Q3 2019 Earnings Call
Good morning, and welcome to the BMO Financial group's Q3, 2019 earnings release and conference call for August 27th 2019.
Your host for today isn't a joke woman that's head of Investor Relations Ms. Hornack. Please go ahead.
Thank you good morning, everyone and thanks for joining us today, our agenda for today's Investor presentation is as follows we will begin the call with remarks from Darryl White BMO CEO , followed by presentations from Tom Flynn, The bank's Chief Financial Officer, and Pat Cronin, our Chief risk Officer, we have with US today Cam Fowler from Canadian PNC, and Dave Casper from U.S. PNC Dann Barclays here for BMO capital markets and Joanna Rotenberg is here for BMO wealth management.
After their presentations, we will have a question and answer period, where we will take questions from pre qualified analysts to give everyone an opportunity to participate. Please keep it to one question. Daryl will then close the call with concluding remarks on behalf of those speaking today I note that forward looking statements may be made during this call actual results could differ materially from forecasts projections or conclusions in these statements.
I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall bank.
Management assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance, Daryl and Tom will be referring to adjusted results in their remarks, unless otherwise noted as reported additional information on adjusting items. The bank's reported results and factors and assumptions related to forward looking information can be found in our 2018 annual report and our third quarter 2019 report to shareholders with that said I will hand things over to Daryl. Thank you Jill and good morning, everyone. Thank you for joining us this morning.
Today, we announced earnings for the third quarter of $1.6 billion and earnings per share of $2.38. We delivered another quarter of strong operating performance that reflects the diversification and resilience of our businesses.
Our core North American personal and commercial banking businesses continue to have strong momentum with pre provision pre tax earnings up 9% from last year and good operating leverage in both Canada and the U.S., we're growing loans and deposits at above market rate and expanding our customer base.
[noise] balanced growth is well diversified and driving good revenue performance.
Capital markets continues to perform well with record investment and corporate banking revenue this quarter and strong momentum in our us business.
Wealth results.
Were impacted by lower insurance revenue in Q4 of last year. We said, we were reviewing ways to lower variability in our reinsurance business in light of the environment in the reinsurance sector performance is no longer meeting our risk return expectations and so we've made the strategic decision to exit the majority of this business.
We absorbed an increase in provisions for credit losses. This quarter as we continue to prudently build allowances for performing loans at the same time as Pat will explain overall credit quality in our portfolio remains strong.
As we guided last quarter expense growth moderated this quarter and we expect that to continue in Q4.
Improving the bank's efficiency is a top priority this quarter the ratio improved to below 60% driven by steady improvement in personal and commercial banking and we are doing more to build on that momentum.
On a year to date basis earnings per share up 5% or 7%, excluding the impact of the severance charge and capital markets last quarter.
Our capital position remains strong with our CE tier one ratio increasing to 11.4% supporting strong organic organic growth.
Turning to slide five our us platform, which is now contributing over a third of the banks earnings continues to deliver strong results with good growth in each of our businesses.
Year to date US earnings were up 24% and efficiency is improving at an accelerated rate.
We are growing our Midwest footprint.
Where we recently took over the number one position as the largest bank in Chicago by assets, a testament to the strength of our teams in differentiating BMO in a highly competitive market.
At the same time, we continue to accelerate organic growth outside our core footprint.
For example.
We recently expanded our presence in Texas.
Opening a new commercial office in Fort worth.
We have a long and successful history, serving customers in the second largest U.S state, including our capital markets office in Houston, and our transportation Finance team in Irving. We've also added wealth management capabilities to our rapidly growing Dallas office.
In personal and business banking.
We're attracting new customers through our competitive digital capabilities, just six months after launching our new mobile banking service customers can open an account in minutes and Weve already gained market leading ranking for our mobile app in the United States in line with the largest us banks and our leading Canadian App.
We're reaching customers across the country, having now opened accounts in all 50 states with two thirds of new balances coming from outside of our branch footprint.
In us capital markets momentum continues to build.
We had strong M&A activity this quarter that included advising on three cross border transactions and three deals completed in close partnership with commercial banking.
With strategic investments, we've made in our US platform together with the strength of our Canadian business. We expect continued good performance and strong operating leverage for the overall capital markets business going forward.
Were continuing.
To grow our backed by executing on strategies that leverage be most unique strengths, including our collaborative approach to building customer relationships and loyalty guided by our purpose to boldly grow the good in business and life in partnership with our customers.
For example, this quarter, we launched a holistic healthcare banking program supported by BMO professionals with a deep understanding of practitioners needs.
