Bank of Montreal's (BMO) CEO Bill Downe on Q3 2016 Results – Earnings Call Transcript

Bank of Montreal's (BMO) CEO Bill Downe on Q3 2016 Results – Earnings Call Transcript

Bank of Montreal (NYSE:BMO)

Q3 2016 Earnings Conference Call

August 23, 2016 02:00 PM ET

Executives

Jill Homenuk – IR

Bill Downe – CEO

Tom Flynn – CFO

Frank Techar – COO

Surjit Rajpal – Chief Risk Officer

Cam Fowler – Canadian P&C

Dave Casper – U.S. P&C

Darryl White – BMO Capital Markets

Gilles Ouellette – Wealth Management

Analysts

Meny Grauman – Cormark Securities

Robert Sedran – CIBC

Gabriel Dechaine – Canaccord Genuity

Sumit Malhotra – Scotia Capital

Sohrab Movahedi – BMO Capital Markets

Mario Mendonca – TD Securities

Peter Routledge – National Bank Financial

Doug Young – Desjardins Capital

Darko Mihelic – RBC Capital Markets

Jill Homenuk

Thank you. Good afternoon everyone and thanks for joining us today. Our agenda for today’s investor presentation is as follow. We will begin the call with remarks from Bill Downe, BMO’s CEO followed by presentations from Tom Flynn, the Bank’s Chief Financial Officer and Surjit Rajpal, our Chief Risk Officer. After their presentations, we will have a short question-and-answer period where we will take questions from prequalified analysts. To give everyone an opportunity to participate, please keep it to one or two questions and then re-queue.

Frank Techar, Chief Operating Officer, Cam Fowler from Canadian P&C, Dave Casper from U.S. P&C, Darryl White from BMO Capital Markets and Gilles Ouellette from Wealth Management are here with us this afternoon to take questions. 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.

Bill and Tom will be referring to adjusted results in their remarks unless otherwise noted. Additional information on adjusting items, the Bank’s reported results and factors, and assumptions related to forward-looking information can be found in our annual report and our first quarter report to shareholders.

With that said, I will hand things over to Bill.

Bill Downe

Thank you, Jill and welcome to everyone joining us on the call. Results were strong this quarter with net income of $1.3 billion, up 5% from last year and earnings per share of $1.94, up 4%. Pre-provision, pre-tax earnings increased 14%, operating leverage was 3.8% positive in each of our groups and the efficiency ratio improved to 61.2%. Provisions for loan losses were up this quarter in line with our expectations. This performance reflects continued operating discipline and execution against our commitment to customer experience. We continue to demonstrate sustained momentum in an environment of low interest rates and moderate economic growth. EPS is up 6% on a year-to-date basis, earnings through our loan loss provisions increased from historic lows.

Overall credit quality remains good and Surjit will provide more detail in his remarks. Our CET1 ratio was strong at 10.5%, ROE was 13.5%, both up from prior quarter, reflecting growth in earnings. I’ll touch on a few highlights from the operating groups. Combined Personal and Commercial Banking delivered net income of $851 million, up 7% from last year. In Canadian Personal and Commercial Banking, pre-provision pretax earnings growth continues to be good, up 6% this quarter and year-to-date.

Operating leverage was positive for the fourth consecutive quarter driven by consistent revenue growth and disciplined expense management. The efficiency ratio was below 50% on a year-to-date basis. Canadian P&C is seeing results from ongoing investment in digital capabilities that matter to our customers. In our Personal business customers are now able to open a deposit account in minutes using their smartphone. Notably, this service is the first of its kind for the major Canadian financial institution.

In our Commercial business, customers continue to expand their use of DepositEdge with roughly a million cheques processed each month. This innovative and time saving solution allows customers to securely image and deposit checks directly to their account without having to go to a branch. These are both examples of how we’re investing in digital solutions which empower our customers and improve efficiency.

The U.S. Personal and Commercial Banking performance was strong, net income increased 19% in constant currency, reflecting continued strength in Commercial Banking including the benefits of BMO Transportation Financial. Operating leverage was strong in the quarter, reflecting revenue growth and well controlled expenses. The efficiency ratio was 61% on a year-to-date basis.

BMO Capital Markets also had a strong quarter with net income up 18% on good revenue performance across a number of business units and tight expense management. Operating leverage was positive for the fourth consecutive quarter. We’re seeing a growing contribution from our U.S. business, which has further expanded M&A capabilities with the addition of Greene Holcomb Fisher, which closed on August 1.

BMO Wealth Management had solid underlying performance in both traditional wealth and insurance. Results were impacted by both market pressures and divestitures, we remained well positioned in a recovering markets as we leverage investments we’ve made.

