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Edited Transcript of BMO.TO earnings conference call or presentation 3-Dec-19 1:00pm GMT

Q4 2019 Bank of Montreal Earnings Call

MONTREAL Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of Montreal earnings conference call or presentation Tuesday, December 3, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Fowler

Bank of Montreal - President of North American Personal & Business Banking

* Daniel Barclay

BMO Capital Markets Corp. - CEO & Group Head

* David Robert Casper

Bank of Montreal - Group Head of North America Commercial Banking

* Jill Homenuk

Bank of Montreal - Head of IR

* Patrick Cronin

Bank of Montreal - Chief Risk Officer

* Thomas E. Flynn

Bank of Montreal - CFO

* William Darryl White

Bank of Montreal - CEO & Director

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Conference Call Participants

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* Darko Mihelic

RBC Capital Markets, Research Division - MD & Equity Analyst

* Doug Young

Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst

* Gabriel Dechaine

National Bank Financial, Inc., Research Division - Analyst

* John Aiken

Barclays Bank PLC, Research Division - Director & Senior Analyst

* Mario Mendonca

TD Securities Equity Research - MD & Research Analyst

* Meny Grauman

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Robert Sedran

CIBC Capital Markets, Research Division - MD & Head of Research

* Scott Chan

Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst

* Stephen Gordon Theriault

Eight Capital, Research Division - Principal & Head of Research

* Sumit Malhotra

Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services

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Presentation

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Operator [1]

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Good morning, and welcome to the BMO Financial Group's Q4 2019 Earnings Release and Conference Call for December 3, 2019. Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead.

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Jill Homenuk, Bank of Montreal - Head of IR [2]

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Thank you. Good morning, 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. Darryl will then provide some outlook comments before we move on to the question-and-answer period. 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.

During the question-and-answer period, we will take questions from prequalified analysts. To give everyone an opportunity to participate, please keep it to one question. 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 2019 annual report and our fourth quarter 2019 earnings release.

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

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William Darryl White, Bank of Montreal - CEO & Director [3]

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Thanks, Jill. Good morning, everyone, and thanks for joining us today. This morning, we announced earnings for the fourth quarter of $1.6 billion and earnings per share of $2.43, both up 5% from last year. We delivered bank-wide pre-provision pretax earnings growth of 11% in the quarter, with positive operating leverage in every operating group. Earnings per share for the year of $9.43 were up 5%, reflecting good revenue and income growth across our North American platform.

2019 was a year of strong and consistent delivery across our businesses, with significant progress made against our strategic priorities. Revenue grew 6%, PPPT earnings were up 7%, and expenses were well managed. As expected, expense growth in the second half of the year moderated significantly with expenses growing at just 2.6%. All of our businesses are working hard to achieve their priorities.

Canadian P&C ended the year with a particularly strong quarter, with excellent loan and deposit growth in both our personal and commercial franchises. In commercial, we're maintaining a dominant position with a strategic focus, having added targeted capacity that is driving incremental return. We're winning on value through expertise and understanding of our clients' needs without sacrificing on our long-term strategy of growth through diversification and prudent risk management.

U.S. P&C continues to benefit from the same strategy. As a top 10 commercial lender in the United States, we have a strong brand and offering an unparalleled understanding of client needs and the ability to compete effectively in every market. We're building relationships for the long term with a strategic focus on continuing to diversify our revenue mix, which includes an increasing contribution from our treasury and payment solutions business and enhancing our return on equity.

Our U.S. personal business has long been the foundation that enables our commercial business to expand and grow. Today, that personal business is successfully growing its deposit base with the same commitment to diversification and long-term performance. We've opened deposit accounts in all 50 states digitally. And in 2019, almost half of our U.S. deposit growth came from outside of Illinois and Wisconsin, up 10% from the prior year.

In Wealth Management, we have clear momentum in key businesses that positions us for enhanced profitability going forward. In our unified private wealth business, we grew our client base and deepened relationships, delivering record levels of net new assets in our full-service brokerage. Strong loan and deposit growth in private banking and significant gains in client loyalty. With a strong track record of providing award-winning products and services, including recognition in the 2019 Thomson Reuters Lipper Fund Awards for 4 BMO ETFs and 3 BMO mutual funds, and we continue to lead the Canadian ETF market and overall market share and in net new asset growth.

Capital Markets had a good year in an environment that was mixed for many industry players. Revenue was strong with good contribution from our KGS-Alpha acquisition, but also reflecting the strength of both our businesses and geographic diversification. At Investor Day, we set a 5-year target for revenue from our U.S. business to reach 45% to 50% of total capital markets, which we achieved in Q4 and in 2019.

Our overall U.S. segment continues to deliver above expectations. It now represents 34% of the bank's total net income, up from 28% in 2018 and 24% in 2017.

This is another target we achieved ahead of our expectations, having made good strategic choices in a favorable environment. U.S. segment earnings increased 23% in 2019, followed by an increase -- following an increase of 27% the previous year.

Today, the U.S. segment is more broad-based than ever with contributions across all businesses as they work together to provide a fully integrated client offering. In all of our businesses, we continue to strengthen our competitive position, including allocating resources to the areas of highest earnings potential and performance as well as accelerating our delivery against priorities and simplifying the way we do business.

