Bank of Montreal (NYSE:BMO) Q3 2019 Earnings Conference Call August 27, 2019 7:15 AM ET
Jill Homenuk - IR
Darryl White - CEO
Tom Flynn - CFO
Pat Cronin - Chief Risk Officer
Cam Fowler - President, North American Personal and Business Banking
Dave Casper - CEO, BMO Financial Group US
Joanna Rotenberg - Group Head, BMO Wealth Management
- Jill Homenuk - IR
- 达里尔怀特 - 首席执行官
- Tom Flynn - 首席财务官
- Pat Cronin - 首席风险官
- Cam Fowler - 北美个人和商业银行总裁
- Dave Casper - 美国BMO金融集团首席执行官
- Joanna Rotenberg - BMO财富管理集团主管
Meny Grauman - Cormark Securities
Gabriel Dechaine - National Bank Financial
John Aiken - Barclays
Doug Young - Desjardins
Sumit Malhotra - Scotia Capital
Robert Sedran - CIBC Capital Markets
Mario Mendonca - TD Securities
Scott Chan - Canaccord Genuity
Darko Mihelic - RBC Capital Markets
- Meny Grauman - Cormark证券
- Gabriel Dechaine - 国家银行财务
- 约翰艾肯 - 巴克莱
- Doug Young - Desjardins
- Sumit Malhotra - Scotia Capital
- Robert Sedran - CIBC资本市场
- Mario Mendonca - 道明证券
- Scott Chan - Canaccord Genuity
- Darko Mihelic - 加拿大皇家银行资本市场
Good morning and welcome to the BMO Financial Group's Q3 2019 Earnings Release and Conference Call for August 27, 2019.
Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead.
今天的主持人是投资者关系主管Jill Homenuk女士。 Homenuk女士，请继续。...
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's 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 P&C and Dave Casper from U.S. P&C. Dan Barclay is 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 prequalified analysts. To give everyone an opportunity to participate, please keep it to one question. Darryl 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. Darryl 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 Darryl.
谢谢。大家早上好，感谢今天加入我们。我们今天投资者介绍的议程如下。我们将以BMO首席执行官达里尔怀特的言论开始这一呼吁，接着是银行首席财务官汤姆弗林的演讲。和我们的首席风险官Pat Cronin。我们今天和我们一起来自加拿大P＆C的Cam Fowler和来自美国P＆C的Dave Casper。 Dan Barclay来到BMO资本市场，Joanna Rotenberg来到BMO财富管理。
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 US, we're growing loans and deposits at above market rate and expanding our customer base. Balance growth is well diversified and driving good revenue performance.
Capital Markets continues to perform well with record investment in 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 and 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 were up 5% or 7%, excluding the impact of the severance charge in capital markets last quarter. Our capital position remained strong, with our CET1 ratio increasing to 11.4%, supporting strong organic growth.
Turning to slide 5, our US platform which is now contributing over a third of the bank's 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're 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 and 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 US 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 we've 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 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.
We're continuing to grow our bank by executing on strategies that leverage BMO’s 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 we're 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 we've 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, Darryl and good morning, everyone. My comments will start on slide 8. Q3 reported EPS was $2.34 cents and net income was 1.6 billion. Adjusted EPS was $2.38 and adjusted net income was 1.6 billion, both up 1%. Our operating results this quarter reflect good performance in our P&C and capital market businesses and 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 P&C businesses and to BMO 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% at the all bank level.
Looking forward, we're 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're on track to deliver that.
Moving to slide 9 for capital, the common equity tier one ratio was 11.4%. The ratio is 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 [indiscernible].
Moving now to our operating groups and starting on slide 10. Canadian P&C net income was 649 million, up 1% from last year with strong pre-provision pre-tax 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 4 basis points from the last quarter, reflecting improved lending spreads including the benefit of a widening prime to BA and favorable product mix changes. Expense growth was 4%, reflecting investment in the business. Operating leverage was good at 1.9% and efficiency improved 47.3%. The provision for credit losses was 204 million and includes a provision on performing loans of 30 million.
