Q4 2024 Bank of Montreal Earnings Call
Speaker Change: Thank you and good morning. We will start with remarks from Darryl White, CEO of BIMOS, followed by Tayfun Tuzun, our Chief Financial Officer, and Piyush Agrawal, our Chief Risk Officer.
Speaker Change: Also present today to take questions are Ernie Johansson, Head of Personal Banking and North America, Adeem Hergy, Head of Commercial Banking North America, Alan Tannenbaum, Head of Capital Markets North America, Delen Kamenga, Head of Wealth Management North America,
and Darryl Hackett, CEO of BeMo-US.
Speaker Change: As our call will end at 9.30, I would ask you to limit to one question during the Q&A to give everyone a chance to participate.
Speaker Change: As mentioned on page 2, forward-looking statements may be made during this testimony, which involve assumptions that have inherent risks and uncertainties.
Actual results could materially differ from these statements.
Speaker Change: I would also like to remind listeners that the Bank uses non-GAAP financial measures to arrive at adjusted results. Performance management is conducted on a reported and adjusted basis and considers both to be useful in assisting with the assessment of the company's performance.
Christine: Darryl and Tayfun will discuss the adjusted results in their remarks, unless mentioned otherwise. I will now hand over to Darryl. Thank you, Christine, and good morning everyone.
Darryl White: A year ago, we had predicted that higher interest rates and a slower economy would present a more challenging environment for business activity, leisure demand, and credit provisions.
Speaker Change: In response, we have established a clear plan and are taking swift actions to dynamically manage our businesses, including controlling expenses, while continuing to invest and support our customers.
Speaker Change: Contrary to this gap, we have delivered a resilient operational performance.
Speaker Change: At the same time, the performance of the loans deteriorated more than we had anticipated.
Speaker Change: The rates of loss of the inheritance are higher than yesterday, in order to impact our results, with a net income of 7.4 billion euros per year and an income share of 9.68 dollars per year, while decreasing by one year.
Speaker Change: We continue to manage our portfolio prudently and work closely with clients who are facing challenges. We expect quarterly precautions to be moderated until 2025.
Speaker Change: Despite a challenging year, there is much to be proud of, including the significant progress of our strategic priorities.
Speaker Change: Pre-tax pre-provision income increased by 5% to a record $13.4 billion, with growth across all operating groups.
Speaker Change: We have experienced our commitment towards positive implementation in the last three quarters and throughout the entire year at 1.6%. Our efficiency ratio has improved by almost 100 basis points to 58.6%.
with a discipline at a sustainable cost.
Speaker Change: Through our businesses, we have accelerated the growth of our customer base. We have provided more connected solutions to a single client, which have built loyalty and expanded customer relationships, and we have increased deposits by approximately 61 billion dollars, or 9%.
Speaker Change: We have successfully managed the evolving regulatory expectations, including the transition to a category 3 bank in the United States.
Speaker Change: Our CET1 ratio has increased significantly by 110 basis points since last year to 13.6%, creating ample capacity to support our clients and return excess capital to our partners.
Speaker Change: These are all indicators of the strength and health of our franchise.
Speaker Change: And this morning, we announced an increase in the dividend by 4 cents to $1.59 per share, an increase of 5% compared to last year, and our intention to repurchase common shares under a NCIB.
Speaker Change: Each of our lines of business has delivered good PPPT growth this year, with momentum expected to accelerate performance in the future.
Speaker Change: In the Canadian PNC, the PPPT increased by 11%, with record income driven by strong growth in housing and deposits.
Speaker Change: We continue to develop market share in key categories, including spending, reimbursements, and credit cards, supported by a record year of net customer growth, and the acquisition of a purely direct savings and acquisition account.
Speaker Change: We solidify deep relationships through customer-centric onboarding journeys with nearly 50% of our clients becoming primary clients within the first 6 months.
Speaker Change: The USP&C increased the PPPT by 4% as cost synergies more than offset the impact of market conditions on revenue development.
Speaker Change: We have created fundamental clients across the country and in our western markets, including in California.
Speaker Change: We have succeeded in changing the branching model to be advice-centric, to achieve deeper customer relationships and higher mobile engagement, which is now leading to the development of a display account above the average power in California.
Speaker Change: In the North American commercial banking sector, we continue to have strong customer loyalty figures across Canada and the United States, and TPS capabilities that lead to deposit growth and deeper customer relationships.
Speaker Change: The rate of information sharing by commercial bankers with other lines of business has doubled since the beginning of the year, as we focus on the best solution for all our clients.
Speaker Change: Our integrated online banking platform for businesses is a key driver of growth with an increase of over 10% in active users this year.
Speaker Change: In the field of BIMO money management, the PPPT was over 10% with good growth in client assets.
Speaker Change: We continue to strengthen our ETF offerings and mutual fund performance, leading to strong net inflows.
Speaker Change: Our first ranking in the study of digital wealth management experiences in Canada in 2024 is a recognition of our focus on modernizing technology and delivering innovative digital experiences for clients.
Speaker Change: BIMO capital markets increased the PPPT by 7% in a mixed environment, with strong trading performance reflecting growth in our securitization business, while the M&A environment in Canada remained quiet.
Speaker Change: We are seeing signs that market activity is accelerating, and we are excited to build our leadership position, including a number one position in the U.S. CMO Issuance agency, and a number two position in Canadian investment banking and ECM.
