estate portfolio given investor interest.
Our portfolio is well diversified across geographies and property types.
Although the higher interest rates and office vacancies are a headwind for the sector. We have maintained consistent and disciplined underwriting standards and client selection throughout market cycles.
The office sub segment exposure represents only 1% of our overall loan portfolio and is monitored closely.
We have reviewed a large part of the portfolio on a daily basis and are comfortable with that exposure.
Overall, our commercial real estate portfolio quality is strong and while we have seen expected migration in the portfolio embed formations and losses continue to be modest and in line with expectations.
This was a significant quarter as we close the bank of the West acquisition on.
On slide 29, we provide an overview of the bank of the west of the legacy portfolio, which further diversifies our portfolio across segments sectors and U S regions.
The bank of the West portfolio Fair valuation included a credit Mark of one $1 billion.
The 705 million initial allowance provides additional provisioning on this portfolio.
Looking back at the quarter, we have seen both intended and unintended consequences from the pace of monetary policy tightening.
The failure of some U S regional banks added to market volatility this quarter why.
We continue to closely monitor our risk management approach and strong liquidity position resulted in solid risk performance throughout the second quarter.
As we look ahead, we are cautious about the economic environment.
Together with the bank of the West portfolio, we expect we expect embedded loss rates to trend towards low to mid 20 basis points.
Given the quality of our portfolio high allowance coverage and strong risk management capabilities, we are well positioned to manage current and emerging risks.
I will now turn the call back to the operator for the Q&A portion of the call.
Thank you. Please press star one at this time, if you have a question there will be a brief pause about the participants register for questions. Thank you for your patience.
Our first question is from John Aiken with Barclays. Please go ahead.
Good morning, not surprisingly, there's a lot of interest in the U S deposits and telephone you did a great job in terms of.
Sean demonstrating the flows but I was wondering if we could have someone talk to the performance of bank of the west specific deposits during the quarter and then secondarily the performance of your digital Oh digital deposit platform through the quarter. Please.
Let me just make a very brief comment and then I'll turn it over to Ernie John .
I think.
We we are obviously very excited about having bank of the west our expanded branch network and the ability to connect our digital to digital banking platform with.
With their physical presence and they're doing quite well.
I think we had the opportunity to obviously work with them early after we closed.
And.
Ernie and her team are focusing.
On on bringing their operations to the same targets that we have so I'll turn it over to Ernie for her comments.
And how that how that's going I think takes it just a couple of comments on the legacy bank of the West franchise. They did experience we did experienced balances deteriorating largely due to some pricing and product choices that existed.
At that time remember now they are not on our core platform that will happen in September , but regardless of the fact that they're not on our platform. We are able to adjust a few things in the franchise and we were able to adjust the pricing some product offering some campaigns and marketing to be able to introduce some changes that are more effective for that marketplace.
And in fact have seen very strong results as a result of those changes will reduce the attrition rate or migration.
Various product being able to support growth dropping.
Production by 30%, 40%, because we've offered out different products at different price points and that's been continuing to March to April and even through the past few weeks as we continue to monitor that and were impressed by the receptivity of the market and to the colleagues in the field that are able to present these offers to customer.
And and be able to retain balances and grow at the same time, our bank of the west represents about a 50% increase in the overall retail balances that we have in the U S.
And just a point back to the digital deposit taking BMO standalone as a business our branch network.
Well over the past quarter, our growing quarter over quarter and outperforming the market in terms of retail balances, we have not yet fully deployed our digital deposit taking capabilities across the 50 states. He died a slow ramp up will continue to ramp that up over the remaining quarters.
As necessary and that is proving to be very profitable at the same time as driving our balances into the franchise. So more to come on that front, but I'm really encouraged to see what's possible in the bank of the west franchise with partial capabilities at BMO brings then it only gets strengthened as we moved past the timber.
Through the conversion time period. So good overall strategy in the U S. Between the 1000 branches, we now have and the digital capabilities. So hopefully that answers part of your question.
No. Thanks for the color I appreciate it.
Problems.
Okay.
Thank you.
Our next question is from many women with Scotiabank. Please go ahead.
Hi, Good morning, there are a lot of interest in the outlook for for your U S business is broadly speaking the U S. P&C business is the U S still as attractive a market as it was when you first announced the bank of the West back in December 'twenty, one what's your perspective on that.