We’re closely managing expenses across the Bank, we’re at the same time continuing to invest to enhance customer experience and efficiency. Across the Company we’ve gotten closer to our customers, made banking simpler and expanded our footprint. We remain confident that our strategy and diversification by businesses, customer segments and geographies will deliver sustained growth.

And with that, I’ll turn the call over to Tom.

Tom Flynn

Thanks Bill. I’ll start my comments on Slide 8.

Q3 EPS was $1.94, up 4%. Net income was $1.3 billion, up 5%. As Bill said, results were strong and demonstrate continued operating momentum, the benefits of our diversified business mix and good contribution from our U.S. operations. Adjusting items are similar in character to past quarters and are shown on Slide 25.

Net revenue was up 7%, or 6% excluding the impact of the stronger U.S. dollar. Net interest income was up 11% from last year, benefiting from the addition of BMO Transportation Finance and organic volume growth. Net non-interest revenue was up 4% primarily from higher trading revenues and other non-interest revenue, partially offset by lower security gains. Expenses continued to be well managed, up 4% from last year and just 2% excluding the impact of U.S. dollar. Operating leverage was strong at 3.8% on a net revenue basis, efficiency of 61.2 improved over 200 basis points from last year. The effective tax rate was 22% or 26.7% on a teb basis.

Moving now to Slide 9, the Common Equity Tier 1 ratio was 10.5%, up from 10% last quarter. The increase reflects good capital generation more than offsetting higher risk weighted assets. As detailed on the slide, risk weighted assets increased by approximately $3 billion largely from the impact of FX and business growth, net of changes in book quality and methodology changes.

Moving now to our operating groups and starting on Slide 10, Canadian P&C had net income of 562 million, up 1% from last year with good pre-provision pre-tax earnings growth of 6%. Revenue growth was 4% reflecting higher balances across most products. Total loans were up 6% and deposit growth was good at 8%. NIM was up four basis points from last quarter as a result of above trend interest recoveries and pre-payments.

Expense growth was 2% reflecting disciplined expense management and ongoing investments in the business. Operating leverage was positive 2.1% and the efficiency ratio for the year-to-date was below 50% at 49.8%. Provisions for [technical difficulty] reflect higher provisions in the commercial portfolio and below trend consumer provisions last year.

Moving now to U.S. P&C on Slide 11, net income was 289 million, up 22% from last year. The comments that follow speak to the U.S. dollar performance. Net income of 221 million was up 19%. The acquired BMO Transportation Finance business represented approximately 15% of U.S. P&C’s revenue and adjusted expenses in the quarter similar to Q2 levels. Excluding the acquisition performance was good with double-digit pre-provision pre-tax earnings growth. Revenue growth of 23% year-over-year reflects the acquisition and higher loan and deposit volumes. Average loan growth of 17% includes organic commercial loan growth of 15% and lower personal loans including the planned reduction in indirect auto portfolio.

Net interest margin decreased 14 basis points from Q2, driven by lower loan spreads and interest recoveries, changes in mix and lower purchase accounting impacts. Expenses were up 14% year-over-year, and down 2% excluding the impact of the acquisition. Operating leverage was strong and the efficiency ratio improved to 59.2%. Provisions were up from a below trend level last year primarily due to higher commercial provisions.

Turning to Slide 12, BMO Capital Markets had good net income of 322 million, up 18% from the year ago with pre-provision pre-tax earnings up 23%. Revenue was 1.1 billion, up 9%, trading products growth reflects higher client activity and investment in corporate banking. Higher corporate banking revenue was partially offset by lower advisory fees. Net security gains were down from last year. Expenses were well managed and were essentially unchanged from last year. Operating leverage was positive for the fourth consecutive quarter and the efficiency ratio improved to 57.2%. Provision for credit losses were up from last year’s levels.

Moving now to Slide 13, wealth management net income was 227 million, traditional wealth and insurance earnings were essentially flat from last year as operating growth was offset by market impacts. Expenses declined 4% year-over-year primarily due to divestures and disciplined expense management. Assets under management and administration were 2% year-over-year including the impact of FX movements.

Turning now to Slide 14 for corporate services. The net loss was 105 million compared to 68 million a year ago. Adjusted results declined due to lower non-teb revenue from an above trend levels last year and higher expenses partially offset by lower provisions for credit losses. To conclude, result in the quarter demonstrates the benefits for our diversified business mix and a good operating discipline.

And with that, I’ll hand it over to Surjit.

Surjit Rajpal

Thank you, Tom and good afternoon everyone. Starting on Slide 16, our PCLs increased this quarter to 257 million or 29 basis points primarily as a result of higher oil and gas provision and two accounts in other sectors. As Bill said, overall credit quality is good. For the quarter both the GIL ratio and the delinquencies remain stable.