Now, let me turn to the restructuring charge we announced today. This was a decision that was made with serious consideration, and it is entirely in line with our strategy and priorities that we've communicated. All areas of the bank contributed to the charge, and there will be ongoing accountability throughout the organization for the decisions that have been made. The charge is one of a number of initiatives that will help us reach our efficiency target of 58% in 2021, while continuing to optimize efficiency beyond that without the need for additional charges.

We're seeing good energy and determination across the bank in reaching that objective, and we've already made significant progress, having improved our efficiency ratio by 410 basis points since 2015.

We ended the year with an efficiency ratio of 61.4% even after absorbing the severance expense in capital markets with increasing momentum into the back half of the year as evidenced by our efficiency ratios of 59.9% and 60% in the last 2 quarters. On an underlying basis, net of the capital market severance, operating leverage for the year was 1.9% in constant currency.

All groups are contributing to our steadily improving efficiency performance. Canadian P&C ended Q4 below 47%. U.S. P&C continues to better its efficiency ratio with a 470 basis point decrease over the last 2 years. Wealth is also showing improvement, while Capital Markets remains committed to its Investor Day target of a ratio of below 60% by 2023.

While efficiency is an important focus for us, it will not come at the sacrifice of investment. We continue to make significant progress in digitizing our bank. BMO employs an innovative model where business and technology are completely integrated through our chief information officers. It's a model that drives efficiency while also encouraging collaboration and a culture that embraces the benefits of technology across the organization.

The result is success stories like BMO QuickPay, an offering that allows customers to pay their bills by e-mail through the use of machining capability and optical character recognition. QuickPay recently won the top digital innovation award at the banking technology awards.

In another example, our online business banking platform now offers on-the-go authentication and approval with our mobile app and biometric ID, implementing a faster and more agile infrastructure.

This feature is awarded a 2019 Impact Innovation Award from the Aite Group. We also support innovation in our partnerships. Recently, we announced a donation to the University of Toronto for a first of its kind program that integrates artificial intelligence with humanities.

This will enable us to better prepare our workforce for a future where companies win when they know the best of technology and human creativity.

One of the keys to driving that creativity is our commitment to placing diversity and inclusion at the heart of our interactions with our customers and our employees. This month, we introduced the true name feature on BMO Harris Mastercard debit cards, meaning transgender and nonbinary people can now use their true name on their cards without the need for a legal name change. BMO was the first bank to issue cards under this groundbreaking initiative.

Reinforcing our status as a truly North American bank, we recently received the American Chamber of Commerce in Canada's True North Social Impact award. This award recognizes the bank's meaningful social contributions across North America over the past year. Our work with United Way in both Canada and the U.S. is proof of this engagement. We recently announced our support of the mayor of Chicago's economic development plan with the first corporate donation through the United Way's neighborhood network initiative. This donation builds on the groundbreaking community partnership work that we've already been doing with the United Way of Greater Toronto.

As always, our team is united in our commitment to be the best and strongest we can be for our customers, our communities and our shareholders. To reflect our simple, powerful statement of purpose to boldly grow the good in business and in life.

And now I'll turn it over to Tom to talk about the fourth quarter.

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Thomas E. Flynn, Bank of Montreal - CFO [4]

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Okay. Thank you, Darryl, and good morning, everyone. My comments will focus on the fourth quarter results, and we'll start on Slide 9.

Q4 reported EPS was $1.78, and net income was $1.2 billion. Adjusted EPS was $2.43 and adjusted net income was $1.6 billion, both up 5%. Results in the quarter reflect good performance in our flagship P&C businesses and positive operating leverage in all groups.

Pre-provision pretax earnings growth was strong at 11%. The lower income growth of 5% reflects higher credit losses and a lower tax rate, given a recovery last year. Adjusting items this quarter include a restructuring charge of $357 million after tax, related to severance and a small amount of real estate-related costs. The charge reflects a bank-wide focus on accelerating the delivery of our agenda, including improving efficiency.

Initiatives underway are focused on digitization, organizational redesign and simplification of the way we do business. The charge will impact approximately 5% of our workforce. We expect our initiatives to drive expense savings of approximately $200 million in fiscal '20 and to achieve run rate savings of approximately $375 million by Q1 of 2021. Adjusting items this quarter also include a $25 million after-tax reinsurance adjustment, which I'll speak to later. Adjusting items are shown on Slide 26.

Turning now to revenue. Net revenue of $5.8 billion was up 5%, reflecting good performance in our P&C businesses and increases in Wealth Management and Capital Markets. Expenses increased 1%, reflecting higher technology and employee-related costs, partially offset by lower premises expenses. Operating leverage for the quarter was good at 3.8% and positive, as I said earlier, in each of the operating groups. One reminder related to the first quarter of next year. In Q1 of each year, we expense deferred compensation granted to employees who are eligible to retire. We expect this number in Q1 to be roughly in line with the Q1 2019 expense of $115 million.

Moving to Slide 10 for capital. The common equity Tier 1 ratio was 11.4%, unchanged from the prior quarter. Retained earnings growth, which absorbed an 11 basis point impact from the restructuring charge was offset by higher risk-weighted assets. The higher risk-weighted assets in the quarter were driven by business growth.

Today, we announced an increase to our quarterly dividend of $0.03 per share to $1.06, up 6% from last year. As you know, there are some changes coming in the first quarter of fiscal 2020 that will impact the CET1 ratio. We expect the adoption of IFRS 16 and changes related to credit risk and the securitization framework to have a combined impact of 10 -- sorry, 15 to 20 basis points on our CET1 ratio in Q1.