This integrated team provides trusted banking and wealth management advice through every stage of our customers' journey from starting a practice to growing and innovating to succession planning.
And to retirement.
Our integrated approach recognizes the unique and evolving needs of our small business customers across industries.
In Agriculture for example, we're proud to be the number one partner for Canadian farmers, where our scale and deep understanding of the industry enables our bankers to build long term relationships as trusted advisors, helping our clients navigate trade and climate challenges, including offering relief programs where needed.
Looking ahead.
Our diversification and earning strength positions us well for uncertainties in the environment. The core of our bank, our flagship personal and commercial businesses on both sides of the border account for two thirds of the bank's income and continue to demonstrate good earnings power.
We're gaining share and were not wavering from our disciplined risk and underwriting principles.
We have a strong foundation and we're executing on agile and sustainable business strategies designed to deliver good performance, even in a more challenging revenue environment.
Operating leverage improved from last quarter, and we expect that to continue.
Our management team remains firmly committed to achieving our efficiency target of 58% by 2021.
We're making strategic choices in each business to drive the profitability and the operating strength of the bank over the long term such as the actions weve taken in capital markets and wealth to align resources with the market dynamics and revenue environment.
Holding true to our purpose will shape, our success and that of our customers employees and communities.
And now I'll turn it over to Tom to talk about the third quarter financial results.
Thank you Daryl and good morning, everyone.
My comments will start on slide eight.
Q3 reported EPS was $2.34 and net income was $1.6 billion.
Adjusted EPS was $2.38 and adjusted net income was $1.6 billion, both up 1%.
Operating results this quarter reflect good performance in our PMC and capital market businesses and the positive operating leverage.
Adjusting items are similar in character to past quarters and are shown on slide 24.
Net revenue of $5.8 billion was up 5% or 4%, excluding the impact of the stronger us dollar, reflecting good performance in our PNC businesses and to be more capital markets, partially offset by a lower contribution from the insurance business expenses increased 4% or 3%, excluding the impact of the stronger us dollar largely reflecting higher employee related expenses and technology costs.
Operating leverage for the quarter was positive 0.5% of the all bank level.
Looking forward, we are on track to deliver positive operating leverage again in the fourth quarter as we said on our second quarter earnings call. We expect expense growth for the second half of the year to be half the rate of the first half of the year and we are on track to deliver that.
Moving to slide nine for capital the common equity tier one ratio was 11.4% the ratio was up 10 basis points from the prior quarter driven by retained earnings growth and lower deductions, partially offset by higher risk weighted assets the higher risk weighted assets were driven by commercial and corporate loan growth across our businesses net of lower market risk out of the way.
Moving now to our operating groups and starting on Slide 10, Canadian PNC net income was 649 million up 1% from last year with strong pre provision pretax earnings growth of 8%.
Revenue growth was 6% driven by higher balances increased non interest revenue and higher margins.
Total loans were up 6% with commercial loans up a strong 16% mortgage growth through proprietary channels, including amortizing Helocs was 4%.
Deposit growth continued to be very good with personal balances up 12% and commercial up 9%.
NIM was up four basis points from last quarter, reflecting improved lending spreads, including the benefit of a widening prime TBA and favorable product mix changes expense growth was 4% reflecting investment in the business operating leverage was good at 1.9% and efficiency improved to 47.3%.
The provision for credit losses was $204 million and includes a provision on performing loans of $30 million.
Moving to U.S. PNC on slide 11, and my comments here will speak to the US dollar performance.
Net income for the for the quarter was $285 million down 1% from last year and pre provision pre tax earnings growth was strong at 9%.
Revenue growth was good at 5%, reflecting higher loan and deposit balances net of lower net interest margin.
Average loan growth was 13% with commercial loans up 16% and higher personal loans deposit growth continues to be good up 14%, marking the fourth consecutive quarter of double digit growth in both personal and commercial deposits.
Net interest margin was down 15 basis points from last quarter due to higher deposit costs, including changes in mix loan spread compression and the impact of loans growing faster than deposits.
Expenses were well managed and up just 2% operating leverage was strong at 2.8% in the efficiency ratio improved to 57.9%.
Provision for credit losses were $73 million and included $28 million provision for credit losses on performing loans.
Moving now to slide 12, BMO capital markets. Net income was was good at $318 million up 5% from last year. The us business continued to perform very well delivering net income of us $83 million and contributing 34% of capital markets earnings revenue growth was strong at 9% with investment in corporate banking revenue up 15% and trading products up 4%.
Expenses increased 13% with the Kgs acquisition accounting for almost half of that increase.