In Canadian P&C, consumer losses are flat quarter-over-quarter. In Alberta, marginally higher consumer delinquencies were more than offset by improved performance in the rest of Canada. Commercial losses increased due to higher oil and gas provisions. In U.S. P&C over provisions are up with higher PCLs in commercial partially offset by lower losses in consumer. Commercial had a large provision on one account in the agricultural sector.

Capital market PCLs fell modestly quarter-over-quarter with most provisions in oil and gas. Corporate services PCLs were impacted by lower recoveries in the quarter. On Slide 17 impaired loan formations are lower. Oil and gas formations reduced from $286 million last quarter to $88 million this quarter. Gross impaired loans were essentially flat at 63 basis points.

Turning to Slide 18, our direct oil and gas exposure increased due to new commitments to the pipeline sector and because of the stronger U.S. dollar. We remain comfortable with oil and gas portfolio and the associated allowances.

In summary, Q3 credit performance was in line with expectations and in the current environment I expect to see losses over the next four quarters in the mid-to-high 20 basis points with some quarterly variability.

I will now turn it over to the operator for the question-and-answer portion of today’s presentation.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. The first question is from Meny Grauman with Cormark Securities. Please go ahead.

Meny Grauman

Just a question on cost savings. How much in run rate savings do you still have left after two rounds of restructuring charges, and if you could also remind us just in terms of how you foresee the timing of those coming into the results?

Tom Flynn

Its Tom, thanks for the question. The restructuring that we took in the last quarter was close to $200 million and we talked about savings from that being realized over about a year. And then total being around 200 million. And in the current quarter, we’ve got benefits equal to around 25% of that amount and I’d expect to build to the full amount pretty much smoothly over the next three quarters. And then the charge that we took a year ago is fully reflected in the operating earnings that you see in the quarter.

Meny Grauman

Thanks for that. If I could just change gears, just to talk about a topic we’ve been talking about for a long time now, but definitely is back in focus. Just on housing, Bill, a number of your peers have talked and more have spoken about the need for further government action in the housing market, especially in Toronto and Vancouver. I’m wondering, if you could share with us your view about that specifically. And in a related point, just your view on what kind of role government policy is playing in terms of the suppliers of land and whether that is a bigger issue or is a big issue in your mind in terms of what’s going on, specifically in terms of Vancouver?

Bill Downe

Thanks Meny, I don’t have a great deal to add to what has already been said. I think public policy is working to try to damping any evidence of speculative pressure in local markets, specifically identified as Vancouver and, also a concern about Toronto and I suppose some parts of Montreal. But I think, you just have to let the adjustments that have been made run through and see what the impact is. Real estate is cyclical and it always has been, and I think there has been so much discourse on this, I don’t think I have a great deal to add.

Operator

Thank you. The next question is from Robert Sedran with CIBC. Please go ahead.

Robert Sedran

Hi. Good afternoon. Tom there is some information on the slide, but I’m hoping, you can provide a little more color on the moving parts in the capital ratio, a 50 basis points jump is larger than what I might have expected. And it looks like AOCI in particular was up almost $1 billion this quarter, and I’m curious how much of that is just sort of normal quarter volatility, how much might have been FX, what else is going on and how you’d see the progression of that ratio in coming quarters?

Tom Flynn

Sure. So I would say, we feel good about the change in the ratio in the quarter. And with the ratio landing at 10.5, we’ve really rebuild the ratio after the closing of the Transportation Finance acquisition, which is good. The AOCI movement that you see is largely related to the impact of U.S. dollar and it basically is offset by higher U.S. dollar risk weighted assets and U.S. dollar deductions from capital. So U.S. goodwill coming through at a higher level. So, big change in the balance, but not a significant contributor net to the change in the ratio. And the change in the ratio this quarter did benefit from a good level of capital generation, we had strong earnings and that certainly helps. And then as well typically after doing an acquisition we managed the balance sheet in a tighter fashion to help get the ratio back up. We did that in this quarter and you’re seeing the benefits of it in the ratio that we reported.

Robert Sedran

Would you say perhaps it takes you back to a neutral position or is this a level at which you feel comfortable restarting the buyback?

Tom Flynn

I would say we’re back into a normal range and as you know the number of moves around, in any quarter and having come back into a normal range, I’d expect that you’d see from October time what I think of as our normal pattern. So, job one from a capital deployment perspective is to generate good organic growth and we’re seeing that in our business. We’ve got good growth in our commercial portfolios in particular really across the board. Canada P&C, U.S. P&C and Capital Markets, we expect that to continue and to feel good about it.

And as time goes on, we’ll look at inorganic opportunities to deploy the capital. And so, I’d say we’re back into a normal pattern of looking for opportunities to grow in a variety of ways. And if the ratio gets above what we think is a needed level, we’d activate the buyback as we have in the past, but that’s not likely to be in the near-term.

