Q3 2023 Bank of Montreal Earnings Call
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All participants please standby your conference is ready to begin.
And welcome to BMO financial group's Q3, 2023 earnings release and conference call for August 29, 2023, you'll host for today is Christine view. Please go ahead.
Thank you we will begin the call today with remarks from Darryl White Bmo's CEO , followed by Typhoon, Susan our Chief Financial Officer, and P. S. Agra, while our chief risk Officer also present to take questions are Ernie Johansen head of beam on North American personal and business banking Nadeem Hershey head of BMO commercial banking.
Dan Barclay head of BMO capital market, <unk> commander head of BMO wealth management and go hack at BMO UFC.
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 matters, just performance on a reported and adjusted basis and consider.
We're supposed to be useful in assessing underlying business performance Geralyn typhoon, we will be referring to adjusted results in their remarks, unless otherwise noted as reported and with that I will turn the call over to Daryl. Thank you Christina and good morning, everyone.
I'd like to start this morning by acknowledging the ongoing devastating wildfires impacting British Columbia, and the northwest territories, we're committed to doing our part to help make sure the families businesses and communities get the support they need including financial relief for options and options for those affected.
Also today I would like to welcome Darryl Hackett, our U S. CEO to his first investor call Daryl has been with BMO since 2000 and for most recently as president of BMO wealth management U S. His track record of dedication to our clients' success extensive community leadership and commitment to eliminating barriers to inclusion will be.
A key contributor.
Contributor to the ongoing success of BMO U S.
Turning to the quarter our performance continues to reflect the strength diversification and active management of our businesses in an evolving environment.
This quarter, we reported earnings per share of $2.78 impacted by onetime items that we will discuss.
Pre provision pretax earnings were up 6% from last year and all bank revenue was up 22% driven by record results in Canadian personal and commercial banking supported by double digit deposit growth and good contribution from the bank of the west.
Credit performance is normalizing in line with our expectations with higher provisions this quarter compared with historically low levels.
Our balance sheet remains strong, reflecting our long standing track record of superior risk management.
We further strengthened our capital position with a CET one ratio of 12, 3% an increase from Q2, despite the impact of the closing of the air miles transaction.
For the year to date return on equity was 12, 6% and return on tangible common equity was 15, 8%.
As we discussed last quarter, we're taking action to adjust to market forces that are creating near term headwinds for the industry.
And negative operating leverage for us this year.
We have a proven track record of <unk>.
Disciplined expense management, while making targeted investments, where we have the best opportunities to support our customers and deliver sustainable growth.
Our approach has delivered positive operating leverage in each of the last five years and continuous improvement in our efficiency.
Our results this quarter included severance severance costs in each of our businesses related to work force reductions representing approximately two 5% of our total FTE, which is complementary and incremental to our ongoing bank of the west integration program.
We're undertaking these changes to enable us to accelerate our efficiency initiatives and align investment with customer and market opportunities.
We expect the impact of these initiatives combined with the expense synergies still to come from the bank of the West to result in a return to positive operating leverage for fiscal 2024.
Our U S segment has consistently contributed to the bank's earnings growth and efficiency improvement.
This quarter for the first time pre provision pre tax earnings in the U S exceeded $1 billion U S double where we were four years ago.
We have a differentiated position in the U S market ranking in the top 10 of diversified banks, while benefiting from the strength of Bmo's trillion dollar North American balance sheet.
And we're positioned to accelerate our long term growth strategy as we complete the acquisition of the bank of the West.
Conversion is on track for the upcoming Labor day weekend, we're bringing the best of both companies together for our employees and ensuring a smooth transaction for our customers, who will benefit from the greater convenience speed and product options of a broader company with deeper resources.
Employees and customers are embracing our entry into the market and we're already seeing a strong response to our offers and campaigns having opened thousands of new accounts and that's before the full rollout of product capabilities and marketing post conversion next weekend.
In addition, we've.
We've added hundreds of active clients in our trading businesses and continue to complete one client transactions between commercial and capital markets.
We know that brand recognition as one of the most powerful factors in attracting new customers and our brand campaign reinforces the scale and the strength of BMO.
Well BMO may be new to parts of California, we're letting customers know, we're not new to banking and we're here to stay.
We're confident in the power of our integrated North American franchise, and our strategy to help clients make real financial progress.
Canadian P&C delivered another quarter of strong performance with personal and business banking breaking through $2 billion in revenues for the first time and continuing to grow market share.
Leading customer acquisition and strong customer Onboarding, there has been a key contributor to our growth.
Our new to Canada segment. For example is up 40% over last year, we're focused on meeting customers, where they are including our branch inside Calgary as Gateway Newcomer Center, where our teams provide specialized guidance and resources.
In addition, this quarter, we closed the acquisition of air miles Canada's longest standing and most recognized loyalty program with 10 million active customers representing half of Canadian households.
We're leveraging BMO strengths in innovation and digital to expand and enhance the program and are already seeing early success in attracting new collectors and partners.
And U S. P&C, we grew revenue 51%.
Reflecting the addition of the bank of the West.
