Q2 2024 Bank of Montreal Earnings Call
Okay.
Okay.
Okay.
Okay.
Yeah.
Bill.
Okay.
Okay.
Okay.
Hum.
Okay.
Okay.
[music] phone participants.
Speaker Change: This conference is being recorded so it's going to stay home if it's all of us each day.
All participants please standby your conference is ready to begin.
Good morning, and welcome to the BMO financial group's Q2, 'twenty 'twenty four earnings release and conference call for May 29th 'twenty 'twenty for your host for today is it just can be Oh. Please go ahead.
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 Pierre Chakra, while our Chief risk Officer also present today to take questions or any johansen head of beam on North American personal and business banking and Tina <unk> head of commercial banking.
I'm Gonna Tanenbaum head of BMO capital markets, and Delon demand got head of wealth management, and Darryl Hackett Emo U S. C O S.
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 useful.
In assessing underlying business performance.
Airlines I soon we will be referring to adjusted results in their remarks, unless otherwise noted I will now turn the call over to Darryl.
Thank you Christina and good morning, everyone.
Today, we announced adjusted net income of $2 billion and adjusted earnings per share of $2 59.
With a <unk> increase in our dividend up 5% over last year.
We achieved strong pre provision pretax earnings growth of 7% from last year, driven by continued momentum in Canadian personal and commercial banking and strengthening performance in our capital markets and wealth businesses.
Canadian P&C delivered record revenue up 13% year over year with industry, leading growth and customer acquisition contributing to market share gains.
We've seen strong momentum from newcomers to Canada up 35% compared with last year due to the success of females New start program pre arrival digital tools and advice all aimed at helping new Canadians make real financial progress.
BMO capital markets had strong P. PPG of 642 million within the range, we have guided to and up 21% from last year, driven by good client activity and record results in debt underwriting.
We met our commitment to positive operating leverage this quarter, which was very strong at 3% <unk>.
Expenses were down from last year and from last quarter from the achievement of the bank of the west cost synergies and a large portion of the incremental operational efficiencies savings, we announced last year.
We remain focused on delivering positive operating leverage for the full year.
Credit risk well elevated from last quarter is well managed and what continues to be a challenging environment for many of our customers were some individuals and businesses are being impacted by prolonged higher interest rates and a slowing economy.
We now expect somewhat fewer and delayed rate cuts this year in both Canada and the U S with the bank of Canada expected to begin lowering rates this summer and the fed in the fall at a moderated pace.
Our balance sheet is stronger than ever with a growing core deposit base, our CET, one ratio of 13, 1% and prudent loan loss provisions.
Since Q2 of 2023, which was the first quarter. After the closing of the bank of the West acquisition, we have effectively and quickly rebuilt our liquidity and capital positions.
During that period, we added $48 billion in customer deposits kept our liquidity and funding ratios stable and added a full 90 basis points to our CET, one ratio positioning us very well for capital allocation optionality heading into 2025.
Our U S businesses continue to be a key differentiator for BMO with our U S segment contributing 45% of the bank's earnings and a significant driver of long term growth.
We have a strong foundation building on our position as a top 10 U S bank with a presence in 14 of the top 25, Msas and our leading market share in businesses like RV Marine equipment finance and wine and spirits, we are competing from a position of strength.
Since March of last year, the U S banking industry has experienced.
Excuse me.
<unk> has experienced.
More muted loan growth.
And intensified deposit competition as the fed continues quantitative tightening.
Well BMO strategy hasn't changed we're building clear competitive advantages in a highly fragmented market structure and as a result.
We've delivered resilient performance ahead of U S Regional bank competitors, reflecting our deep experience competing in this market the expanded scale of our business and strong execution of cost savings.
Pre provision pretax earnings in our U S segment exceeded $1 billion for the fifth consecutive quarter growing 7% over last year, well above peer averages.
Over the last four quarters, we've grown deposits, we've seen stability in commercial lending and we've managed margins.
Brand recognition is strong having achieved a meaningful share of voice in California, and surpassing our targets for awareness and consideration leading to good customer acquisition.
In retail in particular, we've improved branch productivity in the new west markets by 17% since the beginning of the fiscal year complemented by strong digital sales and digital adoption.
March was a record new high for new business generation across the retail and commercial businesses, including record client referrals.
In commercial banking, we have retained over 90% of our clients post conversion and we're now building our base with good new client acquisition.
We're unlocking cross sell opportunities and expanding in key verticals for example in.
In our wine and spirits sector. Our combined teams are exporting expertise from the U S West coast to grow and better serve clients in the Canadian wining winery market, while bringing M&A expertise to our U S clients with five completed or underway deals.
We're also leveraging our leading north American Treasury management and payment solutions. The capabilities. We offer are not easily replicated and continue to be enhanced including seamless access to FX trading capabilities and cross border money movement.
Clients that bank with us on both sides of the border have deeper relationships with over 10% higher revenue and 30% higher deposits.
While the overall environment may continue to constrained revenue growth in the near term, we continue to invest to build on our early success and capture profitable market share and create value for the long term.
Our digital first strategy is an important driver of our growth aspirations and we've empowered our teams to develop and deploy leading digital solutions that drive tangible customer and business value.
We're using agile practices to accelerate time to market deploying increasingly sophisticated data and analytics, including AI and leveraging cloud engineering to drive modernization and deliver more faster with greater quality and security.
Cloud computing is a critical enabler for our business transformation across BMO, and we're seeing meaningful business benefits modernizing legacy wealth infrastructure within the cloud and have invested in industry, leading workflow tools and capital markets to increase efficiencies and deliver better customer experiences.
In retail banking, we have delivered 2 million AI enabled conversations with BMO assist and over 80 million BMO insights to help our customers better manage their finances.
