Q4 2023 Bank of Montreal Earnings Call
Yeah.
This conference is being recorded so it goes to the homes that don't have as you see.
Speaker 4: All participants please standby your conference is ready to begin good morning, and welcome to BMO Financial group's Q4, 2023 earnings release and conference call for December 1st 2023, you. All spoke today is Christine view. Please go ahead.
Speaker 4: Thank you and good morning, we will begin the call with remarks from Darryl White Bmo's CEO, followed by Typhoon, Susan Our Chief Financial Officer, and Peter should outgrow all our chief risk Officer also present to take questions. Today are Ernie Johansen head of female North American personal and business banking Nadeem Hershey head of BMO capital.
Christina : Commercial banking, Alan Tennenbaum, and Dan Barclay are representing BMO capital markets Delon Commando from BMO wealth management, and Darryl Hackett email U S seals.
Speaker 4: 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 supposed to be used.
Christina : School in assessing underlying business performance Geralyn typhoon, we will be referring to adjusted results in their remarks, unless otherwise noted I will now turn the call over to Daryl. Thank you Christina and good morning, everyone.
Christina : Our results this year reflect the fundamental strength and diversification of our businesses driven by record revenue and ongoing momentum in Canadian personal and commercial banking and the contribution of the bank of the West we delivered good performance in a challenging economic backdrop with net income of $8 7 billion in fiscal.
<unk> 2023.
Adjusted earnings per share were $2.81 for the fourth quarter and $11 73 for the year.
Christina : Pre provision pretax earnings grew 5% for the year, driven by 16% growth in revenue, reflecting both organic growth across our businesses and the benefit of acquisitions.
Christina : Revenue was up 10% in Canadian P&C, 43% and U S P&C and 5% in each of wealth management and capital markets.
We continue.
To have a strong capital position with a CET one ratio of 12, 5%.
Christina : For the year return on equity was 12, 3% and return on tangible common equity was 15, 8%.
And this morning, we announced a dividend increase of four.
To $1 51 per share a 6% increase over last year.
Christina : This year, we made significant progress against our consistent strategic priorities to continue to grow and strengthen our bank.
And.
Enhanced customer service and invest in communities.
We closed and integrated strategic acquisitions advanced our digital first capabilities and increased our focus on delivering interconnected one client experiences.
Christina : With the successful conversion of bank of the West, which I'll expand upon in a moment BMO is the most integrated north South bank on the continent.
Christina : For our customers joining from bank of the West. This means an upgrade to the strength and breadth of their bank with access to new capabilities products and services to help them make financial progress.
Christina : When we enter a new market, we commit to making progress for our clients and communities.
Christina : Our BMO empower 2.0 plan is set to deliver more than $40 billion to support underrepresented communities and organizations across our U S footprint, including loans to minority owned small businesses community reinvestment in real estate affordable housing and neighborhood revitalization.
Christina : We also completed the acquisition of air miles with nearly 10 million active collectors, who will benefit from the stability and rejuvenation of the most recognized loyalty program in Canada.
Christina : Since we closed in June we've added already 50, new partners and introduce robust new features including an updated travel booking platform and our mobile app, leading to four consecutive months of new collector growth and increased engagement.
Yeah.
Our relentless focus on putting customers first and supporting their financial goals with innovative digital experiences and expert guidance continues to be recognized including being ranked first by J D power in both its 2023, Canada retail banking and online banking customer satisfaction.
The studies with the highest scores among Canada's largest banks.
This type of recognition combined with the continued strong customer loyalty reinforces the trust our customers place in us and it's translating into results with strong customer acquisition and deeper relationships.
Christina : We've had consistent performance in our flagship Canadian P&C business with P. P. P. T growth of 10% this year, reflecting pure leading revenue growth in our retail bank strong market share in our Premier commercial bank and an ongoing focus on efficiency improvements.
In addition.
Our one client strategy has momentum and we've set a strong foundation to grow and deepen relationships between personal wealth commercial and capital markets clients through our integrated approach and product offering.
Yeah.
The conversion of bank of the West in September was highly successful, we welcomed 2 million new customers converted $2 7 million accounts and over 300 systems and re enrolled over 90% of active digital users within the first week.
Christina : We completed the rebranding of over 500 branches now serving all customers with one unified BMO brand.
Christina : This was a large and complex acquisition, requiring exceptional planning and integration across the BMO and bank of the west organizations evidence of our ongoing excellence in execution, our key competency at BMO.
Christina : Our record of improved profitability and efficiency combined with strong organic growth and successful acquisitions set the foundation for this expansion.
Now.
We are at the starting line to realize the full benefit of our expanded scale leverage our position as a top 10 U S bank backed by the strength of Bmo's full 1.3 trillion dollar balance sheet, a key differentiator relative to our U S regional competitors.
Christina : We're executing against a proven playbook and we're uniquely positioned to gain share in our new home markets.
Christina : And momentum is already building with P. P. P T growth in our U S segment of 27% this year to $4 $1 billion of U S doubling from five years ago.
Christina : Bank of the west customer activity is accelerating as we expected.
Christina : For example, we've seen a three <unk> increase in checking accounts sold digitally on our platform and we've completed thousands of trades and transactions between bank of the west clients and our capital markets businesses.
Christina : With cost and revenue synergies identified and well underway. We are poised to continue to deliver strong performance.
Christina : 2023 saw growing challenges in the global economy impacted by weak or weaker financial conditions and compounded by the escalation of geopolitical crises.
Christina : While the rate of inflation has fallen from four decade highs further progress towards normalization could be impeded by persistent inflation and weaker global demand due to higher cost of border borrowing.
Christina : The potential for an economic downturn remains both in Canada, and the U S with higher risks north of the border.
Christina : At BMO, we have a clear plan to respond to the environmental shift, which we began to anticipate much earlier this year.
We remain vigilant in controlling what we can control.
As typhoon will comment on shortly we're exceeding our planned cost synergies at bank of the West and now expect run rate synergies to be over $800 million U S. Almost 20% higher than our initial estimate of $670 million U S and largely in our run rate by Q2 of 2024.