Loan demand has been muted across the industry, we're continuing to add customers and deepen relationships. This quarter, we launched BMO V payout, an integrated payables solution expanding our product capability within bank of the west to all U S clients. It's a great example of working together as one.
<unk> Bank and building our position as a leader in <unk> payments.
We're committed to actively fostering a culture that gives people space to innovate BMO.
BMO was the only financial institution named among the top 30 companies on fast company's best workplaces for innovators list and we were recently recognized by J D power ranking first in customer satisfaction with online banking in Canada.
These are testament to how Bmo's digital first strategy and industry, leading experiences are exceeding our customers' evolving expectations.
And BMO wealth management, we continued to deliver results and extend our leadership in the ETF market. This quarter. We further expanded our innovative suite of active exchange traded funds to provide investors with more choice and portfolio customization.
BMO capital markets had a solid performance, including good revenue contribution in the U S. Even as client activity remained below historical trends.
We have key momentum in key areas ranking in the top 10 in global and North American M&A, and adding products and capabilities in our U S rates business. Examples of how we're continuing to provide value added expertise and products in support of our clients' needs.
Our purpose to boldly grow the good in business and life got guidance. All we do this quarter. We were included in corporate Knights listings of Canada's best 50, corporate citizens with top quartile scores and board gender diversity and executive racial diversity the only Canadian bank named <unk>.
The list and.
In addition, we received a top quartile sustainable revenue score, reflecting our commitment to sustainable financing and responsible investing.
As we look ahead, we're all aware of the macro headwinds facing the industry.
These external forces are influencing the environment, we're all operating in and I believe they could persist for some time to come.
Against that backdrop, what sets <unk> apart is the strength of our team and the emphasis that we've placed on dynamically managing our business to control the forces that we can control.
We're taking action to reduce our cost base, while making investments to drive high performance for the long term, including realizing the synergies from bank of the west.
I am confident that our unique and differentiated north American growth strategy sets us apart on both sides of the border.
We have the scale across our Canadian and U S franchises to continue to support our customers advance our digital strategy and make meaningful differences in the communities that we serve.
I'll now turn it over to Typhoon <unk>.
Thank you Darryl good morning, and thank you for joining US my comments will start on slide nine third quarter reported EPS was $1 97, and net income was $1 $5 billion.
Adjusting items are shown on slide 38 and include acquisition related impacts for integration costs and amortization of intangibles, which decreased net income by $370 million and $85 million respectively.
As well as a $131 million after tax charge related to tax measures enacted by the Canadian government that amended the HST definition for financial services.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $2 and 78 and net income was $2 billion down 4% from last year.
Our results this quarter were impacted by severance costs and legal provisions, which reduced net income by $245 million and earnings per share by 34 cents on a combined basis.
Revenue increased 22% with good organic growth in each of our operating groups and the benefit of acquisitions.
<unk> increased 33%, primarily due to the impact from acquisitions.
P T of $3 $1 billion was up 6% driven by strong growth in our Canadian P&C business contributions from our bank of the West acquisition and higher results in BMO capital markets.
Total PCL was $492 million, including a 159 million dollar provision for performing loans compared with a total provision of $136 million in the prior year Piyush will speak to these in his remarks.
Turning to slide 10, the acquisition of bank of the West contributed $167 million to net income $1 $1 billion to revenue and $749 million to expenses.
We are pleased with the bank of the West second quarter post closing results as their contribution remains in line with our expectations.
We are highly focused on successfully executing our systems conversion and brand unification. This weekend, which will complete the full integration of bank of the west within our U S segments as.
As we have shared with you since the announcement our confidence level in achieving the cost synergies remains very high.
To date, we have been tracking ahead of our expectations on cost synergies and with the benefit of additional analysis over the last two quarters. Since we closed the transaction. We believe there is potentially more upside, including third party expenses and technology costs.
We plan to give you a final post conversion update when we report our fourth quarter earnings on all relevant metrics.
Moving to the balance sheet on slide 11 average loan growth was 22% year over year or 21% on a constant currency basis, including bank of the west and good growth across our businesses.
<unk> period end loans were down 1% or flat on a constant currency basis.
Consumer loans were higher driven by mortgage growth in Canadian P&C business and government loans were lower as growth in BMO capital markets and Canadian P&C was offset by lower commercial loans in the U S. P&C.
We expect loan demand in the U S will remain muted through the end of the year continuing the trends that we have seen during the last two quarters, while modest growth is expected to continue in Canada.
Average customer deposits increased 22% year over year from bank of the west and higher balances in Canadian P&C and BMO capital markets.
Sequentially period end deposit balances were stable and up 1% on a constant currency basis with strong growth in term deposits in Canada offset by declines in our U S P&C and wealth management businesses.
Turning to slide 12, we continued strong deposit growth in Canada is the result of continued success in customer acquisition, new products and digital investments across our retail and commercial businesses and we have seen signs of term migrations starting to slow.
In the U S trends have stabilized and going forward, our enhanced digital platform combined with a larger retail branch network.
And our advanced Treasury management capabilities addressing the needs of our commercial clients, especially post conversion should help us grow our deposit base.