As a result, we're not only being recognized with our clients' trust and business, but this quarter BMO ranked among fast company's list of the world's most innovative companies of 2024, the only Canadian or U S bank recognized out of more than 600 winning organizations.
At the heart of Bmo's culture is our commitment to ethical business practices, including a responsible approach to AI development that guides the execution of our strategy to strengthen and grow our bank. This quarter. We were again recognized by the Ethisphere Institute as one of the world's most ethical companies for the seventh.
Speaker Change: Second a year an important differentiator for our bank.
I'll now turn it over to typhoon.
Thank you Darryl good morning, and thank you for joining us.
Our comments will start on slide 10.
Second quarter reported EPS was $2 36.
Net income was $1 $9 billion.
Adjusting items are shown on slide 38 and included the after tax impact of the incremental FDIC special assessment of $50 million.
The remainder of my comments will focus on adjusted results.
Adjusted EPS was $2.59 down from $2.89 last year, and net income was $2 billion down 7%.
P. P. P T increased 7% driven by strong performance in Canadian P&C capital markets and wealth management, partially offset by a decline in U S. P&C, where loan demand continues to be muted while deposit pricing remains very competitive.
Revenue was up 2% and expenses decreased 1% with good operating leverage of 3%.
We delivered on our commitment to positive operating leverage this quarter as the benefit of our efficiency initiatives offset the impact of lower revenue growth.
<unk> growth was offset by an increase in PCL, which piyush will speak to in his remarks.
Moving to slide 11, our balance sheet remains well diversified with solid loan and deposit growth average.
Average loans grew 4% year over year, excluding the impact of last quarter's RV loan portfolio sale and the wind down of the indirect auto book.
Consumer loans were up 7% and business and government loans were up 2% with good growth in Canadian P&C and capital markets, partially offset by lower commercial lending and U S. P&C.
Average customer deposits increased 6% primarily from balanced growth in Canadian P&C and capital markets.
Turning to slide 12 on an ex trading basis net interest income was down 1% from the prior year due to lower margins and was down 2% sequentially due to the impact of fewer days in the quarter.
Speaker Change: The decline in trading net interest income was offset in noninterest revenue.
Compared with last quarter, NIM was modestly lower by two basis points.
In Canadian P&C, the impact of lower deposit margins was offset by higher loan margins and favorable balance sheet mix with NIM up three basis points.
We expect NIM in Canadian P&C to tightened during the second half of the year due to the migration and continued deposit competition.
And U S P&C lower deposit margins drove a 10 basis point reduction in NIM.
Although we expect deposit competition to continue in the U S. The quarterly impact on NIM should be more modest.
Although the deposit environment is competitive in both countries and migration to higher rate deposits continues at a decelerating pace, we maintain our expectation of relative fall back margin stability for the remainder of the year.
Moving to slide 13 expenses declined driven by the continued progress on enterprise operational efficiencies. We began in the third quarter of last year and the full realization of back over the last cost synergies.
While we achieved positive operating leverage this quarter and expect the same for the remaining two quarters of the year and for the full year, we are seeing profitable opportunities to capture market share in both Canada and the U S and will invest accordingly.
Turning to slide 14, our capital position has strengthened with a CET one ratio of 13, 1% up 30 basis points from the prior quarter driven by internal capital generation. The final quarter of common shares issued under the dividend reinvestment plan.
And lower source currency, our W. Lower source currency our W. E as lower market risk was partially offset by higher credit risk.
Our capital outlook for the rest of the year remains strong and is likely to remain above our management targets.
Okay.
Moving to the operating groups and starting on slide 15.
Radian P&C net income was up 7% year over year, driven driven by strong E. P. P. T performance up 17%, partially offset by higher P. C. S.
Record revenue of $2 $8 billion was up 13% driven by higher net interest income, reflecting both solid balanced growth and improve margins.
And higher noninterest revenue, including the acquisition of air miles.
Expenses were up 9%, reflecting the inclusion of air miles and higher technology costs.
Loans were up 5%.
With good growth in mortgages and commercial loans and deposits were up 11%, reflecting continued growth in term products across both consumer and commercial clients.
Moving to U S P&C on slide 16.
My comments here will speak to the U S dollar performance.
Net income was down 25% from the prior year with lower revenue and higher PCL was partially offset by lower expenses.
Revenue was down 7% driven by lower net interest income due to a 23 basis point reduction in margins, which is consistent with industry trends.
Noninterest revenue decreased 11% as higher M&A advisory fees in commercial banking were offset by lower deposit fees and personal and business banking.
Expenses were down 6%, reflecting good expense management, including cost synergies and operational efficiencies.
Loans were up 1%, excluding the impact of the RV loan portfolio sale last quarter.
Deposits remained relatively stable with strong growth in term in the money markets offsetting decreases in non interest bearing balances.
Moving to slide 17, BMO wealth management net income was up 33% from last year.
Wealth and asset management revenue was up 4%, reflecting good operating performance with client asset growth and stronger markets offsetting lower net interest income due to lower deposits in margins.
Insurance revenue increased from last year due to changes in portfolio positioning during the transition to ifr at 17 and was up $21 million from last quarter due to the impact of favorable changes in interest rates on investment results.
Expense growth of 1% reflected higher revenue based costs, which were largely offset by the benefit of efficiency initiatives.
Moving to slide 18, BMO capital markets net income was up 23% year over year, reflecting strong P. P. P. T performance of $642 million in the quarter consistent with our guidance, partially offset by higher PCL.
Revenue in global markets was up 8%, primarily due to improved market conditions driving higher interest rate trading.
Investment in corporate banking revenue was up 1%.
Strong debt underwriting fees were mostly offset by lower advisory fees.
Expenses were down 3% due to a legal provision in the prior year.
Speaker Change: Turning now to slide 19 court.
Corporate services' net loss was $244 million compared with $63 million in the prior year.
$316 million in the prior quarter.