On the revenue side.
Our high impact marketing campaign is in place across our expanded footprint driving strong brand aided awareness, leading to thousands of new appointments with our customers and supporting revenue synergies in line with our expectations.
Speaker 4: Additionally, actions, we announced and started last quarter on efficiency initiatives to optimize legacy BMO workforce.
Christina : Real estate technology and procurement are expected to result in additional run rate savings of $400 million Canadian and be largely in our run rate by the end of 2024.
Christina : We continue to focus on strengthening return on capital through our disciplined dynamic capital allocation decisions, including the winding down of our indirect auto portfolio and our focus on one client experiences to deepen customer relationships.
Christina : Combining these actions with our long term track record of superior risk management and the full run rate of our acquisitions should differentiate BMO from peers in fiscal 2024, and beyond driving positive operating leverage and setting us up to compete from a position of strength regardless of the environment.
Christina : Our consistent performance enables us to put our purpose into action to boldly grow the good in business and life and support a sustainable and inclusive future.
Christina : We continue to advance our ambition to be our clients' lead partner in the transition to a net zero world through industry, leading sustainable finance and energy transition solutions.
Christina : This year, we ranked first in the sustainability linked loan market and launched one of the first sustainability linked deposit offerings in North America.
Christina : As I look ahead, we are focused on a consistent set of strategic priorities and are squarely focused on disciplined execution to deliver sustained performance against our medium term financial objectives, including delivering positive operating leverage.
Christina : This year, we've added total pardon me. This year, we've added return on tangible common equity of over 18% as we believe it to be an important measure of our performance across our capital structure.
Okay.
As the bank best positioned to serve more clients across the Canadian and U S. Economies, we're confident in the power of our integrated North American franchise, and our strategy to help clients make real financial progress.
Christina : BMO will continue to leverage opportunities to drive progress across all our home markets.
Speaker 4: I want to thank our employees, our customers and shareholders for their commitment to BMO and I will now turn it over to the typhoon.
Speaker 4: Thank you Darryl good morning, and thank you for joining US my comments will start on slide 10.
Christina : Before moving to the quarter's results I would like to update a few of the financial metrics on the acquisition of bank of the West.
Christina : With the benefit of almost 10 months of operating a larger scale integrated U S business.
Christina : And a very successful conversion now behind US we are in a better position to assess the full strategic and financial value of the acquisition and give you a refreshed financial outlook.
Speaker 4: First we are pleased with the core performance of back of the west Despite a more difficult U S banking environment than we anticipated coming into this year.
Christina : As a result, we are confirming our 7% net EPS accretion, reflecting our updated outlook for the performance of our underlying business and the contribution from bank of the west.
Speaker 4: Second as Darryl mentioned with the benefit of directly assessing the resource allocations across the combined franchise. We now expect run rate cost synergies of over $800 million U S by fiscal 2025 significantly higher than the previous 670 million.
Dollar U S estimates the.
The increase is driven primarily by a reassessment of technology and operations resource needs.
Christina : We expect to achieve almost all of these run rate benefits by February 2024.
Christina : We have realized $220 million U S of these benefits in 2023 with an additional $550 million U S.
Benefit to be realized in 2024.
Integration costs are expected to be approximately $1.9 billion U S, reflecting higher expenses associated with the later than originally anticipated closing date higher contract termination costs.
Christina : And pre conversion expenses, which were instrumental in executing one of the most successful integrations in the industry.
Christina : We remain confident in delivering revenue synergies of $450 million to $550 million U S. Although timing, maybe one or two quarters later than initially planned given a more muted near term environment for U S banks.
Christina : Or acquisition has remained robust even during the pre conversion period and we are encouraged by early wins.
Christina : Similarly, we have maintained strong sales force retention during this time.
Christina : We are processing significantly more transactions through our existing digital platforms, and we see meaningful opportunities to improve both sales productivity and client penetration in each of our business groups.
Christina : Ported by stronger connectivity between businesses to serve the full needs of our customers.
Christina : We are confident in achieving an incremental $2 billion U S and run rate pre provision pretax earnings by the first half of 2026, resulting from the acquisition.
Turning to slide 12.
Fourth quarter reported EPS was $2 six and net income was $1 $6 billion. Adjusting items are shown on slide 40 and include acquisition related impacts for integration costs and amortization of intangibles, which decreased net income by 433 million.
And $88 million respectively.
The decrease in reported net income reflected these items and the gain on fair value management actions related to the bank of the West acquisition in the prior year.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $2 81 down from $3 four last year and net income was $2.15 billion up 1%.
Christina : Revenue increased 19% with good organic growth and the benefit of acquisitions.
<unk> increased 26%, primarily due to the impact from acquisitions.
P. P. P T of $3 $2 billion was up 9% driven by strong growth in our Canadian P&C and capital markets businesses.
And the addition of bank of the West Tower.
Total PCL was $446 million, including a $38 million provision for performing loans compared with a total provision of $226 million in the prior year.
Piyush will speak to these in his remarks.
Moving to the balance sheet on slide 13 average loan growth was 18% year over year, driven by back of the west and good growth in Canadian P&C and capital markets.
Christina : Sequentially period end loans were up 4% or 1% on a constant currency basis.
Christina : Business and government loans were up 2% with growth across all operating groups.
Christina : Consumer loans were up 1% driven by mortgage growth in both Canadian and U S. P&C, partially offset by declining indirect auto balances.
Christina : Average customer deposits increased 20% year over year due to the back of the west.
And higher balances in Canadian P&C in capital markets.
Sequentially Purion deposits were up 4%.
Or 2% on a constant currency basis with growth in Canadian and U S P&C and capital markets offset by lower balances in wealth management.
Christina : Turning to slide 14 on an ex trading basis net interest income was up 16% from the prior year and net interest margin was up two basis points driven by back of the west and higher margins in Canadian P&C, largely offset by higher low yielding asset balances for liquidity purposes and corporate.
And continued pressure from deposit migration.
Net interest margin was down two basis points from last quarter, driven by higher margins in the U S P&C more than offset by lower net interest income in corporate services.