Moving to US P&C on slide 11, and my comments here will speak to the US dollar performance. Net income 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, loans 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% and the efficiency ratio improved to 57.9%. Provision for credit losses were 73 million and include a $28 million provision for credit losses on performing loans.
Moving now to slide 12, BMO capital markets’ net income was good at 318 million, up 5% from last year. The US business continued to perform very well, delivering net income of USD83 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 of 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 permission 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 Darryl 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 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, the 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, a 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 P&C 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 collections 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 impaired provision, an increase of $26 million from the prior quarter. This increase was mostly due to loss provisioning on one account. Apart from these two factors in Canadian P&C, 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 adjustment 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 2 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 of 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.
[Operator Instructions] Our first question is from Meny Grauman with Cormark Securities.
[操作员说明]我们的第一个问题来自Menmark Grauman和Cormark Securities。
We hear a lot about trade uncertainty these days and what that's causing to the overall business environment, given your position both in Canada and in the US. Can you comment on what you're seeing there 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? If you could comment on that from a credit perspective in particular?
鉴于您在加拿大和美国的地位，我们现在听到很多关于贸易不确定性以及这对整个商业环境造成的影响。 您能否根据交易对客户的影响评论您在底层看到的内容？ 具体而言，如果你能谈谈ag业务，你有没有看到任何麻烦的迹象？ 如果您可以从信用角度对此进行评论？...
Meny, it’s 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 hard to ignore the fact that the trade tensions are creating, first of all, volatility in 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 developments of late last week that we would see something in the order of a half a percentage point of US GDP impact as a result of 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 any historical standards. And we've got inflation around 2%. So 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 6 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 value, so you don't see provisions necessarily, but there is some stress in that small portfolio for us. Would you add much to that, Pat?
梅西，这是达里尔。谢谢你的提问。也许我会开始 - 关于ag业务，Pat可能会对您提出的信用问题发表评论。总的来说，我想说，很难忽视这样一个事实，即贸易紧张局势正在创造，首先是市场的波动，正如你所知，但也有一些抑制增长。如果我们在所有行业中看一下，如果我们看看整个美国，我们的估计是包括上周末的后期发展，我们会看到美国国内生产总值影响的半个百分点的结果贸易保护主义措施的总体来说，这是相当健康的水平。
No, we're certainly seeing the signs of stress in the US ag 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 going on for a while. I would contrast that quite strongly though, with Canada, where we're seeing very little impact from issues and in fact, which is the bulk of our portfolio, roughly about 83% of the ag books that's in Canada. And at the moment anyway, the level of impairment in that portfolio is virtually nil.
And maybe Dave or Cam, if you want to make a broader comment on other sectors.
不，我们当然看到了美国农业投资组合的压力迹象。 这实际上持续了过去几年的大部分时间。 最近的一些关税问题可能会略微加剧。 但它已经持续了一段时间。 我对此表示强烈反对，与加拿大相比，我们看到问题影响很小，实际上，这是我们投资组合的主要部分，大约占加拿大农业书籍的83％。 目前无论如何，该投资组合的减值水平几乎为零。
I think you've covered it well.
Just as a follow up there, just in terms of your expectations for loan growth specifically or commercial loan growth on 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 it to moderate to some extent, not necessarily, due to any of the factors that we've discussed as far as trade. It's just, we've experienced good, strong, loan growth. And I think over time, it will moderate. That would be the general view.
这是戴夫。 我想说，由于我们在交易中讨论过的任何因素，我认为它会在一定程度上缓和，不一定。 只是，我们经历了良好，强劲的贷款增长。 而且我认为随着时间的推移，它会适度。 这将是一般观点。
It’s Cam. I’ll follow up on Dave's as well. In Canada, we're in the 16% zone on the commercial book, as you can see. Pipelines are -- the pipeline is more or less where it has been the last three or four quarters. I talked about diversification of that growth on this call. It's five industries that are at around that number, and it's 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 much in the near term.