Speaker Change: Overall, BMO is recognized as the best bank for currencies and mining of the year by Global Finance Magazine for the 15th consecutive year.
Speaker Change: Through our companies, we have advanced our Digital First strategy, powered by AI data and technology modernization to drive tangible value for the customer and the business.
Speaker Change: For example, BMO Insurance launched a digital assistant powered by AI.
Speaker Change: Designed to enhance the underwriting process for advisors, eliminate complexity and simplify the client experience.
Speaker Change: and we have recently been recognized by the digital banker with five global banking innovation awards for leadership and digital innovation, customer experience, and distribution excellence.
Speaker Change: We consider these results as fundamental assets that underestimate the health of our franchise and the strength of our North American platform as we move quickly into a more constructive environment in 2025.
Speaker Change: Even if the risks remain limited interests, geopolitical tensions, and potential trade protection measures,
Speaker Change: We are optimistic that central financial policies, distancing, and expansion will begin to establish a relief framework for Canadian and American clients and support a moderate reduction in growth in both countries. This optimism is reflected in my recent conversations with clients.
In advance.
Speaker Change: Our top priority is to rebuild income on equity in order to achieve our goal of 15% over the medium term. We have a clear path focused on disciplined execution across four specific areas.
Speaker Change: Firstly, we have improved performance in our American sector, including lower PCLs, by enhancing our expansion scale and optimizing our business mix.
Speaker Change: The weaker banking environment over the past 24 weeks in the United States has affected our core performance, with trading activity being lower than expected and a balance increase. We have partially offset these forward sales through the purchase of cost synergies, and at the same time, we have made critical investments for the future.
Speaker Change: The United Kingdom remains an attractive growth market, with a GDP more than 10 times the size of Canada and an environment that is now expected to perform well.
Speaker Change: With an advantageous position as a top 10 bank in the United States, we are executing our strategy to compete in an improved environment.
Speaker Change: Revenue synergies are underway and being built, benefiting from the successes of a first client.
Speaker Change: our total PPPT expectations are intact and, as we have already mentioned, delayed until the end of the fiscal year 2026.
Speaker Change: We are also driving stronger results across the company, including...
Speaker Change: Continued Risk Management Discipline and Improving Market Conditions, which will help deliver normalized PCL over time as we continue to manage appropriate risk return targets.
Speaker Change: Then, we provide consistent and positive support to the operation of all banks by focusing on fundamental operational performance and on the execution of corporate priorities.
And finally,
Speaker Change: and the optimization of disciplinary balance sheets, by systematically allocating capital to prevent profitable growth.
Speaker Change: We have a strong foundation to accelerate our momentum and move to the next phase of growth and improvement of ROE.
Speaker Change: With strong risks in money management as key enablers, I am confident in our strategy to drive improved investor revenues.
Speaker Change: This implies our continued focus on attracting top talent, as we add leaders and teams with deep expertise in key areas, including artificial intelligence and data, American private wealth, and American commercial banking.
Speaker Change: At BIMO, employee engagement and a culture of victory are key drivers to support the company's performance and advance our goal of improving the well-being of the company and life. We are proud to have been recognized as one of the most admired corporate cultures in Canada by Waterstone Human Capital.
Speaker Change: I want to thank our employees for always putting customers at the center and for supporting them in the communities we serve. I will now turn it over to Tayfun.
Tayfun Tuzun: Thank you, Darryl. Good morning and thank you for joining us.
Speaker Change: My comments will begin on page 9. The EPS announced in the fourth quarter was $2.94, and the net income was $2.3 billion.
Speaker Change: The adjustment items are shown on page 39 and include a reversal of a legal provision that increased the liability to 870 million dollars.
The remaining comments will focus on the adjusted results.
Speaker Change: The adjusted EPS is $1.90, down from $2.93 last year, and the net income is $1.5 billion, down 31%, as the 4% PPPT growth was offset by higher PCLs.
Speaker Change: Revenue growth, excluding insurance, which was impacted by the transition to IFRS 2017 the previous year, was 2%, with strong performance in Canadian P&C and wealth and money management, offset by weak results in capital markets.
Expenses have decreased by 2%.
Speaker Change: We have fulfilled our commitment to the positive supply of operations during the third quarter in Q4 and throughout the full year, and we have improved our efficiency ratio to 58.3%.
Speaker Change: PCL increased to 1.1 billion dollars, which Piyush will discuss in his remarks.
Speaker Change: Let's move on to table 10. Residents' taxes have increased by about 5% year over year, excluding the impact of RV portfolio sales and the acceleration of indirect bus, driven by good growth in residential housing and government and corporate taxes.
Speaker Change: The strong growth in customer deposits has continued, with an average increase of 9% since last year.
Speaker Change: As a result, terminal deposits were stable, and there was good growth in daily bank accounts and commercial operating accounts.
Speaker Change: In the United States, total deposits have increased by 6% since last year and by 2% sequentially.
Speaker Change: Let's return to page 11. On an ex-trading basis, the tax on net interest was 3% at the beginning of the previous year.
Speaker Change: The NIMX of 190 basis points was stable compared to last year and increased by 7 basis points since the last quarter.
Speaker Change: In Canadian P&C, NIM decreased by three basis points sequentially, mainly due to loan growth outpacing deposit growth.
Speaker Change: The basis points of the U.S. BNC NIM have increased, mainly due to a sequential decline in loans, while deposit balances continue to grow.