Yeah. Thanks for the question many of my perspective is unambiguously yes.
We we play the long game as you know.
Look the U S is the largest and most profitable banking market on the planet and do we have to make a decision I suppose in the first place do you want to play there or not and if you do.
Our view is that if you have a meaningful presence.
And you execute against that as we have for the last several years you've seen us.
Run a P&L that runs the same ROE and the same efficiency ratio in the U S S Canada.
And then you want to grow that and it'll go through cycles, and some cycles there'll be a little bit more difficult than others, but my view is through time, and I think youre going to see it's going to get particularly exciting as we ramp up the next few quarters. The answer to your question is emphatically, yes, and when you step back from it many when I step back a minute. Let me tell you if I were to clean sheet. It I would say what would.
You want in terms of your positioning in the U S market you'd want to operate at scale and so there I would refer you to page six of our presentation, where we show that we're in a pretty unique category of participants in the industry structure number one number two you'd want to be in markets where.
Business is good and you can grow and you're good at it and we pointed out that we're in three of the five largest markets in the U S 50 states digitally that is differentiated.
I'll give you my word on that relative to most of our regional banking competitors and thirdly, ideally you'd like it to be fully integrated into a bigger and broader north American business and balance sheet and thats, what we bring and so when the bank of the west.
Thats, a general comment I suppose many in particular, when we look at the comment I made to you last quarter. When we had this conversation that the expectation is that we would deliver an incremental $2 billion U S dollars of PPP T. By the end of 2025, it's as a result of all of those things as we combine those.
<unk> and so far keep in mind, we've owned that business for 79 business days, including U S weekends, and holidays and as I look out to fully synergize ing. The expenses by the end of only three quarters from now first quarter of 2024.
And then starting to build in the revenue synergies as we go through 'twenty four and 'twenty five.
I couldnt be I couldnt be more confident and I would say I'm more confident today. Despite the environment I am more confident today than I was when we made the acquisition announcement.
Understood and then just a follow up just on the regulatory side, which is definitely a concern for investors. It seems pretty reasonable that the fed is going to have a regulatory response to the crisis that we've seen so I'm just wondering how you view those risks that's specifically for BMO.
Regulatory uncertainty, but do you have a sense of how impactful the regulatory blow back if you want to call. It that will be on female yeah. No I know I know what youre getting at many I would say.
As we've said to you we are moving to a category three bank in the U S. I'd also take you back to the fact that we've said we thought we were always built in the U S for more scale and more customer throughput and more assets and that's what we've brought to it so.
Whatever regulatory implications there are with the current environment I feel very confident that were built to be able to handle them as they come I don't think youre going to see a radical a shock to our our architecture in the U S. At all in fact, we think we're built for it in the first place.
Are there any regulatory changes that you were expecting non particularly.
But you know, it's always an involving evolving I mean, I don't have any announcements to make on behalf of the fed if that's what you're asking.
No I didn't think so.
Thank you.
Next question is from Gabriel <unk> with National Bank Financial. Please go ahead. Good morning, I'd like to follow up with that line of questioning I guess I know you cant talk about future regulations. If you have any thoughts there I'd love to hear them, but just the FDIC levies that were announced a couple of weeks ago.
Oh, I get through but a $250 million, even with the cumulative impact of BMO is that in the ballpark.
You're also thing.
Moving to the category three you already built for that.
Just that you don't need to build additional liquidity.
And then finally on bank of the West, but I'm just looking at the total balance sheet loans plus deposits I net out the the fair value marks on loans and deposits I am still coming I guess, 4% to 5% below where your you expected to be in at least in the Q1 slide deck.
Is that in the ballpark and if so how does that affect your accretion outlook.
Hi, Gabriel this is typhoon so a series of questions. There in terms of the impact of.
The proposed FDIC assessment, that's probably going to be closer to $300 million okay.
And in terms of any expected changes on liquidity management et cetera.
Related to new a regulatory restrictions.
Restrictions look we operate our balance sheet is a $1 $3 billion balance sheets, and our liquidity management approach.
Is really not.
Based on only our U S presence and I don't believe that there's going to be a significant change in the way we manage liquidity.
Whatever may come our way in terms of.
A transition from a category four bank to a category three bank there will be some investments mostly related to operational readiness, because theres going to be a change in the frequency of data transfers theres going to be a change in the way we are.