Turning to slide 13.
On an ex trading basis net interest income was up 25% and net interest margin was up seven basis points from the prior year driven by bank of the west and strong balance growth and margin expansion in the underlying businesses.
Year over year growth was partially offset by the impact of higher low yielding asset balances for liquidity purposes.
Net interest margin was up two basis points from last quarter, driven by higher margins in Canadian P&C, partially offset by lower margins in U S P&C and wealth businesses.
In Canadian P&C NIM increased by seven basis points, driven by wider deposit margins as well as higher loan margins and favorable change in our loan and deposit mix.
And U S. P&C NIM was reduced by 16 basis points sequentially, driven by lower deposit balances and margins as well as lower loan margins.
We continue to expect relative stability in our overall margin as the benefit of reinvestment of equity and non maturity deposits at higher yields offset pressures from higher deposit costs.
Although we may see some NIM tightening in Canada over the next couple of quarters based on strong pricing competition in loans and deposits in the U S. We expect a more stable outlook.
Moving to slide 14 expenses increased 33% from last year, mainly due to bank of the west and higher severance costs sequentially.
Sequentially expenses were down 1%, excluding the impact of severance costs three more days in the current quarter and the addition of two months of results from the acquired air miles business.
As we predicted earlier in the year the expense trends are improving based on our decision to curb expense growth earlier in the year and reinforced by the dynamic expense management actions, we have taken this quarter to moderate growth and meet our commitment to positive operating leverage and improved efficiency.
This quarter, we incurred severance costs to accelerate operational efficiencies across the bank, while we continue to align resources to areas that will support long term customer growth.
We expect this to drive expense savings of approximately $200 million in fiscal 2024 and run rate savings of approximately $250 million by early 2025.
In addition, we have identified further actions to optimize real estate technology and procurement costs.
Next quarter, we will record an impairment charge of approximately $45 million for real estate reduction opportunities that will generate future savings.
The estimated cumulative run rate benefits from the severance costs and these additional actions are estimated to exceed $400 million at an annualized basis.
Combined with the targeted cost synergies with bank of the West. We expect these will result in positive operating leverage in 2024 and help us continue to invest in our businesses, while keeping our expense growth at acceptable levels.
We expect our expense trends to start reflecting these benefits starting in the first quarter of 2020 for once the conversion related activities. This quarter are behind us.
Turning to slide 15, our capital position remained strong with a common equity tier one ratio of 12, 3% up 10 basis points from the prior quarter.
Internal capital generation shares issued under the dividend reinvestment plan and lower resource lower source currency, our Wi primarily reflecting change in assets were mostly offset by the air miles acquisition and the impact from acquisition integration costs and tax related charge in the current.
Quarter.
Moving to the operating groups and starting on slide 16.
Canadian P&C delivered net income of $923 million down 4% from the prior year.
Pre provision pretax earnings grew 10% year over year offset by higher provisions for credit losses.
Record revenue of $2 $8 billion in the quarter was up 10% driven by 10% growth in net interest income, reflecting both strong balanced growth and higher margins as well as 11% growth in noninterest revenue due to higher card fees as well as the acquisition of air miles.
Expenses were up 10% versus prior year, reflecting the impact of severance costs and inclusion of air miles.
Loans were up 7% year over year with 8% growth in residential mortgage lending and 7% in commercial loans and were up 1% from the prior quarter.
Deposits increased 12% 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 17, my comments here will speak to the U S dollar performance.
Net income was $489 million up 10%, mainly due to the contribution from bank of the west.
Pre provision pretax earnings growth of 22% was partially offset by higher provisions for credit losses.
Revenue was up 51% year over year, driven by bank of the West.
Sequentially revenue was down 3% due to lower deposit margins and lower loan balances.
Expenses increased 82% year over year, primarily due to the impact of bank of the west and up 4% quarter over quarter, primarily due to severance and higher advertising costs as we prepared to rollout our unified brand across our U S markets.
Loans were up 53% from the prior year driven by the bank of the West and declined 1% quarter over quarter, primarily in commercial.
Deposits increased 41% year over year and declined 3% sequentially.
Moving to slide 18, BMO wealth management net income was $304 million down from $325 million last year wealth and asset management net income was $223 million compared with $264 million in the prior year.
Contributions from bank of the West and growth in new client assets were more than offset by lower net interest income and higher expenses.
Insurance net income was $81 million compared with $61 million in the prior year driven by favorable market movements in the current quarter.
Expenses were up 15%, mainly due to the impact of bank of the West investments made in the business last year and severance costs in the quarter.
Moving to slide 19.
BMO capital markets net income was $316 million up 18% year over year.
Revenue in global markets was up 7%, reflecting higher trading activity.
Improved client activity in investment and corporate banking and the prior year markdowns on loan underwriting commitments resulted.
And a 35% increase in revenues year over year.
Expenses were up 17% driven by higher performance based compensation and legal provisions.
Turning now to slide 20.
Corporate services' net loss was $159 million compared with $187 million in the prior quarter and net income of $7 million in the prior year.