Operator

The next question is from Gabriel Dechaine with Canaccord Genuity. Please go ahead.

Gabriel Dechaine

I have a quick numbers one, and then I’ll follow up on the capital. The quick numbers one, 8% revenue growth in Capital Markets very strong, but expense growth was negative. I am wondering is there some true up we could anticipate by the end of the year, because normally they move in the same direction, expenses and revenues? That’s my first question.

Darryl White

Gabriel, it’s Darryl. I don’t think you can expect a true up per say, I think that underlying what you’ve pointed out is that you’ve got some good core client driven revenue growth in both of our businesses and anticipate this in the Trade Products business. In the expense category I think you should think about a couple of things. We’ve gone through as Tom alluded to earlier two rounds of restructuring. We’ve taken our share of that in the Capital Markets business and we’ve held the line very tightly in terms of controlling those costs going forward, while at the same time investing in the places that we need to invest.

And the other thing you might notice is that in the Q3 of last year, if you’re comparing year-over-year, we had the GKST business, in this Q3 we do not. So we have sold that business. So that had a little bit of a contribution through the good expense year-over-year performance that we’ve seen in the U.S., but going forward I don’t think you should see a true up. We may have some small increases as we go forward, but we’ll manage it pretty tight.

Gabriel Dechaine

Okay thanks Darryl, that’s pretty helpful. Then on the capital, I guess you touched upon it Tom and Bill if you want to contribute as well, inorganic opportunities. Are you — in the past you’ve been opportunistic, you bought into the U.S. at a very low point of the cycle. In 2010, F&C, I am not sure how well that’s doing right now, but you even paid big multiple for it for sure. There are certainly some areas in the U.S. that are out of favor, well Texas and you’ve always said that the contiguous state you like to be bigger in. Are you actively on the hunt for acquisitions right now or is it more of a passive stance that you’ve got, what’s the size of acquisition that we could — BMO could stomach at this stage?

Darryl White

I think you answered it when you asked it, which is that we’ve been pretty consistent over time in our approach and I wouldn’t signal any change. We maintain an active dialogue across a wide range of opportunities at all times, when our capital is building and when it’s in the area where we have the most flexibility and it’s so often simply driven by where opportunity arises and some of that is a question of what’s on the minds of potential partners. And we’re going to maintain the discipline we have around price and if we have the opportunity to expand within footprint or adjacent to footprint in things that are complementary to our business, of course as we always have, we’ll pursue it. But I wouldn’t imply that there is something imminent.

Gabriel Dechaine

I guess just follow-on to Tom, just to hear his voice, the –.

Darryl White

You didn’t like my answer?

Gabriel Dechaine

No, no, I did. [Multiple Speakers] So, 40 basis points of internal capital generation if I exclude the book quality improvement and the other model refinement items, so, that’s quite a bit more than what your old guidance would have been, I believe which was in the 15 to 20 basis points a quarter range.

Looking ahead what do you think of — could you quantify what you think your normal run rate for internal capital generation is considering the environment, considering the regulatory changes on the horizon of which there are several that you list in your disclosures that we’re all aware of but can’t really quantify?

Tom Flynn

So, I’ll answer the question, but I’ll give just a caution that as you know the number can move around in any quarter, and this quarter was a good quarter for the reasons that we’ve talked about. But we’ve been saying for the last few quarters that in a typical quarter we would expect the ratio to build by in the zone of 10 to 15 basis points and there is variation around that. But that what I would expect in a typical quarter or quarter-over-quarter.

Operator

Thank you. The next question is from Sumit Malhotra with Scotia Capital. Please go ahead.

Sumit Malhotra

Tom, sorry if I missed it but I was just hoping you could give some details on what exactly were the methodology changes or the improvement in book quality? When you say book quality, not that the credit quality numbers are deteriorating materially or anything, but it seemed like it was a stable to slightly up quarter in terms of impairments, provisions. So just hoping you would give a little bit more detail on what those two factors were that drove the increase?

Tom Flynn

We had improvements in both areas, they weren’t significant but they were helpful. On the methodology side it was about a $1 billion of RWA and included in that we had one U.S. portfolio that moved from a standardized risk weighted treatment to AIRB. And so that was an item that contributed to the methodology change.

On the book quality I referred to how we’ve been managing the balance sheet in the tight fashion post the acquisition and included in that we did have a transaction to lay off some of the risk and risk transferred transaction that shows up in book quality in the quarter sort of a CDS-like transaction. And we also have the benefit of the recognition of collateral values in our LGD calculations that are helping. So the book quality change is more reflective of those things than fundamental migration in the portfolio, which overall is pretty stable.