Track single counterparty credit exposures et cetera. So those will require some operational investments, but you know we know what they are and we are well prepared to do that in terms of the size of the bank of the west balance sheet is most over that change occurred.
Prior to.
Closing day and what happened in 2022 is as you know bank of the West had significant excess liquidity.
On their balance sheets with there are.
Transactional deposits they had no wholesale funding supporting the asset side. So they basically we're focused on maintaining and growing their margin and they were willing to let go some of the deposits that really is what.
Constitutes the difference between the previous numbers versus the closing day balances.
But again from our perspective.
That is not a huge impact.
Looking at a similar type of expectations in terms of their overall performance and contribution to to BMO and as Roni articulated. We now obviously have a much different focus going forward in terms of growing both the deposit side of their balance sheet as well as the loan side of their balance sheet across all businesses. Thank you.
Thank you.
Next question is from Doug Young with dish on the capital markets. Please go ahead.
Hi, Good morning, just maybe to clarify on the bank of the west versus last quarter and what we saw on page 39, and the deposit side I kind of get the loan side looks a little bit lower.
Then what you kind of threw in to last quarter's slide deck and so im just confused as to what the difference would be on the loan side.
So there is an impact on the Mark which is I believe a couple of billion dollars.
And then in general I would say theres really nothing unique or different about the loan side of their balance sheet, except that they're facing the same type of environment that we all are.
A little bit of a.
Softer loan growth and also I would point out that.
<unk> like these with large acquisitions are always tend to slow down new customer on boarding acquisitions, so theres going to be a little bit slow out of the gate, but we expect that activity, especially post conversion on labor day to Nora.
<unk> from the current level. So this is nothing unusual in terms of what we've been expecting.
Okay.
That's what I was looking for and then that's it.
Just on the hedge unwind and the impact and you walked through.
The details in your prepared remarks, and so maybe I'm a little confused on that so I kind of get you get a negative hit from the unwind of the unrealized loss, because you're kind of crystallizing that but youre going to spread it over the period of time in which you flowed through the marks I thought that negative effect would be kind of closely matched with the loss I'm sorry, with the gain on that.
Mark are you, saying, it's a net positive impact.
Okay.
Yes. It is it was a net positive.
This quarter it will be a net positive, it's probably going to get smaller and smaller as we go forward and basically what happened is the combination of the hedge position.
And unwinding there was initial swaps booking the gain against <unk>.
Higher amount of goodwill and then overlaying new swaps against the treasuries that we had.
Brought us back really to the day, one announcements accretion number. So all that's left now for the next few years is for the net amount to accrete back it's going to get smaller and smaller as the calendar moves forward.
And keep in mind, what the dollar figure you said.
What is that dollar figure I was $103 million pretax this quarter.
Pre tax okay. So when I think of the bank.
Bank of the West I think it was $3 17 pre tax pre provision earnings from bank of the West alone that 103 is embedded in that is that correct. Yes.
Okay.
Okay, and then just clarification lastly, I apologize for the number of questions here, but the negative operating leverage sounds like Thats, what you expect in fiscal 'twenty, three but I'm a little confused you expect.
Just show some positive move.
And then towards positive operating leverage through the back half of this year or it's just going to be not get up in that fiscal 'twenty four you're anticipating material positive operating leverage just wanted to get some clarification how to think of it in the back half of this year, yes. So let me provide some clarification because with bank of the west and without bank of the West. These numbers tend to differ from each other with bank of the west in 2023 clearly.
There is a larger negative operating leverage because of the dynamic of their expense base.
And on a standalone basis, we still had negative operating leverage this quarter and overall.
The expense trends actually are very much in line with what we expected coming to this year. We did actually say very early this year, we significantly curtailed our sales head count expansion, we changed the timing of some of our technology.
Technology investments.
So we anticipated that on a quarter over quarter basis. This year, we would see either flat or declining expenses and that's what we exactly have seen in the first quarter now in the second quarter quarter over quarter, our expenses have declined.
What you are seeing in our negative operating leverage numbers is really the follow through impact of the expenses that we added to our base last year.
Once we were those are true and they are going to be very shortly we're going to be through them. Our expense growth will decline towards low single digits I don't Wanna BMO Standalone basis on top of it you also now have the cost synergies that especially towards the end of this year and into the first quarter of next year.