To conclude we acted with pace this quarter to accelerate operational efficiencies that are necessary to align our operating performance with our long term commitment to positive operating leverage and we will continue to exercise disciplined expense management going forward.
While remaining focused on our long term growth strategies.
Strength of our North American franchise supported by the underlying diversification of our businesses. We will continue to create a significant differentiation for BMO as the banking industry continues to evolve.
I will now turn it over to Peter.
Thank you typhoon and good morning, everyone.
Our risk performance continues to reflect strong risk management discipline across the bank against a backdrop of significant monetary tightening and other macroeconomic headwinds.
Starting on slide 22.
Total provision for credit losses was $492 million or 30 basis points.
And back provisions for the quarter were $333 million or 21 basis points up five basis points from prior quarter consistent with the expected normalization in loss rates.
Moving to slide 23.
Performing provision for credit losses of $159 million for this quarter, primarily reflected portfolio credit migration, which is a natural outcome of the higher interest rate environment.
Over the last five quarters, we have added consistency to what allowance to reflect risks in the economy.
A $3 $4 billion of performing his own allowance provides good coverage of over three four times on trailing four quarter impaired losses.
Turning to the impaired loan credit performance in the operating groups.
Canadian retail impaired loan losses about $174 million or 33 basis points up one basis point from last quarter.
For residential real estate secured lending we continue to continue to view the risk from higher rate as modest giving out high credit quality borrower base and low ltvs.
Delinquency rates and losses remains though and based on data over the last couple of quarters.
Customers renewing are able to absorb the impact of the higher interest rates.
In U S retail impaired loan losses were $55 million or 41 basis points up nine basis points from second quarter, primarily due to unsecured credit losses.
Turning to our corporate and commercial businesses.
Canadian commercial impaired loan provisions with $35 million or 13 basis points up nine basis points from very low loss levels in Q2.
U S commercial embedded losses was $64 million or 16 basis points up 10 basis points from prior quarter, driven by a large provision in the retail trade sector.
Our capital markets businesses continue to experience low impaired loan results with a loss of $1 million this quarter.
On slide 24 bank wide impaired formations of $917 million increased $74 million from second quarter.
Gross impaired loans was $2 $8 billion up $186 million from prior quarter.
The gross impaired loan ratio of 44 basis point remains below pre pandemic levels.
On slide 26, we provide an overview of our commercial real estate portfolio.
The portfolio is well diversified across geographies and property types.
Throughout market cycles, we have maintained consistent and disciplined underwriting standards and client selection.
The office sub segment, which represents 1% of our overall loan portfolio is monitored closely and is diversified across urban and suburban areas with no concentration in any particular city.
As expected we have seen negative migration in the portfolio.
Impairment and losses remain low.
Overall, we are comfortable with our commercial real estate portfolio, given the caf with client selection strong credit structures and credit quality.
As we look ahead, we continue to monitor those would be the macro environment.
The economic outlook unfolds in line with consensus estimates, we expect embedded loss rates to remain within the low to mid 20 basis points consistent with this quarters performance.
Given the quality of our portfolio high allowance coverage and strong risk management capabilities, we remain 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.
Thank you we will now take questions from the telephone lines. If you have a question and you are using a speaker phone. Please lift your handset before making your selection.
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Our first question is from Ebrahim <unk> from Bank of America. Please go ahead.
Hey, good morning.
I guess, maybe typhoon first question just unpacking, what you said on the net interest margin. If I heard you correctly that NIM could see tightening U S expect more stabilization.
That's the opposite of what I would have thought I would have expected the U S pressure to continue on deposit pricing.
Some promotions that you might've done for systems integration with bank of the West and in Canada. The back book repricing should serve as a tailwind to the NIM going forward. So clearly I'm missing something if you can.
And elaborate on what the dynamics out both on the asset and the deposit side.
Giving that NIM outlook sure I will make some comments and then also turn it over to Ernie and the team for what they are seeing in the U S and Canada. So I'll start at the interpreter enterprise level Abraham we actually feel very good about how we are positioned today, our NIM expanded a couple of basis points, we are guiding for Morris.
Stability.
And in the foreseeable future.
You know where rates are today clearly we are benefiting from higher longer rates and we are I think are pretty well positioned.
To deal with whatever the monetary authorities do in Canada, and the U S. So at an enterprise level.
Our NIM.
Positioning looks very good in the current environment coming down to sort of Canada, and the U S and Canada this quarter.
Have seen deposit spread widening some loan spread widening and I think our business manage their spreads very well during the quarter, but at the same time, we are aware of rising.
Reising competition, both on deposits as well as loans, especially.
As the quarter came to an end.
And we're cognizant of how that May impact, our NIM going into the next couple of quarters thoughts the comment about some tightening in Canada.
In the U S.
In Canada, obviously, we also benefited from good deposit growth.
Relative to loan growth during the quarter, that's always very helpful. In the U S.
The pricing competition continues clearly theres, no, let down yet and we're not necessarily anticipating a significant change I think in general migration towards term deposits will continue.
We are those switching to a more growth mode.
And our personal deposits as well as commercial deposits, which will be helpful, which will support some of that stabilization. We are also expecting.