Speaker Change: At OBank, our Q4 margin benefited from discrete Treasury products and evolved significantly compared to Q3.
Speaker Change: Nevertheless, we still project marginal stability at this higher level, with some potential for acceleration in the latter part of the year, assuming that the forward curve accelerates, and that we maintain the benefits of higher and longer rates.
Speaker Change: Together with the growth of Valecheap, we hope for stronger growth in net interest income in 2025.
Speaker Change: In our P&C businesses, we continue to expect a stable environment, even though rent growth and excessive deposit growth are putting pressure on the company's margins.
Moving to slide 12.
Speaker Change: Expenses continue to be well managed, below 2% of what they were last year, including a few individual items this week.
Speaker Change: For the full year, the 1% increase in expenses reflected the additional periods included for Western banks and AirMiles, as well as the full realization of cost synergies from Western banks and broader operational efficiencies.
As we look ahead to 2025,
Speaker Change: to revenue growth and to continue investing for growth.
Speaker Change: For the first quarter, similar to previous years, we hope to recognize the seasonal benefits and the impact of stock-based compensation for employees authorized to withdraw, which we project to be less than 300 million dollars.
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Speaker Change: Returning to page 13, our CET1 ratio increased to 13.6%, which includes a benefit of 48 basis points from the reversal of the 2022 legal tax provision and the RWA associated with lower operational risk.
Speaker Change: Moreover, the changes in methodology in the neighborhood offset the impact of the money migration on the RWA money risk.
Speaker Change: Our view on capital remains strong and is expected to stay above our management target during fiscal 2025, including the impact of our projected share repurchases, in light of the regulatory approach.
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Speaker Change: We will now move on to the operation groups, starting with page 14.
Speaker Change: The income of Canadian cabin crew was decreasing year after year due to the IRPCLs, which hindered the growth of the PPPT to 6% and the positive deployment of 1.1%.
Speaker Change: The record revenue of 2.9 billion euros was increased by 5%, driven by higher interest income, which reflects solid balance sheet growth, with loans increased by 6% and deposits increased by 10%.
Thank you for watching this video!
Speaker Change: Non-interest income has triggered, reflecting the impact of the transition from bankers' acceptance to laws, as well as card-related income.
Speaker Change: Expenses are increasingly high, at 4%, in reference to operational and technology costs related to the employer.
Thank you for watching this video!
Let's move on to the USBNC on page 15.
My comments here will speak to the U.S. dollar performance.
Net income decreased due to higher PCLs.
Speaker Change: The annual and year-on-year growth of 2% in PPPT was driven by low expenses that offset the impact of low margins on revenue growth, resulting in a positive deployment of 2.2%.
Speaker Change: The laws have increased by 3%, excluding the impact of the sale of the RV portfolio.
Speaker Change: Commercial taxes were relatively low year after year, and expenditures were above 6%.
Moving to slide 16.
Speaker Change: Did the impact of the transition to IFRS 2017 contribute to a decline in insurance?
Speaker Change: The revenue from wealth and asset management was 12% due to good growth in client assets and market appreciation, more than offsetting the lower net economy revenues.
Speaker Change: Expenses increased by 3% and employer-related costs, including income-based expenses, were partially offset by our focus on operational efficiency.
Speaker Change: With the global markets established, we hope to see continued growth and acquisition of new clients by taking advantage of the strong demand for our product offerings and investments in technology and talent.
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Moving to slide 17.
Speaker Change: The income from the IMF's capitalized markets has declined year after year, mainly due to high PCLs.
Speaker Change: The income in global markets was less than 1% because the treatment of equity, including the effect of eliminating certain Canadian deductions, was largely offset by the treatment of higher prices.
Speaker Change: Investment and tangible banking income were below 6% due to tax portfolio markings for health sales and registration and advisory costs, partially offset by higher tangible banking income.
Speaker Change: The expenses were high, mainly due to higher technology costs, partially offset by performance-based compensation.
Speaker Change: In terms of more constructive market conditions in 2025, we hope to offer a PPPT with a daily average above 625 million dollars in capital markets.
Let's now move on to page 18.
Speaker Change: The net loss of commercial services is 147 million dollars compared to 180 million dollars the previous year, as minimal expenses offset minimal revenues.
Speaker Change: In the fiscal year of 2025, we hope that the expenses remaining at the company level will be partially offset by a better trajectory for full-year revenues than last year, resulting in higher annual money losses.
Speaker Change: Because of the seasonal items, first quarter net loss should be the high point for the year.
Speaker Change: In summary, in 2024, while credit provisions have not met our expectations,
Speaker Change: we delivered a solid operational performance, with good revenue and PPPT growth, and we fulfilled our commitments to positive operation while still investing in the business.
Speaker Change: As we look ahead to 2025, overall, our current view is that the performance drivers are constructive in all of our businesses.
Speaker Change: In Canada, the momentum we have on both sides of the ledger should result in similar long-term growth trends as we have seen in 2024.
Speaker Change: We remain well-positioned to generate continuous market share gains in our businesses.
Speaker Change: In the United States, our consistent PPPT growth demonstrates the strength of our operational performance, and now, with an improved macro environment, we hope to benefit from growth opportunities beyond our expansion space.
Speaker Change: We hope that these opportunities will be the results of stronger law growth.