Moving to our operating groups and starting on Slide 11. Canadian P&C had a very strong quarter with net income of $716 million, up 6%. Pre-provision pretax earnings growth was strong at 10%. Revenue growth was 7% driven by higher balances, higher margins and increased noninterest revenue. Total loans were up 7%, with commercial loans up 16%. Mortgage growth through proprietary channels, including amortizing HELOCs, was 5%. Deposit growth continued to be robust at 13%. NIM was up 4 basis points from last quarter, reflecting positive product mix changes and a benefit from rates. Operating leverage was strong at 2.7%, and the efficiency ratio improved to 46.6%.

Moving to U.S. P&C on Slide 12. And my comments here will speak to the U.S. dollar performance. Net income of $305 million was up 4%. Pre-provision pretax earnings growth was good at 9%. The difference in these growth rates mainly reflects a low tax rate last year, given a recovery. Revenue growth was good at 4% reflecting balanced growth net of lower net interest margin. Average loan growth was 13% with commercial loans up 15% and personal up 6%. Deposit growth continued to be strong at 13%. Net interest margin was down 11 basis points from last quarter due to lower deposit margins as a result of the Fed's interest rate cuts. Expenses were well managed and relatively unchanged from last year. Investments in the business were largely offset by lower premises costs and an ongoing focus on efficiency. Operating leverage was strong at 3.4%, and the efficiency ratio improved to 57.1%.

Turning to Slide 13. BMO Capital Markets net income was $280 million for the quarter. The U.S. business continued to deliver strong performance with net income of USD 94 million, up 60% from last year and representing 45% of Capital Markets earnings in the quarter.

Pre-provision pretax earnings were up 5% from the prior year. Revenue growth was up 4% with Investment and Corporate Banking revenue down slightly from last year and global markets up 9%. Expenses increased 3% in the quarter. The provision for credit losses was $40 million compared to a small recovery last year.

Moving to Slide 14. Wealth Management net income was $301 million, up from $229 million last year. Traditional wealth net income of $246 million was up 22% from last year, benefiting from higher revenue, including the impact of a legal item last year.

Average loan growth was strong again at 14%, and deposits grew at 12% as we continue to diversify our product mix. Insurance net income was $55 million, up $28 million from a relatively low level last year. As mentioned earlier, adjusting items this quarter include a $25 million after-tax net impact from reinsurance claims related to Japanese typhoons that were incurred after our communicated decision to wind down this business. Expenses were down 2%, reflecting below trend expenses in the current quarter and a legal provision a year ago.

Turning now to Slide 15 for Corporate Services. The net loss was above trend at $94 million compared to a net loss of $65 million a year ago. Results decreased primarily due to lower revenue, excluding teb partially offset by lower expenses.

To conclude, the fourth quarter performance demonstrates good momentum in our businesses and the benefits of our diversified business mix. Heading into 2020, we're focused on continuing to execute on our consistent strategy to grow our North American business, build customer loyalty, leverage technology and drive efficiency.

And with that, I'll hand it over to Pat.

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Patrick Cronin, Bank of Montreal - Chief Risk Officer [5]

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Thank you, Tom, and good morning, everyone. Starting on Slide 17, the total provision for credit losses this quarter was $253 million or 23 basis points, a decrease of 5 basis points from last quarter. Both provisions on impaired and performing loans were lower this quarter compared to the prior quarter, with PCL on impaired loans down $12 million and provisions on performing loans decreasing $41 million.

Turning to the credit performance in the businesses. Canadian consumer impaired loan provisions decreased $23 million quarter-over-quarter to $110 million. The improved Canadian delinquency rates disclosed in the supplementary financial information package also supports what we're seeing as continuing good underlying loan performance in the Canadian consumer portfolio.

Canadian commercial P&C on impaired -- PCL on impaired loans at $24 million is also down from the prior quarter reflecting a constructive credit environment across most of the portfolio.

U.S. consumer PCL on impaired loans was $17 million, up from a low result of $8 million last quarter, but well within our expected range for this portfolio. U.S. commercial PCL on impaired loans decreased slightly from the prior quarter to $49 million, reflecting the stable credit performance that we saw across most of our commercial portfolios.

Capital Markets PCL on impaired loans was $32 million, the large majority of which was in oil and gas, mostly related to 3 accounts. The provision for credit losses on performing loans was $22 million, a decrease of $41 million from the prior quarter. The decrease from the prior quarter reflects somewhat more positive macroeconomic variables and modestly lower balance growth versus Q3.

Turning to Slide 18. Formations were $799 million, as an increase in business and government formations was partially offset by a decrease in consumer formations. The largest increase in formations was in manufacturing across a range of sectors and geographies with no specific theme. While oil and gas formations were also up from the last quarter with a few names driving most of the increase. Oil and gas gross impaired loans ended the year at $404 million, of which over 90% is based in the U.S. Our risk approach in the U.S. E&P space is to lend conservatively against proven reserves and that has protected us well against losses in the past. Additional details on our oil and gas portfolio can be found on Slide 23 in the appendix.

On gross impaired loans, our ratio of impaired to total loans was 58 basis points, well within our normal range. We continue to see high levels of impairment in the U.S. agricultural portfolio. However, given the relatively small size of the U.S. ag portfolio at $2.1 billion and the fact that much of the impaired loans are collateralized by land, we remain comfortable that loss rates in this segment will be modest.

Our Canadian agricultural portfolio continues to experience low levels of impairment.

