Bank of Montreal (NYSE:BMO) Q1 2024 Earnings Call Transcript
Bank of Montreal (NYSE:BMO) Q1 2024 Earnings Call Transcript February 27, 2024
Bank of Montreal beats earnings expectations. Reported EPS is $2.56, expectations were $2.24. Bank of Montreal isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to BMO Financial Group's Q1 2024 Earnings Release and Conference Call for February 27, 2024. Your host for today is Christine Viau. Please go ahead.
Christine Viau: Thank you and good morning. We'll begin the call with remarks from Darryl White, BMO's CEO; followed by Tayfun Tuzun, our Chief Financial Officer; and Piyush Agrawal, our Chief Risk Officer. Also present today to take questions are Ernie Johansson, Head of BMO North American Personal and Business Banking; Nadim Hirji, Head of BMO Commercial Banking; Alan Tannenbaum, Head of BMO Capital Markets; Deland Kamanga, Head of BMO Wealth Management; and Darrel Hackett, EMO U.S. CEO. As noted on Slide 2, forward-looking statements may be made during this call which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance.
Darryl and Typhoon will be referring to adjusted results in their remarks unless otherwise noted. I will now turn the call over to Daryl.
Darryl White: Thank you, Christine and good morning, everyone. Today, we announced net income of $1.9 billion and adjusted earnings per share of $2.56 and against a challenging economic backdrop, continued to demonstrate the strength and resilience of our diversified businesses. While the environment has constrained revenue growth in market-sensitive businesses in the near term, the strength of our personal and commercial businesses further enhanced through the integration of strategic acquisitions, delivered revenue growth of 10% and pre-provision pre-tax earnings growth of 3% from last year. We're executing against simple, clear and well-defined plan by optimizing our businesses and balance sheet, controlling costs and growing customer relationships to drive long-term sustainable growth.
We significantly strengthened our capital position with a CET1 ratio of 12.8% and up 30 basis points from last quarter and up 60 basis points since closing the Bank of the West transaction. Through disciplined balance sheet optimization, we've absorbed regulatory impacts and credit normalization and are well positioned to support client growth going forward. Given the outcomes of our actions, the result -- the resulting strong position and consistent internal capital generation, we've removed the DRIP discount as of this quarter. We're delivering against the expense management commitments we announced last year, including the full achievement of the US$800 million run rate cost synergies at Bank of the West as of February 1 and 1 year after closing and 20% higher than our initial plan.
We're also on track to deliver the additional $400 million of expense savings by the end of 2024 from the early actions put in place last year to enhance bank-wide operational efficiency. The benefits of these programs are now accelerating. In fact, we've reduced expenses by 4% from last quarter and remain focused on returning to positive operating leverage beginning next quarter. Credit remains well managed. While impaired loss provisions have increased from very low levels and our consistent and disciplined risk management practices and the expertise within our lending teams and the quality of our client selection are resulting in good overall credit performance in line with our expectations. As we've been saying for several quarters, the near-term growth outlook industry-wide is muted by slowing GDP growth.
We expect North American economic growth to remain subdued in the first half of this year before recovering towards the end of the year on the back of lower interest rates. While directionally similar, we do expect a meaningful difference in the landing between Canadian and U.S. economies. In Canada, real GDP is expected to fall from 3.8% in 2022 to 0.8% in 2024. The U.S., while also slowing is expected to show much better growth of 2.2% in 2024. We foresaw these trends emerging and we're dynamically managing our businesses to succeed and further strengthen our competitive advantage as the environment improves. In Canada, Personal and Business Banking continues to outperform with net new customer growth up 7% year-over-year. We continue to expand our suite of innovative products, including our new BMO Eclipse RISE Visa card that rewards customers for establishing good financial habits.