<unk> loan spreads in the U S, which also is helpful and then overall the corporate.
Interest rate risk management related support that is provided by the rollover impact of our non maturity deposits is helping.
The U S P&C business, so I think.
Both of these expectations.
Are in line with what we are seeing in the market as well as our overall risk management approach without any comments or any entity.
Yeah.
Sure.
I would just say it characterized that loan volumes are down of course, both sides of the border, but there is a divergence. So in Canada, we're still seeing better loan volume demand and more opportunities for deposit growth, but the competitor sets are different as well so the Canadian banks are still fighting for market share there so far.
Writing on structures and so we're not seeing as much pricing discipline in Canada on the other hand, the U S. A.
With the specialty regional banks tightening up on capital and liquidity.
We are seeing structures now tightening we are seeing banks, taking lower holds.
And that is leading to stabilization in our margins and spreads within the loan book. So that's why we're seeing a bit of a divergence.
And then on the deposit side, let me just make some comments about U S. First then Canada and so on.
In the U S. We're seeing some actual good performance relative to peers on a retail book, that's a function of both the legacy BMO aside as we like to say as well as the bank of the west that platform. We're seeing some good success in terms of stabilizing the retail deposit.
In the bank or the last market.
Offering out promotions et cetera, and capabilities that are being well received by our colleagues there and our customer base. So as we think about that coupled with that digital deposit taking I'm really confident in our U S growth strategy around deposits to continue.
Be at peer or above peers in the market place and then if I switch gears and go to Canada. You know we are in top tier market share growth consistently in deposits in the retail side of the Canadian business, that's driven by our leading acquisition you have record customer new customer acquisition in Canada that strong digital sales case.
Ability branch conversations that are focused on full relationships, we are seeing that shift a bit to turn but as you mentioned, it's slowing down we're watching it and its plateauing.
And so we'll continue to see that happen over the next little while but overall really confident in our ability to continue to drive growth in deposit side going forward.
Got it thanks for the color and just very quickly takes one on capital and remind us the impact from F. RTD buses to effect to increases in <unk> 24 to the CET, one and separately the U S. Basel endgame NPR were to pass as is it seems like the Oh blood alone.
Foreign Bank IFC, there's going to be quite meaningful both in capital markets and otherwise how impactful is that to be more U S operations. Thanks sure.
Thanks for the question in terms of the impact Okay for our TB, we think that the impact will be very very modest.
Into Q1.
The work still continues and we have some additional details that we need to finalize.
But we are not expecting a big impact into Q1 Darryl.
Darryl would you like to comment on the U S side, the regulatory developments in the U S. I'm just going to I'm, just going to clarify for people who are gonna have to get used to this when typhoon said Darryl he's referring to Darryl Hackett first call here and so it's a great question Abraham for him to take as far as the overall environment is concerned in the U S. Yes. Thank you for the handoff here and Hello, everyone.
In terms of Basel III and game first its really important to remember that we've operated in the U S. S. A significant entity for nearly 40 years and we've effectively begun our journey to being a category three U S bank nearly two years ago, when we announced the acquisition of bank of the West.
Earlier this year with the approval and close the bank of the West we became a U S entity with more than 400 billion in assets, making us a top 10 U S bank. So given this we are uniquely well positioned among our peers and we've already been maintaining strong capital ratios in our U S regulated entities, so while the Basel III <unk>.
Proposals are still in early stages.
We feel really prepared very well prepared for what's to come and we expect the current proposals to only have a modest impact on our current journey.
Thank you.
Thank you.
Our following question is from many Goldman from Scotiabank. Please go ahead.
Hi, good morning.
That's one I think you were clear in terms of your commentary on.
Our expense synergies coming from the bank of the west, but I'm I'm curious.
I apologize if I missed it but if you could just talk about the outlook for revenue synergy.
Typically in the context of a tougher U S operating environment.
It's clear that.
What's emerging so I'm wondering if there's any impact on your ability to deliver on the revenue synergies that you've got.
Yeah. Good question look I mean, we acknowledge the environment you know it impacts all banks that are operating in the U S. But overall you know our expectations remain intact and.
Although the timing may change a little bit we are still you know.
Still of the opinion that our financial expectations remain well grounded.
We have an important weekend coming up with conversion as I said, we are all so.
Doing more work on you know potentially identifying additional expense.
Expense saving opportunities.
We plan to update you.
With all of these metrics are once we get to the end of Q4, but broadly.
Our expectation is that we are still.
And the same in the same range in terms of our expectations.
That's sort of as a.
Not necessarily denying the current environment, but I think our expectations and optimism remains the same.
Daryl many just to complement that I agree with all that I think the thesis is holding completely in fact as days go by we're getting increasingly encouraged.
By the thesis on the customer side and you asked about revenue synergies.
Well typhoons right, we will give you all a complete update at the end of the conversion quarter, which is the one that's coming in the meantime.
We can tell you that the acceleration on new accounts, new customers the crossover between the commercial business in the capital markets business. We talked to you about that last quarter continues to increase at a healthy rate.
And we've even observed early days, even before are pretty substantial marketing push which will begin in.