Slide 19 provides an overview of our loan portfolio by consumer product and industry. Overall portfolio growth was 1.6% quarter-over-quarter consistent with our comments earlier this year that loan growth would moderate.

Looking back at the full year, provisions on impaired loans were $751 million or 17 basis points, which included the benefit of some larger recoveries in Q1 and Q2, reflecting the strong efforts of our loan workout team. That rate of 17 basis points compares to a full year rate of 18 basis points in 2018.

Provisions on performing loans were $121 million in the year, which was within our expectations, given loan balance growth and changes in scenario weights during the year. The performing loan provision raised total losses to 20 basis points for the full year at the low end of past guidance.

The performing loan allowance on the balance sheet increased to $1.6 billion in the year, providing 2.1x coverage of our trailing 4-quarter impaired losses, confirming that we are prudently reserved. You will note that in our annual disclosure, we've added a moderate downturn scenario to provide a view of potential credit performance during a more modest recession compared to that in the adverse scenario.

Looking ahead to the next year, based on the current economic forecast and our outlook for loan balance growth, we expect to continue the loss rates of recent orders with a total PCL rate in the low to mid-20s, subject to some quarterly variability.

I will now turn the call over to Darryl.

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William Darryl White, Bank of Montreal - CEO & Director [6]

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Thanks, Pat. Looking ahead to next year, we are going into 2020 with confidence and good momentum in our businesses.

It's a general balanced optimism that's shared by our clients. In fact, in the past couple of months, many of them have expressed more confidence to me on general outlook than they did several months ago. We expect the opportunities they're seeing in this somewhat more stable environment will support their propensity to continue to invest and build for future success.

In Canada, we expect macroeconomic conditions to remain constructive in 2020, improving modestly from 2019 with stable interest rates and unemployment running at a 4-decade low of 5.6%. In the U.S., we expect economic activity to slow modestly in 2020 in response to trade protectionism. With 3 interest rate cuts in the past 4 months, lower interest rates should provide support to the U.S. economy in 2020. We intend to continue to grow by taking market share in this environment.

As we said before, we anticipate that commercial loan growth will moderate somewhat from the growth rates that we've seen for some time, both in Canada and the U.S. On credit quality, as you've just heard from our Chief Risk Officer, we're confident in the strong credit quality of our portfolios, and we expect to see relatively stable credit environment in 2020 with PCLs in the low to mid-20s.

Overall, while we anticipate some revenue headwinds in 2020 in a few areas, including absorbing the full impact of 3 U.S. rate cuts in the early part of the year, we'll continue to grow our business. And we will maintain disciplined expense management, targeting overall expense growth around the 2% level for the year with each of our operating businesses working to deliver positive operating leverage.

Our financial objectives remain unchanged. Our goals over the medium-term are to achieve average earnings per share growth of 7% to 10%, return on equity of 15% or more and an annual net operating leverage of 2%. While some of these targets may be more challenging in the current environment, we remain committed to them in the longer term. Our capital position remains strong with a CET1 ratio of 11.4%. We're well positioned to support our long-term performance while staying alert to opportunities for growth.

To conclude, I'm very proud of what we've accomplished in 2019. We've made good progress on our strategic priorities, and I feel good about the clear momentum we have going into 2020.

We have energy, resilience and focus. We see growth potential across all of our businesses. We know where we're heading, and we're accelerating how we'll get there. By intensifying our focus on areas of competitive strength, we will continue to grow long-term value for BMO stakeholders.

And now I'll turn the call over to the operator for the question-and-answer portion of today's presentation.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Meny Grauman with Cormark Securities.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [2]

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I wanted to ask about the restructuring charges, specifically, if you could talk to how you decide to take restructuring charges. And specifically, I'm wondering when you took the Q2 charge in Capital Markets, was the plan to take this Q4 charge? Or did something change in your outlook? And what was that?

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Thomas E. Flynn, Bank of Montreal - CFO [3]

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It's Tom. I'll take that. Thanks for the question. So the -- I'll firstly deal with your question around the Q2 capital markets charge. When we took that charge, we were not expecting the fourth quarter charge that we took. And as you know, we absorbed that charge within the capital market results. And the way we think about it, this Q4 charge is different in that, it reflects a bank-wide program to, as we've said, accelerate delivery of our priorities, including improving efficiency. So when we're doing things on a bank-wide basis of this magnitude, we take the approach that we've taken to putting the charge in corporate and adjusting.

And an answer to what might have changed or shifted. As we thought about the year we were in and then look forward to next year, we wanted to be in a position to continue to drive the efficiency. And although we feel very good about our relative momentum and we feel good about our ability to grow next year, in a couple of places, there will be a little bit of pressure. And to, I would say, offset or more than offset that, we wanted to be in a position to drive very low expense growth. And Darryl has talked about the target of 2%, which is what we're shooting for and the charge is an enabler of that and an enabler of us achieving the midterm efficiency target that we've set of 58%.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [4]

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And just as a follow-up. When you talk about the pressure that you foresee, is that primarily margin pressure or is there something else when you talk...

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Thomas E. Flynn, Bank of Montreal - CFO [5]

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No, the margin pressure in the U.S. is a part of it. And you saw that in the U.S. P&C margin in the quarter. There's a little more that we'll roll through next quarter. And GDP growth for the U.S. is projected to be down slightly next year. Our economists actually have Canadian GDP up next year compared to '19. So we're not expecting a big shift in the environment, but there are pockets of pressure. And again, we do feel good about our ability to continue to outperform, which we do think we've done in both of our P&C businesses, in particular, over the last several quarters.