The decline in quarter over quarter loss was in line with our expectation.
And the increase relative to last year was driven by the lower net accretion of purchase accounting fair value marks.
As well as impact of treasury related activities.
To conclude this quarter, our revenues improved and our expenses declined in line with our expectations.
The power of our franchise is evident in our ability to deliver a positive operating leverage while investing in future growth opportunities.
We have built strategic flexibility as a competitive advantage that relies on the strength of our operational resilience.
And business and geographic diversity, and we expect our financial performance to reflect that strength as we move to a more supportive economic and market environments.
I will now turn it over to Paresh.
Typhoon and good morning, everyone.
Paresh: Starting on slide 21, the credit teams, we've been seeing over the last several quarters continue to play out as the higher level of interest rates and slowing economic activity I'll, just selected and credit migration and higher embedded loss rates.
The total provision for credit losses was $705 million or 44 basis points up from 38 basis points last quarter.
Paresh: Embed provisions was $658 million or 41 basis points up from 29 basis points last quarter.
Given the environment, we continue to manage our portfolio as closely as but a long track record of good performance through cycles.
Paresh: In Canada, the increasing trend in credit card delinquencies and elevated consumer insolvencies over the last number of quarters have resulted in embedded losses of $247 million up $44 million from prior quarter.
Paresh: Continue to take actions to manage the losses within these portfolios and.
Excluding pre delinquency engagement with customers, who are most vulnerable to payment stress.
Our residential portfolio continues to perform well, including renewing customers.
And the amount of variable rate loans and negative amortization decline further this quarter down 34%.
Year to date.
U S retail impaired loan losses was $44 million down $36 million from prior quarter.
Our commercial portfolio remains well diversified across sectors and geographies.
Paresh: Median commercial impaired loan provisions of about $48 million of up $14 million from last quarter.
U S commercial embed provisions were $244 million up $141 million.
Provisions, primarily came from commercial real estate transportation and services sectors.
Commercial real estate, including office is performing in line with our expectations and we've maintained strong coverage, but given the rate environment, we do expect modest provisions going forward.
Capital market impaired losses was $61 million, primarily driven by one idiosyncratic account in the insurance sector.
On slide 24, our business and government portfolio continues to be well structured and well secured.
What is the impact of higher rates has resulted in negative credit migration or like half of the portfolio continues to be investment grade the lower impairment levels of 1%.
Moving to slide 22, performing provision for credit losses of $47 million, primarily reflected portfolio credit migration and uncertainty in credit conditions, partially offset by an improvement in the macroeconomic outlook.
Having added two performing allowances for the last eight quarters, we are comfortable that a third of the performing allowance of $3 $7 billion continues to provide appropriate coverage over performing zone at 56 basis points.
Paresh: Turning to slide 23, unimpaired loans informations.
Formations increased to about $2 billion with all of the increase in business and government.
Paresh: The rates are continuing to feed through to higher impairment grew.
Gross impaired loans increased to approximately $5 $3 billion of 79 basis points with increases across most industries, most notably in services.
To conclude we expect that the delay in central bank easing of monetary policy and slowing economic activity could keep embed provisions at around these levels over the next couple of quarters.
Given the quality and diversification of our portfolio allowance coverage and strong risk management capabilities, we remain well positioned to manage the current environment and emerging risks.
I will now turn the call back to the operator for the Q&A portion of this call.
Thank you.
We will now take the questions from the telephone lines.
I have a question and you are using a speaker phone please lift the handset before making a selection.
If you have a question. Please press star one on your devices keypad.
You may cancel your question Tony time by pressing star two.
Please press star one at this time, if you have any question there will be a brief pause while the participants register for questions. Thank you for your patience.
The first question is from Ebrahim <unk> from Bank of America. Please go ahead. Your line is now open.
Okay. Thank you.
Yeah, just news for you.
On the comments at all in that D. C is.
Speaker Change: So one.
You bet. He she is a 41 basis points in the second quarter should we assume that the guidance I think it was around military needs.
Speaker Change: Sales for the year, that's shifting more into the low forties and then just talk to us around your visibility on credit I Hope I heard you say hi.
Honestly.
Yes.
It's quite a while higher for longer for them to say.
I do understand the risk if we don't get materially it cuts over the next 12 to 18 months is the list that impaired PCL could get even higher just give us a sense of your visibility on credit and your comfort level that were.
Speaker Change: There are impaired PCL could peak out accent.
The session.
Yeah, Hey, Brian Thank you for the question.
When we gave the guidance of lower turkeys cause obviously predicated on our assessment of what monetary policy will be and if you remember in the same guidance. We said we were expecting three to four rate cuts in both Canada and the U S.
Speaker Change: And also said there'd be some intra quarter volatility just given the business mix, we have on business and government.
That of course has changed with the restrictive monetary policy, which I think is not getting moved out.
Quite a bit so as Dennis said in his comments, it's probably one probably zero in the U S probably two or three in Canada that then changes the psychology of the sentiment of the consumer.
What you see today at 41 basis points, we are guiding around the same range, but a couple of reasons I can break it down.
You're going to see you've seen unemployment pick up.
About five 3% same time last year to around $6, three going up to $6 five in Canada.
So that is going to have an impact, especially on our unsecured portfolios in Canada.
The mortgage consumer is very resilient that continues whether there'll be an uptick in delinquencies H b is strong.
And so figuring out our taking into account what unemployment rate due to the unsecured portfolio and then you have the exogenous factor of Canadian insolvencies of proposals that have been and continue to be surprisingly higher.
Then agenda the expectation.
The second piece I would say is around the whole salad.
And if I back up to where we are in this quarter.
Speaker Change: Two or three underlying trends that I would probably call out one.
Zone growth has remained muted and this is not unique to BMO. This is in fact, a market phenomena and so you get about I would say a heck vent into that impact portfolio by two or three basis points when loan growth was muted.