We're going to show up which by itself has is going to create positive operating leverage what we are now saying is as we look at our expense base.
And in.
And in a relatively weaker revenue environment. We also tend to make other expense decisions at Banco back at BMO stand alone in order to get back to our targeted efficiency ratio, which always was around 55%.
We will continue to assess those will make those decisions and combined with the bank of the west synergy pick up these.
These additional decisions that we are looking at we expect those two to generate meaningful positive operating leverage in 2024.
Got it appreciate the color. Thanks.
Thank you our next.
Question is from Scott Chan with Canaccord Genuity. Please go ahead.
Good morning, maybe tackling just a couple of.
Questions I'm still going through it but in terms of the bank a little less contribution. They just hit your wealth management and U S. P&C segment did it hit in the other segment at all.
Those are the two main points in corporate obviously has some impact as well.
Just on the corporate I noticed the preferred equity dividends shot up to 95 million you know in total was 127 versus $38 million last quarter was that due to bank of the west and how do we.
Actually for it Yeah, I think I think.
That really is dependent upon the frequency of the preferred dividend payments. Some of them are semiannual some of them have different frequency. We actually are happy to share with you. The details as to on a quarterly basis, what amount of preferred dividends, we pay out so we'll be able to give you. The details for you to track that.
Yeah, that'd be super helpful.
Knowing the nuances on on there.
And just lastly on capital you talked about the first phase of the E. Three reforms this quarter.
Looking out to future quarters is visible.
Visibility, if theres going to be not negative not positive or negative impact on our further phases. So the next important date is the first quarter of next year.
That's when the.
The trading rules will.
We will come in and then as you know between now and the first quarter of 2026. The floor factor will go up by two 5% every year.
But the more important a quarter of all for the next three years is probably going to be next next year's first quarter, which is going to have a negative impact.
On capital.
And we will shortly.
With you are our assessment of what that maybe once we conclude the work that's currently underway.
Okay got it thank you very much.
Thank you. Our next question is from Paul Holden with CIBC. Please go ahead.
Thank you a couple of questions for you I guess first thanks for the additional detail on the CRE portfolio on slide 30 and on that point.
Hoping you can provide some more color around the exposure in California, just given the focus in that market, maybe you can give us a context of.
How much is office, how much it might be more exposed to like San Francisco L. A for those regions that are or reading a whole lot about.
Sure. Thanks.
Thanks, Paul.
So we have given the <unk> portfolio, what I'll say is that on page 30, you see 14% of our total accretive.
$67 billion in California.
We haven't broken down within that specifically office or other areas, but I would say you can take a general mix of the broader portfolio of what we have.
Nice step back I would say that the strength of our credit portfolio remains pretty strong.
Within that we've got a.
A deep dive across all of our large properties and exposures and the office for a B mall is 1% of their total book.
So as you've seen in the disclosure, 10% of our Cree is office, which equates to 1%.
And overtime, obviously provide more disclosure, but I think the jump off point of the strength of the relationships. We've built over the last 2030 years, both at BMO as well as at bank of the West actually positions is very bad.
And so again, we added some California with the bank of the west portfolios, but I feel very good about the quality you can see that in our impairment book, there's a very normalized trend coming in.
And we are watching the news and tracking with our borrowers.
Going on so I wouldn't highlight any significant area of concern.
I would just also add that we've got the credit marks from the bank of the West portfolio. We've got the opening provision. So despite a very high provision coverage overall, we have a significantly higher coverage on commercial real estate that we've been carrying for the past few quarters, though so obviously we track this.
I think this is a topic, which all of you and all of US are interested given all of the news, but where we are today I feel very confident about the quality of our book.
Okay. Thank you.
Second question is with respect to.
Commercial and corporate loan growth would be great to hear an update on.
How you're viewing or what your your gross appetite who looks like right. Now you know we're hearing a lot about regional U.
U S regional banks.
Pulling back in terms of credit underwriting standards.
Standards wondering.
If you're slowing growth intentionally or if you're seeing less demand in certain pockets, maybe just a broad update there in U S and Canada would be would be helpful. Thank you Yeah sure. Let me begin and then maybe I'll ask nadeem to jump in from a business perspective.
Overall, you know you've seen a risk underwriting criteria have been through the cycles lenders with deep relationships and I think that continues the trend we are not walking away from a new landing a new relationship it's really a function of the economy and so you're seeing business activity slowed down so within that loan portfolio growth, there's a lot of.