In about 10 days from now.
A real activation at the branch level with the digital platforms as well I don't know Ernie would you would you complement that with some some specificity yeah definitely.
As Darrell pointed out we have not launched all of the capabilities.
Tools financial planning et cetera in the market, yet nor our big brand campaign or nature offers that we're going to introduce over the next couple of weeks, having said that those the performance of our branch network just being allowed to be able to have different offer than campaign, we're already seeing.
Lift overall about 20% overall in terms of performance and that's a function of them reaching out to customers. After having great conversations. So the colleagues are ready and the customers are extremely open to these conversations and receptive to what we have to offer and we haven't brought the full product suite as we mentioned earlier to them as well.
Our digital capabilities are performing.
We've taken the bank of the West digital capabilities out of the market and put BMO ASEAN and they're actually performing at parity, which says even without the brand advertising, we were able to deliver the same sorts of less. So these are all promising indicators of the future ahead. After you get through the next weekend.
Thank you so much.
Thank you.
So we ask that you limit yourself to one question.
And one follow up.
Following question is from Gabriel <unk> from National Bank Financial. Please go ahead, yeah I wanted to continue on that line of questioning just Oh. My words, you can tell me, if I haven't right or not.
But the sense I'm getting is maybe there's some no revenue.
Shortfall versus expectation.
Related to the bank of the West acquisition, because the margins maybe the loan book and deposit book are both smaller.
But you still sound pretty confident in your accretion targets and I'm reading through the into the expense management commentary that.
And you might find some additional cost savings to keep.
Keep you on track, but is that a fair interpretation or.
Well first of all I don't think that we're stepping back from our overall revenue synergy expectations I don't think that we're necessarily changing that now.
Already mentioned some of the more promising signs of how.
How we are getting there.
Again as I said.
Once we finalize our expense saving.
Assam Todd.
Targets, which we expect to be higher than what we shared with you before we will also update the.
The accretion numbers, but as I said overall, we believe we are still intact with.
Largely intact with our expectations that we shared with you earlier in the year.
So one question one follow up.
Hmm.
But just the comment you made the customers renewing at higher rates in the mortgage book.
And they're absorbing it or adapting well can you quantify.
Quantify that I mean, I don't know.
I don't know what the adjectives mean, but.
So what does that mean from your perspective sure. So I think the Canadian residential secured book remains high quality because again the customer base has an average FICO of 790.
When you've got about 10% renew was a yard and if I go back to the last full quarter of data.
We've had significant success in those renewals.
They added about a 10% to 20% increase as they come up for renewal and all of them have successfully renewed and the performance has been stellar. In addition, I'll give you. The fact that for those that are even not do today, you've got programs underway to reach out to customers, who reach out to about 40% of the cost.
And we are getting very good positive feedback from <unk> customers have come up and he does topped off payments if that a negative am or increase debt payments as there going forward.
So even though the back book the Big maturities are $25 96 mhm. The early success, you would see from anecdotal data of full quarters, and our expectations because of the strength of the Canadian customer in the secured portfolio.
It gives us a very high level of confidence.
Alright, thank you.
Thank you.
Our following question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, Good morning, just maybe.
Maybe to drill down on the U S commercial loan book.
Obviously down sequentially. It seems and you can correct me, if I'm wrong, but maybe it's down a little bit more than what we would've seen some some of your peers I'm just trying to understand a little bit more and I understand the economic side of it is there any particular part of the box, it's contracting more or where youre seeing less retention, just hoping to get a little bit more color.
And then maybe just kind of weaving that in to the NIM discussion is the loan balance movement.
Have a positive negative impact on your Nims and your NIM outlook.
So in terms of segments I would say that when you look at segments that are more reliant on M&A activity, we're seeing more <unk>.
Softer loan growth in those areas versus our general diversified businesses.
Private equity of course has slowed down real estate has of course slowed down quite drastically. So those would be the segments that would have the biggest effect but.
What we're looking at right now is demand is starting to increase we are seeing pipelines, increasing as we move into Q4. So I expect that we will see better growth in the U S franchise as we go into fiscal 'twenty, four, but we can't deny that macroeconomic background that we're under so when we look at deploying our capital we are laser focused on <unk>.
Not just volume growth, but rather how do we optimize return for our shareholders. How do we go after sole bank relationships, our left lead where we get the treasury and payment services revenue the cash management fee revenue and how do we also get share of wallet and make sure that we're getting are trading products and one client referrals to our wealth and capital markets.
So we're not going after volume, we're going after quality because its these relationships both existing and new that add the most significant shareholder value and when the commercial banking demand does come back we are on both sides of the border extremely well positioned to meet or probably beat what the market will be at at that time.
Especially when we see the M&A activity, increasing any when you think about M&A activity. If I look at our mid market M&A groups pipeline right now, it's probably the biggest pipeline that I've seen and two to maybe three years. So we're definitely starting to see the term comment but as always when it comes to Q4, we'll update you on our growth numbers at that time.
I mean that complement that Doug it's Daryl speaking.
When I look at the quarter over cover quarter sequential commercial growth that you referred to in the U S.