Christina : In Canadian P&C NIM was unchanged from last quarter as favorable balance sheet mix was offset by lower deposit margins due to the continued migration to term deposits.
Christina : And U S. P&C NIM was up seven basis points of which approximately four basis points was due to a one time net interest income benefit offset in corporate services.
Christina : The remaining increase reflecting favorable balance sheet mix, partially offset by continued strong deposit pricing compared to competition.
Christina : On a full year basis, our overall net interest margin was up eight basis points from 2022, driven by the impact of bank of the west.
Christina : And the benefit of higher longer term yields partially offset by pressures from higher deposit costs and low yielding asset balances for liquidity purposes.
Moving to slide 15.
Based on the decision that we made early in the year to curb incremental expenses our year over year underlying expense growth has continued to come down throughout the year.
Christina : We also have announced additional expense management actions last quarter that will further improve our operational efficiency.
Christina : This quarter included a $51 million charge related to the consolidation of BMO real estate that will reduce expenses in future periods.
Christina : As a reminder, we expect to achieve run rate expense savings of $400 million from all of these actions by early 2025. In addition to the bank of the west cost synergies.
Christina : The full year expense growth of 24% primarily reflected the impact of acquisitions.
Christina : And higher business development costs as well as the flow through from last year's investments in sales force and technology.
Christina : On a normalized constant currency basis underlying expenses increased 4%, excluding the impact of acquisitions revenue based compensation and upfront charges to accelerate operational efficiencies.
Christina : As we look ahead to 2024, we are confident in our ability to deliver positive operating leverage starting the second quarter. After we reach the first year anniversary of the closing of the backup the west acquisition as well as for the full fiscal year.
Christina : This excludes the impact of the estimated FDIC assessment charge of approximately $300 million U S, which we expect to recognize in the first quarter as an adjusting item.
Christina : Turning to slide 16, our capital position continues to strengthen with common equity ratio of 12, 5% up 20 basis points from the prior quarter.
Christina : Internal capital generation and shares issued under the dividend reinvestment plan were partially offset by acquisition integration costs in the current quarter.
Christina : We expect the combined impact of regulatory changes in the first quarter of 2024.
And the FDIC charge to be approximately 25 basis points.
Moving to the operating groups and starting on slide 17.
Radian P&C delivered record net income of $966 million.
Up 5% year over year.
P. P. P. T of one $6 billion increased 13%, partially offset by higher provisions for credit losses.
Christina : Revenue of $2 $9 billion was up 13% driven by 10% growth in net interest income, reflecting both strong balance growth and higher margins.
Christina : Non interest revenue increased 20%, primarily due to higher card fees as well as the acquisition of air miles.
Christina : Expenses were up 12%, reflecting the inclusion of air miles and higher employee related expenses.
Christina : Loans were up 6% year over year with growth across both mortgages and commercial loans and increased 2% from the prior year quarter.
Christina : Deposits were up 12% year over year, and 3% sequentially across both retail and commercial businesses.
Christina : We have strong momentum on both sides of the balance sheet and while we expect some continued moderation and balanced growth. We are well positioned for continued market share gains in our businesses.
Speaker 4: Moving to U S. P&C on slide 18, my comments here will speak to the U S dollar performance.
Christina : Net income was $543 million up 11% and P. P. P. T was up 18% mainly due to the contribution from bank of the west.
Christina : Sequentially revenue was relatively stable with an increase in net interest income, mostly offset by a decrease in noninterest revenue.
Christina : Expenses declined 3% quarter over quarter, reflecting lower severance and technology costs.
Christina : Loans were up 48% from the prior year driven by bank of the West and were flat quarter over quarter on an average basis and up 2% on a period end basis, reflecting increases in both mortgages and business and government loans.
Christina : Deposits increased 43% year over year and were flat sequentially on an average basis and up 1% on a period end basis.
Christina : While the banking environment remains muted, we are well positioned to capture growth opportunities across our expanded footprint and outperformed the market as conditions improve.
Christina : Moving to slide 19, BMO wealth management net income was $263 million down from $298 million last year.
Christina : Wealth and asset management net income of $213 million decreased three 3% from the prior year.
Christina : Contributions from bank of the West and growth in new client assets were more than offset by lower net interest income due to migration to term deposits and higher expenses.
Christina : Insurance net income was $50 million down from $77 million in the prior year, driven by unfavorable market movements compared with the prior year.
Christina : Expenses were up 12%, mainly due to the impact of bank of the west and higher employee related and technology costs.
Moving to slide 20.
BMO capital markets had a strong quarter with net income of $492 million up 36% year over year, and ppt of $620 million up 39%.
Christina : Revenue in global markets was up 12% with strong equities trading activity.
Christina : Investment in corporate banking was up 29% on higher M&A and underwriting activity expenses were up 9% driven by higher performance based compensation technology and transaction based costs.
Christina : Turning now to slide 21, corporate Services' net loss was $311 million compared with <unk> hundred $59 million in the prior quarter and $104 million in the prior year.
Christina : Results reflect higher expenses, including the charge related to BMO real estate in the current quarter as well as lower revenues.
Christina : Looking ahead to 2024, we are encouraged by moderating inflationary pressures lowering the need to increase policy rates in the U S and Canada.
Christina : With a slower economic growth outlook, we expect loan growth in Canada to continue to moderate.
Christina : And U S loan growth, which has lagged Canada in 2023 to gradually improve during the year.
Christina : We expect the combined loan growth to be in the low to mid single digit range, along with similar growth rates and core deposits. Our NIM is forecasted to be relatively stable as the benefit of reinvestments at higher rates offsets continued deposit margin pressure.
Christina : On the expense side, we remain confident that we will achieve positive operating leverage with low single digit growth, reflecting the additional quarters related to the back of the west and <unk> acquisitions.
Christina : In summary in 2023, we delivered solid financial results, while we successfully closed and converted the largest bank acquisition in Canadian history.
Christina : We remain proactive in addressing challenges that largely related to the cyclical nature of our business and expect the actions that we have taken this year and our continued relative strength in Canada to support strong performance in 2024 with the added benefit of a larger scale of operation in the U S which.