Speaker Change: One last comment on our expectations for the year 2025. Our expectations are that the effective tax rate for next year would be in the range of 24 to 25%, which includes the implementation of the global minimum rate.
Speaker Change: While trying to generate solid revenue growth next year, we are also focusing on delivering results in line with the progress we need to make to return to our medium-term R&D objectives.
Speaker Change: Across all our businesses, today's resource deployment choices are predominantly driven by this ambition, and we are confident that the strength of our franchise on both sides of the border will help accelerate our performance and support our progress towards achieving our medium-term goals.
Hello.
Speaker Change: Thank you Tayfun and hello everyone. My comments will start on page 20.
Speaker Change: For the full year, the impaired provisions were 47 basis points, which was higher than we had anticipated for this year, particularly in the corporate portfolio.
Speaker Change: which, combined with changes in consumer preferences, have contributed to higher losses.
Speaker Change: This four, in consistency with my comments on our last call,
Provisions increase from the prior quarter.
Speaker Change: and we expect that provisions will remain high, we believe that Q4 represents a high point and will start to moderate until 2025.
Speaker Change: The total forecast for credit losses this week was 1.5 billion dollars compared to the forecast of 906 million dollars last year.
Speaker Change: The impact provisions are 1.1 billion dollars, or 66 basis points, above 16 basis points from the previous quarter.
Speaker Change: Personal and commercial bank provisions increased by 1 million dollars in Canada and by 4 million in the United States.
Speaker Change: With the current employment levels in Canada still high, I hope that tax losses in the market will increase modestly during the first half of next year.
Speaker Change: In the commercial banking sector, impact provisions increased by 86 million dollars in Canada, driven by the services and retail sectors, and by 63 million dollars in the United States, due to higher provisions in the commercial business, portfolio, and services sectors.
Speaker Change: Our American office portfolio remains well diversified and our experience in this sector is in line with our expectations for the cycle.
Speaker Change: Provisions on the capital market have increased by 111 million dollars.
Speaker Change: primarily driven by additional provisions taken on previous impairments, most of which are now fully reserved. In addition, there was a new account in the mining sector related to an environmental issue.
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Speaker Change: On page 21, we provide you with additional information about our portfolio.
Speaker Change: We have experienced an account migration in Watchlist this quarantine, mainly reflecting the coverage durations of the debt service switch.
Speaker Change: These clients receive high attention from the organization and our special accounts group by proactively working with them to manage their financial needs.
Speaker Change: Overall, I remain confident in the quality of our wholesale portfolio.
Speaker Change: with good diversification across industry and geography, and an investment size of more than half.
Let's move on to page 22.
Speaker Change: There has been a significant increase in the leisure allocation with a provision of 416 million euros, which mainly reflects the migration of portfolio credit as well as the impact of higher-than-modeled leisure activities that we have observed on certain impaired leisure activities.
Speaker Change: The impact of money migration is measured by the increase in the watchlist, where laws in stage 2 attract a higher provision.
Speaker Change: We have now added ten consecutive quarters to our operating permit and have a good coverage of 62 basis points on the operating laws.
Speaker Change: We hope to continue building permits in the coming quarantines, but at a lower level than here.
Return to page 23.
Speaker Change: Unmatched trainings have increased to 2.2 billion dollars across different industries.
Speaker Change: Mandatory taxes decreased to 5.8 billion dollars and the GIL ratio decreased to 86 basis points as a result of higher taxes.
Speaker Change: Looking ahead to Fiscal 25, we hope that the specific client challenges we experienced this year will be moderated, and that the entire portfolio will benefit from the impact of monetary accommodation and a more constructive business environment.
Speaker Change: From this environment, we hope that the impaired losses for the full year will be similar to those experienced in fiscal 2024, in the basis points of the increase of the 40s, with daily variabilities.
Speaker Change: At the same time, we continue to monitor the risks of accidents in the environment, including uncertain monetary, fiscal, and trade policies, and employment levels.
Speaker Change: Because of the strength of our risk culture, the quality of our portfolio, and prudent alliance coverage, we remain well-positioned to manage current and emerging risks.
Speaker Change: I will now turn the call back to the operator for the question and answer portion of this call.
Speaker Change: Thank you. We will now take questions over the phone lines. If you have a question, press button 1. You can cancel your question at any time by pressing button 2. Press button 1 at this time if you have a question. There will be a short pause while participants register for their questions. Thank you for your patience.
Speaker Change: And we will take the first question from Gabrielle Deschaines, National Bank Financial. Please go ahead.
Speaker Change: I wasn't ready to start. Darryl, you are speaking from a more work-focused perspective. I know why you say it. What do you see specifically in credit applications in the United States? It's quite early for feedback, I suppose. How do you hope housing growth will evolve over the course of the year?
Speaker Change: where we will end up at the pace of monetary and fiscal change. But I would say that if you ask about the United States in particular, there is no question that since the election, we have seen very good results.
Speaker Change: narrow-based optimism in our client base. When I say that, I think of asset classes and capital markets, I think of our commercial clients and the United States in general, noting that there are always restrictive measures on the cost of capital as well as the threats that exist with trade policies. But when I say net, I take all of that into consideration. So, net and positive. And I think the second part of your question was...
Speaker Change: We hope that the market will be more constructive than it was in 2024 for tax growth, which is not difficult because it has been recorded for some time in the United States.