Sumit Malhotra

And the first part about the U.S. portfolio that got transferred to or migrated to the advanced approach, that was the one I was looking for, is there — you’ve mentioned one specific portfolio and I know you may not want to go into full details, but is there more of that that we can expect from the bank, that there are further components of the U.S. portfolio that as they, I’ll used that term again, migrate to the AIRB approach that you should get some RWA relief?

Tom Flynn

There is likely to be a little bit overtime, but the strong majority of that transition has taken place and most of it took place last year. So I would say yes, but not in a way that significant.

Sumit Malhotra

Thanks for that and the second part of the question, or my final part of the question is likely for Bill and to go back to expenses. So as you mentioned it’s been four or five quarters now that BMO has had positive operating leverage on an all bank basis, it certainly looks like, at least the way I am looking at the numbers that it’s accelerated in the past two quarters.

Is this as simple as you now have the benefit of two restructuring charges that are making their way through the expense line that we’re seeing, or is there something on your end? Have you slowed the pace of investments spend or some of the regulatory projects that were underway? And is that one of the factors that’s really driving even stronger expense metrics that we’re seeing from BMO of late?

Bill Downe

When I’d say that the cumulative effect that you’ve identified, two years in a row of progressive changes on the same agenda, basically working the same agenda is paying off and I think Tom talked about the fact that really not a large portion of the most recent one has flowed through yet, and it’s really as we have spoken about, it has been focused on two things, the evolution or the movement of client transaction volume into the mobile space which drives higher customer satisfaction and a more efficient fulfillment process.

You can imagine account opening on mobile device in 7 to 8 minutes is pleasing to the customer, it’s also a much more efficient way. Lower air rates, higher levels of confidence, all of those things. So I think these things are building on each other. Also the work that we’ve done on process simplification builds on itself. The capabilities necessary to start the change, the processes cost more money around just the basic architecture upfront and then as you move across different applications in the organization, it becomes more efficient.

So I think that’s really where you’re seeing the benefit. Contrary to any suggestion that investment in the future has moderated, I would say that the regulatory and supervisory agenda which has being big for all banks, it’s being complementary to the things I just spoke about because the digitalization of information and process makes compliance more reliable and brings down the costs and I would say that there is some repurposing, if you like, of investment dollars that we’re really focused on getting to a high level of capability now being more available to apply to both customer experience and then contributing to the flow through in efficiency.

So I think it’s a good story, it’s a progressive story and it’s pretty consistent with what we’ve been talking about, I would say going back to the first charge that we took.

Sumit Malhotra

Thanks for the details Bill.

Bill Downe

My pleasure.

Operator

Thank you. The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

Sohrab Movahedi

Two quick hopefully questions, one for Darryl. Darryl the trading revenue in particular was another good quarter. This north of 400 million type trading revenue, is this now what you look to be a sustainable set of numbers. And if yes, maybe talk a little bit about if there is any new businesses you’ve entered or what is it that’s helping that top-line growth in Trading?

Darryl White

Sohrab, I would say, if you look through the contributors to the Trading business. I agree with you it’s another good quarter, It’s off a nick from Q2, which was very strong, I think its 95% or 96% of the Q2 number. When I look through it, you see rates consistent, you see a small drop in FX and in equities and you see a pick-up in commodity. So all told, I think it’s a good mix and a good quarter.

What’s driving it? I think what you’re seeing is the benefit on the revenue side, because there are revenue benefits as well from the restructuring that we undertook last year, when we reorganized around trading asset classes and our customer focus enhanced and we got a lot better at getting closer to the customer. I think you’re seeing really good client execution, I think we’re also seeing — you asked about new products, we’re seeing good product developments and we’re seeing ourselves close gaps in areas where perhaps our competitors were and we weren’t, I guess you asked for an example, an example might be our SSA business. Our SSA business if you looked at it a year ago, you’d see that globally we were somewhere around 20th in the global lead tables and today were around 13th. I think we’ve done 22 transactions this year on a lead basis relative to three last year. I can give you other examples, but we sought out about a year half ago to close some of those wide spaces relative to market opportunities and I think we’re executing on some of those.

So going forward, the short answer — that was long answers your question, the short answer question is, yes, I would expect if markets remained constructive, we would be able to continue to perform at or about these levels on the Trading side.

Sohrab Movahedi

Okay thank you and maybe a question for David out of the U.S. P&C segment. I mean the commercial loan growth in particular, organic up 15%. David can you just confirm that you haven’t adjusted or the Bank hasn’t adjusted its risk appetite, it’s like you’re not getting this loan growth by going down market as it were as far as credit quality is concerned?

Dave Casper

Yes, I can confirm that. The growth has been good at 15%. Really has come over a long period of time, largely really starting with the time we purchased M&I and we felt that there were some businesses that with the size we had become that we were not at of scale [ph]. Mostly, businesses where they’re secured by loan, by assets, like our asset base lending business, our auto dealer financial basis, also our equipment finance business.