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Operator [6]

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The next question is from Gabriel Dechaine with National Bank Financial.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [7]

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Just a quick follow-up on the restructuring charge of the cost savings that you're expecting. Can you give me a sense of how that's going to be split across segments, where am I going to see it? And then I've got a follow-up on U.S. loan growth.

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Thomas E. Flynn, Bank of Montreal - CFO [8]

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Yes. So it's Tom. Thanks for the question. I guess I'd say it's a bank-wide focus and set of initiatives as we've talked about. And so I would expect the savings that we've talked about to flow through each of our businesses in a fairly representative way. And it's fair to think about that both by operating group and by geography. And so it's true on both dimensions.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [9]

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All right. And the question on the loan growth in the U.S. It's been mid-teens for a few quarters now. And that's a good thing to see. People like growth, but on the other hand, it's generate some concerns that it brought upon additional risk to the bank [because it's outsized] growth versus the industry. And I'm looking at the oil and gas portfolio as one of the drivers. In the past few years, it's had phenomenal growth and now we're starting to see losses. Hopefully, you can help me frame the oil and gas growth and some of the credit issues we're seeing today.

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Patrick Cronin, Bank of Montreal - Chief Risk Officer [10]

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Sure. It's Pat, and thanks for the question. I'll speak specifically to oil and gas. Yes, the growth has been strong over the course of the last couple of quarters. I think you'll see that the growth actually is starting to moderate in this quarter, and we would expect that to be the case going forward. The thing we like from a credit perspective in this segment. Particularly in the U.S., is that most of that lending is reserve-based. And if you look at the U.S., figure of the U.S. exploration and development segment of the portfolio, 99% of that segment would be reserve-based lending. And so we would lend pretty conservatively with fairly reasonable loan-to-value against proven reserves.

And so we think that actually protects us quite well in a downturn. And so even though you might see formation rates and GIL rates higher in this segment, the -- we expect the provision for loan losses to be reasonably low. So you'll see the PCL we took this quarter relative to the formations, you'll see it's a rate of around 15%, 17%.

We're pretty comfortable with that profile as we grow the book. It's a sector that we think we have a North American and, arguably, a global franchise. So we really have good lending standards and good bankers in the segment. We've been in it for a long time. We understand how the cycles work, and we're good at workout. So we're pretty comfortable with the growth rate, especially given the secured nature of the lending that we do there.

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David Robert Casper, Bank of Montreal - Group Head of North America Commercial Banking [11]

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Let me -- this is Dave. Let me just add a little bit to your question on the U.S. loan growth, which, on the commercial side, would not include oil and gas, but was high, and I think you mentioned 15%.

I would expect in the next year that it would moderate from that. The growth has really come from adding new customers throughout the United States, where we still have a lot of white space. We have not, in any way, compromised on the risk appetite that we've had. It continues to be the same. And I'm very comfortable with the growth we've had. But I would expect, just for similar reasons we talked about before, there would be some moderation in 2020. Does that help?

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [12]

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It does.

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Operator [13]

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The next question is from John Aiken with Barclays.

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John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [14]

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Pat, just carrying on from Gabriel's question, we've seen the gross impaired loan ratio ticking up. Now I understand -- I completely get with the underlying security how you can have provisions falling when formations are going up. But this has been a trend for the last 3, 4 quarters where we've seen greater amounts of formations. How comfortable are you that this is going to ease off or expectations that we're going to see continued impaired formations going through for 2020 at a similar pace?

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Patrick Cronin, Bank of Montreal - Chief Risk Officer [15]

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Sure. And thanks for the question. Yes, and I think we've been flagging for a while that we would have -- we expected the impaired loan and the PCL rate to drift up really from a really benign level that you would have seen in 2018 and 2019. I mean if you look back at Q4 '18, the gross impaired loan rate in the portfolio was the lowest we saw in a decade.

And so there's light -- just logically going to be some upward drift in that. At 58 basis points, just to put that into context for you, the average GIL rate over the past 3 years was 56 and the past 5 years was 59, so I actually see that rate in more or less of a normal zone for where we are in the cycle. I'll split it though into 2 pieces. Consumer, I would say, is actually quite strong. Wholesale is a little bit towards the higher end of the range. And as we've noted, that's really being driven much more by some sector-specific issues related to oil and gas and agriculture. Those 2 sectors make up 40% of our total gross impaired loan portfolio right now. And as we've talked about in the past, we expect loss rates to be low there because the oil lending is secured against reserves and the ag lending is secured against land.

So I'm not uncomfortable with where we are. I think we've been expecting a drift upward in the loss rate. And I would expect it to stabilize at this level going forward, given a fairly stable economic environment that we're seeing, and fairly modest GIL rates in many of the other sectors that we're growing in business and government.

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John Aiken, Barclays Bank PLC, Research Division - Director & Senior Analyst [16]

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That's great. But I mean when we take a look at the U.S. business formations, I understand that you can take a look at oil and gas and even on the ag side as being a little bit more, I guess, specific, but we actually are seeing inflation in some of the others like manufacturing, even though you said it was broad-based. Is the fact that we're seeing hot spots varying -- to varying degrees in different segments? Is this concerning? Or are you still quite confident that, like you said, leveling off at 58 -- 55 -- sorry, 58 basis points is expectations going forward?