The stronger US dollar contributed approximately 1% to each up revenue and expense growth.
Provisions for credit losses were $10 million compared to $7 million in the prior year.
Moving to slide 13.
Wealth management net income was $257 million.
Traditional wealth net income of $233 million was up 10% from last year with higher revenue, primarily due to the impact of a legal provision in the prior year and higher deposit and loan revenue.
Average loan growth was strong at 16% and deposits grew 5% as we continue to diversify our product mix.
Insurance net income was $24 million down from $89 million in the prior year and below the level of a typical quarter largely due to lower reinsurance results and the impact of lower interest rates.
On reinsurance as Daryl mentioned, we have made the decision to wind down our property and casualty reinsurance business.
This decision reflects returns in the business coming in at a level below our expectations and a higher level of variability in results, partially due to wet weather related claims expenses were well managed and up 1% from last year.
Turning now to slide 14 for corporate services. The net loss was $21 million and 34 million better than the net loss a year ago results were above trend and include items that had a positive impact on revenue and expenses in the current quarter, including a gain on the sale of an office building.
To conclude the third quarter results demonstrate the benefits of our diversified business mix, good operating discipline and a positive trend on expenses as expected.
We're focused on executing our strategy and continuing to generate positive operating leverage as we head into the fourth quarter and into next year and with that I'll hand, it over to Pat.
Okay. Thank you Tom and good morning, everyone.
Starting on slide 16, total provision for credit losses was $306 million or 28 basis points, which is up from 16 basis points last quarter. As you may recall last quarter's PCL included a $40 million recovery on the us commercial loan adjusting for that significant recovery the quarter over quarter increase was driven by three main factors first higher Canadian consumer losses realized almost entirely as a result of implementation issues with a new consumer collections platform second a single large loss in our Canadian commercial portfolio and third higher provision this quarter for performing loans I will discuss each of these further in my subsequent comments.
Looking at the PCL for impaired loans, our provision this quarter was $243 million or 22 basis points, an increase of $93 million from the prior quarter.
Adjusting for the $40 million recovery I referenced earlier the balance of the increase this quarter was in Canadian PNC and came from two principal sources first consumer PCL increased $26 million to $133 million. This increase was primarily due to elevated delinquencies, which were driven by implementation issues associated with our new collection system.
With these implementation issues largely behind US, we expect Canadian consumer losses to normalize over the next few quarters.
The second factor driving the overall increase this quarter was in the Canadian commercial business, where we had a 41 million dollar impaired provision an increase of $26 million from the prior quarter.
This increase was mostly due to a lock to loss provisioning on one account.
Apart from these two factors and Canadian PNC, the PCL on impaired loan results in the other businesses were good this quarter.
US consumer provisions at $8 million were up from their very low level last quarter, but still remain at the lower end of the recent historical range.
US commercial PCL on impaired loans was $53 million compared to $16 million last quarter.
Adjusting for last quarter's $40 million recovery commercial PCL was actually lower this quarter than in Q2.
PCL on impaired loans for capital markets was also lower this quarter at $7 million compared to a $12 million provision in Q2.
Now turning to the performing loan provision and the third of the three factors I referred to at the outset of my remarks, PCL on performing loans was $63 million, an increase of $37 million from last quarter.
This increase was due to a combination of balanced growth.
A modestly softer economic outlook and to a lesser extent credit migration.
We view this increase as a prudent adjustments to our performing loan provision and not a reflection of concern with credit quality in any of our lending portfolios.
Turning to slide 17 formations decreased $62 million this quarter with notable decreases in Canadian consumer as well as in commercial loans, while there were formations in the oil and gas sector as with last quarter, we provisioned appropriately based on our expectation of relatively low ultimate losses on these formations.
The ratio of gross impaired loans to total loans was 55 basis points this quarter up two basis points compared to the prior quarter and well within recent historical levels.
In summary, we are not seeing any concerning systemic thematic or sectoral trends in any of our credit books, which remain strong and consistent credit quality. While this quarter's loss rate is at the high end of recent guidance based on the nature of this quarter's increases and our current economic outlook, we still expect to see losses in the low to mid 20 basis points going forward.
I will now turn the call over to the operator for the question and answer portion of today's presentation.
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Our first question is from many grauman with Cormark Securities. Please go ahead.
Hi, good morning.
We hear a lot about trade uncertainty these days and what that's causing that to the overall business environment, given your position both and Ken in the us.
Can you comment on what you're seeing there on on a ground level in terms of the impact that trade is having on your customers and specifically if you could talk about.
The AG business are you seeing any signs of trouble there.