Speaker Change: And in this market, we expect to participate fully. I don't have a number for you, we are not going to put a number in the window today on what we expect the broadening of the laws to be, but we expect it to be positive and we should fully participate in that based on the strength of our platform.
Speaker Change: OK, and for Piyush, the PCL Outlook, you gave us a...
Speaker Change: I think we have a good sense of what to expect, but the message in Q3 was that we would, you know,
12 months of the odd, it's always lower than usual.
Speaker Change: Of course, Gabe. Thank you. Two parts to the question, on behavior and impairment.
Speaker Change: Let's start with the impaired portfolio and the results we have given you.
I guided you to the farm.
Impaired losses in the next one or two quarters.
Speaker Change: I am also confident in the moderation from where we arrived at the end of the fourth question, starting from the fourth question.
Speaker Change: And there's a couple of reasons for my confidence in the guidance I'm giving you today.
Speaker Change: It starts with the number of reviews we have done over the last three quarantines, and that we continue to do with our watchlist and our training.
Speaker Change: The year 2024 was a delicate year in terms of credits, but it was overshadowed by some large files.
Those large files have now been resolved.
Speaker Change: Until the end of Q4, there are a few that we have worked through. But in general, I will tell you that the team conducted a review of Granada. I conducted a review myself on our top watchlist, as well as on our top impaired list.
Speaker Change: And that gives me confidence, going up to the age of 25, that we should come down from where we were at the end of Q4.
Speaker Change: As it relates to the performing provision, we've been prudent. It's a rigorous process.
Speaker Change: But in general, at the moment, as we continue to see an increase in negative migration,
and we will probably have a growth of 25%.
Speaker Change: I call that the good cholesterol of why we'll be building.
Speaker Change: until we can see indicators of change in migration. I do not expect release. We will obviously give you guidance quarter by quarter during the entry, but I am quite confident of where we are at the end of quarter 4 in our intelligence in general.
Thank you.
Speaker Change: Thank you. The next question is from Doug Young, Desjardins Capital Markets. Please go ahead.
Hello, just next to the capital.
Speaker Change: You have implemented a NCIB, I just want to get a sense of your intentions.
Speaker Change: I think that Darryl, in your comments, you mentioned that you want to maintain the Z1 ratio above a management target. Can you talk about...
Speaker Change: on what the target SET-1 ratio is, and can we also perhaps just infer what the target SET-1 ratio is that is involved in recovering your ROE to 15%?
Tayfun Tuzun: Doctor, it's Tayfun. So, as you know, with a very high ratio of 13.6% at the moment, once we have all the approvals we expect to obtain, sometime towards the end of the first quarter probably,
Tayfun Tuzun: I have the impression that, apart from the 13.6% delta and our management target of 12.5%, I think that at the beginning it will be a bit more difficult.
Speaker Change: of the growth of the ILO, of the growth of the IWF, and of the net income, etc. But this is the general approach. And built into our medium term, the achievement of the ILO objectives is this 12.5% management objectives.
Speaker Change: To return to the ROE, we are talking about optimizing money, I suppose that obtaining reimbursement is a big part of that.
Speaker Change: What else is there in capital optimization? Are there other investments for companies? Can you maybe explain what else there is?
Yes, the buybacks are part of that.
Speaker Change: of the approach, or of the part of this quantification. In addition to the reimbursements, there is clearly a continuity in optimizing the allocation of money to businesses.
and the links between the clients.
Speaker Change: We really want to ensure that our relationships exist, that our profitability and revenue goals are met.
Speaker Change: at the client level. There is a significant effort in all our companies that goes through the portfolios. We are also doing the same for all the portfolios, ensuring that
at the portfolio level, we are achieving our objectives.
Speaker Change: At this moment, I cannot tell you if there are any inputs or outputs that would allow us to achieve our medium-term financial goals, but if we find them, we will let you know, and we will also include them in our financial optimization objectives.
Speaker Change: In terms of capital optimization in companies, is there a particular company that you would point out as advantageous? We are looking at all companies. There is no single focus. All four companies are going through their relationships and portfolios.
Thank you.
Speaker Change: Thank you. The next question is from Matthew Lee. Can I call Janita, please? Go ahead.
Speaker Change: Hello everyone, thank you for asking the question. On the slide, you added, on the return to 15% revenue, a large part of that is categorized as an improvement in the U.S. segment. And I know you touched a little on the growth of money, but perhaps, what are the other items included in the improvement of the U.S. sector? Because this part of the chart seems to be a large piece.
Darryl White: Hey Matthew, it's Darryl. Maybe I'll take that and it's possible that our colleagues running the business might want to jump in with some examples. But if you read the chart and pay attention to the size of the blocks, it's the biggest block that's deliberate, just to point that out.
This block includes...
Darryl White: of the expected improvement in the PCLs, based on the relationship between the PCLs and the American segment, just to be clear. And then the next block you see are the PCLs that are outside the American segment.
Darryl White: But there is much more than the improvement of the PCL that applies to this segment. And much more includes driving positive procurement of the operation across all our businesses in the United States. This includes taking a really hard look at our current positioning as a top 10 bank and looking at how we compete in regional markets.
and that includes...
Darryl White: It's probably the allocation of resources to places where we have the right to win, where we compete in multiple lines of business, and where we can take partnerships and grow profitably and cycle money in the United States, within the United States.
Speaker Change: to compete more effectively across businesses. We have some actions that are already underway on these themes, and I'm just looking across the table here at Ernie and Nadeem, if you want to go ahead.