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Patrick Cronin, Bank of Montreal - Chief Risk Officer [17]

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Yes, I would say it's not concerning. I'll deal with manufacturing specifically because that was one of the bigger formations this quarter. Formations, as I'm sure you've seen in the past, can be quite lumpy. And if you look at manufacturing, in particular, you look back at formations and GIL rates over the course of the last 2 years, you'll actually see they've been running low, including even in Q3 of this year. So this is quite specific to this quarter. And this, to me, reflects the normal lumpiness that you see in a big segment like manufacturing. That really reflects 4 names, 1 in Canada, 3 in the U.S., no theme to them from completely different subsectors. So if your question is, am I seeing systemic themes within the portfolio reflected by those kinds of formation rates, the answer is no.

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Operator [18]

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The next question is from Steve Theriault with Eight Capital.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [19]

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If I could just start with a follow-up on capital. Tom, based on year-end in the 15 to 20 basis points of headwind, it looks like -- for Q1, it looks like you could be -- with normal accretion, you could be below that 11.5% level through much and maybe all of 2020. So wondering is there anything you're looking at or aware of that might provide some upside to the CET1? I guess I'm asking in the context of prior indications that the buyback is on pause here until you get above 11.5%?

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Thomas E. Flynn, Bank of Montreal - CFO [20]

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Yes. So a few things. In Q1, we will have, as others will be adjustment. So our impact for that is in the 15 to 20 basis points level. And we talked normally about the ratio going up by 10 to 15 basis points per quarter. That continues to be our expectation. And as we've said for the last few years, given the strong commercial and corporate loan growth we've had, we're more likely to be at the lower end of that range than the upper end of the range.

In terms of buybacks, the focus on that, from our perspective, goes up, I'd say, as we approach the 11.5% ratio on the CET1. And so as we look forward, there's some potential for activity in the middle-ish of the year. And exactly where we land will be a function of the loan growth that we've got, but we think there's a reasonable chance that mid-ish year could be Q2, could be Q3. There's some activity under the buyback as we approach that 11.5% level.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [21]

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Okay. That's helpful. And then I did want to ask on the U.S. capital markets, very strong even with the oil and gas provision. If we look through that credit charge, it looks like earnings would be in U.S. dollar terms well over $100 million and pretty close to double run rate from last year. So just, Dan or Tom, maybe you can talk a bit about the sustainability there? And how much of that lift is due to the KGS acquisition this year.

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Thomas E. Flynn, Bank of Montreal - CFO [22]

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Well, thanks for noticing that. Yes, we had a very strong performance in the U.S. this year. As we've talked about for a while, we've been making good investments in people and in the KGS acquisition so that, that platform will be scalable and allow us to continue to grow. I think as we looked at, at this year, we wanted to get over the next 5 years somewhere between 45% and 50% of our revenues out of the U.S. We've achieved that target now and are bullish that we can increase beyond that. We are working towards our other targets to double market share as we go forward. And so all of those are building to what I think is a relatively robust U.S. outlook and very sustainable from where we are today.

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Operator [23]

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The next question is from Robert Sedran with CIBC Capital Markets.

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Robert Sedran, CIBC Capital Markets, Research Division - MD & Head of Research [24]

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I just wanted to start with a follow-up on the restructuring charge, and it's, I guess, for Darryl. I mean, you mentioned this is probably the last one. But there's been one every year for a number of years. I'm curious what gives you the confidence and what should give your shareholders the confidence that this is truly the last one for the foreseeable future?

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William Darryl White, Bank of Montreal - CEO & Director [25]

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Yes. Thanks, Rob. It's a good question. Let me give you a little bit of context. If I go back over the last couple of years, you'll have noticed that I've been asked in some conferences, might we take another charge, and my response has been, we don't know, but if we do, it's very probable that we will say that we will not need to do it in the foreseeable future. So that's exactly what we did today. And in unpacking that, when I think about your question, there're a few things that are going on that are different. The first is, as you've seen, this is a sizable move. This is 5% of the bank's global population that's in scope. The second is, you heard me say and you heard Tom say quite clearly, we're holding the line a lot more tightly in the normal course on expense growth. You saw us at 2.6% expense growth in the third and fourth quarter of this year. That was not benefiting from this restructuring charge. So we're on a new path as far as a continuous improvement of the operating efficiency of the bank, and this charge is designed to accelerate that path as we go forward. And it's also the case, Rob, that if you think about the management through the spine of the organization. And you looked to the discipline that we expect from managers, and this is, I would say, an important change in terms of how we're looking for people to make operating decisions every day. We're looking for people to invest in areas where we have opportunities for growth and slowdown in areas where we don't without reliance on this technique and the assist of a charge.

And so that's a very sort of clear message to the entire organization in terms of how we expect to manage ourselves going forward. So when I put all those together, in addition to the real benefits that we're starting to see from technology and digitization, we're confident in telling you that we'll retire this play from our playbook.

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Robert Sedran, CIBC Capital Markets, Research Division - MD & Head of Research [26]

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Okay. And just a quick question for Cam. I guess the margin has been up 4 basis points in each of the last 2 quarters. I can't imagine that, that is the rate environment. So is it business mix? Or is there something else going on? And how sustainable do you think this level of net interest margin is for you?