We're already seeing great traction with over 15,000, new accounts since launching in December. We continue to attract newcomers to Canada with our award-winning digital offerings and services with new accounts up 35% from last year. In the U.S., we are executing against a very specific plan. We closed, converted and integrated the Bank of the West acquisition during a period of heightened uncertainty in the U.S. banking market where several banks have been challenged to maintain liquidity, capital and customers. Since closing, our total U.S. segment has consistently delivered quarterly PPPT above US$1 billion and contributing 45% to the bank's earnings. We've sustained this performance despite intensified deposit competition and decreased loan demand.
We've overachieved our cost synergies and steadily improved our capital ratio in the U.S. banking subsidiary which is up over 80 basis points from a year ago. We're gaining momentum from our initial brand campaign which when combined with targeted marketing, including becoming the official jersey sponsor of the LAFC is driving new customers across our entire footprint, all under the unified BMO brand. In our new Western markets, we've had over 250,000 customer conversations this quarter, providing valued and trusted advice. In California, new deposit relationships were 38% higher compared to last year as branch productivity continues to build towards our full potential. In North American Commercial Banking, while pressure on loan demand reflects lower utilizations as businesses wait to deploy capital at a lower cost, we continue to see strong momentum in customer acquisition across our integrated North American platform.
The U.S. is now contributing 60% of our total new client growth compared to 37% during the same period last year. And we've retained over 90% of Bank of the West clients solid evidence that the BMO brand is strong and gaining traction. We're actively pursuing revenue synergies across our businesses with early indicators providing confidence that we will outperform the market when the environment becomes more constructive. In our Wealth business, we continue to create new and innovative solutions in the ETF and mutual fund space to help investors achieve their financial goals. BMO Global Asset Management received top honors across several categories at the 2023 Canada Lipper Fund Awards and led all ETF providers at the 2023 Funddata awards. At BMO Insurance, investments in data and analytics are helping speed up and simplify the underwriting process, improving productivity for financial advisers and helping make life insurance coverage more accessible to Canadians.
In BMO Capital Markets, client activity is gaining momentum after a muted start to the year. In Canada, we were number one in completed M&A and ECM this quarter. And in the U.K., BMO was recently designated as a gilt-edged market maker, a natural extension of our global rates business. We're driving real financial progress for our clients and communities and continuing to deliver on our client -- on our climate ambition. In partnership with the Canada Infrastructure Bank, we launched an innovative program to support the financing of energy retrofits for commercial building owners to deliver certified reductions to greenhouse gas emissions. It's just 1 example of how we're supporting our clients as the air lead partner in the transition to a net zero world.
BMO's leadership continues to be acknowledged once again being ranked among the most sustainable companies in the Dow Jones Sustainability Index. In summary, our first quarter results were impacted by revenues that fell short of expectations due in part to environmental pressure and other specific factors Tayfun will describe in detail. Meanwhile, our core fundamental pillars are strong. Capital is very strong and ahead of expectations. Credit is within our range of expectations and expenses are tightly controlled and we're delivering on our efficiency commitments and driving clear results. We will continue to manage for optimal performance in this environment and also proactively improve our competitive positioning for outperformance as we move to the next stage of the business cycle.
I'll now turn it over to Tayfun.
Tayfun Tuzun: Thank you, Darryl. Good morning and thank you for joining us. My comments will start on Slide 8. First quarter reported EPS was $1.73 and net income was $1.3 billion. Adjusting items are shown on Slide 38 and included the after-tax impact of the FDIC special assessment of $313 million, the net accounting loss on the sale of a portfolio of recreational vehicle loans related to balance sheet optimization of $136 million and acquisition-related impacts for amortization of intangibles and integration costs of $84 million and $57 million, respectively. The increase in reported net income from last year reflected the loss on fair value management actions related to the Bank of the West acquisition in the prior year. The remainder of my comments will focus on adjusted results.