Speaker Change: the movement and acceleration that we see in California and in the western markets.
Speaker Change: Part of this ROE rebuild is really to capitalize on that strong growth market. We have a proven retail playbook we use in a North American manner that's paying out and proving to be accelerating even faster than we actually anticipated on some factors, in particular digital engagement, digital sales, our sales team's productivity, having more holistic conversations with customers, doing some really strong referrals to our wealth business, which supports our NER growth as well. And so that's part of the formula that we have. But the other piece is we're seeing our ability to build new products and capabilities in digital as a result of the scale we now have with about a thousand branches. You can imagine building something that has a fixed cost.
Speaker Change: and then applying it to this kind of market allows revenue to drive more and more quickly. So, these are some of the partnerships we have in hand. And as I said, we are seeing strong performance now and we are closing the gap between what I would say is the performance of our Midwestern market and our Western market, which is exactly what the thesis was in our acquisition. Nadim, I'll pass it to you. OK, thank you, Ronny. What else is there to include in the U.S. segment?
Speaker Change: That's what Tayfun talked about, particularly for the U.S. segment, it's the capital and the fund.
Speaker Change: Optimization for redeploying capital from segments and customers that do not return.
to higher return segments.
Speaker Change: by maximizing risk-adjusted revenues. This is also something to consider in this context.
Speaker Change: And the other one is the Banque de l'Ouest Revenue Synergies. It's still something to come, and it's happening. We see good momentum, we see good growth in the pipeline, good acquisition of new clients, which is increasing over the months. And it's also part of what you see there, in this box.
Speaker Change: More information to come, Matthieu. I hope these are good examples.
Yes, it is useful. Thank you.
Speaker Change: Thank you. The next question comes from John Aiken, from Geoffrey. Please, go ahead.
Speaker Change #100: The BIMOs are strategically monitored in the market, and with the experience of 2024, which Piyush mentioned, in terms of increasing the watch list, what are your expectations for business development through 2025? I imagine I'm going there. Do you have the experience you saw last year? Does that whet your appetite for commercial housing in advance?
Speaker Change #101: Thank you for the question. I will return to a comment I made earlier. When we look at our commercial franchise, we...
Speaker Change #101: We continue to invest in this franchise. It is a leading franchise in Canada.
Speaker Change #101: and in the United States. When we think about what you are going to do, growth will move forward in light of the 2024 experience, so it's a good question. We would like to participate in the market. If the market is constructive next year, which we expect,
Speaker Change #101: we are waiting to be on the market. If you look at last year's example, where everything was silent, there was very little growth in the leisure market in the United States, for example, from less than 1% to 0%. We are in this range, we are not very far from being above, and I hope that, moving forward and looking at the year 2025, to your question,
Speaker Change #101: You should see us move with the market. We are not trying to advance and grow at rates that exceed the market, and we do not hope for a market change.
Thank you, Darryl. I appreciate that.
Thank you.
Speaker Change #102: The next questions are from Paul Oldham, CIBC, please go ahead.
Speaker Change #103: Thank you, good morning. You have given very good advice on capital markets, the PTPP. I wonder if you can elaborate a bit more. I suppose in particular, we are talking about better pipelines and investment banks. I am wondering, specifically for BMO, in this mid-market space, P-E, what do you see there in terms of pipelines and demands indicated by clients? I think it is also about business growth.
Speaker Change #103: Hello Paul, this is Alan Tannenbaum. Thank you for the question. As Darryl mentioned earlier, we have really seen a warming of momentum across all our businesses over the last 30 to 45 days. We have seen this over the past year, but it has really accelerated here. And we are seeing it very closely.
our trading companies are very active.
Our financial companies are robust.
Speaker Change #104: What really attracted me, what you touched, is...
on M&A processes.
Speaker Change #104: and the levels of sponsor activity. If you look at the recent years, we are all aware of the impact of the highest prices
Speaker Change #104: of a financial sponsorship activity that dampened M&A and the equity maturity of this world.
Speaker Change #104: pitches, entry and registration processes. That's what gives us optimism for the direction of the PPPT for next year, so I feel very good about the momentum.
Speaker Change #104: I will talk a little about marketing, which is very similar to...
Speaker Change #105: As Alan said, we are seeing pipelines develop. In Canada, last year, we had recent growth and momentum. Over the course of the year, this momentum continues. The Q1 and Q2 of the fiscal year are showing good growth.
Speaker Change #105: In the United States, as Darryl mentioned, the tax industry has been halted. The sentiment of the customers after the election is positive.
Speaker Change #105: There is an expectation of a pro-entrepreneur environment, a tax regime, and a decrease in interest rates. All of this is positive, and it will apply throughout the system. I therefore hope that housing growth will occur. I think I will be slower in the first part and probably faster in the second part of the year.
Okay, I'll leave it there. That's very helpful. Thank you.
Speaker Change #106: Thank you. Next question is from Ibrahim Pnawala, Bank of America. Please go ahead.
Speaker Change #107: Good evening. I think it might be Piyush who is holding onto the credit.
Thank you.
Piyush Agrawal: Thank you for listening to our comments on the PCL. I would like to add two things. When we think about the training, the 2.2 billion this neighborhood, is it...
Piyush Agrawal: I think that based on the work you have done, we are at peak training. Again, let's assume there is nothing wrong with the macro. Should we see the 2.2% start to go down by the end of next week?