Comment on that from a credit perspective in particular.
Well I may ask Darryl thanks for the question maybe I'll start.
And with respect to the AG business Pat might have a comment on the credit question that you asked.
In general.
I would say, it's it's hard to ignore the fact that the trade tensions are creating first of all volatility of the markets as you know well, but also some suppression of growth. If we look at it across all industries. If we look at across the US our estimate is that including.
The late late developments of late last week that we would see something in the order of a half a percentage point of view as GDP impact as a result of the.
The trade protectionist measures.
In aggregate, that's coming off of a fairly healthy level and unemployment as we know is still extraordinarily low by historical standards and Weve got inflation around 2%. So it's not it's not a catastrophe, but it is definitely a slowing.
Environment from the perspective of GDP growth, our customer base in Canada and the us.
Continues to spend and continues to expand I would say a little bit more prudently than perhaps they might have six or 12 months ago. So a slowing environment as a result of the trade measures.
For sure as far as credit is concerned we do feel it.
In some portfolios more than others.
The good news is you referenced AG in particular, the AG portfolio.
In the us in particular is under some stress partly related to trade, it's well covered by land values. So you don't see provisions necessarily but there is there is some stress in that small portfolio for us would you add much to that Pat no.
We're certainly seeing the signs of stress in the USA portfolio that has persisted actually for the better part of the last couple of years, so exacerbated probably mildly by some of the recent tariff issues, but it's been a it's going on for a while I would contrast that quite strongly though with Canada, where we're seeing very little impact from from issues and in fact, which is the bulk of our portfolio roughly about 83% of the AG book sits in Canada and at the moment anyway, the level of impairment in that portfolio is virtually nil.
Hi, Dave or cabbage, one bigger broader comment on other sectors.
Thank god as well.
And just as a follow up there just in terms of your expectations for loan growth specifically, our commercial loan growth.
Both sides of the border it doesn't look like.
There is any impact.
Given the kind of numbers, you're putting up would you expect that growth to slow materially over the next few quarters.
This is Dave I would say I would expect that the moderate to some extent not necessarily due to any of the factors that we've discussed as far as trade. This is.
We've experienced good strong loan growth and I think overtime.
It will moderate that would be the general view.
It's cam a follow up on daves as well.
In Canada, we're we're in the 16 presents zone on the commercial book as you can see pipelines are.
I find is is more or less where it has been the last three or four quarters Ive talked about diversification of that growth on this call. Its five industries that are at around that number and its five regions of the country that are double digits. So I do agree with Dave there will be some moderation, but I wouldn't expect there to be too too much in the near term.
Thank you.
Thank you.
Our next question is from given the Shine with National Bank Financial. Please go ahead. Good morning, just a question for Pat and clarify the issue with the Canadian consumer Peafiel, you implement the new system.
There were some delays and tracking or taking action on collection of them, maybe created a backlog in your system and therefore, a spike in peafiel kind of.
Correct them walk me through how.
The normalization.
True.
Hello.
Sure. So your description is accurate.
And.
Yes, there was just some implementation issues with the platform that we have largely started our way through I think your best indication of any future impact really comes from early stage delinquencies. So you don't see it but last quarter, we had a fairly large spike in early stage as you would expect as we fell behind on collections that flowed through this quarter into the higher pcls that you're seeing when I look at early stage delinquencies now across all of the consumer portfolio. We're seeing early stage delinquencies down in every single product category and actually in terms of delinquency rates pretty much back down to where they have been historically and so on that basis Thats why we are making a statement that we expect it to normalize we're not seeing any of the same issues in those early stage delinquency numbers that we saw last quarter. So we think the issue is largely behind us so from here on and it will really depend on how the economy changes more than more than anything else. Okay. And then just another one on the margin for for the us business Big drop there.
Actually.
Is there any.
Timing issue there you alone go down immediately in the deposit.
Either replace those over time and then.
Okay is there any.
Need or appetite to pick from other action I know you've done it in the past where you've disposed of some low margin loan book because.
They just weren't making enough spread for you is there anything about nature brewing.
So let me let me take the first it's Dave the.
The quarter drop this this quarter was probably three things in all you touched on them and all of them had a pretty similar impact. We did have this quarter stronger loan growth and deposit growth. So that in the quarter that did make some of the difference. We also have rising deposit costs as we continue to grow our customer base.
More and more of our deposits are coming from our.
Interest bearing deposits, so that has an impact as well and loan spreads to some extended this would maybe get to your last question.
Have come down a little bit, but I would say that is not due to.
