Release Date: August 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Bank of Montreal (BMO, Financial) delivered record pre-provision pretax earnings of $3.5 billion, up 8% year-over-year.
- The bank achieved positive operating leverage of 5.2% for the quarter and 1.3% year-to-date.
- Canadian Personal and Commercial Banking saw record revenue growth of 7% year-over-year.
- BMO Wealth Management's net income increased by 44% year-over-year, driven by strong client asset growth.
- BMO Capital Markets reported strong client activity and revenue performance, with PPPT of $625 million.
Negative Points
- Loan loss provisions were above historical ranges, driven by cyclical increases in credit costs.
- Impaired provisions were significantly impacted by a limited number of accounts, with 15 accounts comprising almost 50% of year-to-date impaired provisions.
- The bank's adjusted EPS was down from $2.94 last year to $2.64, an 8% decrease.
- Net interest margins (NIM) were pressured by lower deposit margins, particularly in Canadian and US P&C.
- The bank expects impaired provisions to remain elevated over the next few quarters, with a return to normalized levels anticipated in 2025.
Q & A Highlights
Q: On the PCL, the guidance was for impaired to be in line with Q2. It was up 9 basis points, and I get the things changed. Just curious, what surprised you when you mentioned impaired PCLs likely remain elevated for a few quarters. What gives you confidence that it's going to -- you refer to the long-term average in fiscal '25. And is this more midway through fiscal '25, early '25? Just some color.
A: (Tayfun Tuzun, CFO) When we look at our overall impaired PCL performance, there are several reasons for this elevated number this quarter. The current environment is complex and changing rapidly. Retail losses have been in a tight range of what we expected, influenced by Canadian insolvencies. Our wholesale book has performed in line with our expected model, but variability on a few large names has been challenging. We expect this will be elevated as we go through the next one or two quarters, starts to start coming down. And by the end of the year, it should start reverting to our long-term average.
Q: Darryl, I wanted to ask about capital. 13% CET1, a little bit below expectations, but still very strong relative to the range of 12% to 12.5%, which seems to be where most banks are comfortable operating now. So I'm just wondering why no buyback given that capital level are credit concerns keeping you cautious?
A: (Darryl White, CEO) I think it's just more generalized than that. We just turned the DRIP discount off in Q2. As we assess the overall environment, the short answer would be not yet. We want to maintain lots of capital for deployment when we see good customer opportunities and the expectation is we'll start to see some expansion opportunities there as we go into 2025. We'll update you again at the end of the fourth quarter based on where those conditions are.
Q: Is there an issue in terms of the bank having too many outsized credit for its size, because for a bank of BMO size, one loan, two loans moving credit meaningfully quarter after quarter is a little bit surprising. So one, just talk through in terms of how you're approaching whole size? Are these all shared national credits in the US and you're having to take these charges as you go through the review with examiners?
A: (Piyush Agrawal, CRO) About 70% of those credits, we're not alone. These are syndicated facilities. We have banks north and south of the border in those in different ranges, different sizes and some we're the lead bank and some other lead banks. These aren't unique to BMO. We are always making refinements to ensure we're capturing the evolving risks in the industry. Many of these loans have related to underwriting we have done around the end of the pandemic. We've gone back, looked at our entire book, combed through underwritings we've done that. We believe the position is contained. It will get through the system.
Q: So BMO's PCLs, as you've disclosed, have gone from 21 basis points impaired last year to 50% this year, and your peers are something like 24% to 38%. So clearly, something's gone wrong. And I appreciate your comments around the pandemic, but the pandemic was not unique to BMO. So as you look back, do you see can you identify the failures, like the underwriting failures, the mistakes that the bank made?
A: (Nadim Hirji, Head of BMO Commercial Banking) Our credit underwriting policies, procedures are robust and we did not make any significant changes to our credit risk appetite over the past several years. We had a growth strategy but we didn't lose discipline. We're going to look at our underwriting and portfolio management practices in a changing environment, but it's going to be to support continued growth and support our clients through these times.
Q: You mentioned the watch list and I noticed it's going from to 5% of the book, up from 3% at the end of '23. Can you maybe just talk about what level of credit deterioration the company has to show before they end up on that list?
A: (Piyush Agrawal, CRO) We are evaluating credits between our bankers and risk partners throughout a company journey with us. As we underwrite risk rating changes that come through because of higher leverage, weaker cash flows, lower liquidity, is what drives our internal ratings. When you get to a certain level, you put in a watch list, which really means we are evaluating you more often, we have a higher connectivity with you. It's a category that allows us to continue to be highly engaged with the client and start also thinking about risk mitigation strategies.
Q: Darryl, I wanted to circle back in terms of your commentary about the timing of revenue synergies from the Bank of the West deal. Now understandably that's being pushed out. But do you still think that you're able to achieve what you originally thought?
A: (Darryl White, CEO) Yes. The available wallet is less than we had forecasted, but underneath that, we are seeing progress on the P&BB side of the business, commercial side, and across our wealth and capital markets. We are seeing strong core deposit checking and savings growth, strong performance from our branch network, and digital sales up 40% year-over-year. We are making significant progress in building talent and expanding our media finance business into the California market. We feel pretty good about it.
Q: What is really preventing you guys from providing more specific guidance on PCLs given that you guys have done this deep dive in commercial wholesale exposures?
A: (Piyush Agrawal, CRO) For the retail portfolio, it's easier because of the way it flows into what an impairment is. In the wholesale in a benign environment, it's easier. But when you get into a situation of a credit cycle where we are, it's always hard. I can guide you for a year, but I can never be able to tell you exactly which quarter and how much amount. The variability has been very high for various reasons and it's being compounded by the rate environment, credit conditions, and a pullback from regional banks. We expect it to be higher for the next couple of quarters and then start coming down.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