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Cameron Fowler, Bank of Montreal - President of North American Personal & Business Banking [27]

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Yes, I'll take that. It's Cam speaking. It's a combined effect of mix and some flow-through of the longer rates. Primarily on the mix side, though, you can see the deposit growth in there, and where we're seeing growth in other areas, they're in the higher-margin areas that we've not been as good in particular in cards. So that with commercial lending, I think, is helping. With respect to outlook, I'd say we sustain it. It will be broadly flat through '20 is what my expectation is.

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Operator [28]

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The next question is from Doug Young with Desjardins Capital Markets.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [29]

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Just wanted to go back to the restructuring charge that you took in capital markets in Q2. And so when I look at what you said then in terms of guiding to it, but I think it was and correct me if I'm wrong, $40 million of savings this year, $80 million next year, I'm surprised we haven't seen more of a drop in the capital market expenses. I'm hoping you can unpack that. And is that $40 million of savings this year? Has that been achieved? And should we still be expecting $80 million next year? So just hoping to get a little more detail on that.

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Thomas E. Flynn, Bank of Montreal - CFO [30]

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Sure. So in terms of the performance this year, yes, we have saved the $40 million that we advertised. The run rate is going to be $75 million versus the $80 million we talked about in Q2, and that's just really a slight change in people that we've looked at. And obviously, with our participation here in corporate-wide charge, we expect higher savings next year. And so as we go forward, I think that number you're using around $75 million for next year is a good number.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [31]

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And is there a reason why we haven't seen more of an expense reduction overall over the last few quarters in capital markets? Is there something sticky in there?

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Thomas E. Flynn, Bank of Montreal - CFO [32]

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Yes. I think the expenses have come down materially. If you look at it on a full year basis, I think the gross number is up 14%, 13.5%. But if you take out the acquisition of KGS and you take out the restructuring charge we took in Q2, that's about 2% for the year.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [33]

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Just -- I'm just -- because I look at the [NIX] ratio being just over 67% in Q4 this year, thinking it was the same last year. So I just -- anyways, I'll move on. I just -- I was just a little confused by that. And I guess, Tom...

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Thomas E. Flynn, Bank of Montreal - CFO [34]

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Just one question there just for you. I mean I think I see it a little bit tighter than that, but we delivered positive operating leverage this quarter, which is the first quarter this year. And as we look forward, we expect to deliver meaningful operating leverage next year.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [35]

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Okay. And then Tom, just on the reinsurance business, is -- how long -- can you remind us how long the tail is on this? I mean when does that risk roll off?

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Thomas E. Flynn, Bank of Montreal - CFO [36]

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Yes, the tail is pretty short. So by the middle of next year, it's basically gone. It's not entirely gone, but it's very small at that point.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [37]

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So middle of fiscal '20.

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Thomas E. Flynn, Bank of Montreal - CFO [38]

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Yes.

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Operator [39]

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The next question is from Sumit Malhotra with Scotia Capital.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [40]

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I'll start with Tom. The statement that expense growth in 2020 will be in the range of 2%, that's not overly different from what we saw in the second half of this year and, frankly, not different from where I see expectations for the bank before this charge was announced.

So is the benefit that you're deriving from these savings that you're talking to us about, having to be reinvested in other areas of the business? Because I know you look at these numbers very carefully as well. It just doesn't seem like that targeted expense growth is that different than we otherwise would have had.

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Thomas E. Flynn, Bank of Montreal - CFO [41]

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Yes, thanks for the question. I guess a few things. Firstly, we absolutely do continue to invest in areas of the business where we think there are good growth opportunities. We've been doing that for the last 3 years, and we continue to do that. And I'd say, we're pushing ourselves to differentiate more in terms of how we allocate resources, so where we see opportunities, where dedicating resources and where the reverse is true. We're going in the other direction. And then there is a bit of a timing issue here. So I talked about in my comments how the benefits from the charge in fiscal '20 would be $200 million. And by Q1 of '21, the annualized run rate would be more like around $375 million. And so the timing factor is part of the picture as well.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [42]

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So -- and then certainly, I think when you've announced these charges over the years, it's always been the -- you will build into a greater level of savings. So I think what you're saying is as -- the savings or the expense growth in 2020 may not be that different than we were expecting, but perhaps it lowers the 2021 and beyond level of increase that the bank will achieve.

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William Darryl White, Bank of Montreal - CEO & Director [43]

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Gabriel, it's Darryl. I'll just comment on this as well. I would say...

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [44]

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It's Sumit, by the way.

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William Darryl White, Bank of Montreal - CEO & Director [45]

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Sorry, Sumit.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [46]

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Gabe is a charismatic guy, though. I'll take...

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William Darryl White, Bank of Montreal - CEO & Director [47]

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You guys are all starting to sound the same to me. So that's fine. Look, Tom is nodding his head. The answer to your question, Sumit, is yes. The additional point I wanted to make is when you look at 2%-ish for 2020, another way to think about it is that as you guys know, you've got certain expenses that are much higher than that, and you've got some that are much lower than that as you decompose the expense base of a bank.

For example, you'll have certain costs that you're locked into contractually. You'll have pension, you'll have real estate, you'll have certain things that will increase at a mid- single-digit expense rate. You'll have technology that, as we've told you, we've invested above the 10% level for the last 3 years. That will moderate a little bit into the mid- to high single digits as we go into next year. So you have a whole bunch of things that pull the weighted average expense growth up and then you have a whole bunch of others who are, frankly, we're looking at -- and this is where the impact of the charge will come in. We're looking at direct controllable expenses across functions and groups that will be negative.