Piyush Agrawal: and let's also talk about how we should think about losses. When you look at the tax cuts, which have been a bit of a topic this week, it's important to get a sense of the content of the losses from these laws that concern tax laws.
Thank you for watching this video!
I am sorry, Brian.
So, when we look at both...
Piyush Agrawal: the training and the watchlist on what is happening. It is really a proactive risk measure that allows us to engage our team of experts and special assets to work with our clients earlier.
Piyush Agrawal: And the way I assessed the formations in impaired provisions, to give an example, this quarter, we only took impaired provisions on a few names. And what that tells you is that...
Back to our 30-year history of risky performance.
or covenants in these structures that have not guaranteed
Piyush Agrawal: and provision of the applauding. So, it's very rare that it will be a bit of respect.
Piyush Agrawal: for training and provisions in any neighborhood. There will be variabilities and these variabilities will continue. That's what you saw last year. I said it on the calls earlier, I will continue to repeat this in terms of the expectation of the variabilities that the company's portfolio table we have presents.
Piyush Agrawal: On the issue of timelines, I would say that it's good practice, you have made the impairment provision, but when you have events, maybe a bankruptcy, a liquidation, or in some cases, a sale of a property,
Piyush Agrawal: And in a conservative or cautious sense, I would say that when we think that reconciliation is not in the short or medium term, even if we do not give up on this issue, we take the right.
Piyush Agrawal: This has no P&L implication, but it's just the right thing to do to take the impaired portfolio and take the right action, and that's what we reflected, probably in a higher number, in Q4.
Speaker Change #109: Okay. And I think there might be one for you, Darryl.
Speaker Change #109: You spoke about optimism regarding the future of the United States. I think there is a lot of optimism here, even about bank M&A in the United States.
Speaker Change #110: As you've been acquisitive over the years in the U.S., give us a sense of...
Speaker Change #110: regarding franchises today with Banque de l'Ouest, the synergies on the com.
Speaker Change #111: Should we expect BMO to participate in the M&A activity in the American banking world over the next 3 to 6 months? Or is 2025 more about focusing on synergy with southwestern banks and thinking about M&A afterwards?
Speaker Change #112: Abraham, thank you for the question. I know where you are coming from. I will give you a similar answer that I have given in the past, which is that we always consider M&A as a path for growth, if you look at our trajectory in the United States over the past few years.
Speaker Change #112: 60% of our growth was organic, and 40% of that was due to episodic acquisitions.
Speaker Change #112: So, the interest is there, but I would say that, at the moment, the priority, looking at 25, is to ensure that we have the wheel flying well and correctly on the ROE optimization exercise that we talked to you about. We have money to deploy organically for our clients first.
Speaker Change #113: Should something come along that makes sense, that fits all of the criteria that we think about, we would look at it, but that won't be our first choice. Right now, our first choice.
Speaker Change #113: it's about returning to the R&D performance that we have historically seen from our American companies, and restoring the platform, so that, potentially, if something happens afterwards, we will be in good shape to be able to act. But at this moment, I am trying to be very clear with you about our priorities.
Very clear. Thank you very much.
Speaker Change #114: Thank you. The next question is from Minnick Wilman, Scotiabank. Please go ahead.
Speaker Change #115: Hello. This question might be for Darryl or Piyush. Now that you have more confidence about increasing the credits, can we maybe revise...
Speaker Change #116: Just your thoughts or lessons or takeaways from this credit episode. It definitely surprised the street. So just wondering what you draw from this in terms of lessons going forward.
Speaker Change #117: Thank you for the question. Three quarters, of course, provides a lot of learning and, from a risk management perspective, we've always gone back and seen what things we can incorporate into our risk practices, given the strong risk culture we have.
Speaker Change #118: In our growth, there were some customer segments that we borrowed from this vintage, around 2021, and with larger openings.
Speaker Change #118: which did not work to our advantage and are the reasons for our significant losses in 2024. I think that from there and the direction we have given to the teams working with Nadeem, Alan, and the other business leaders,
Speaker Change #118: We have an improved process, or an enhanced process, in many areas, whether it is customer selection or customer dedication.
Speaker Change #118: on the criteria of registration, sustainability, and also how much we risk mitigating at inception, rather than keeping our books. So, these are regular courses, I would say, for the course. I am happy that the teams have worked together, the first and second lines, and I think that's what you should expect from us.
in particular with the view of the neighborhoods that have passed.
Speaker Change #119: Thank you for that. Perhaps as a follow-up, I think initially, when we saw that the credit issue was raised, there was a fear that it could negatively impact development expectations going forward, particularly in the United States.
Speaker Change #120: Your comment doesn't seem like that of the environment in the United States.
Speaker Change #121: have changed for the better. So, I just wanted to confirm that in terms of, you know, how these...
does this experience have an impact or not?
Darryl White: It's Darryl, you have heard my comments, you have heard Piyush. As you know, we have a business franchise and a capitalist franchise in the United States. So, I invite Nadeem and Alan to look into the issue of the tension between, you know,
Darryl White: by managing risks and evolving with the market at the same time.
Speaker Change #122: The increase was between minus 1 and 3%.
Speaker Change #122: At the beginning of the year, we were flat, everyone was at a percentage or two. So we are at the right height. With the user's feeling of improving...