So we’ve grown probably larger and faster in those businesses really as we’ve tried to grow to scale and fill those businesses, fill the pipeline up with our clients where we didn’t have those businesses before. But there is no change in our risk appetite, it’s a very — the commercial business is a really good business for us. We’ve been in it for almost 200 years now and we like it and we like going through the cycles.

Sohrab Movahedi

And so are there pockets where you think you still have the opportunity to improve to let’s say to punch out your weight, that you maybe were punching below your weight or will these just become now the type of run rate loan growth expense. I guess what I am trying to get at, we’re going to get into a more difficult comp period, you’re not going to be able to grow at 15% forever. But are there some one-off pockets still that can help maintain that kind of growth trajectory?

Dave Casper

Well, we’re always looking for new areas where we can be helpful to the clients and bring the whole bag. I do think that the growth we’ve had at the 15% level was probably not — I wouldn’t expect that it would stay at that level. But we still expect good growth, good commercial growth as we gain market share and add businesses.

Operator

The next question is from Mario Mendonca with TD Securities. Please go ahead.

Mario Mendonca

If we could look at the other side of that question in the U.S. loan growth, specifically the U.S. consumer, that hasn’t played out as well. And Bill I think you’ve guided in the past to an improvement in the second half of ’16. What’s your outlook on why that hasn’t played out and what your outlook is going forward?

Dave Casper

This is Dave. I think first of all the personal business is actually doing pretty well as we look at it over the last couple of quarters. We’ve invested in it, we’ve built it on both sides on both the retail deposit gathering business, which is the core part of our business and critical for our loan growth that we’ve just talked about. But also on the consumer lending side, where we’ve had — we’ve made progress, we’ve had a couple of our regions where we’ve actually had good sequential growth. We’re not where we want to be at this point, but we’re making really good progress and it’s an important part of our business, but the larger and more important part of our Lending business — our Personal business is really on the deposit side and there we’ve had very good growth, 6% year-over-year and that continues to grow.

Mario Mendonca

Help me think through that answer. You were suggesting that — sorry, the Consumer had been growing, that you’ve been generating consumer loan growth?

Dave Casper

No, we have in the couple of our regions we have seen the consumer growth actually grow sequentially from month-to-month. We haven’t seen that throughout our whole footprint at this point.

Mario Mendonca

Is your expectation that eventually everything will start to grow or the total will grow?

Dave Casper

No, I think one thing we would want to back out, because as you may recall we intentionally reduced our indirect auto lending last year in essence to help fund the acquisition of Transportation Finance. But ex that we absolutely would expect the personal lending to grow over time and we’re seeing signs that it’s moving in that direction now.

Mario Mendonca

So, Bill just going back to your guidance in the past, is that now — is it no longer appropriate to rely on that guidance that the Consumer will grow in the second half?

Bill Downe

Well I think if we’re talking about one quarter of movement, Mario, that would be the only adjustment. I expected we would see absolute growth in the second half — second calendar half. And I would say, I would adjust that by a quarter and I think next quarter and the quarter after we’re going to see the plateau and the balances on the loan side.

But as Dave said and I think this is an important part of the answer that he gave you, deposit growth has continued to be very strong, we’re adding customers. The uptake of borrowing as you know in the market, most of the mortgage activity across the marketplace has been refinancing, new home construction is still lagging natural demand and I think plus or minus 180 days or 90 days we still have expectation that loans will grow and we’re pleased with the deposit growth.

Mario Mendonca

Okay, so we’ll just move on another issue and I’m not sure whether I care about this or not, maybe you could help me think through it. The 0 to 29 or the 1 to 29 day delinquency bucket, did move substantially year-over-year, not so much quarter-over-quarter. It seems elevated and I’m just not sure whether that short perspective really matters, if maybe Surjit you can take me through that?

Surjit Rajpal

You’re talking about the U.S. still, aren’t you?

Mario Mendonca

Yes.

Surjit Rajpal

In the U.S. I think some of it is got to do with the early stage delinquencies, and I think I’ve explained this before, when you have a year — a quarter end that’s on a holiday and this time it was a Saturday, then two days of receipts sometimes get delayed. So that’s one reason when you compare year-over-year, that becomes an issue and I think there is one part of the portfolio that is going through the system which we watch very carefully, which is referred to as the end of draw, where we’re actually talking to our HELOC clients that where they had these 10 year interest only and then had to be converted back to a repayment schedule.

Some of it could be attributed to that, but I’m not sure at this point in time. But nothing with the quality. From a quality perspective in fact when I look at the rates that we’ve had from the loss perspective this quarter our PCL rates have gone down and I don’t see the 30-day early stage delinquency as anything other than an indicator of perhaps the first point I made which is the weekend [Multiple Speakers].