Is a significant differentiation or bema.
I will now turn it over to Peter.
Thank you to iPhone and good morning, everyone.
We had good risk performance this fiscal year, despite the challenging year marked by economic and geopolitical headwinds supported by the strong risk management discipline across the bank.
Starting on slide 23 for the fiscal year.
Total provision for credit losses was $2 $2 billion, a 35 basis points, including the initial provision for bank of the west in the second quarter.
Christina : Adjusting for this one time charge total provisions for credit losses were $1 $5 billion or 24 basis points.
Christina : During the year, we added close to $1 billion to the performing allowance, which included the $705 million initial allowance for bank of the West end up performing better driven by portfolio credit migration and reflecting a forward view of the changing risk environment.
Christina : Embed provisions for the year of a $1 $2 billion or 19 basis points compared with 10 basis points in 2022, consistent with the expected trend to more normal loss rates.
Turning now to the current quarter on slide 24.
Total provision for credit losses was $446 million or 27 basis points compared with the provision of $4 $92 million last quarter.
Christina : <unk> provision for the quarter with $408 million or 25 basis points up four basis points from the prior quarter, reflecting the lag transmission of monetary policy tightening into the economy.
Christina : Moving to slide 25, the provision for credit losses on performing loans was $38 million, primarily reflecting portfolio credit migration is largely offset by an improvement in the forward view of our macroeconomic outlook as well as a lower probability of a hard landing scenario.
Christina : Given the credit profile of our current portfolio and our forecast for embedded losses, we are comfortable that our performing loan allowances provides adequate provisioning against loan losses.
Out three times coverage on trailing four quarters impaired losses.
Turning to slide 26 and.
And beg formations were $1 8 billion and gross impaired loans increased to $4 billion with the largest increase coming from the business services manufacturing and commercial real estate sectors.
Christina : But the gross impaired loans increased from very low levels in recent quarters. The Gi as a ratio of 59 basis points has wreaked on as expected to pre pandemic levels.
Christina : Despite the increase in formations in business and government lending in this quarter, we did not see large losses coming from them about 12% rate of losses and formations, reflecting either collateralized position are the strong underlying credit structures.
Christina : Given investor interest we have included additional information on the Canadian mortgage portfolio on slide 28.
Christina : Portfolio credit quality remains strong with low delinquency rates, a 15 basis point average FICO scores of 789 and average LTV of 55%.
Christina : All of which provide significant risk mitigation with that said, we do expect that higher interest rates would impact borrowers when they refinance or renew we continue to actively manage and stress test this portfolio and given that the majority of our customers have multi product relationships.
Christina : Critical insights indicate customers have the capacity to absorb higher payments.
Christina : In fact about $16 $3 billion of mortgages renewed in 2023 at higher interest rates and these customers are demonstrating strong payment performance. Despite payment increases of just over 20% on average.
Christina : A larger portion of our portfolio renews in 2026 by which time, we expect interest rates will have moderated and customers visit have had time to prepare.
Christina : We are proactively reaching out to customers, particularly our variable rate customers. We've had a positive customer response to the outreach, resulting in a reduction in mortgages in negative amortization from prior quarter.
Christina : As we look to the upcoming fiscal year, we have experienced a credit normalization that we weren't expecting.
Christina : Given our current outlook, what higher for longer and the lagged impact from these interest rate increases, we expect embedded loss rates to trend somewhat higher from Q4 levels in the range of 30 basis points.
Christina : Still below our long term average and then improve as the rates start to come down and the economy begins to strengthen further.
Christina : Given our strong risk management capabilities, the quality of our portfolio and prudent allowance coverage, we remain well positioned to manage current and emerging risks with that I will now turn the call back to the operator for the Q&A portion of this club.
Speaker 4: Thank you we will now take questions from the telephone lines. Please press star one at this time, if you have a question that.
Christina : That would be a brief pause among participants register for questions. We thank you for your patience.
Speaker 4: First question is from many Rodman from Scotiabank. Please go ahead.
many Rodman: Hi, Good morning, Piyush I just wanted to follow up with something that you concluded with in terms of talking about the guidance on I believe impaired PCL ratios and you highlighted that you still think that you will be able to be below historic averages.
Speaker 4: I'm just wondering what gives you confidence in in that are the ability to be below the historic average even next year or this year actually.
Speaker 4: Sure. Thanks, Manny so gross impaired loans, obviously, you put up this quarter up from historically low levels of impairment from the last few just coming out of the benign cycle in the pandemic.
Christina : I think what we've done is we've gone ahead and looked at all of our portfolios and seeing whether its particular stress and already accounted for those.
Speaker 4: Indian Bad book, So as I look at that base of impairment why did they might be an increase formations and that's why you see this AR increase formation.
Christina : Think that the amount of impairment coming from doors as evidenced this quarter and our history over the last 30 years, we think that we are adequately provisioned.
To be in that range of the authorities.
Then there is an implicit assumption that the economy is improving as youre seeing in interest rates will continue.
At the end of 'twenty four to take.
Have you started seeing cuts in interest rates by the end of 2004. So the economy has been holding up very well you're seeing a positive revisions to economic forecasts and I think these will play out to our benefit as we go into 'twenty four.
Speaker 4: And just a follow up in terms of sort of are higher for longer rate scenario. I mean, you talked about the the new disclosure, which is helpful. In terms of the capacity of of customers of our borrowers to to.
Christina : Absorb higher payments, but I'm curious how you think about the knock on effects of that so they can absorb higher payments, but certainly there must be a sort of a cost there to the economy and maybe some other parts of the credit book, especially on the unsecured side. So I'm just curious how you think about the knock on effects of of.
Christina : Higher for longer if the mortgage book can hold on but.
But what are the implications beyond that.
Germany. So we are beginning to see that in fact in the unsecured book, which is why Youre seeing delinquencies go up but I think it's also important that customers are also adjusting to the new reality and that's evident across our behavior patterns credit card spend has come down by about four per.
And fostering the discretionary spend areas.