Recycling happening.
We are growing the book I think growth will be slow coming off the back of all of the things you are hearing and seeing probably in the mid single digits and then more focus on some of the other sectors again, just from a balance portfolio growth but.
But I'm pretty confident just given the quality that are.
Growth will continue, albeit slower just in line with any of the other banks I think with closing the bank of the West acquisition. Now you can see we are again in a position of capital strength and so I think.
Relationship lending continues and I think we've said to you in the bus 90% of those are sole bank lead bank and we expect we will continue to capitalize on that I think would you add something yes sure.
I would say that if you look at the countries in north and South U S is definitely slower than what we see in Canada.
But we're still we're still doing deals that are still doing loans and there are pockets that you know when you look at aggregate look at food.
We're still seeing good volumes, there dealer finance media Financers good volumes in those as well, but areas where leverage finance for free those are areas of course that has slowed down dramatically in the U S. It will affect our growth and Canada. Those guys have slowed down as well just not to the same degree so as Peter said, we're still growing.
We're still doing deals the volumes are down as they would be in any cycle, but our risk appetite as Pierre said and I'll just back up one more time and say it is that we go through cycles were not eating out of industries.
But we are looking at capital we are looking at risk optimization in return and we are looking at long term relationships and that's how we get through cycles time and time again.
Got it. Thank you that's it for me.
Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning.
In the past when that particular asset class.
Came under some pressure the banks have given us some outlook on the loss content in that particular asset class.
Comments were around hey in a stressed environment, we could see you know X 100 basis points of loss content or something to that effect is there any way to size that in the context of commercial real estate as a whole and maybe office in particular specifically.
In a stressed environment have you given some thought to what the loss content in those businesses could be I. Appreciate that these are not massive parts of bmo's portfolio.
Overall loans, but it would be helpful to get some outlook there.
Yeah.
Again, Maria Piyush I would begin by saying that are you know.
We've come off a very benign cycle and so.
The early parts of this year, we have we've been hinting to you I think it actually more normalizing.
Normalizing and so these trends are really normalizing versus.
Stress, having said that from a risk management perspective, we have a good discipline offers regularly stress testing upward for the OS overtime.
When the normal loss rates have been zero to one basis point in commercial real estate for us over the last 18 years and I. Just said we are significantly over provisioned compared to that loss rate I feel pretty good about maybe I had it so unlike some of the news items you here.
There is a large stratification within commercial business Jay the preponderance of multifamily, which is doing very well single family, but yes. We have looked at office again I'll reiterate office is 1% of our book within the 1% as you look at the disclosure between recent medicals that are doing doing extremely well I can then segment down.
213 office classes, a b or C in urban and suburban and we've done a deep dive so in our stress test we.
We don't see any immediate worries.
Now, but we know there is blood in the water there will be impacts as rates rise as cap rates change and so in due course, we'll come back and you'll see those in the results. If there is something that is of a higher concern.
If you go back to the 30 year history of loss rates overall that 30 basis points across the portfolio in that some stresses here and there but at the moment I don't have much more to offer other than we feel very confident about our overall portfolio.
Did you say 13 or 30 basis points of losses over the last 30 years in commercial real estate.
He said overall the across the entire portfolio three easier with 30 basis points and he's coming off the benign cycle and so you're seeing our loss rates. This quarter at 16 basis points on embed. So we are still a long way to the normalized average before we start thinking about stress.
So I don't want to put words in your mouth, but it sounds like what you're saying is that the loss content on your commercial real estate and office.
Just on the work you've done to date the loss content is still very very modest that seems to be the message you're sending unless I'm misinterpreting that.
Correct the loss content from the performance we have seen.
And the formations.
And the other you've watched this we have a we feel pretty strongly about it.
Got it thank you.
Thank you. Our next question is from and Lamar Prasad with core Mark. Please go ahead.
Thanks, maybe just to start off I, just want to summarize a lot of the prior answers to the loan growth question.
Would it be like I'm going to ask it very directly would it be fair to suggest that BMO has not changed any of its underwriting standards and in the U S or Canada.
And then yes.
If that's true then would it be fair to suggest that in the commercial loan growth in the U S. Excluding bank of the less so that sequential decline I think it was 4% should reverse.