这是Cam。 我也会跟进戴夫的。 在加拿大，正如你所看到的，我们在商业书籍的16％区域。 管道是 - 管道或多或少是过去三四个季度。 我谈到了这一增长的多样化。 这个数字大约是五个行业，而且这个国家的五个地区都是两位数。 所以我同意Dave，会有一些节制，但我不认为在短期内会有太多。
Our next question is from Gabriel Dechaine with National Bank Financial.
我们的下一个问题来自Gabriel Dechaine和National Bank Financial。
Good morning. Just a question for Pat and to clarify the issue with the Canadian consumer PCL, you implemented a new system. There were some delays in tracking or taking action on collections and that’s maybe created a backlog in your system and therefore a spike in PCL, so just kind of, is that correct and walk me through how this normalization trend is expected to develop?
早上好。 只是Pat的一个问题，为了澄清加拿大消费者PCL的问题，您实施了一个新系统。 跟踪或对集合采取行动有一些延迟，这可能会在您的系统中产生积压，因此PCL出现飙升，所以只有一点，这是正确的，并指导我预测这种正常化趋势会如何发展？
Sure. So your description is accurate. And, yeah, there was just some implementation issues with the platform that we have largely sorted our way through. I think your best indication of any future impacts really comes from early stage delinquency. 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, that's why we're 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 in, it will really depend on how the economy changes, more than anything else.
Okay. And then just another one on the margin for the US business, a big drop there sequentially. Is there any timing issue there, your loans go down immediately and the deposits that you need to reprice those over time? And then, like, is there any need or appetite to take some other action? I know you've done it in the past where you've disposed of some low margin loan books because they just weren't making enough spread for you. Is there anything of that nature brewing?
好的。 然后又是美国业务利润率的另一个，顺序大幅下降。 那里是否有任何时间问题，您的贷款会立即下降，而您需要的存款会随着时间的推移重新定价？ 然后，是否有任何需要或胃口采取其他行动？ 我知道你在过去曾经处理过一些低利润的贷款账户，因为他们没有为你做足够的利差。 有没有那种自然酿造的东西？
So let me take the first -- it's Dave. The core drop this quarter was probably three things and 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 extent and this will maybe get to your last question have come down a little bit, but I would say that is not due to any particular real strong diminution, 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 had some impact. But I would not say there's any drastic action at all. We continue to grow our loans to good customers and also deposits. So that's probably the summary.
所以让我拿第一个 - 这是戴夫。本季度的核心跌幅可能是三件事，你触及它们，所有这些都有类似的影响。本季度，我们确实有更强劲的贷款增长和存款增长，因此在本季度，这确实产生了一些差异。我们的存款成本也在上升，随着我们的客户群不断增加，我们的存款越来越多来自我们的有息存款。所以这也有一定的影响和贷款利差在某种程度上，这可能会让你的最后一个问题有所下降，但我会说这不是由于任何特别真正的强烈减少，更多，我们确实有如今信用质量更高，我们的大部分增长来自于我们的亏损较低的业务，默认情况下。所以这有一些影响。但我不会说有任何激烈的行动。我们继续增加对优质客户和存款的贷款。所以这可能是摘要。
It’s Tom. Maybe I'll jump in on the trajectory and add the total bank perspective. So on the US P&C 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, that cut itself would be in the zone of 5 bps and there could be another 2 to 3 depending on the loan growth level and how strong it is in relation to deposits. So that's US P&C for Q4. The Canadian story 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 margin 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 flattish, if 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's a potential for some incremental pressure. And so at the total bank level, if you roll that up, Q4, with a little bit of pressure in the US, NIM is likely down ex trading in the zone of 1 to 3 bps. And out to next year, with Canada stable, bit of pressure in the US, there's the potential for another 1 to 2. So, big picture, Canada's pretty stable. US, with a strong loan growth and the Fed cutting bit of pressure, but not a really significant impact at the all bank level.
Our next question is from John Aiken with Barclays.
Tom, wanted to just get a little bit of more information on the reinsurance. What was the recurring level of earnings if you're going to go over a longer period of time, 3 to 5 years and with exiting the business, do you expect to see a material release of capital?