Speaker Change #122: We believe that the demand for leisure will return, and our appetite for risk is there to grow. This is not a strategy based on the balance sheet, but we are here to grow our revenues and risk-adjusted revenues, and optimize our balance sheet and capital, which is what we are going to do. We will do it deliberately, and we will increase the balance sheet as we do so.
Speaker Change #123: Thank you. Thank you. The next question comes from Dr. Mihalic. The capitalized markets, please, go ahead.
Speaker Change #124: Hello, thank you, good morning. I will be very quick. Piyush, with respect to the teaching and everything you have provided for us in terms of...
Speaker Change #124: who tried to help us analyze what happened.
For example, if it's the 2021 vintage.
do not die.
at that moment.
Speaker Change #124: What is the impairment of this portfolio, the size of this portfolio, and how should we think about the level of comfort going forward?
Speaker Change #124: I say this knowing that last year, you were comfortable with the credit quality. Can you determine the size of this vintage for us?
Speaker Change #125: and how it works in the system today and why it gives you comfort.
Speaker Change #126: Tarko, thank you for this question. We ended the year at 47 basis points. A large part of this, as you know, was directed towards our corporate portfolio.
Speaker Change #126: I would say that there are about half the losses in the portfolio.
Speaker Change #126: which adapted to the vintage of 1921, with a higher size.
Speaker Change #126: And my confidence today is because of the amount of work that the teams have done.
Speaker Change #126: to check the size of the portfolio, the expected loss on the general portfolios in connection with our long-term experience,
Speaker Change #126: The expected damages, which I called unexpected, on some of the larger files, are those that caused greater damage in this area.
Speaker Change #126: As I come into the call today, like I have every time.
Speaker Change #126: As part of our work, my goal is to give you the best estimate of the environment, with the portfolio and clients we have. As a result, we have resolved a large number of vintages.
with the losses we took in Q4.
Speaker Change #127: I give you advice on moderation. Remember that the height of the 40 is still above the long-term average, but it is continuously decreasing as it goes through this book and reaches the year N25. Of course, when things change and when they change, I will come back to give you my best advice.
Speaker Change #128: OK. And why is there no issue with the 2022 vintage?
Speaker Change #129: There are a few, but these names have not been billed. They are not the same size as the 21. So there is nothing thematic around the 22 that I can start to pronounce as a problem. The bigger laws, the biggest losses come from the 21. That's why I called these out for you.
Thank you very much.
Speaker Change #130: Thank you. Next question is from Lamar Purcell, Cormac. Please go ahead.
Speaker Change #131: Thank you for Piyush. I think that last year, you suggested that the losses of Q4 and Q1 might be the limit.
Speaker Change #132: and then we will return to a long-term historical average through the year 2025. I think that number is the mid-30s, if I'm not mistaken on that one. I'm just interested in what you think about the trajectory and reaching the height of 40. Does it look like...
Speaker Change #133: Towards the end of 2025, moving back to that historical average is possible, exiting 2025.
Thank you for watching this video!
Thank you, goodbye. Goodbye.
Speaker Change #134: I have more confidence in the year than I have in any given quarter, and you've seen that in our Q4, where some large files can really skew the difference.
Speaker Change #135: and I will present to you some basic points. So, as we move towards a medium to long term,
at the end of the year 2025-2026.
Speaker Change #135: depending on the environment and the time when these losses will occur.
Speaker Change #135: We see, for example, some recoveries in certain files, and at the same time, we are working through large files. So there is a mix of those who will keep the neighborhoods available.
Speaker Change #135: I am not going to give you specific advice on when this will happen, but I think that the way the portfolio is shaping up, and based on our own practices, we should reach our long-term averages by the end of the year 2025-2026.
Speaker Change #136: Ok, I appreciate that. And then, just on these questions regarding the vintages, the vintages of 2021-2022 and so on.
Speaker Change #137: You have determined that something needed to be changed regarding these...
Speaker Change #138: Was there a change or an epiphany that made it clear to you that you needed to change the way you manage the company after 2021?
Darryl White: It's Darryl, I accept Lamar. Has there been a change in management? No. When we look back at the time, there was clearly a change in practice. You have sometimes heard Piyush talk about a large size, for example, with new clients at BMO.
Darryl White: And, as he said, in hindsight, the selection of clients was not ideal. Regarding the changes, I can tell you that the changes have been made now, looking at how we are experiencing similar circumstances today, if I do a like-for-like comparison, the results we will produce from today's vintage and last year's vintage, and probably the year before as well, will be different from the vintage we are focusing on in today's conversation. I hope this is helpful.
Thank you.
Speaker Change #139: Thank you. There are no further questions at this time. I would now like to return to the subject, Mr. Darryl White.
Speaker Change #140: OK, thank you. I will be quick, because we know you have another call to take, but I want to leave you with three questions.
Speaker Change #140: for their key messages today. First of all, as you heard today,
Speaker Change #141: We believe that our credit is contained and, while losses are currently high, we expect the moderation we talked about today until 2025. Secondly, our confidence in the business aspect, while there are growing sales, we are confident in the United States and elsewhere.
Speaker Change #141: It is implied by the decisions we have made regarding the dividend increase and the request for normal course imposition today. And thirdly, we have a clear path to rebuild our ROE up to the 15% I mentioned above average.
Speaker Change #142: With that, I wish everyone a joyful season and I look forward to meeting you again in the New Year.
Thank you.
Speaker Change #143: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
This conference is no longer recorded.
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