And then as I was going through the results. You saw we also have two or three large credits one specialty I called out in capital markets.
And to put that in context, you know 16 or $17 million of impacts can give you a basis point. So when you get 50 or 16 Cabot in the market, that's three or four basis points. So you take the three four basis points there.
That and the loan growth.
You really get down from 41 to 35, which.
It's just again, a starting point of giving you a sense of how we performed this quarter. So we did expect our.
Speaker Change: Rates are the impact should go up.
And that's how we've landed here, but unemployment continues to pick up you're going to see a little bit off cyclical businesses and a mix of wholesale that may have higher losses transportation finance being one of them and I can get into more detail about district.
Just to give you the perspective of why we are guiding in the similar range again with that caveat that there will be volatility because two or three large names can move that number around by three or four basis points. So I hope that's helpful.
You know going forward much longer term I think they revert back to longer term averages, but that's something we have to see rather than speculate on the rate cycle when that happens.
We will provide you more guidance as we go along.
So thanks for that and then I'll follow up offline and just one question for Daniel just about a week 10, plus 9% absent any improvement in the macro can you can be maybe better than 11% return on equity anytime. Thank you.
Thank you Graham Ah the answer the short answer is yes, I do remind folks that the R. O T. C. He is an important metric for us as well, which is substantially higher than that but you did hear a typhoon and I talk about continuing to push on positive operating leverage as we go forward. So assuming we can do that.
And assuming no change in the macro I think we can continue to improve on where we are right now and if there is a change in the macro to the positive. Obviously, we think we can do even better.
Thanks for taking my questions. Thank you.
Speaker Change: The next question is from Matthew Li from Canaccord. Please go ahead. Your line is now open.
Hey, good morning, and thanks for taking my question when we look at Jay all formations, it's missing a bit of a step up from the U S service industry, some CRE and wholesale trade I can you maybe talk to whether that Samsung discrete identifiable clients or if it's more of a broad based weakness in the industry.
Sure.
So Matt I don't think this is a systemic weakness in fact, we've been assessing many of these sectors for quite some time.
Some of the weakness I talked about was for example, I mean this is probably the expanding on the point on transportation.
Speaker Change: Last year 18 months you've seen.
Freight rates have remained at an all time low volumes haven't pick up is if you look at the American tonnage index, that's been at a low point and resale values because of oversupply have also been impacted.
But our business like transportation, we've been in for 40 50 years, we've been through several cycles, we managed through several cycles and we are beginning to see some recovery a flattening out of delinquencies all dead.
To your other question around commercial real estate sector, we focused on.
There was one large name this time around in our impairment.
I'm actually optimistic to get backup partial recovery over the next few quarters, even on that because it's a boofy manage so it wasn't a surprise in our small Washington ish of names that we've been tracking more closely even after re of raising them. Every few months. This name was within our expectations. So it is a key.
Names in a couple of cyclical sectors, and a diversified business, but it's not systemic to anything that I would call out for you.
Alright, that's helpful I'll requeue.
Yeah.
Thank you.
The next question is from Doug Young from dish out capital markets. Please go ahead. Your line is now open.
Hi, Good morning, Alex I want to go back to some of the points you made in your opening comments, you emphasized strong capital and liquidity position.
And you stated that BMO is positioned well for capital allocation optionality going into 2025 and I'm just.
Just hoping you can dig into what you're trying to say here, what you mean by that statement.
Sure Thanks, Doug listen what I mean by it isn't anything more than.
Then what you heard and when I say that.
Look back to a year ago at the end of the quarter. After we close the bank of the West I also advised in my opening comments that we have since built.
Speaker Change: 90 basis points on the CET one ratio, we've built almost $50 billion of deposits on our liquidity.
You heard us last quarter announced that we were going to turn.
The drip off in your size today, consistent on dividend expectations and as I look forward Doug over the next couple of quarters. We just see those trends are at least stable if not continuing to improve and so setting us up for 2025, we feel like we're in a good position in terms of capital allocation Optionality is.
The word I used and that's what I meant in that goes to all the things. We always talk to you about we will have we take a differentiated position from a from a capital availability perspective in the U S. In particular relative to many of the names we compete against there.
And in Canada will be with some of our peers and have lots of optionality to first serve our clients.
And then to consider other options if the capital continues to accrete beyond.
Beyond our base level. So that's a good that's a good place to be in and it's a it's a it's quite a I mean, we think at least to an impressive track.
Speaker Change: Track record of progress on those metrics relative to a year ago. After completing a large acquisition that was the point I was trying to make is that is that helpful.
And then I was just trying to kind of maybe finer point on it doesn't mean that you are in a position to do further M&A or would you be more inclined to be more active on buybacks given the flexibility on the capital side, that's yeah yeah.
Yeah, no. It's a good it's a good question, Doug and it's you know it's hard to be particular in answer because as you know it depends on the circumstance and you know as we look at the environment.
You know it continues to be as we've outlined in our opening comments a softer environment in that environment.
<unk>, you're less likely I think to pursue M&A relative to you know having a worldview that says the clouds are parting so that would be an important factor at the time and it also goes to strategic attractiveness and price in all of the rest of it that we always talk about so subject to that but that's kind of my way of saying that the M&A environment.
Has to be has to be helpful and constructive we think when it is helpful and constructive we are an attractive alternative for many protect many potential candidates, but but that doesn't mean you go ahead and do something.
You go ahead, and do something because it makes sense for shareholders and in the aggregate and if we get to a point, where we've got excess capital in 'twenty five and we're not pursuing a because things don't make sense. Then of course buybacks are on the table at some point as we go through 'twenty five.
Okay, and then second just I tunes in Europe opening remarks, he talked about positive operating leverage our gardens, both talked about positive operating leverage but that's when you.