Hi, this is Joanna. Thanks for your questions. So, as you described, and you saw, we did take a step to exit our business. Part of it was because of the consistency of earnings, and I would say over time, [indiscernible] by 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 larger scale of events we've seen both in 2017 and 2018, it did give a lot more volatility to the business. And so, we have seen pricing improved, 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 frequent and higher claims. And so we didn't feel like there was a good symmetry between risk and reward.
What I would describe is 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 I do expect it to lower the volatility of our business, and even more importantly, improve the ROE for wealth.
Our next question is from Doug Young with Desjardins.
Good morning. Just maybe going to Pat, the 63 million PCL build and performing loans, hoping maybe you can just flesh that out a little bit 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? Is it 2 basis points, 3 basis points?
And then just lastly, on credit, you talked about one large Canadian account that you provisioned for, was this something that was impaired in the quarter or was this something that was previously impaired and the provision was just updated?
早上好。 或许可以去Pat，6300万PCL构建和执行贷款，希望也许你可以稍微充实一点，我知道它在过去几个季度反弹，只是试图了解如果，对于正常情况 季度，如果有这样的事情，什么是正常表现贷款PCL建设？ 是2个基点，3个基点？
Sure. I'll start with your first -- or 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, in the healthcare 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 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're seeing. Then it's going to depend on your forecast, that view of economic conditions out over the next 12 to 24 months.
And for us when we looked at 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 or 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, positive credit migration within stage 1 gives you a little bit of a benefit to ECL.
But negative migration from stage 1 to stage 2, when you trip over from 12 months to lifetime gives you quite a bit of an incremental bump to ECL. 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 of the 63 million. And so, I can tell you going forward, as Dave said, and Cam 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 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 likely won't change but again, to the extent that things get better or worse, we will move our economic forecast in light of the updated data.
但是从第1阶段到第2阶段的负面迁移，当你从12个月到终身旅行时，你会对ECL产生相当大的影响。因此，即使是负信用迁移也不一定意味着投资组合存在很多弱点。它 - 有时它只是由于事物如何移动的不对称性而产生的。对我们来说，本季度的迁移量约为6300万的四分之一。所以，我可以告诉你，正如Dave所说，而且Cam会同意，我们确实希望看到贷款继续增长。
Our next question is from Sumit Malhotra with Scotia Capital.
我们的下一个问题来自Sumit Malhotra和Scotia Capital。
Just to pick up on that, when you mentioned 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 inclusive of 2020? And are you looking only at the impaired portfolio or is that the total provision rate.
That would be the total provision rate. And, I think, we've been guiding to that number for a while now. So and 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 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 normally, you'll see them at 15 bps this quarter. That's pretty much exactly where they've 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 a year ago by a couple of basis points, but still, again, well, within the normal range. The weighted average probability 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 as 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-20s. But based on what we're seeing in the credit quality of the book, both consumer and wholesale, we're not seeing 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 to where they are now, it's 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 provisions are going, do you embed any changes in the stage 1 and 2 provision or do you assume that to be zero unless model refinements are already being forecast?
坦率地说，我认为你在前面的一些评论中略微提到了这一点，当你考虑到银行的PCL比率前进到现在的位置时，可以说其中一个更大的波动因素是，我会想 ，你没有想到恢复的方式，只是要清楚，当你谈到条款的进展时，你是否在第1阶段和第2阶段的规定中嵌入了任何变化，或者你认为除非模型为零 正在预测改进？
Yeah, the provision that we have right now reflects our best estimate of how the future is going to look for the performing provision. And then as you said, 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, consistent, pretty consistently. So, they're going to come in the future. I don't know when and how much, but, we certainly wouldn't bake them into our forward look.
是的，我们现在的条款反映了我们对未来如何寻找表演条款的最佳估计。 然后正如你所说的那样，我们并没有真正将恢复加入到PCL的前瞻性中。 它们确实不时发生，并不是非常不寻常。 正如我在上个季度所说的那样，我们的恢复非常努力，一致，非常一致。 所以，他们将来会来。 我不知道什么时候和多少，但是，我们当然不会把它们融入我们的前瞻性。
Last question is for Tom on capital. Just want to have the numbers right here, Tom, some of your counterparts had mentioned some adjustments that are coming in to start 2020 with IFRS16 and some of the other parameter updates. Do you have an estimate for the impact to BMO? And was there any pension liability hit for capital this quarter? It didn't look like it based on your number.