Any any particular real strong dimunition, it's more we do have a higher credit quality today, we have most of our growth is coming from businesses, where we have lower loss given default. So that's that's had some impact but I would not say there is any drastic action at all we continue to grow our loans to good customers and also deposit so.
That's probably the summary.
Three of them.
It's Tom maybe I'll jump in on the.
Trajectory and add the total bank.
Perspective so.
On the us.
PNC business with the cuts that we've seen from the fed.
And the potential for ongoing very strong commercial loan growth, although a little moderated likely to be some pressure in Q4 on the margin.
The cut itself would be in the zone of five bips and there could be another two to three depending on.
The loan growth level, and how strong it is in relation to deposits.
So that's.
PNC for Q4.
The Canadian story is.
Is different and in Canada, we had a nice increase in margin in the current quarter, we think that will sustain for the fourth quarter. So Canadian margins should be.
Flat to flattish in the fourth quarter and looking out to next year for the Canadian business, We think the margin will be.
Again flat ish.
At the bank of Canada moves, there's maybe a little bit of pressure, but nothing significant from what we're seeing here today.
And on the us side, if the fed moves.
Again, there is a potential for some incremental pressure and so the total bank level, if you roll that up.
Q4.
With a little bit of pressure in the U.S. NIM is likely down X trading.
In the zone of one to three Beps and out to next year.
With Canada stable bit of pressure in the U.S., there's the potential for.
Another one to two so big picture, Ken is pretty stable us with the strong loan growth and the fed cutting, but a big a bit of pressure.
But not really significant impact of the all bank level. Thank you.
Thank you.
Our next question is from John Aiken with Barclays. Please go ahead.
Good morning, Tom wanted to just get you get a little bit of a more information on the reinsurance what was the what was that.
Recurring level of earnings if you're going to go over a longer period of time three to five years and exiting business do you expect to see material release of capital.
Hi, This is Joanna thanks for your question.
So so we as you described you saw we did taken it took a step to exit our business.
Part of it was because of the consistency of earnings and I would say over time.
It Didnt move around bye bye.
A few million dollars I would say overall one of the reasons. We've exited is because over the past two years in particular because of some of the largest scale of events. We've seen both in 2017 and 2018. It didnt. It didnt give a lot more volatility to the business and so we have seen pricing improve but not at the level. We expected and we are expecting and have continued concerns with climate change, we're just going to see more and more frequent higher claims and so we didnt feel like there was a good symmetry between risk and reward what I would describe it as going forward. It won't have a material impact on our insurance earnings partly because of the volatility we've seen in the business. What I would say, though is that do you expect that to lower the volatility of our business and even more importantly, improve the ROI for a while.
Great. Thanks for the color.
Thank you.
Our next question is from Doug Young with Deutsche Bank. Please go ahead.
Good morning, just maybe going to Pat the 63 million PCL build than performing loans, hoping maybe you can just flesh that out a little bit and and I know it's bounced around the last few quarters, just trying to get an idea of what if for a normal quarter. If there is such a thing what is a normal performing loan PCL build visit two basis 0.3 basis points.
And then just lastly on credit you talked about one large Canadian account that you provision for what is this something that was impaired in the quarter or is this something that was previously impaired and the provision was just updated thank you.
Sure I'll start with your first question. Your second question first it was something that was impaired in the quarter, where we took a provision on.
And it was in the services sector and the healthcare sub sub sector. So I think you can see that in the disclosure.
In terms of the performing provision.
Unfortunately, I don't think there is such a thing really as a normal quarter and I think you've seen that from all the banks over the course of the quarters I can tell you tip in any given quarter, it's going to be driven first by loan growth as you would imagine.
And we had some of that this quarter I would say that accounted for maybe something like a third of that number that you are seeing.
Then it's going to depend on your forecast did view of economic conditions out over the next 12 to 24 months and for US when we look that the current data that we saw during the quarter.
And particularly some softening and variables like corporate profit growth rates and some modest adjustments to GDP.
That added about another probably call it about a third to a half of the increase in the era. The total provision and then you're going to get credit migration in the portfolio as well and that credit migration can go up and down it is somewhat asymmetric, though because credit migration and positive credit migration within stage. One gives you a little bit of a benefit tcl, but negative migration from stage one to stage two when you trip over from 12 months to lifetime gives you quite a bit of an incremental bump tcl. So even negative credit migration doesn't necessarily mean, there's a lot of weakness in the portfolio. It sometimes it just results from that asymmetry to how things are moving around and for us that migration. This quarter was about a quarter above the $63 million and so I can tell you going forward as Dave said and can would agree we do expect to see continued loan growth. So to the extent that continues you should expect to see a provision for that.