You also talked about making investments because you see profitable opportunities to take market share in Canada U S and I don't think you would make those investments to that.
Speaker Change: That would take you away from positive operating leverage I think you've been clear on that but I'm just curious as to you.
Trying to make sure we're not surprised by something like can you dig into what those opportunities are giving you kind of talk about what those investments might be.
That impact that might have on the expense line.
It's nothing more than a reference to a number of businesses, who are taking market share profitably. Both in Canada, and then a number of opportunities that we have including.
Our newly expanded franchise in the U S and there will always be pockets, where we think that.
Combining our balance sheet strength capsule in liquidity with the ability to take market share.
Take advantage of those opportunities, but we believe we can do those even within the guidance of positive operating leverage.
Speaker Change: That may mean that you know the expenses may tick up a little bit, but as long as we deliver a pause or operating leverage we're quite comfortable.
Leveraging our growth opportunities with smart investments.
And so there wasn't any one or two particular opportunities we wanted to point out or no.
I'll leave it there thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from Matt menu Grauman from Scotia Capital. Please go ahead. Your line is now open.
Speaker Change: Hi, good morning Pierce.
I think it's very clear and you highlighted that the higher for longer rate environment definitely putting upward pressure on the impaired PCL ratio, but I'm wondering if there any other factors here worth considering.
One factor that I wanted to specifically get your comment on is just collections.
Is that tracking relative to expectations is there anything there that would explain some of the upward pressure on impaired PCL as well.
Yeah, I think so you have higher for longer I think everybody's talking about it as a new normal and so customers adjusting to a new normal of higher for longer although it takes time and you're seeing some of that come through over here.
Specifically on collections I wouldn't say that collections is getting impacted because of that.
Speaker Change: Two or three points. It is when you haven't lost money in the past you can't collect enough. So you know the impairments are beginning now and that's one of the better the collection inventory for the future, but the second box, which is a challenge for the industry is when it comes through insolvencies of proposals.
Speaker Change: It's going to take a longer window for collect because you can't collect but the first four or five years. Those are just the way. The rules are so that does have an impact on collections.
Speaker Change: Other than that in the normal write offs I, thank god, because actually window or one or two years remains as robust as it was even before I don't know if you would like to add something else.
Speaker Change: Yeah, I was just going to add that we've been very successful in proactive contact to customers getting in front of the situation for them and helping them navigate whether that be mortgages or credit card or any unsecured lending and what we're finding is the receptivity has been very strong and the performance of those contracts.
Cat had been very helpful to the customers that ultimately and us being able to navigate and reduced losses and I think that will continue as the market as we talked about earlier macro environment as interest rates higher for longer and consumers are facing more cash flow out efforts. The efforts are good and they will continue over the course of.
Next probably a year and as.
As you go forward.
Thanks for that and then maybe just a question for Daryl you know just given the environment.
Are you seeing any increased regulatory scrutiny on AML proceeds these for.
Speaker Change: Especially in the U S and and.
And I guess sort of related question is there a risk of a material increase in spending relative to plan because of that.
Many short I get it the short answer is no.
Regulatory scrutiny is pretty continuous rather than episodic I would say you know a couple of thoughts come to mind. We've been you mentioned the U S. We've been operating in the U S continuously for decades, we're coming up as it turns out on our 40 year anniversary of the acquisition of the Harris Bank and all the way through.
Through we felt risk and governance and control infrastructure that would be appropriate for the size of the operations at the time and now as we talked to you about before our programs are subject to.
Speaker Change: Ongoing review so when I say, it's continuous that's exactly what it is in the jurisdictions that we operate including in the U S, where we transitioned to a category three bank. So there was no surprise there and I'm just as we believe our AML program as is mature and it's effective through through that pace pay piece.
We of course remain vigilant and this goes to your question I guess on investment risk.
Risks are elevated criminals are more sophisticated as we know and we therefore continue to invest and strengthen our practices but.
Speaker Change: All of that happens, whether it's AML fraud advanced technologies that we introduce.
With the oversight and with the spending envelope that typhoon I outlined earlier in terms of how we look at our business planning so nothing like nothing particular Lee unusual.
Speaker Change: Relative to the environmental factors that I think you're referring to.
Nothing additional relative to what you've been doing before correct. It's I, it's all in the plan.
Thanks, Tim.
Tim: Thank you.
Our next question is from.
John Aiken: John Aiken from Jefferies.
Please go ahead. Your line is now open.
Good morning, just wanted to focus on U S deposit growth given the environment, where you've highlighted that it's a very competitive.
Can you discuss the strategy of the tactics are continuing to pursue the deposit growth in an environment, where it is compressing your margins is this.
While bringing in deposits that will hopefully then our expand the customer base and be able to build more products and secondarily can you talk to how much of that growth was actually driven by all your digital platform.
Is there any I'll answer that question. Thanks, a ton and a couple of things one I would say first of all I see I'll I'll do the personal and business banking side, and then I'll turn it to nadeem, but on the personal and business banking side, we have been successful in terms of growing overall deposits relative to the market and you probably noticed that industry has been.
Nadeem: Negative <unk> growth that we have actually had positive growth in and really lead in this division. It's a function of a couple of things that the mix of blend that we have happening between as you stayed at new customer growth in the franchise and we've been particularly pleased with what we've been seeing in our west new western market and that's driven through a combination of.
Our branches and our digital capabilities as you referred to so we have digital capabilities that are in the email enterprise banking capability and in our new markets. In particular, we've been extremely pleased with how they've been performing at about 40% of our sales has been coming in through those on checking and savings account.
It's a core franchise as well so that's a big component of it as well as our attraction factor of acquiring mass affluent customers into our what we call a premier banking offer in the U S that allows us to build full relationships I'm, referring to our our wealth our wealth colleagues.