最后一个问题是汤姆的资本。 只想在这里找到数字，汤姆，你的一些同行已经提到了一些调整，这些调整将在2020年开始，IFRS16和其他一些参数更新。 您对BMO的影响有估计吗？ 本季度资本是否有任何养老金责任？ 它根据你的号码看起来不像。
Quick answer. So the Q1 impact from the IFRS 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 that's a deduction from capital. So that's actually a positive. And with that, the net impact from pension was de minimis in the quarter.
快速回答。 因此，IFRS 16的Q1影响发生变化，部分参数的变化为15至20个基点。 在养老金方面，本季度没有任何有意义的影响。 我们管理养老金风险的方法似乎使资产与负债相匹配。 这不完美。 但这是一个非常好的匹配。 我们还有养老金资产。 因此，在本季度，该资产减少，这是从资本中扣除的。 所以这实际上是积极的。 由此可见，养老金的净影响在本季度是微不足道的。
At this level of capital, do you anticipate once again becoming active on your NCIB?
Well, I'll stick to our normal story on that. We have 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 moves above 11.50, we would expect to be active. So our 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 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.
好吧，我会坚持我们正常的故事。 我们对业务中的贷款增长以及随之而来的客户增长感到非常满意，特别是加拿大和美国的商业增长一直高于市场，我们对业务的发展方式感觉良好。 这是我们对资本的首次使用。 如果该比率从当前水平建立并超过11.50，我们预计会活跃。 因此，我们的正常指引是该比率增长10至15个基点，我们上个季度表示将在该范围的较低端附近且增长强劲。 这就是本季度的表现。 正如你在问题中提到的那样，我们已经有了Q1的变化。 这么长的答案，但我希望活动的比例从目前的水平上升。 我们需要完成我们即将到来的Q1调整。
Our next question is from Robert Sedran with CIBC Capital Markets.
我们的下一个问题来自Robert Sedran和CIBC Capital Markets。
I’d like to try to combine, Tom, your outlook on the margin with some of Dave’s discussion on loan growth, to get a sense for revenues. It sounds like you’re still expecting a fairly robust top line 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 of around, I believe it was 9% in the US, is that a reasonable assumption even in this margin world, or should we expect that to slow?
我想把汤姆，你的利润前景与戴夫关于贷款增长的一些讨论结合起来，以了解收入。 听起来你仍然期待一个相当强劲的收入，就像我们试图预测利润将会做什么一样，我想我们真的想要获得收入。 因此，我们看到的预先提供的收益，我认为在美国是9％，即使在这个边际世界中也是一个合理的假设，或者我们应该预期这会减缓？
So let me start. It's a tough question to answer. 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 rate, so it's really hard for me to predict and what I can predict over the long term, we’ll continue to grow our US business on both the personal and commercial side. We've got some really strong momentum. And despite a lot of noise in the US economy, our clients are generally still pretty positive and I'm pretty positive about the long-term aspects of this business.
让我开始吧。 这是一个难以回答的问题。 这就是我所知道的。 我们将继续以比市场更快的速度扩大我们的客户群。 这对我们来说仍然是非常好的机会。 这将带来更高的收入，更高的贷款增长和更高的存款增长率。 更艰难的部分就是速率所发生的事情，因此我很难预测以及我可以长期预测的内容，我们将继续在个人和商业方面发展我们的美国业务。 我们有一些非常强劲的势头。 尽管美国经济中存在很多噪音，但我们的客户仍然非常积极，而且我对这项业务的长期方面非常乐观。
So just to try to push a little bit further, I mean, we're -- so you're still expecting reasonable growth rates and with the margin contraction you had this quarter, you still put up some pretty strong top line, 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 that's still what you're looking for.