And but yet balance as I said high so we've talked about higher balances of about 30% coming out of the pandemic. Those bathroom says that getting used up but haven't gone down to zero, there still about 12% higher than pre pandemic you.
Christina : You saw the statistic on savings, which is a very rich at about 5% savings rate and there's also an increase amount going into investments so that our buffer mechanisms as customers are adjusting.
Christina : And this higher increase rate of delinquencies really is around what we expect for pre pandemic as bad as what we would want for a risk appetite. So we are getting compensated for the underwriting we're doing on the revenue line to compensate for some of the increases.
Speaker 4: So it's evident that our weaknesses, but had weaknesses as compared to what you've seen is benign quarters of the last seven or eight coming out of the bank dynamic.
Thank you.
Thank you. Our following question is from him I'm, putting out water from Bank of America. Please go ahead.
Good morning.
Maybe I guess sticking on credit just listening to you.
The trajectory of the economy over the next year it sounds like you're baking in some version of a soft landing with things.
Christina : Get a bit worse and started getting better by the end of the year.
And so.
So.
Gibson stupidity around like what happens the level of visibility around.
Speaker 4: That guidance when you look at sort of cash flows within your commercial customer base, both in Canada, and the U S. Like what gives you confidence and any insights into that if you can and maybe if nadeem can chime in on the health of the commercial customer base.
Christina : And maybe tied to that you talked about that you've reserved for areas of most tests in my view, we should see areas of scarce why didn't beyond like office, CRT or lower income FICO consumer into other categories as businesses go bankrupt et cetera, one do you share that view and if so what are the are there.
It is a test that youre watching right now.
Sure. So there's a couple of questions there, Brian let me try and take one of those at a time.
Okay.
Yeah.
Your first one is just around provisioning and how what we think about going forward, so that would be better to about $1 billion of provision and performing allowance.
For the year.
And as you know I have bought it at nine.
It can be counterintuitive, but it's counter cyclical so over the we thought about what the forward forecast was going to be in.
Christina : Including a higher weighting of a hard landing or a severe recession, which as you've seen over the last few quarters.
The World has adapted and macroeconomic consensus has gotten better.
If you don't think it's better that that's negative and so both of those are helpful and so as we go into 'twenty for the.
Speaker 4: <unk> basic those provisions to give us a coverage of about 54 basis points, which at this point of time is 50% higher.
Pre pandemic.
And a second metric just to put that in perspective is.
Christina : From a trailing four quarter losses, even at 25 basis points that I just talked about we are at about three times coverage that would tell you it's very prudent conservative.
Christina : Conservative depending on how you take it so we've thought about that going into 'twenty. Four is the last one I would make that I'd pass it onto Nadeem is by now we have reviewed every customer once or twice, but the impact of that interest rates on the behavior of background and so you're seeing that in the risk rating migration, you're seeing that in the flow to RMB.
Christina : <unk> zones, and we've factored all of those in even through our deep dives in fact previous quarter. When we took the big bad it was around sectors of stress like commercial real estate.
Speaker 4: That the models did not pick up that's already factored in and you can see that in our performance in Q4. So that you might not know what you would add on commercial lending what you were saying okay. Thank you.
Christina : What I would say, it's very similar to what we talked about in the last quarter and we are seeing stress a portion of the portfolio. Our U S. Distressed was earlier than Canada. We are seeing in Canada, having more stress than we get couple of quarters ago, but everything is absolutely in line with what we had expected and then when you talk to customers, they're looking at their P&L.
They're managing their expenses.
They are looking at labor rates, which have stabilized in some cases have come down shipping rates have come down logistics is down so theyre seeing some margin relief there. So overall when I look at the portfolio, we feel very comfortable that our customer base is solid.
Christina : Do think theres going to be some more formations, which we have forecasted already but the momentum is good so in the U S. We had said recall last quarter that we expect quarter over quarter loan growth to stabilize or loan loss arthritis loan reductions to stabilize and then positive into 2024, we were 1% down quarter over quarter in there.
Christina : The U S. But if you look at it as that balances from June to October we were actually up 1%, which is exactly what we had expected or wanted and with solid momentum going into 2024, and the pipeline's, Canada as we had expected did come down.
Christina : In low growth numbers, but again, it's as we had said in the last call and looking into 2024, we're seeing M&A activity starting to come back.
Christina : Things are starting to improve and so we continue to believe that we will have mid single digit growth both in Canada, and the U S and if I was a betting person probably slightly higher growth in the U S.
Speaker 4: Understood and maybe a follow up maybe for typhoon or data will just strategically when you think about the balance sheet.
Speaker 4: Avi in optimization mode like you've done some small business exits the portfolio exits seasonably. So maybe talk about is there more to do and just thought process around optimizing capital and the balance sheet and where we are playing offense in terms of taking market share given the pullback, especially with the U S lesion lengths. Thank you.
Speaker 4: Yes in terms of capital allocation you, Brian we're always on and on about right. So we have to constantly review our balance sheet and make sure that allocation of capital to businesses is taking place for the best interest of our shareholders. So we'll continue to do that.
Christina : We've done a very good job I think over the past couple of years and ensuring that we are allocating capital to its best use in terms of market share gains obviously that is a strong point for us.
Christina : And with the addition of bank of the West and expanded footprint and a larger customer base, we do see significant opportunities and the other point that I would make is we closed the quarter at 12, 5% a very strong capital position, we have a pretty modest impact in Q1.
Christina : The cumulative impact of the regulatory changes as well as the 300 million dollar.
Speaker 4: FDIC charge. So we feel good about our capacity for growth and we will continue to look for opportunities to allocate capital to its best use on our balance sheet, yeah, Ebrahim as Darryl I'll just pile on I can't help myself on the last part of your question on whether this puts us in a position to be a share taker.
Christina : If you go back to before we grew the bank in the U S that was always our objective, particularly.
Christina : In some of our wholesale businesses and we did that pretty successfully relative to our competitive set that we judged to be pretty good but in some cases, a little bit weaker than us now you roll forward with the integration of our business the balance sheet that we have in the U S $435 billion. The presence in 32 states the digital bank across the entire nation.