Mario Mendonca

Let me just drive on the final question then, the tax rate. You normally don’t get into this in too much detail, but is there anything happening with the total return swaps that maybe causing the tax rate to move higher this quarter?

Tom Flynn

Not in the current quarter, no. Tax rate was to me and it’s Tom speaking, a pretty normal tax rate.

Operator

Thank you. The next question is from Peter Routledge with National Bank Financial. Please go ahead.

Peter Routledge

Just a quick follow-up for Dave on, you’ve mentioned indirect auto, you’ve pulled for the acquisition of Transportation Finance, I had thought you pulled back because you didn’t like the risk return dynamics in that market, is that — did I misunderstand that or?

Dave Casper

Well, I think they’re both right. We wouldn’t have pulled back, had we not seen a better opportunity and this was a portfolio that really — it’s a very-very high grade portfolio, but with that comes pretty low spreads. So it was a good opportunity to reposition the balance sheet a little bit. We still are in that business, just not to the extent that we were before.

Peter Routledge

Okay and related questions for Surjit, I mean the pull back from indirection auto is consistent with what I’ve seen from BMO in terms of being a bit more conservative in terms of credit risk management. And so I wonder, I look at uninsured mortgages in BC and Ontario and they were up about 3 billion quarter-over-quarter and then an environment of elevated home prices and I guess the question is, why not more restrained in those portfolio?

Surjit Rajpal

I’ll de-couple your question into two, first point you make with respect to indirect auto being a reflection of our risk appetite is not necessarily correct. I think you got to look at risk in the context of return as well. And when we look at these businesses, you never look at them just from a risk perspective. From a risk return perspective when it’s not attractive then we tend to slow down.

Now going back to your second point on mortgages per say, we are very selective in how we underwrite our mortgages in all the geographies and we recognized that there are markets that there are more frothy and others, but we adjust our parameters given where we see every markets. We have various — we have the ability to change our loan to LTVs and if you look at our chart, you’ll notice in our mortgages that we give you by province as well, in one of slides, I think its Slide 20, you will notice that our growth in mortgages is quite secular, it’s in all the areas and our loan to values on the uninsured portfolio is still at 56%.

So we are mindful of market, the conditions they are in and we make our adjustments and what should give you some satisfaction is that the loan to value that you’re seeing and the fact that these are more fixed terms, the fact that the delinquencies are not bad at this point in time, the fact that our condos are again not going at the same levels as the rest of the portfolio, all give us comfort. So we do adjust our parameters all the time to make sure that as a portfolio mix we remain comfortable.

Peter Routledge

Yes, I recognized the very good point make on the 56 average LTV, but I mean there has got to be some portion of mortgages within that number that are north of 65% LTV at origination, and although that seems to still low today, I wonder with Vancouver up 25% year-over-year, if those LTVs are really accurate, if we look back on it a year two from today, will they be as accurate and will those credit risk decisions seem at prudent?

Surjit Rajpal

And so you’re absolutely right, so what we tend to do is we tend to watch our originations in those markets and make sure that the originations at those levels are contained. And we do run our stress test [ph] as well, we look at our numbers and we stress our portfolios given the distribution across the LTV curve. And we are satisfied that our portfolio is very robust in that sense and even though –.

Peter Routledge

But if you see like detached homes going up too much in a particular area, you might pull back from that area and maybe put more into condos or houses in different areas?

Surjit Rajpal

Do that and we would also lend less for the higher value homes? Which we’ve already started doing by the way.

Peter Routledge

Right. Okay. Thank you.

Operator

Thank you. The next question is from Doug Young with Desjardins Capital. Please go ahead.

Doug Young

Hi, good afternoon. Just I guess my first question is for Surjit. Hopefully, this is a relatively straightforward one. But I just wanted to get a little more color on the Oil & Gas PCLs that did go up quite substantially, sequentially, but your gross impaired loan formations in the segment went down substantially. So I guess my question is, was there a catch-up here or is this just a function of the loss on the loan or loans that went bad, just hoping to get a little extra color?

Surjit Rajpal

Yes. It’s a good question Doug. I wouldn’t use about catch-up. I think these things are — these you can never predict the timing of when you make determinations to a client ability to payback. There was one particular largest loan in Capital Markets and there was some in the Oil & Gas services sector, which we saw reflected in our corporate, in our commercial business in Canada that was spread out. So they are higher than the last quarter and this is something that we have seen would have — perhaps happened, if oil prices remain low. So it didn’t come as a surprise at all.