所以只是为了试图进一步推进，我的意思是，我们 - 所以你仍然期待合理的增长率和你本季度的利润率收缩，你仍然会提出一些相当强劲的顶线，即使是 利率变动了。 所以，一个非常强大的顶线仍然 - 仍然是工作假设。 我知道这不是指导，但这仍然是你正在寻找的。
Well, I don't -- I think I pretty much said what I would say. I think it's -- again, I think 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 PPPT was strong and -- that's a good number for us. I don't know what it is going to be next quarter.
嗯，我没有 - 我想我几乎会说我要说的。 我认为 - 再次，我认为利率会产生一些影响。 我只是不知道他们会是什么。 但我们将继续增加客户。 我们将继续增加存款和贷款，我们会看到会发生什么。 本季度PPPT的9％强劲，这对我们来说是一个很好的数字。 我不知道下个季度会发生什么。
And Rob, it’s Darryl. Let me see if I can come in on this. I think you've raised an important question and 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 is 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 P&C business that you're quizzing Dave about just now, when we look at a compressing margin against an expanding customer base and top line growth, we also look at the fact that it does now have a double digit ROE and an 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 167 basis points, we think it's quite competitive with respect to other investment opportunities. 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, that may have been an unanswerable question. So I appreciate the attempt.
Our next question is from Mario Mendonca with TD Securities.
Darryl, you made a -- you've emphasized the importance of continuing to manage expenses lower in this environment and I'm just observing a sort of different approach to this across banks in Canada and the US, so I'm taking a very aggressive approach with big restructuring charges and others sort of doing it at the margin. When you think about BMO in 2020 and 2021, how do you think BMO behaves a little more aggressively with perhaps some restructuring initiatives, meaningful restriction initiatives or just -- perhaps just let attrition take care of expenses, how do you envision BMO playing out?
达里尔，你做了 - 你已经强调了继续在这种环境下管理费用的重要性，而我只是在加拿大和美国的各个银行观察到一种不同的方法，所以我非常喜欢 采取大规模重组收费的积极做法和其他类似的做法。 当您在2020年和2021年考虑BMO时，您认为BMO如何更积极地进行一些重组计划，有意义的限制措施或者只是 - 或许只是让磨损来处理费用，您如何设想BMO的发挥？
Yeah, so 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, the most important outcome 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. We're at -- we're below 50 for the – 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're 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're 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 -- 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 we’ll 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%.
是的，所以这是一个很好的问题。所以，为了回答这个问题，我会带你回去。几年前我们谈到了降低效率并通过运营杠杆提供效率，最重要的结果是我们给出的预测，在2021年我们对自己负责58％。如果你看到了这个轨迹，我们正在那里。我们在 - - 60岁时我们已经低于50，原谅我，这是本季度很长一段时间以来的第一次，我们通过调节我们的费用增长来实现这一目标。汤姆上个季度告诉你，我们将在本季度开始减少费用增长。
我们已经这样做了，我们今天告诉你，我们将在第四季度进一步调整。我想你会看到我们这么做。然后，当我们超越它时，我们正在制定我们的业务计划。我们正在思考我们将如何管理整个2020年和2021年的过程。我认为假设我们将会采取这样做是非常谨慎的 - 我们和其他人将会有合理但收入较低的收入成长环境与他们合作。
So at this point, it would not be appropriate for me to rule it out, like a meaningful restructuring charge?
Yeah, 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 where we’ll say that story is behind us.
And then maybe for Pat, looking back at other credit cycles, and I'm not suggesting that what we're seeing today is a credit cycle that appears to be normalization. Looking back at other cycles, PCLs got as high as 80, 90, 100 basis plus. As I start to model out a credit cycle today or what it might look like today, would it be your view that a credit cycle today could in fact be a lot less meaningful in terms of how high the PCL’s ratio gets than it has been in the past, because of things like mix or perhaps just underwriting standards? Is that conceivable or is that wishful thinking on my part?