And then I can tell you that our best guess for the outlook for the economics economic condition in the next 24 months is our current forecast and so unless that changes on the basis of new data that's coming in over the course of the subsequent quarters.
That that that likely won't change, but again it will it to the extent that things get better or worse, we will move our economic forecast in light of the updated data.
Okay. Thanks for the perspective.
Thank you.
Our next question is from Sumit Malhotra with Scotia capital. Please go ahead.
And just to pick up on that when you mentioned in your at the end of your prepared remarks that.
20 to 25 basis points is still a reasonable level for.
The PCL ratio for the bank.
Is that.
Is that inclusive of 2020 and are you looking only at the.
So far the impaired portfolio or is that the total provision rate.
No that would be the total provision rate.
And I think we've been guiding to that number for a while now so and I could not can I can give you a sense of how why I'm thinking that way. If you look at the consumer portfolio like I said, when we look at early stage delinquencies.
Both overall and regionally, we're seeing things returning pretty much to normal and so that was the job that was the origin of my earlier comment about why we think consumer Pcls will normalize over the course of the next couple of quarters, because we're just not seeing it in the early stage delinquency numbers.
On the wholesale side, we're seeing formation rates pretty much normal you'll see them at 15 Bips. This quarter, that's pretty much exactly where they have been on average over the last few years, our gross impaired loan rate at 55, it's a little bit higher than what you saw last quarter and about any year ago by a couple of basis points, but still again well within the normal range. The weighted average probability of default of the book is essentially flat to last quarter and almost flat to last year.
And when I look across the diversification of the book.
All of that tells me that we're not seeing signs of stress that would cause that PCL rate to rise dramatically other than the general upward trend from what we have highlighted particularly low levels of loss rates in the last couple of years and so that general trend I think will take us into the mid twentys, but based on what we're seeing in the credit quality of the book, both consumer and wholesale razzing that anything that would dramatically cause us to deviate from that number.
And candidly I think you touched a bit on this in some of the remarks earlier when you think about.
PCL ratios for the bank going forward, so where they are now is it fair to say one of the larger swing factors is.
I would think you're not expecting.
As much in the way of recoveries and just to be clear when you talk about where we are provisions are going do you embed any changes in the.
Stage, one and two provision or do you assume that to be.
To be zero.
Yes.
Model refinements are already being forecast.
Yes, the the the provision that we have right now reflects our best estimate of how the future is going to look for the performing provision.
And.
And then as you said, we don't we don't really bake in recoveries into our forward look on Pcls.
They do happen from time to time, and it's not wildly unusual as I said last quarter, we work recoveries pretty hard consist and pretty consistently so.
They are going to come in the future I don't know when and how much but.
But.
We certainly wouldn't bake them into our forward look.
Last question is for Tom on on capital.
Just one I don't have the numbers right here, Tom some of your counterparts had mentioned.
Some adjustments that are coming in to start 2020 with.
Hi for 16, and then some of the other parameter updates do you have an estimate for the impact to be Mo and was there any.
Pension liability.
Pit for capital this quarter it Didnt look like based on your number.
Quick quick cancer, So the Q1 impact from the IRS 16 change and the.
Change in some of the parameters is 15% to 20 basis points.
And on the pension side, there was no meaningful impact in the current quarter.
Our approach to managing the pension risk.
Looks to match the assets to the liabilities, it's not perfect.
But.
It's a pretty good match and we also have a pension asset and so in the current quarter that asset reduced and Thats a deduction from capital So thats actually a positive and with that the net impact from pension was de minimis in the quarter.
At this level of capital do you anticipate.
Once again, becoming active on your nclb.
Well I'll stick to our normal story on that we.
I felt very good about the loan growth that we've had in the business and the customer growth that comes with that the commercial growth in particular in Canada and the US has been above market and we feel good about how the business is going so that's our first and best.
Use of capital.
And if the ratio builds from the current level.
And and moves above.
11.
50, we would expect to be active so our no more normal guidance is for the ratio to grow by 10 to 15 basis points, We said last quarter that would be around the lower end of that range with strong growth. That's what played out this quarter. We've got the Q1 change coming as you asked about in your question. So.
A bit of a long answer, but I'd expect activity with the ratio moving up from the current level and we need to get through the Q1 adjustments that we've got coming.
Thanks for your time.
Thank you.
Our next question is from Robert Sedran with RBC capital markets. Please go ahead.
Hi, good morning, I'd like to try to combine Tom your outlook on the margin with some of Dave's discussion on.