Adjusted EPS was $2.56, down from $3.06 last year and net income was $1.9 billion, down 12%. Revenue increased 10% and PPPT increased 3% with good growth in Canadian P&, C the benefit of acquisitions and market-related impacts in insurance from the transition to IFRS 17, partly offset by declines in Capital Markets and Corporate Services. Expenses increased 16%, primarily due to the impact from acquisitions, partly offset by the realization of cost synergies and efficiency initiatives. Total PCL was $627 million, including a $154 million provision for performing loans compared with a total provision of $217 million in the prior year. Piyush will speak to these in his remarks. Turning to Slide 9. There were some idiosyncratic items within the quarter that had outsized impacts on the total bank revenue growth.
First, in Wealth Management, the transition to IFRS 17 resulted in variability from market-related impacts. While quarterly results in the prior year were restated. They are not necessarily representative of our future earnings profile as hedging strategies to mitigate the impact of changes in interest rates on our earnings began to be implemented in the second half of the year. We expect our quarterly insurance revenue stream to be more consistent with the first quarter during the remainder of this year. Second, Capital Markets revenues reflected a weaker environment and client activity to start the year. In addition, the impact of proposed legislation that eliminates the deductibility of certain Canadian dividends reduced trading revenue by approximately $50 million from the prior year.
Activity levels improved at the end of the quarter. And if markets remain constructive, we expect to reach $625 million to $650 million of average quarterly PPPT in Capital Markets during the remainder of the year. Third, Corporate Services revenues decreased compared with the prior year and prior quarter. About 2/3 of the decline from the prior year was related to the earnings on excess equity that we were holding ahead of the closing of Bank of the West. We are also holding more liquidity on our balance sheet which always comes at a higher cost. In addition, market volatility during the quarter had a negative impact on the valuation of our hedge-derivative positions that runs through our P&L. This item can cause some variability but the cumulative impact converges to 0 over time.
This was the largest contributor to lower sequential revenues as well as a lower benefit from purchase accounting market accretion. Barring unexpected market volatility, we expect our average quarterly revenues in corporates to be around negative $200 million to $225 million for the remainder of the year. Moving to the balance sheet on Slide 10. Average loan growth was 16% year-over-year, driven by Bank of the West and good growth in Canadian P&C and Capital Markets. The sale of the RV loan portfolio in the quarter reduced average loans by $4.8 billion and period-end loans by $9.6 billion. Excluding the impact of the sale and the wind down of the indirect auto portfolio, average loans were up 2% sequentially on a constant currency basis with growth both -- in both business and government and consumer lending.
Average customer deposits increased 19% year-over-year due to Bank of the West and higher balances in Canadian P&C and Capital Markets. Sequentially, period-end deposits were up 2% on a constant currency basis. Turning to Slide 11. On an ex-trading basis, net interest income was up 12% from the prior year and net interest margin was up 3 basis points driven by higher margins in our P&C businesses, partially offset by lower net interest income in Corporate Services. Net interest margin was down 6 basis points from last quarter, reflecting continued pressure from the overall competitive deposit environment and deposit migration, net of benefits from reinvestment at higher rates. The total bank margin was also impacted by lower net interest income related to net accretion of purchase accounting fair value marks and risk transfer transactions, including the sale of the RV loan portfolio.
In Canadian P&C, NIM increased 3 basis points, mainly due to favorable balance sheet mix, partly offset by lower deposit margins due to the continued migration to term deposits. In U.S. P&C, NIM remained flat as favorable changes in balance sheet mix were offset by lower deposit margins as customers migrate to higher cost deposits. During the remainder of the year, we expect relative stability in our overall margin as the benefit of reinvestment of equity and non-maturity deposits at higher yields offset pressures from higher deposit costs. Moving to Slide 12. Expenses increased 16% from the prior year, mainly due to the impact from acquisitions. The current quarter included an $84 million benefit from the consolidation of certain U.S. benefit plans.