Nadeem: On the pricing side per se, we use and obviously a number of tactics to be able to optimize but what we're finding is as you can imagine more price competition in general and in the U S. The U S market place, but overall, we're seeing that growth in our new customer base as well as just aren't real.
Focus on phone conversations with our customers to ensure that we're also migrating them proactively in some cases to our C. D product. So that we're at at the whole keeping our deposit franchise.
And growing and and I thought that it is growing relative to the market place and I'll turn it over to Neil to talk about commercial deposits in the U S. Okay. Thanks, Terry what I would say on the commercial side.
Is that where we've had significant focus on growing deposits overall and you see that in our Canadian balance sheet. The U S is a bit more challenged with the way that macro environment is there where we see a significantly higher mix shift, but I will say is that that that mix shift has been going at a decelerating pace in the last few months and so over the last three months months.
Over a month, we have seen a deceleration of that mix shift, which is positive now with the rates where they are I still see margin pressure on deposits is still a competitive environment, but I do as typhoon mentioned see the level of margin compression are dissipating and the mix shift dissipating and she'll be a positive to the overall deposit book in terms of where we're focusing.
The things I will say is that we are highly focused on simplifying our treasury business, making it easier for clients to onboard and making it simpler for our employees to sell the treasury products, creating bundled pricing, which makes it easier for clients to sign up with us and focusing a lot more on our what I'll call the emerging midmarket space climb.
With good operating deposits, so lead relationships strong ROE good loan to deposit ratio type portfolio and so we are allocating our resources capital and focus on businesses, where we can gain back kind of traction and frankly be all deposits gaining opportunities for our wealth business as well.
Thanks for the color guys.
Thank you.
The next question is from Gabriel Deschaine from National Bank Financial. Please go ahead. Your line is now open hi, good morning, I want to look at the performing loan book for a minute here specifically the stage two classifications. So they're around the you know the.
But at 11.5% of your loans were classified as stage two last quarter that jumped up to 16%. This quarter I was just wondering what the process is.
What's involved in you know moving loans from stage one to stage two I know technically how it works, but what do you do specifically do you think you've got it.
You've gone through with a fine tooth comb and identified which commercial borrowers.
On the brink or whatever because of higher rates and that we should see that balance it'll be stable from here on out because that's where the bulk of formations should be emanating from right.
Yeah give thanks for the question, so we'd always making our dynamic assessment of our borrowers and even you know for people who continue to be paying the assessment really is is it a change in the credit conditions that may affect future performance and so our risk team working with the business.
S. As they continue to evaluate customers both on the retail side and wholesale side are making their determination and then based on that we move customers from stage one to stage two and you know the impact as you know as you go from a one year two a lifetime loss so for.
Plumbing provision picks that up I think this process has been going on for the last year and a half with the rate change cycles. That's happened both the impact of rates and inflation that affects our clients earnings.
It has a material impact on bad finding the ratings might be.
And so I think this will continue with this should be a dynamic process no change in the risk management practice as we go forward.
My expectation is if we go into the higher for longer we will continue to evaluate what that means for our clients and.
Booked provisions and where we are today I mean, having built for eight quarters I think we are prudently provisioned.
Coverage ratios as you look through different metrics, when we compare ourselves in the context of our peers, we feel very good about that.
Yeah, I guess the other question I have is last quarter, you had a pretty large.
The performing provision on a smaller increase in stage two classifications and this quarter was a smaller increase I get there's some netting effect going on have you released some of those because of some of those stage to go into stage three.
Is there.
What's the are we kind of are you messaging that the the buildup in performing provisions is it was more or less done before you open are in anticipation of what you're seeing in the market today.
Yes, that's a hard question because the performing provisions as a quarterly decision based on many factors and so macro economy and how that moves.
Quality of our portfolios and the size of the portfolios all of those will have an impact on what the final number is and as you know why do we rely on models. We also sprinkle human judgment at the end just to understand what the models may not be saying.
So until we see a peak Indian bank portfolio of V. C change around in the economy I think they'll continue to be small biggs I don't know how smaller how but the sizes I don't expect releases anytime soon but the reason we feel good about this is performing provisions as opposed to proceed.
Back provisions, that's why you've seen the better over the last few quarters and you know over the next one or two quarters looking at the shape and size of our portfolios.
To give you a better guidance on what the direction of performing would it be okay. And then just the last one for Tyson I missed it because I was distracted, but the Oh look for U S. P&C ma'am.
Compression this quarter Oh.
Remind me of what the.
Nadeem: You know the assumptions are moving pieces are.
Yes, my comment was that the biggest impact on this quarters NIM.
Was.
There are lots of pricing competition and reduced spreads or deposits, but I said that I do not expect that phenomenon. Although competition will continue that it will impact quarterly NIM as much as it did this quarter.
I suspect that there is a little bit more of a contraction left in the U S. But we probably will not see a quarter over quarter compression similar to what we just saw in Q2.
A bit more.
Nadeem: Down, but more stable outlook I should say.
Nadeem: Good.
And forgot to pick my Riddle and to do so I missed that one alright. So it was a good one.
Okay.
Thank you Dan.
Next question is from Lamar Prasad Foreign car Mart Securities. Please go ahead. Your line is now open.
Yeah. Thanks.
Just sticking along the deep line of questioning there.
I think I heard that you guys are expecting stable kind of stable ish or flattish NIM at the all bank level. So correct me if I'm wrong, how do you guys get there because I think I heard that we should expect some pressure in domestic retail and less pressure than in U S. Retail. So how do you get flattish at the all bank result, or did I just hear that wrong.
Thanks, No I mean, you did hear that we are expecting stability in our all bank NIM and that is largely related to the.
The five to seven year rates remaining where they are today, because our reinvestments are continuing to provide good support against the deposit price competition.
And then at the sort of it in Canada.