On loan growth to get a sense for revenues it sounds like still expecting a fairly robust topline as much as we try to forecast.
What the margin is going to do I guess, we're really trying to get at revenue. So the pre provision earnings that we saw around I believe it was 9% in the U.S. is that.
A reasonable assumption even in this margin world or should we expect that to slow.
So let me let me start.
So it's a tough question to answer I, Here's what I know, we will continue to grow our customer base, probably faster than the market. It's still very good opportunities for us that will lead to higher revenue higher loan growth.
And higher deposit growth the tougher part is just what happens with rates. So so it's really hard for me to predict and when I can predict over the long term, we will continue to grow our us business on both the personal and commercial side, we've got really strong momentum and despite a lot of.
As always in the US economy, our clients are generally still pretty positive and the and I'm pretty positive about the long term aspects of this business.
So.
Just to try to push a little bit further I mean, we're so you're still expecting reasonable growth rates and what the margin contraction you had this quarter you still put up some pretty strong topline even with the rate moves so.
A pretty robust top line is still would still be the working assumption I understand it's not guidance, but thats still what you're looking for.
Well I don't I think I pretty much said, what I would say I think it's again I think the the rates will have some impact I just don't know what they'll be but we're going to continue to grow customers, we're going to continue to grow deposits loans and.
We'll see what happens the 9% this quarter of PBT was was strong and I know that's that's a good number for us I don't know what it's going to be next quarter, Rob Rob. It's Darryl let me see if I can come in on this I think you raised an important question I thought you framed it well.
In the sense that we think about the revenue growth of the business and we think about the overall returns of the business. The NIM as part of that equation of course, it's part of that equation, but when we look at our us businesses plural I talked about them earlier up 24% on earnings year to date.
14% in the quarter the PNC business that you are causing Dave about just now when we look at a compressing margin against an expanding customer base and topline growth. We also look at the fact that it does now have a double digit our OEM and efficiency ratio that is accretive to the rest of the bank's efficiency ratio. So when I put all that together that's an attractive package for the growth of the bank overall and Tom talked earlier about the total bank NIM.
And when we look at total bank NIM, and we don't get completely myopic into the margin in one of our business segments at a 167 basis points. We think it's quite competitive with respect to other investment opportunity. So when we put that into the mix, we like the trajectory we can't control the rate environment as Dave said, but our strategy is unchanged and we keep pumping with our customer base.
Okay, well I have that may have been an unanswerable question. So I appreciate the attempt thanks guys.
Thank you.
Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning.
Daryl you made it.
You've emphasized the importance of continuing to manage expenses lower in this environment and I'm just observing.
Sort of different approach to this across banks in Canada. The U.S., some taking a very aggressive approach with big restructuring charges and other sort of doing it at the margin.
When you think about BMO in 2020 in 2021, how do how do you think PMO behaves a little more aggressively with perhaps some restructuring initiatives meaningful reduction initiatives or just perhaps just let attrition take care of expenses, how do you envision people playing.
Yes, it's a good question so.
In order to answer that question I'll take you back a bit.
We talked a couple of years ago about working our efficiency ratio down and delivering it through operating leverage most important outcome is the is the forecast that we've given holding ourselves accountable to the 58% in 2021, and if you see the trajectory. We're on our way there were at or below 50 for the for 60 pardon me for the first time in a very long time.
This quarter and we're getting there by moderating our expense growth. Tom told you last quarter that we would start to moderate our expense growth in this quarter. We've done that we're telling you today, we are going to moderate that even further in the fourth quarter I think you're going to see us do that considerably.
And then as we go out beyond that.
We're working on our business plans, we are thinking about how we're going to manage through the course of 2020 and 2021 I think it would be very prudent to assume that we're going to have we and others are going to have.
A reasonable, but lower revenue growth environment to work with them and in that context, we'll make our decisions on how aggressive will be with respect to restructuring I would say as we launch into the first couple of quarters of 2020, so stay tuned on that decisions aren't yet made but it will be in the context of our assessment of the overall revenue environment and.
Our ability to reach the commitment that we've made to 58%.
So at this point it would not be appropriate for me to rule it out like a meaningful restructuring charge. The I've said before I think in a couple of your competitors conferences in fact.
That you shouldn't necessarily rule it out, but there will be a day that will come more we'll say that story is behind us I understand and then maybe just looking back at other credit cycles, and I'm not suggesting that what we're seeing today is a credit cycle effect appears to be normalization.
Looking back at other cycles Pcls got as high as 80 9100 basis points plus.
As I start to model out a credit cycle today or what it might look like today.
Would it be your view that credit cycle today could in fact be a lot less.