On the surface you might come to the conclusion that it's a little bit below market, but I'm not fussed by it and I'll tell you why some of that is and by the way when I say, a little bit like a very little bit. Some of that is explained by mix, which which nadeem was just into and some of it is actually explained by the fact that we have July in our quarter in the U S banks.
And I think when you adjust for those two things Youll see that were pretty much right on market is my hypothesis.
And more importantly, the <unk>.
Nadeem made just now and when the Sun comes out on the industry and it will one day, we've shown time and time again that when it does we can perform better than market and commercial banking with the fourth largest book on the continent, and we expect that we'll be able to do that.
Again, and and the Great news about that is that we will also simultaneously have the flow through of the efficiency of the program that we announced today as well as the full flow through of the efficiency of the bank of the west synergies and when you put all of those things together for us that's what to me.
Gets me excited because it's a pretty differentiated outcome for our bank.
And on your NIM question Doug.
In quarters, when deposit growth exceeds loan growth, we see a positive impact of that on our NIM.
This past quarter in Q3, our loan growth exceeded deposit growth. So therefore that had a negative impact.
On our NIM next quarter, we are predicting is stable loan environment and potentially a better deposit environment, which should be marginally helpful for our name in Q4.
I appreciate it thank you.
Thank you.
On a linked question is from Paul Holden from Cie.
D C. Please go ahead.
Thank you good morning, a quick.
Quick question on capital management, just wondering the thought process behind the drip discount and when that might come off given you are seeing.
Build and the C T or you should be seeing a build in the seat you want I think on organic basis, given the slow loan growth environment, and then obviously with the operating efficiency improvements expected that will also help organic capital generation and then you've provided some pretty call it neutral.
Neutral positive outlook for F. R. A T P and and Basel III impact.
Yes. So good question, we will be finalizing our car T V analysis over this quarter, which.
Which will give us more clarity as I said, we are you know.
Pretty confident that it will have a modest impact on our capital.
Look I mean, when we started the year, we said that the assessment on drip as a quarterly process that management and the board will go through together.
We are.
Maintaining our 12 plus percent CET, one ratio targets across the bank and depending upon what we see in the environment with respect to our there'll be a growth.
And the regulatory decisions that.
You know are still coming in you know in the U S. Obviously, we've seen it which as Daryl said.
It does not impact us much more clarity we have on the environment, both macro as well as regulatory the closer we will get to a decision on drip.
Got it and then I guess my follow up on that point would be kind of can you give us a sense of what your operating target range is for the CET. One we've heard some other bank sort of talk about maybe getting up to 12, and a half plus or you sort of thinking the same thing over time I think a reasonable range is between 12 and.
12, 5% and then the current environment as I said before the.
The target.
Target level of capital is impacted by multiple factors, including.
Including the environment and the regulatory regime and the peers. So we will be very sensitive to all of those three.
I think that.
The range is still 12 to 12 and a half under.
Under the current osby regime, and potentially closer to that 12 and a half point.
Got it thank you for that.
Thank you. Our following question is from Lamar Prasad from <unk> Securities. Please go ahead.
This maintenance for typhoon.
Should we think about the severance charges.
Being a one quarter phenomenon or are there further charges coming down the pipeline.
It is it is a one quarter phenomenon.
And that's the reason why we noted the severance this quarter we expect.
Continued focus on expense savings.
As our commitment to positive operating remains firm.
But the severance charge this quarter.
Okay, perfect and then could you remind us what the conditions are for to adjust for legal provision I guess, you guys called out higher legal expenses and a lot of the reasons for elevated expenses, but.
Just looking at adjustments, we have seen legal provisions that are adjusted for it. So I guess, how do you draw the line in the sand for for what you adjust for and what you leave in your in your core expense numbers, yes.
We tend not to adjust for legal provisions you know in our normal business, we always have legal proceedings and we believe that.
If there is a reason for us to take reserves that they should be included.
In our financials on a non adjusted basis as part of the operating performance.
You might ask then Lamar why why did we call. It out this quarter I think it really is your question because you're right normally we don't adjust and the reason we've called it out this quarter is because it's unusually high we don't expect that level in the normal course. So we wanted you all to know.
We wanted you all to know that.
Okay.
Linking to the severance is that what it's related to no. It is not linked to this effort to separate from the severance.
Okay and it does include the off channel communications settlements that are very public obviously.
Okay perfect. Thanks again.
Thank you.
Following question is from Nigel D'souza from Veritas investment research. Please go ahead.
Thank you good morning, I, just wanted to drill down a little bit more on the trends youre seeing on the deposit side in your U S business any color on what youre seeing or noninterest bearing deposits how much of that remains in terms of positive mix, while youre sitting on uninsured deposits and there's a difference in flows.
Deposits for the bank of the West franchise versus a.
But BMO U S franchise.
Yeah.
I'll take that one so what we're seeing in terms of the U S. We're still seeing the pre pandemic through the pandemic surge deposits still existing to some degree in the franchise are there slowly running off we would anticipate that that to take place probably in the first half of next year to be fully out there still.
Elevated.