In future quarters.
And then sometimes it's we've seen commercial loan growth. This soft excluding perhaps some like one time negative impact in the U S like PTC runoff or et cetera.
Wanted to be really clear on that part.
Yeah.
Sorry.
If you wish again, I'd say that the risk appetite is a through the cycle risk appetite and our risk underwriting hasnt changed now in that given seasonality given cyclical trends, we tend to overstress more of the underwriting.
Origination, but this really is much more of a function of the market that it is a function of us in that market and so.
Loan growth demand is slowing down you're seeing that across the banks you are seeing across sectors and so as economic activity picks up as there's more confidence in the market I think we start to see more originations and it will be definitely for our clients.
We continue to like I said managed through the cycle in that risk appetite, we manage through our concentration risk management and all of those have held us in good stead over the many years and we don't plan to change any of that otherwise put lamarck Daryl just to help on the question I think in time youll be youll be exactly right. The question is how.
Much time will it take for you to be exactly right, meaning the vast majority of the.
Of the catalyst for the decline in loan growth is in fact, if not the entirety of it is demand. It's the market, we havent changed underwriting standards and we don't change our approach to managing our clients and so as we work through this phase of softening economic activity.
That should be the outcome.
As that Phase turns then you should see a return to positive loan growth for us, particularly in commercial and as you know our strategy has always been in good markets. When loans are growing broadly in the industry and commercial in both Canada and the U S. Our strategy is to outperform that market when that occurs and that would be our intent today.
No change.
Thanks, and then my next question I want to turn to U S P&C margins.
At your waterfall on slide 14, it seems to suggest that excluding bank in the last margins that turned negative on the Standalone business. If you will.
It looks like it was a rapid shift in deposit margins comparing this waterfall versus last quarter's positive margins turned to a negative drag on this well is this directly related to the U S Regional bank turmoil on that.
You talked to the outlook for U S specific retail names just says.
I mean for my modeling.
Yeah. So.
To too.
Two elements here.
You are seeing actually what the bank of the West contribution.
Was to U S P&C them, we're quite pleased.
With a you know pretty healthy contribution to our margins.
The.
Pact of faster deposit.
Repricing clearly has an element of very strong competitive markets in the U S with respect to deposit rates.
We try to sort of maintain a stable approach to how we price our deposits, but the market.
Over the past 90 days.
Has accelerated.
And we are feeling the impact of that on our margins. There's also an element of migration to term deposits, which looks a bit more stronger in Canada, but in Canada, it's actually coming slowly two in and probably over the next couple of quarters will run through the migration impact on Canadian <unk>.
<unk> in the U S and my expectation is that until the market achieves.
<unk> picture, we will probably continue to see.
More fast a repricing of both commercial and retail deposits I suspect by the end of this year.
With also the fed hopefully coming.
To the end of their rate increase cycle that pressure will will come off.
So it sounds like that relative to that $3 96, we could see that come down a bit and then hopefully.
Switch course in 'twenty 'twenty four is that does that is that fair.
Yes, but not meaningfully I mean as I look ahead.
Both in Canada as well as in the U S. We are seeing a fairly stable.
Net interest margin in our P&C businesses and the same message holds true for our consolidated margin as well so.
We're not we're not expecting.
Significant cigna.
Significant significant pressure on these margins.
Okay. Thanks, that's it for me.
Thank you we have no more further time for questions I will now turn into bad just quit the meeting over to Darryl White well. Thank you operator, and thank you all for your questions I have two important thoughts to close the meeting with one is to remind us all that BMO is highly diversified business mix strong.
<unk> Foundation built on the strength side stability of our balance sheet and fortified by our superior risk liquidity and capital management is built to perform in any environment and second before we close the call I want to take a moment to recognize while he's here with us in the room, Dave Casper, who is retiring next month after.
Over 40 years of service with BMO, Dave as you all know has been instrumental in bmo's growth, particularly but not exclusively in the United States and under his leadership, our commercial banking businesses have become a top five commercial lender on the continent. Dave has also played as you all know a very key role in the acquisition of the bank of the.
Western Theres been a staunch supporter of all the communities, we serve but particularly the great city of Chicago, So I'll always be grateful for Dave's legacy of outstanding leadership at female with that I. Thank you all for participating and we look forward to speaking to you again in August thanks, everyone.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.