On the other hand the formations have come down quite significantly as you’ve noticed and that’s what gives me a lot more comfort. We’ve gone to our portfolio, now we are well past the stress test days and we actually know every part of our portfolio and see how it performs in a low oil price environment. And with the slowdown in our formations to the level it is, that should give you — point to the fact that we, I think a lot of the issues that the $35-$40 oil would have indicated are behind us. But it also depends on how long the prices remain depressed.

But we are very comfortable with our portfolio and the way we manage it. In fact, I did mention in my remarks that we will grow the portfolio selectively as the opportunity arises.

Doug Young

So when I think about it, just thinking about it going forward, are we at kind of steady state at this portfolio or is there a little bit more potentially erosion that could happen if oil price stays flat from these levels?

Surjit Rajpal

Yes, there could be, if potentially oil prices stay flat. Depending on the duration of them staying where they are, there could be a little bit more that comes our way. Because cumulatively when I look at the losses to this point in time over the last six quarters or loss rate is about 1.8% and this is not annualized, this is just accumulative loss rate. And I can see that going up and we do have and I think, I mentioned again in my comments that the allowances that we’ve kept for the remainder of the 12 months is more than adequate. But I can see it going up under certain circumstances.

Doug Young

Okay, thank you and then I guess my question — next question would be just for Cam on NIMs in Canada. And I think the NIM last quarter was 2.51%. I think you guided to in the back half, another 1% to 2% decline in NIMs yet we had a nice bump up. Is that delta really just the pre-payments or higher interest recoveries, so is it above — was that about a 5 to 6 basis point positive impact in NIMs? I’m just trying to think of the sustainability of that as we look forward to the latter half of this year and into next year.

Cam Fowler

Thanks, it’s Cam. The guidance I gave last quarter I would say stands. Yes, the majority of the bump this quarter is on the above trend interest recoveries and pre-payments. So, I would expect that in Q4 we’re back in the Q2 range as guided. There are good components to the performance in there on the NIM, to be sure, including good deposit growth. But you’re right I would stick with the guidance I gave last quarter, which is where I expect Q4 to be closer to Q2.

Operator

Thank you. The last question is from Darko Mihelic with RBC Capital Markets. Please go ahead.

Darko Mihelic

I just want to get a little more specific with Tom on some of the answers that he gave earlier. First, Tom, the question is when you answered the question on the restructuring, you said you’re 100% through the first charge and 25% through the second. Is that the same as you’ve drawn down on the provision by those amounts, is that correct?

Tom Flynn

From an income statement perspective, I am not sure that that’s how I’d put it, but I am not sure what you mean. So, I’ll explain how I was thinking about it. We took the charge in Q2 of last year, we said savings would be in the zone of 100 million and those savings are now in our run rate. So we’ve achieved those benefits. And then we had a charge in the second quarter of last year — sorry second quarter of this year, around 200 million. We said we’d realized savings of around 200 million over the next year. And of that amount, a little over 25% is in the results for the current quarter. And so that’s hitting the P&L, and the balance we’ll get over the next three quarters.

Darko Mihelic

Okay and then just with respect to the actual provision, how much have you drawn down on it?

Tom Flynn

The provision — if by the provision you mean the amount of the charge, how much of that have we consumed. It would be under half of it.

Darko Mihelic

Okay, so under half but you’ve got — okay, under half, but you have about half of all of the savings that you’ve talked about so far?

Tom Flynn

No, there, I am just referring to the most recent charge, the Q2 charge and all of the charge from last year would be gone.

Darko Mihelic

Okay, that’s helpful and then so — I’ve done a little back of the envelope math to the first decimal point and so if I take the run rate savings of 150 million so far that’s annualized, that’s in your number, I can effectively say, to some extent, keeping the revenue number as is, that about 1.3% of your 3.8% operating leverage is coming from the restructuring initiatives. And the rest of it’s coming from normal course discipline. Have you looked at it that way and do you think that, that’s a correct way of thinking of it?

Tom Flynn

Directionally I would say yes. I mean the savings are coming through. They’re absolutely contributing to and a key part of the operating leverage and your math sounds like it’s in the right zone.

Operator

Thank you. I would now like to turn the meeting back over to Mr. Bill Downe.

Bill Downe

Thanks very much, operator. Before we wrap up I’d like to recognize Russ Robertson, Executive Vice President who has announced his intention to retire from banking at the end of this month. As many of you will remember Russ joined the bank in 2008 as Chief Financial Officer from Deloitte, Canada where he was Vice-Chair. He went on to oversee the integration of Harris and M&I, the largest and most complex acquisition the bank had ever undertaken.

Russ has earned the deep respect of colleagues across our organization and the industry. He’s been a tremendous partner and will leave a lasting legacy. Russ accomplished all of this while championing integrity, empathy, diversity and responsibility to best of our values and for that I’d like to personally thank him and on behalf of everyone at BMO wish him the very best.

And with that thanks everyone for joining today and have a good afternoon.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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