<unk>.
And.
Theres really no other way to say it is we didn't do this transaction to not take share. We're good at it before and we'll be even better at it afterwards, we're a top 10 bank in the objective is to continue to take share, particularly.
Christina : As markets become more constructive which has been our power alley in the past as well and we've got the balance sheet to do it because at 12 and a half.
Competitors that that we know them very well.
The competitors that we will be looking to take share from don't don't don't have that capital ratio.
That's helpful. Thank you.
Thank you.
<unk> question is from Gabriel <unk> from National Bank Financial Please go ahead.
Gabriel: Hi, good morning, I'd like to follow on with that line of questioning sort of.
Speaker 4: Ebrahim touched upon the portfolio exits I believe none of this has been confirmed by the bank I don't think but it sounds like you're getting out of auto lending and indirect auto lending in Canada U S and maybe the RV and marine lending business in the U S. Just wondering what do you have to say about blue.
Speaker 4: Scuttlebutt ER and then if there's some legitimacy to the coke that.
Stuff.
Is there a financial impact, but we should be you know flagging earnings in particular.
Speaker 4: Yeah. So we don't comment on on skull bugs and rumors Gabe as you can appreciate.
Speaker 4: And I'll turn it over shortly to Ernie hurt with her comments about the indirect auto loan business, we like the RV business, we have a large scale operation in the U S was the number three market share that bank of the west brought to US. It's a good business and we have very good relationships with our dealers we are not.
Christina : Getting out of that business no matter what else. They may say, so I'll leave it there and then I'll turn it over to Ernie for the indirect auto piece yeah. Thanks on the indirect auto piece, we're winding down that that portfolio stays you can imagine the impact over the next few years will be marginal in each year and you can typically see an indirect auto book roll in about three.
Christina : Three years or so so that'll be the end of it I really want to reiterate a typhoon that point around our marine RV business in the U S is a 30 year business that.
Christina : Number three market share it was attractive to us as we went into the bank of the west that arrangement and that we're committed to the ongoing origination of that program and are seeing good success as we speak right now alright.
Speaker 4: Alright, thanks for the clarity there was a bit surprised without particular ones because it sounded like you liked it too.
Clearing that up helps.
And then on the capital front, the consolidated picture clearly you're in a good position and but if I look at the call report you know your U S. A subsidiary of data.
Christina : I you know exclude the Aoc off though it looks a little bit are you know lower relative to a you know where you probably wanna be I'm just wondering if.
Christina : Youre entertaining doing something along the lines what one of your peers did as.
Speaker 4: As far as recapitalizing, the the U S business I don't I don't know what the picture doesn't give the full one of the U S operations. So maybe there was a missing link there but.
Well what are your thoughts on that.
Positioning.
Answer to your question is an unqualified no.
We actually feel pretty good about our capital position in the U S. I think we are at 11 and a half at the bank level and a little bit below that at the holding company level and it's a number that actually is going to continue to accrete at a fast pace.
Christina : With the Aoc I I think we feel pretty good about it where you are not planning to do anything in the U S that is similar to what some of our peers.
Group banks that had to do.
Just a quick one here I'm just want to confirm you are reiterating the accretion guidance on bank of the West was 7% accretive the 'twenty 'twenty four.
And you know.
If you can.
Just state that and then Oh, maybe the comment on the revenue outlook for the business you talked about having 300 million or so of revenue accretion.
Not not 7%, but.
The timing about the execution would be an.
Interesting response gave.
Maybe I could help you with that so the answer is yes, we are reconfirming of 7% accretion target that we talked to you about earlier this year.
Christina : Secondly, I think a way to frame the second part of your question is around.
Speaker 4: The $2 billion of PPP T that we had also held up to you all.
All over the course of our discussion of this acquisition.
There were also sticking with that number now you might ask if your synergy number is higher why isn't the $2 billion also higher.
Christina : And there I would say confidence level has gone up I think it's been our practice.
Christina : To to estimate conservatively and then update the street when objects become closer in the windshield.
Speaker 4: So at this point I would say are the $2 billion that we put out to all of you includes.
Christina : Number one the baseline contribution from their core business number two the cost synergies, which have gone up and our confidence level is virtually 100% on those and then on the revenue synergies if we get more confident as time goes on and we'll update you there as well, but this just goes to show you that we've got.
Christina : We've got quite a bit of a room to hit that that $2 billion number that we've talked about in the past by the first half of 2026.
Okay, Great well December.
First Merry Christmas if we don't talk to before Europe, well, we're celebrating I understand belated birthday.
Well, so happy birthday to you. Thank you Sir.
Thank you.
<unk> question is from Doug Young from Desjardins Capital markets. Please go ahead.
I'm not going to wish him happy birthday again so.
Maybe the first question 25 basis points impact in Q1 from a combination of of items just wanted to confirm what's in a 25 basis points. That's the FDIC. That's F. R. A T b, that's the CBA and that's including the negative amortize mortgage impact all of that is <unk>.
And there is that correct, yes and.
The last one that I would add to that is the ifr at 17 transition as well. So everything is included in that number okay.
Speaker 4: Okay. So then if I think of 12 five this quarter you take out 25 basis points in the same organic 25 year round 12 point 12 five call. It is that is that the range in which youre comfortable running at or I don't think you've talked about a kind of an operating target range for your set one ratio, but can you just can you spell out what you're comfortable with.
Speaker 4: Yeah, I think we the comment that we made in the past is that we would be looking for a 50 plus basis point type of cushion to regulatory guidance. So in that sense I. Suppose next week, we will get some more clarification from us as to what they are thinking about in terms of the remaining 50 basis points of.
Buffer left.
But our overall management approach to it is.
To operate with.
That 50 plus range, depending upon what the regulatory guidance may end up being.
Speaker 4: Okay, and just lastly on on the gross impaired loan formations and I get all the explanations that does come through I'm, hoping maybe you can kind of do a bit of a quicker deeper dive in you. Obviously had the formations you didn't have a big PCL build you're talking about terms and conditions and collateral gives me confidence can you give it a sense or a numeric sense of.