And I'm gonna be as going away is really is neutral at the bank level. It does not impact the bank's NIM.
So as you can see the dynamic where some pressure in the U S retail less than we saw this quarter and some pressure in the.
In the domestic business and still have flat all banks. So then it's it's at the at the corporate level like just help me understand those pieces like how you get to flat at the consolidated with.
With pressure quarter over quarter.
Speaker Change: Impact of the corporate side I should provide some support for the broader backing them.
Speaker Change: Okay, Okay and then.
Piyush, if I if I may.
<unk> was kind of going along the lines that I'm thinking in terms of the his performing questionnaire.
If you could just talk about why shouldn't we see performing PCL has moved materially higher just given these trends and formations and higher unemployment and a longer a higher for longer rates like if I look at your coverage ratio was only up two basis points since the end of 2023.
Sure.
I'd say that underperforming again similar to the way I answered.
There's so many things that go into a performing provision.
As you think about so you've obviously couldn't say, Doug the macro economy in our forecasts.
Say, Doug things around higher unemployment and that's why within the performing provision youll see a higher allocation towards Canadian retail, we felt our coverages that need to be higher and we've done that.
So that I think continues as we go forward. The other thing I would say is we look at trends and you've talked about the impact portfolio honor.
And our impaired portfolio, we've historically had a 15% to 20% reservation. This quarter was a bit higher but we look for trends with our with the formation of what it's telling us and then dynamically adjust where we can in terms of allocation of our of our catheter portfolio mix.
And don't forget we also have a very large synthetic portfolio and our credit insurance I outlined and so some of the losses as we move forward. We think will get covered also reinsurance protection. So there are several other ins and outs that going.
That's why I feel we will grow outperforming provisions, we just don't see it grow size of the as we had last quarter, which was really the impact of a onetime model impact as we go forward.
Okay. Thanks, I appreciate the time.
And just in the interest of time, perhaps I could ask operator, if we could limit to one question as we try to fit everybody and thank you.
Thank you.
The next question is from Nigel D'souza from various investments research. Please go ahead. Your line is now open.
Speaker Change: [laughter].
Thank you I just wanted to quickly follow up on impaired provisions and.
Last time, you had significant impaired formations I think you mentioned a loss rate of 12%.
Round, there and you mentioned, it's higher so this quarter. So any details on what the loss rate was this quarter it looks like.
Loss rates.
Manufacturing retail trade at.
Commercial real estate.
In the context of the macroeconomic environment has not deteriorated substantially in policy rates have not changed what's driving increase in wallet share.
Yeah. So there's a couple of factors that go in.
See because I and behavior and so.
As you've seen supply of credit change, especially in the U S with what's happening with the regional banks.
Speaker Change: Refinancing for many of our clients get Tomorrow is limited.
And those who have postponed refinancing hoping rates will come down sooner.
I find these they have to hit as they hit a maturity, while they're coming to us if he wants to get clients extensively in fact, that's a huge relationship trade for US is working with our clients over cycles, we continue to do that.
In the impairment provision rate, which I was answering the previous question, which is in the 15% to 20% range. It can move around a bit depending on the cycle or the sector that is in the embedded book Transportation Finance I said was higher we had a large screen dos. We also had a large gap to the market with us and so.
When you've got larger cash no unsecured you may have a higher loss in that quarter, but at the end, it's such a diversified book, there's no concentration that come up that I feel pretty confident that going forward the trends should come back to where we've been over the last few years.
And sorry, just to follow up on the point you made there on.
The extension of maturities and commercial real estate the 'twenty two 'twenty three maturities, we know across the industry.
That was extending into 2024, and we haven't seen the rate cuts will provide relief. So could you just provide us some color on how active you my husband, you mentioned, a special discount management team, but how active is it.
Renegotiating modifying or extending maturities over the last year and what could the impact from that actions speak for it.
Speaker Change: Yeah.
Yes.
So you'll see that in our watch list, you'll see that did not embed formation.
Commercial real estate impaired formations is still I would say compared to the market as the words have you actually done better, but we haven't taken a rise of it we've said in calls before we've looked at every large zone.
In the office space, which is where most of the stress has been in the U S market.
And we only have a handful of them we've been working with our borrowers in fact.
Speaker Change: Over the last few quarters.
But it was a refinance several of the zones, which we had on our watch this was paid off and the one large as on this quarter that you've taken the impairment I've also added that I'm confident over the next few quarters as we work with our sponsors and buyers and we may get a partial recovery even on that now there is.
Dressed in the sector you read about this but it again it depends.
<unk> city to city property to property and again the assessment has been very good we continue to reappraise. So.
This is going to continue and we'll keep reporting back to you as you can see through our results on any of these events.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is now open.
Good morning, I want to take the credit position credit question, but maybe from a more positive perspective now its been my experience over the years that BMO has in the past and Perry P sales a little sooner.
Taken some pretty big provisions and then a year or so later.
Speaker Change: We get these really unusually outsized recoveries that continue for some time. So the nature of my question is has anything changed.
And relative to the past and below the impairment.
Disciplined provisioning discipline or is there anything different about this cycle that.
It would cause us to rethink that historical trend to trend, where elevated provisions elevated impairments relative to peers, and then elevated recoveries a year or so or two years later yeah.
Yes, Mario sterile I might I might try and help you with that and while I have the mic operator, I think what we'll do is we'll extend the call for five more minutes because we've got a few people in the queue and I'll ask people to try to stick to one question and then I'll ask my team to try to stick to quick answers. So we can get to all of you and I'll try to lead by example here.
So Mary I think the short answer is no nothing has changed our appetite hasn't changed our underwriting practices haven't changed the composition, particularly in the wholesale side of the business, whereas we told you before 90% of the relationships are sole or lead relationships haven't changed so our ability to work through.
As opposed to be at the end of the line and credit negotiations as we work out.