然后也许对帕特来说，回顾其他信贷周期，我并不是说我们今天所看到的是一个看似正常化的信贷周期。 回顾其他周期，PCL高达80,90,100基数。 当我开始模拟今天的信贷周期或今天的情况时，您认为今天的信贷周期实际上可能在PCL的比率高于其所处的水平方面没那么有意义。 过去，因为混合或者只是承保标准之类的东西？ 这是可以想象的还是我的那种一厢情愿的想法？
Sorry, I don't think that's wishful thinking at all. I do think the mix issue is an important one. I look at some of the more particularly volatile sectors like CRE, and I think about what our mix looks like in the CRE sector now, relative to what it looked like going into the last cycle. And when we start to decompose sectors like that, we actually feel much better about where we are now versus say the last cycle. And 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 a change in the cycle.
But, I think I'm kind of with you with respect to the cycle. I'm not calling for a recession, either nor are we institutionally. When I look at forecast for GDP rates, for unemployment, for housing starts, for interest rates, all of that to us for 2020 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 2008 and I think that'll serve us well.
Our next question is from Scott Chan with Canaccord Genuity.
我们的下一个问题来自Scott Chan和Canaccord Genuity。
Good morning. Maybe going back Tom to the US NIM question, I think you commented that the initial Fed cut impacted US NIM by 5 bps. And if that kind of continues three or four times, say up until fiscal 2020, is that kind of a nice barometer for you on potential future impacts, just on that isolated item.
早上好。 也许汤姆回到美国的NIM问题，我认为你评论说美联储最初的削减对美国净息差影响了5个基点。 如果这种情况持续三到四次，比如直到2020财年，那么对于潜在的未来影响来说，这是一个很好的晴雨表，就在那个孤立的项目上。
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 and that impact diminished in the last couple of cuts. And so we'd expect higher sensitivity in the first couple of cuts, then in cuts that would follow. So, direction would be similar, but the impact will become muted as the Fed moves add it up.
所以我猜两件事。 你听说过第一次切割的近似影响。 然后，我想说，关于考虑未来削减影响的第二个问题的答案是否定的。 因此，通常情况下，随着利率下降，我们预计削减利润的敏感度会降低，而且我们看到同样的动态在最初的利率上升。 随着利率开始上升，我们的存款利差大幅扩大，而且在最近几次削减中，这种影响减弱了。 因此，我们预计在前几次削减中会有更高的敏感度，然后是随后的削减。 因此，方向将是类似的，但随着美联储的加速推动，其影响将变得微弱。
For timing purposes, our last question is from Darko Mihelic with RBC Capital Markets.
为了计时目的，我们的最后一个问题是来自RBC Capital Markets的Darko Mihelic。
Just a quick question on the corporate. It looks like you had 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?
只是一个关于企业的快速问题。 看起来你有办公楼出售和一些较高的证券收益。 只是为了帮助建模，我想知道你是否可以给我们一个关于它的大小的想法，或者也许每个季度企业应该失去什么？
Yeah, so it's Tom. So corporate had better than average performance in the quarter for the reasons I mentioned in my remarks, and you played 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, the last six quarters is a reasonable approach. And again, the number is 62 million for the last six quarters.
是的，所以这是汤姆。 由于我在发言中提到的原因，公司在本季度的表现要好于平均水平，而且你回放了。 我看待企业的方式是我们过去六个季度的平均损失约为6000万。 这和任何合作的数字一样好。 这些数字每季度四分之一左右。 而且，我们在本季度看到了这一点的好处，但出于建模目的，我们认为在过去四个季度中，过去六个季度是合理的方法。 而且，过去六个季度的数字是6200万。
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. White.
谢谢。 目前没有其他问题。 怀特先生，我想把会议转回给你。
Thank you, operator. As I said earlier, we continue to have strong operating performance in our businesses with good PPPT growth for the quarter and for the year to date, while 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.
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 two, 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 US segment’s earnings are up 24% year-to-date, and we've done this by prudently taking share in our core businesses and consistently delivering double digit PPPT 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 will 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.
Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
谢谢。 会议现已结束。 请在此时断开您的线路，我们感谢您的参与。
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