Checking and savings accounts.
Again that migration to term, which is expected as it continues to be in.
In a market where the rates are attractive to our customer base as well on the bank of the west side as I mentioned, we're seeing stability in terms of our ability to retain deposits and are now seeing growth. That's a function of our our introduction of better pricing optimization of the portfolio itself.
And expect that to move forward and then on our digital deposit taking we're seeing strong outcomes as well in terms of what we're seeing being driven through through the digital channels across the 50 states.
So overall I'd say those are the trends.
We believe that there is lots of opportunity in the franchise itself with bank of the west given the market itself is very attractive and so I think those through our campaign season et cetera will anticipate to be able to grow at market in those particular market I'm not sure Nadeem. If you have any other thoughts.
So it'd be very similar but I would say if you were asking trends.
The shift in mix that we've seen.
Going from non interest to interest bearing has slowed down and it is stabilizing so.
I think I don't think it's going to shift back any time soon but I do think that it has stabilized in terms of the ship just last point on this I think Nigel you're also asking the whether theres a juxtaposition between the bank of the West franchise in the legacy BMO franchise I would say, we're pretty much at the point, where that's converging converging I should say pardon me because you'll see.
But as we go through Q4, we have our our conversion weekend literally coming ahead of us and the franchise value starts to integrate and blend together almost completely so the benefit that we bring with the scale and the capabilities and the technology is infiltrated into the bank of the West system and so as time has gone on we've seen.
Seen a convergence of the performance on deposits and that's what we'd expect to see unemployment basis going forward.
Great and just a quick follow up for Sean the credit loss outlook I think he's signal for T cell b somewhere in that.
Low 20 basis point range that actually puts you above and that's unimpaired, but that's the type of run.
The run rate for <unk> sales in 2019, so I'm just wondering if you could comment on are you seeing interest rates way.
On.
Commercial side or retail side and do you expect those provisions to remain elevated in any pathway for wind that could fall below 20 basis points.
Sure Yeah. So I think on the impact piece I think that's the one you're referring to.
The guidance, we're giving is consistent low twenties.
Twenties.
Interest rates is a big part of the environment, It's a very natural evolution for our borrowing customers.
Just that performance to a 500 basis point increase in a very short period of time.
That's what you're seeing coming through so I would say if you take that for the next quarter and your sort of average it out for the entire year well below <unk> 20 on an average basis, but again within the realm of normalization that I think all of you and all of US had been expecting for the industry.
I don't have anything else to sort of add over that I think the bank of the west portfolio performed very badly converging as we view as a dumb with BMO U S portfolio and the trends are similar weaker in unsecured BEC, but strong secured portfolio and risk rating changes on the hotel portfolio. So overall.
This position of strength from where we're starting.
And a very strong risk appetite.
That's it for me thank you.
Thank you.
Our last question is from Joe Ho Kim from Credit Suisse. Please go ahead.
Hi, good morning.
Stan.
There aren't a lot of moving pieces here.
Or was this quarter.
And real estate optimization.
Exactly.
Uh huh.
Pablo.
Before but do you see those.
It says you expect.
Synergies.
Oh, sorry to interrupt you youre coming in a bit choppy, if you could tell I'm sorry.
I'll start from the beginning I just had a question just on the expenses there.
Can you hear me, but can you guys hear me okay.
Yes, that's better.
Okay.
Expenses, there are a lot of moving pieces I'm, just trying to get a sense of how you see your efficiency ratio evolving in 2024, and I'm trying to get a better idea of if theres a pathway to get back to the mid fifties inefficiency ratio that year or if that's more of a story.
Beyond 2024.
Yes look I mean, I think we are just as we signaled earlier this year we.
Significantly curtailed expense growth at the beginning of this year and predict it that our year over year expense growth would start coming down on a quarter over quarter expense growth would start reflecting that and.
And that happened this quarter that has happened over the past couple of quarters as we look forward now.
We are truly still committing to positive operating leverage.
Both with the contribution that's coming from bank of the west as well as from our own operations. So we will update.
Our expectations for 'twenty for when you get to the end of Q4, but the primary driver of our actions clearly is that.
Firm commitment to positive operating leverage the efficiency ratio is going to be an outcome of that we would expect improvements in artificial <unk> ratio.
And we hope that we will be able to update you with that when we get to the end of next quarter, operator, I've got my eye on the clock here and I'm cognizant that our guests have another call to get to so I'll bring us all brings to a close with that as I understand is the last question in the queue.
So I want to thank everybody for their questions and leave you with the following thought guided by the purpose driven strategy that I've talked about and the winning culture that I've talked about.
I think you can take away that we are proactively addressing the period of volatility that we're in to deliver consistent and sustained performance, we're doing that by dynamically managing our business to continue strengthening the already robust foundation and invest in our businesses for growth and with the full integration of the.
Bank of the West ahead of us the strength and the size and the stability of our balance sheet and our superior risk and liquidity capital management are built really to outperform in any environment.
And with that I want to thank everybody for participating and we look forward of course to speaking to all of you through the fall and again formally in December . Thank you.
Thank you <unk>.
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