Christina : <unk> are an example of that that term or or the collateral backing. This like we can see loan to values for mortgages like we don't have good sense about the commercial side I don't know if there's anything you can give concrete to give them a little more confidence around that.
Speaker 4: Yeah sure. So I think it brought it goes back to our risk culture and he brought them recognition and so when you recognize the problem or do you get a work out in our Samuel a special team.
Christina : Working with our bankers, helping rehabilitate client so the embed poured for the formation itself is it's a data point, but I think your question's a good one which is and how does that how do you think about what's next.
Christina : Because of the collateral or the structure now to give you. An example, when you have bankruptcies that are growing both in the U S and Canada.
Christina : You automatically the client you marked decline in the exposure into our formation owing to impairment.
Christina : Then you look at your facility or our credit exposure and in many of these cases, we have a fantastic team that does the asset backed lending and so when you think of a large retail.
Christina : And that goes into bankruptcy, but we've got a very scientific way of looking at lending across our borrowing base, even though it's in bankruptcy losses of zero. So it might be a large number in the formation.
Christina : It's close to zero when it comes to the impairment, which is why the confidence from the same thing goes across.
Many of our secured portfolios.
Seen that even in our commercial real estate book in some cases wed name goes in but you don't need any provisions only because there's plenty of value in that so I hope that helps and why the confidence around.
The formations versus impaired losses.
Yeah no it does.
I'd, probably want to dig a little deeper at another time, but I appreciate the color. Thank you.
Thank you.
Our following question is from Darko <unk> from RBC capital markets. Please go ahead.
Yes.
Hi, Thank you. Good morning, just a couple of questions for some clarification. Please piyush with respect to the mortgage payment.
Payment shock.
In your slide deck here on on slide 28.
What is the renewal rate that you're assuming for for these payments in 2023.
Speaker 4: So the one that you see here on slide 28 that is just the absolute.
The amount that's maturing in that yeah.
Or do you have that.
Our renewal rate for 'twenty, three which was about 6%.
Showed an increase of about 21% in payments.
We haven't given that detail on the site I'd tell you if I look forward and we have all sorts of sensitivities if rates didn't come down it stayed constant.
Christina : That 21% is in the same 20% to 25% next year and.
Christina : And probably a little higher in the 25, the bulk of it you see the maturity is coming due in 'twenty six.
Christina : And then I'll go to Baghdad, I'll just to give you more perspective, we've looked at no income change of our borrowers and this higher payment and that equates to about a 5% increase of the total income at the time of origination. So we can provide you more details darko, but at the end what you see.
How to just the contractual maturity.
<unk> done a lot of work around.
What it would look like at different payment rates.
I didn't even do you add something.
Yeah I was curious to your question is the percentage of customers, who are renewing because that's really high as 90% of our book renewed with US. If that's part of your question instead of really the statement is that what we're seeing customers reading you right now they are facing an increase they're able to handle that increased quite nicely.
Christina : A couple of factors as you know quite well they were stressed at a higher interest rate when they were originated when you've seen.
Christina : The ability for consumers to adjust and be able to afford the increased payment which is what you're also seeing on this slide which is the regular plant payments went up 21% for consumers who are renewing this year.
Christina : Between the fixed and variable mortgages and they are handling it.
Speaker 4: Yes. Thank you very much I think Mike, but my real question was that last bullet point here.
Adjusting that.
<unk>.
Yeah.
22% increase in the payment for the variable rate mortgage what rate are they renewing at there must be an assumption built in there right for or.
Speaker 4: So the one thing that last bullet point are exactly customers today in 2000, okay, they're renewing at todays rate exactly right.
Speaker 4: Okay, Okay, and then and if they did that in 2024, you are suggesting we would see similar sort of impact okay fair enough.
Correct.
Okay and then the second question along this same sort of line of questioning is.
Speaker 4: The average is 22 what are the tails look like so there must have been some customers.
Speaker 4: The significantly higher increase and clearly it would have been some with a very small increase is there any sort of distribution you can provide.
Christina : If we do see people having to face a 30% increase this year that'll get higher as we move into 'twenty six.
Christina : We're seeing if you assume no rate decrease there will be customers, who would potentially these 18 35 or 40% at that tail, a tailwind again, but again going back and you think about where they were stressed at in their current income as we look at their cash flow in a variety of ways. We felt pretty confident that there is an appetite or an ability.
Christina : To be able to consume that increase or to handle that increased and also the same customers from our outreach programs have come back and are actually already pre paying wasn't totally down quite a bit. So there are some who know it is a higher number than waiting for the rate decrease to happen.
Christina : But we've got very positive outreach and customer reaction around the voluntary pre payments back to lower than their games.
Speaker 4: Okay. This is all very helpful. I really appreciate the disclosure I guess the last lingering question that we're all having around this.
Yes.
I can see the increase on average for the customers in 2023.
Did they renew at a shorter term.
And how much time before you suspect there will be some cracks for people that are paying these arent payments.
Speaker 4: I think what we're seeing right now is renewing and renewing obviously into interest fixed rate product and also into shorter duration, because the anticipation of rate decreases which is very prudent on the part of Canadians who are renewing it.
Christina : I just wanted to clarify as well if you think about that 40% increase those are going to be X smaller numbers at that tail end of it when you think about the increase that consumers are going to be facing on price.
On the payments.
Okay and underwriting today, just to just to finish off this discussion, but you're still growing your mortgage book, presumably youre doing originations.
What does it look like today.
Versus four or five years ago.
Are you looking at better.
GDS Tds ratios.
Is there anything you could point to.
That suggests that people that you're underwriting today at a higher rate.
Speaker 4: And then you would have four or five years ago or in fact are they putting down more down payment as the LTV Laura what can you tell us about the originations that you're putting on today.
Christina : I'll turn the I'll respond a couple way so what we're seeing obviously is at a stress right on top of the high rate that exists today insurers that you're you're you're a customer has more robust cash flow and ability to pay our underwriting remains as prudent as it has been in the past in the sense that we look at loan to value we look at affordable.