Meaningful in terms of how high the Pcls ratio gets than it has been in the past because of things like mix or.
Perhaps just underwriting standards is that is that conceivable or is that wishful thinking on my part.
Paul.
Sorry, I don't think that's wishful thinking at all.
I do think the mix issue is an important one.
You know I look at some of the more particularly volatile sectors like Korea, and I think about what our mix looks like in the Cree sector now relative to what it look like going into the last cycle and we start to decompose sectors like that we actually feel much better about where we are now versus say the last cycle.
Add the diversification of the book has only gotten better since the last cycle. If you think about how we've diversified into the us how we've diversified into multiple other sectors that weren't there in 2008, and I think diversification is a pretty powerful benefit when it comes to comes to a change in the cycle, but I think I'm kind of with you around with respect to the cycle I'm not I'm not calling for a recession either nor are we institutionally.
I look at forecast for GDP rates for unemployment for housing starts for interest rates all of that to us for it for 2020, it looks pretty stable relative to 2019, and so while I think things will be softer relative to some really strong performance in 17 and 18 it doesn't feel recessionary, but if we do end up in that cycle I think you're right I think the mix of our business and the diversification profile is much better than what it was in 20 and 20 O eight and I think that will serve us well.
Thank you.
Thank you.
Our next question is from Scott Chen with Canaccord Genuity. Please go ahead.
Good morning, maybe going back to onto the U.S. NIM question. I think you commented that the initial fed cut impacted us NIM by five beeps and if that kind of continues three or four times say up until fiscal 2020 is that kind of a nice brommer views on potential future impacts just on that isolated item.
So I guess two things you heard correctly on the approximate impact of the first cut and then I would say.
The answer to the second question about thinking about the impact of future cuts would be.
No so typically.
As rates move down.
We'd expect less sensitivity in the margin to cuts and we saw that same dynamic playing out as rates moved up initially.
Our deposit spreads widened significantly as rates started to move in that impact diminished in the last couple of cuts and so we'd expect higher sensitivity.
The first.
A couple of cuts than in cuts that would follow so direction would be similar but the impact would become muted as C.
Fed moves added up.
Okay. Thank you very much.
Thank you.
For timing purposes. Our last question is from Darko Mihelic with RBC capital markets. Please go ahead.
Hi, Thank you just a quick question on the corporate it looks like your head office building.
Sale and some higher securities gains.
Just to help with the modeling I Wonder if you can give us an idea of the size of that or maybe what corporate should really be losing every quarter.
So it's it's Tom so corporate had better than average performance in the quarter for the reasons I mentioned in my remarks, and you you play back.
The way I would look at corporate is our average loss over the last six quarters is about $60 million and that's as good a number as any to work with.
And the numbers move around quarter to quarter.
And we saw the benefit of that in the current quarter, but for modeling purposes.
We think taking the last four quarters last six quarters is is a reasonable approach and again the number is $62 million for the last six quarters.
That's helpful. Thanks very much.
Thank you there are no further questions registered at this time I would like to turn the meeting back over to you Mr. Mike. Thank you operator.
As I said earlier, we continue to have strong operating performance in our businesses with good ppt growth for the quarter and for the year to date, well credit losses increased from very low levels as we prudently added allowances for performing loans as Pat explained credit quality in the portfolio remains very high.
Now going back to the beginning of fiscal 2018, we discussed with you two clear objectives, one growing our us business at a faster rate than the rest of the bank and to improving the overall bank's efficiency performance now almost two years later our update on each of these objectives remains very positive we've increased the share of the bank's earnings from our US operations from roughly 25% then to roughly 35% today and as we said earlier, our U.S segment's earnings are up 24% year to date, we've done this by prudently taking share in our core businesses and consistently delivering double digit ERP growth in the United States.
On efficiency in fiscal 2017, our adjusted efficiency ratio was 62.7% in the quarter that we announced today, we broke through 60% and delivered 59.9% efficiency going forward.
As Tom said, we have a clear focus on managing expense growth, which moderated this quarter and will further moderate in Q4, we committed at our Investor day last fall to 58% efficiency by 2021, and we are focused on delivering that outcome for our shareholders. So we feel good about our momentum on both of these objectives and we'll continue to have a sharp focus on them going forward, regardless of the environment. We're operating in overall, we're executing on our strategies and they position the bank for sustainable performance going forward.
So thank you all for your time today, and we look forward to speaking to you again on the Q4 call in December .
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Knowledge is promoted confirm also that the whole piece.
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Okay opinion, if it had been cofetel for Tommy pick a question about filling fees.
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