Sequentially, expenses were down 4%, mainly reflecting the higher realized Bank of the West cost synergies and additional operational efficiency savings. These more than offset the impact of stock-based compensation for employees eligible to retire and seasonality of benefits that is recognized in the first quarter of each year which had a combined impact of $280 million. As Darryl mentioned earlier, we have been very successful on delivering on our expense commitments. We now have achieved the full US$800 million in the Bank of the West run rate cost synergies per our commitments and we have been progressing well on the remaining enterprise operational efficiencies we announced last year. To date, we have realized $325 million of the $400 million run rate expense savings that we are targeting to achieve by the end of the fiscal year.
Based on our current expectations, the first quarter should be a low point for revenues and a high point for expenses for this fiscal year. And therefore, we remain confident in our ability to deliver positive operating leverage starting the second quarter and for the full fiscal year. Turning to Slide 13. Our capital position continues to strengthen with a common equity Tier 1 ratio of 12.8%, up 30 basis points from the prior quarter, driven by internal capital generation, shares issued under the dividend reinvestment plan and the benefit from the sale of the RV loan portfolio. These were partially offset by the FDIC special assessment charge and higher source currency RWA, reflecting higher market and operational risks and net asset quality changes.
The combined impact of regulatory capital developments and adoption of IFRS 17 effective this first quarter did not have a significant impact on our capital position. Moving to the operating groups and starting on Slide 14. Canadian P&C delivered net income of $925 million, down 3% year-over-year. PPPT of $1.6 billion increased a strong 8%, offset by higher provisions for credit losses. Revenue of $2.8 billion was up 9%, driven by growth in net interest income reflecting both solid balance growth and higher margins. Noninterest revenue increased 6%, primarily due to the acquisition of AIR MILES. Expenses were up 9% and reflecting the inclusion of AIR MILES and higher technology costs and down 4% from the prior quarter, driven by lower employee-related costs and operational efficiencies.
Loans were up 5% year-over-year with good growth across mortgages and commercial loans and increased 1% from the prior quarter. Deposits were up 11% year-over-year, with retail deposits up 10% and commercial deposits up 12% and reflecting continued growth in term products. Deposits increased 2% sequentially. Moving to U.S. P&C on Slide 15. My comments here will speak to the U.S. dollar performance. Net income was $475 million, down 4% from the prior year with PPPT growth of 19%, offset by higher provisions for loan losses. Sequentially, revenue was up 1%, driven by an increase in net interest income on higher deposit balances. Expenses declined 4% quarter-over-quarter, reflecting benefits from expense management and our focus on operational efficiencies.
Loans were up 48% from the prior year driven by Bank of the West. Excluding the impact of the RV loan portfolio sale, average loans were up 2% sequentially, with growth across both mortgages and commercial loans. Deposits increased 45% year-over-year and 2% sequentially, driven by strong growth in term and money market deposits. Moving to Slide 16. BMO Wealth Management net income was $241 million, up from $160 million last year. Wealth and Asset Management net income of $188 million decreased 7% from the prior year. Contributions from Bank of the West and growth in new client assets were more than offset by lower net interest income due to migration to term deposits and higher expenses. Insurance net income was $53 million compared with a loss of $43 million in the prior year, primarily due to market-related impacts in the prior year, reflecting the transition to IFRS 17.
Expenses were up 8%, mainly due to higher employee-related costs, including impact of Bank of the West and were up 1% sequentially. Moving to Slide 17. BMO Capital Markets net income was $408 million compared with $495 million in the prior year, reflecting weakness in the market environments. Revenue in Global Markets was down 13%, reflecting lower trading revenue. Investment and corporate banking revenue was up 5% on higher underwriting and advisory fees. Expenses were up 1% driven by technology costs, partially offset by lower performance-based compensation. Turning now to Slide 18. Corporate Services net loss was $316 million compared with $180 million in the prior quarter and $114 million in the prior year. The widening of the net loss was driven by the revenue items previously discussed, partially offset by lower expenses.