If you look at their stress.
Rates that they can afford and with an increase in payment. So I would say our underwriting remains consistent I think that market and interest rates have improved the quality of the customer simply because you have to be stressed at higher interest rate.
Speaker 4: And are you happy with the spreads are getting on mortgages. These days.
Speaker 4: Yeah, Let me take two seconds on that we our approach to mortgages and all our retail market share growth that we've experienced over the past few years is a function of our strategy around holistic conversations with customers and holistic relationships and growing new customers with first of all relationships. So when I look at this business I look at that.
Christina : How many customers do we have with primary relationships, which is leading right now in the industry and also how much we're consolidating our relationships with existing customers. So it's not a mortgage strategy per se, it's a retail relationship strategy for driving.
Speaker 4: I think we can try to fit in a couple more questions. If I if I could just ask the next people in the queue to limit it to one question I'll try to take a few more here.
Okay. Thanks for saying okay. Thank.
Thank you.
<unk> question is from Paul Holden from CIBC. Please go ahead.
Paul Holden: Thank you so limiting it to one question one I want to ask is on bank of the west and I want to make this clear and I think I know what the answer is but you know you have increased cost synergies, 20%, but EPS accretion is expected to be the same.
Christina : Is that a function purely of the change in the macro environment or has there been any change in customer.
Retention.
There is actually no change in customer retention and we are actually very happy with both the client retention as well as our employee retention. So this is really due more to the environmental factors that we have seen over the past year.
Speaker 4: Okay and so this is a quick one maybe I can sneak one more in when does the drip discount come off.
Speaker 4: Well look I mean, as I said, we will find out soon you know what <unk> intention is.
Christina : We have this first quarter, we need to get through them.
Christina : The impact and make all these changes and we will assess that during the quarter and we'll come back to you and give you our perspective.
Thank you.
Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.
Speaker 4: I think in your opening comments, you referred to $1 $9 billion of integration costs could you just is that a forward looking number or has that already been incurred no that is.
Christina : Very largely behind us so we have a little bit left but you know it's.
Speaker 4: <unk> portion of that is already behind US Okay, and then real quickly on the variable rate mortgages. The 62% could you talk about what that number was last quarter.
Christina : 60% negative amortizing what it was last quarter and why that number is so high your peers seem to be hovering around 50, even less than 50.
Yes, so I think.
Our number we've got paid down about by $3 billion sort of a little bit higher as long as rates remain where they are if they come down or they continue to come down over time.
Why so high.
Is there any let me explain that why so high feel remember our acquisition growth occurred in a market where variable rate mortgages, where the consumer preference and so you'll see us having a higher proportion as a result of our growth our growth rate took place in those years, where that product was.
Taken over.
Fixed rate product.
Essentially a consumer preference and shahar time of acquisition.
And then finally like I'm not sure. If this is because I'm tired in the earning season has gone on too long, but I kind of hear this message that BMO could very well need more capital if the domestic stability buffer was raised am I reading too much into your comments not yes.
No.
We don't need more capital, Okay, Okay, and just felt that way listening to some of your comments. Thanks again.
Speaker 4: Thank you. Our following question is from Mike who is that.
All of it.
K B W. Research. Please go ahead.
Hi, Good morning, just wanted to go back to the mortgage renewals and what I'm wondering about is when I look at your expectation for the bank of Canada overnight rate it looks like for cuts in 2024 for cuts in 2025 and that would bring us down to a 3% overnight rate.
Christina : I'm, assuming and correct me, if I'm wrong, but you'd be looking at a normal upward sloping yield curve.
And if that is your expectation then.
It doesn't seem like the five year fixed rate would be much different than the 6%. It is at today because right now the five year Bank of Canada Bond rate is at about 365, and then you've got to add that spread on top of that so it doesn't seem like the expectations on the rate side are really conducive providing relief on this one.
These little issue and then.
In that vein when I look at some of the originations done back in 2021 early 2022 like the payment differential just simple math will tell you that it's somewhere around 70 to 80 per cent for some of your borrowers and this is not just for BMO, but an industry wide. So any thoughts on that any color you can provide would be super helpful.
Okay.
Yeah, It's Ernie I'll just remark on your last last comment our modeling would not suggest that and we look at what the rate is that they they took two when they were they are applied to the rate that they will be renewing yet and don't see it going into that zone.
Christina : So that's one point the second point I would say is our expectation is that even if the rates stay the same that we'll be looking at customers facing upward up to about a 40% increase.
Speaker 4: In terms of at the Max or 45 at the Max.
Speaker 4: When they renew so a little different from where your assumptions are.
Christina : But again I'll come back to the fact that these customers were underwritten with a very strong performance and we monitor them today for their increase in red in <unk>.
Christina : Cash flow and what they have remaining their capacity to pay so I feel very confident that these customers are able to absorb the increase shock should there not be a rate decrease.
Speaker 4: So I'm not sure if there's maybe an embedded expectation of amortization extensions, there and hardship rule, but the 40% would be higher if I just look at the just the straight math of originating at sub 2% renewing at 6% or even in the mid fives would be in some cases more than 40. So maybe you can take it off.
But I'd love to get more details on that.
If we can do that.
Thank you.
Thank you. This is all the time, we have for questions I would now like to turn the meeting back over to that in light.
Speaker 4: Thank you operator, and thank you all for your questions. This morning, before we conclude I would like to take a moment to recognize Dan Barclay who's in the room with us after a 30 year career, Dan will be retiring next month Dan's long track record of client service ethical leadership innovation and strategic counsel have.
Christina : Key to the progress, we're making across the bank for our clients down on behalf of all of US congratulations on a remarkable career Allentown and bomb is succeeding Dan and has hit the ground running his appointment represents <unk>.
Very strong hand off from a high performing business.
Business into a high performing business, we are at the bank proactively positioned.
Christina : For future growth and confident in the power of our integrated North American franchise with consistent and differentiated performance that will help our clients make real financial progress. Thanks, everyone I want to wish everyone. A happy holiday season, and we look forward to speaking to you again in the new year.
Yes.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.