Speaker Change: Is it.
Speaker Change: At the end of the day, you know advantaged relative to some I would say and to your question unchanged now I can't necessarily extrapolate that and say that that will result in accelerated recoveries.
As compared to others as as you've pointed out that has happened in the past it might happen.
And I can but what I can tell you and I sat around this table for a long time looking at these cycles is that the way we approach the business. The way we're looking at the diversification of the business and where these particular impairments are coming from right now there isn't a particular surprise relative to prior peaks and values that I've seen.
And so the scenario that you that you outline is certainly possible I can't go so far as to say, it's probable but it's certainly possible because there isn't anything underlying that's that suggest otherwise is that helpful.
Thank you.
Question is from Mike Rees, Zenovich from Keith, but who yet and woods. Please go ahead. Your line is now open hi, Good morning, just a quick one for Piyush just just not sure. If you can delineate or if there is a difference at all but have you seen more noise from existing legacy relationships longer.
Trim relationships in that commercial lending book.
As the new ones that you would have acquired a few quarters ago with bank of the West just trying to understand if there's a specific source in terms of client base between legacy and new clients that drove that T. C. L.
Doing more than double in the quarter sequentially.
Speaker Change: Yeah, Mike Thanks for that.
Speaker Change: Short answer is no just in the interest of time I'll just add one more sentence.
We've actually fully integrated bank of the West It's one BMO portfolio and so if you look at it and do and like any other practice all of our policies processes everything is the same but going back to the beginning.
It's the same U S performance across bank of diverse and our legacy book.
Yeah.
Speaker Change: Thank you. The next question is from Darko <unk> from RBC capital markets. Please go ahead. Your line is now open.
Hi, Thank you for fitting me in Piyush I don't know if all of that same line of questioning for Mike, but I'm gonna do it a little differently when I compare your impaired.
Speaker Change: Experience in the quarter versus your U S peers is worse.
And so possibly there is a timing impact here, meaning your quarter ends in April in the U S. Banks ended in March.
Part of this perhaps could be explained if there were a lot of files that was imperative April and then secondarily when I compare you to T D.
Speaker Change: There is no difference in timing.
Also significantly more impairments, which perhaps may not necessarily see bank of the west wood might might suggest Midwest to the west coast of the U S. A day. So I wonder if you can just comment on whether or not those observations lead to that.
Conclusion that there were a lot of impairments in April.
Speaker Change: From the Midwest out to the west.
Darko Thank you.
I wouldn't say it is a made vast or California or any of the geographic question. If I were to just be that back for you on the U S. Commercial side, there are two or three big or the U S side, there's two or three big reasons one.
You got to back out the idiosyncratic loans like the larger files are not a regular feature they'll come idiosyncratic COVID-19, which is exactly what happened.
So that's one piece, we've never lost money I would say never goes to almost never on the financial sector and this is a one zone, we hadn't gone to the market that was large.
It is within our book, we have the transportation business that is a very cyclical business compared to the rest of the industry. It's much more I would say small truckers that that's been down when you compare the <unk>.
The business of delinquency index in the U S and combat our performance.
Not only have you been better than the delinquency index, we are better about 40 years and so I think this quarter, we took the higher impairment on that.
We feel good about that performance because with the summer Ah tonnage is picking up freight rates move up and I think as supply goes down this.
Speaker Change: Should do well.
And the third is.
You've got.
Speaker Change: Borrowers in different sectors that but just you know with higher average who are feeling the heat from inflation and then the higher interest rate are coming to us and working out their solution and.
And so that's why it's a little bit more this quarter dismayed at like I said to continue if rates don't change, but theres nothing unique I would say on the overall portfolio that is system, but it's just these one off events that add up to our U S performance.
On the other side momentum is really good risk appetite continues to be strong and I think nadeem, especially on this very if I look at pipelines and activity I actually think both loan growth and our client engagement.
Got it and just a better overall mix of revenue to overcome these losses.
Thank you. The last question is from Paul Holden from CIBC. Please go ahead. Your line is that okay.
Thanks for making my time when I ask question quickly on your U S mid market private equity lending business, if that's adding any noise to the impairments and then two if that's adding any noise to the revenue lines for those mark to market positions I can see.
Speaker Change: The L. P positions you've taken some of those funds. Thank you.
Yeah. So we've got a very good strong presence with our private equity partners.
The private equity I think you're referring to the call program with a sponsor fund lending has been an exceptional.
So I don't see any losses from that that's not the impairment.
Speaker Change: It would be small names of operating companies that we take very granular physicians and those you know a part of the Reg is a higher risk profile that you've always known but in general I think it's a the market activities needed to on the revenue side, let me hand, it over to Nadeem, because I know we have a regular discussion on piping and the pipelines are very rich.
And so all of those are probably waiting for the election cycle in the U S and Nadeem yeah. Thanks, Paresh I would just say activity has been needed. So that's definitely a gap and our ability to grow within that space, but we are seeing is capital markets activity is increasing we are seeing M&A starting to increase our there are M&A transactions or waiting for the election to see.
Policy changes.
Our mind about the transaction or not so things are delayed for a little bit longer specifically in the U S than we'd like it to be but it's but to your question. No. We haven't had significant F&B type losses in that book that are contributing to the numbers you're talking.
Thank you there are no further questions registered at this time I would like to turn back the meeting over to Darryl.
Okay. Thank you all for your questions I'll, just close by saying that we remain confident in the growth opportunities across our businesses and importantly, as I said earlier the power of the integrated North American franchise, we're clearly building competitive advantages in a highly fragmented U S market our strategy is.
Isn't changing and we are poised to press those advantages. So thank you all for your time today and we look forward to speaking to you again in August.
Thank you. The conference has now ended may disconnect. Your lines at this time and we thank you for your participation.
Speaker Change: Yeah.