To conclude, the banking environment is at a point in the cycle where the outlook for revenue growth is more constrained in the near term. In response, we are delivering on our committed expense savings to deliver PPPT growth and positive operating leverage. At the same time, we are focusing on investing for growth, allocating additional resources to areas where we have expanded our revenue opportunities through acquisitions and to businesses where we are capturing market share profitably to build continued shareholder value. We are cognizant that we need to execute with discipline and our track record in risk and expense management should be a strong proof point for such accountability. I will now turn it over to Piyush.
Piyush Agrawal: Thank you, Tayfun and good morning, everyone. Starting on Slide 20. The total provision for credit losses was $627 million or 38 basis points. Impaired provisions for the quarter were $473 million or 29 basis points, up 4 basis points from prior quarter, reflecting the continued impact from tighter monetary policy. Credit performance remains well within our expectations and was driven by strong risk management discipline across the bank and the benefit from our risk mitigation actions over the last few years. Canadian retail impaired losses were $204 million, up $14 million from prior quarter and U.S. retail impaired loan losses were $80 million, up $20 million. Consumer loan losses in both Canada and the U.S. reflect higher delinquencies in credit cards and other personal loans, reflecting increases in customer insolvencies which in Canada are now above pre-pandemic levels.
Also of note, the discontinued indirect auto business provisions are now reported in Corporate Services and have increased in line with industry trends. Canadian commercial impaired loan provisions were $34 million, down $8 million from last quarter and U.S. commercial impaired provisions were $103 million, up $20 million, primarily due to higher losses in the transportation and retail trade sectors. Capital markets impaired losses were $11 million, flat to previous quarter. Moving to Slide 21. Performing provision for credit losses of $154 million primarily reflected portfolio credit migration and model updates, net of changes in expert credit judgment. Negative credit migration which began in the second quarter of last year is not yet over but we do expect it to slow up late during the remainder of the year.
Also of note is an $87 million release of performing allowance related to the RV loan sale. This release is outside of the $154 million build and netted in the noninterest revenue line against the loss on the sale of the RV portfolio that Tayfun referenced in his remarks. We are comfortable that our total performing allowance for Q1 of $3.5 billion provides appropriate coverage of 55 basis points over our performing zones and 2.4x trading 4-quarter impaired losses given the credit profile of our current portfolio and our forecast for impaired losses. Turning to Slide 22 on impaired loans and formations. Bank-wide impaired formation slowed by $400 million from prior quarter to $1.4 billion. Gross impaired loans increased to $4.3 billion or 65 basis points with the increases coming primarily from health care and manufacturing.
On Slide 23, we provide an overview of our business and government portfolio which remains a key differentiator for the bank. The portfolio is well diversified across geographies and industries, highly secured and well structured. Throughout market cycles, we have maintained consistent and disciplined underwriting standards as evidenced by the portfolio quality and strong performance over time. Our expertise in workout practices consistently results in lower losses on impaired loans with a focus on helping clients return to performing status. As expected, inflation and monetary tightening are impacting businesses and resulting in negative migration. However, 54% of this portfolio continues to be investment grade with low impairment level of less than 1%.
On Slide 24, we provide an overview of the Canadian mortgage portfolio that continues to perform very well. We've provided additional information on the impact of higher interest rates on customer payments, while higher rates are expected to impact borrowers and renewal or refinancing, our internal analytics indicate that customers have the capacity to absorb these higher payments. In fact, over $19 billion of mortgages have now renewed in this higher rate environment and they continue to exhibit good payment performance. Additionally, our outreach to customers continues to be successful with many taking actions, resulting in a significant reduction in mortgages that are in negative amortization by over $7 billion in this quarter alone. To conclude, we continue to expect that the higher level of interest rates and slowing economic activities will be reflected in somewhat higher impaired loss rates in the range of low 30 basis points for the year with some variability quarter-to-quarter.
But given the quality and the diversification of our portfolio, our high allowance coverage and strong risk management capabilities, we remain well positioned to manage the current environment and emerging risks. With that, I will now turn the call back to the operator for the Q&A portion of this call. Thank you.
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