And so when you bring all that together, you get to the number that we're giving you at 2%-ish. And I think the way you might think about it is that relative to the past couple of years, when you think about the expense rate of the bank growing at 3.5% or 4% or a little over 4%, that comparable relative to 2% is, in our mind, a pretty big difference in a commitment to shareholders.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [48]

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The fact that this charge wasn't contemplated as recently as 6 months ago from what we heard, Darryl, did you decide that the 2021 NIX target of 58% or maybe even the 7%-plus EPS growth that you target, I know that's more medium term, did you make the determination that those targets would be unable to be achieved without a restructuring charge of this magnitude?

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William Darryl White, Bank of Montreal - CEO & Director [49]

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Yes. I think the way to think about it is that this accelerates our ability to get there sooner. And we're investing in this now. We don't expect to do it again. And for sure, Sumit, in the last half of the year, we saw things that we didn't see in the first half of the year, including 3 rate cuts in the last 4 months. And so whether that was in everybody's forecast or not 4 months ago, 5 months ago, here we are today, and that will have some impact as we talked about for us and everybody else as you guys have shown in your modeling on the revenue side. So I'd say it's a combination of all those things.

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Operator [50]

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The next question is from Scott Chan with Canaccord Genuity.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [51]

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I just had a follow-up question to Meny's question on U.S. margin. Tom, you talked about fiscal Q1 getting impacted. Again, can you kind of just clarify the comment? Are you talking about a higher sequential decline in margin in fiscal Q1?

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Thomas E. Flynn, Bank of Montreal - CFO [52]

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Yes. So in Q1, we'll just have some of the roll through from the Fed cuts that we've already had. So they're not fully in our numbers. We think that will result in the Q1 NIM being down about 10 basis points, so down a similar amount in Q1 compared to Q4. And then after that, we're expecting more stability. And we don't think the Fed moves again. We'll see how that plays out. But on the assumption that they don't move, and given the expectation that there will be some moderation in loan growth, we think that the margin is going to be more stable after the Q1 point. And then in Canada, we do think, as Cam said, that the margin will be fairly stable through the course of the year.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [53]

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Okay. And if I can just dig in 1 more just on the Canadian loan portfolio, I see that consumer and other personal continues to kind of increase, and we're kind of seeing, obviously, higher leverage from consumers and some delevering, I think, across some of your peers. What's driving that incremental growth in those portfolios for BMO?

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Cameron Fowler, Bank of Montreal - President of North American Personal & Business Banking [54]

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It's Cam speaking. I heard you say what's driving the consumer lending growth in Canada? So I'd say a couple of things. On the bigger change side of things, we have quite strong card growth. You can see that that's been the result of a battery of activities linked to stronger use of digital and data around our portfolio management.

And most of that is actually focused on doing more with our existing customer. In addition to that, in the cards line, you'll see more activity on the small business side, which is the result of 2 things, a new product, as a product suite that came out in recent quarters as well as improved product capabilities that are more digital in nature linked to line of credit. So that's what I'd say on the card side.

On the -- there is similar side of capabilities that are actually driving the line of credit side on the personal -- in the last several quarters, we've seen stronger growth in that regard.

Again, more around digital and data capabilities with existing customers is underneath that. And then finally, on the [resel] side, we've said that we would expect to be at or just above the market here that we focus on the proprietary channels. And with respect to that, I think the combined effect of some sales force adjustments that we've made by region as well as offering and digital capabilities are driving some strength there at 5%. So there's no one thing here, which I think is what we should be looking for.

I think to your point at the beginning about where the Canadian consumer is at, I think it's conceivable that some of that activity does slow in the market modestly over the next several quarters, which probably isn't a bad thing.

I would expect our capabilities and momentum will likely continue about where we are because we still have opportunity with our existing base. And I would say also that the housing market is a little stronger probably than most people thought a couple of quarters ago, and that will be to the good.

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Operator [55]

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The next question is from Mario Mendonca with TD Securities.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [56]

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First maybe for Tom. Outside of the domestic P&C and U.S. P&C, did you see any meaningful change in margins that the bank generated in the quarter?

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Thomas E. Flynn, Bank of Montreal - CFO [57]

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I guess the only other thing I'd highlight looking at the all-bank quarter-over-quarter X trading margin is that we did have some pressure in the corporate segment. And that came through as a result of holding higher levels of liquid assets. So that was a contributor to the all-bank X trading quarter-over-quarter move.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [58]

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But anything specific ignoring the mix?

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Thomas E. Flynn, Bank of Montreal - CFO [59]

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No, no. The changes really, I would say, were driven by mix and the Fed cuts in the U.S.. And so other than the higher level of liquidity in corporate, there was nothing at all unusual.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [60]

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Okay. Just a quick follow-up and maybe not a quick follow-up actually. I'm looking at the improvement in the bank's efficiency ratios since 2015, and it's been meaningful. It looks like a solid maybe a little under 300 basis points. Maybe 270 basis points is what I've been looking at. And in that time period from 2,000 and maybe a little more -- yes probably over 300 basis points. In that time period, the bank has had some meaningful restructuring charges well above $600 million pretax.

Your outlook over the next 2 years would imply another, say, 300 basis point improvement in the NIX ratio from where it stands today, I think. Yes, that's about right, with, call it, $488 million pretax and restructuring charges. And the reason I'm going through the numbers here is, it seems to me like the next 2 years, the revenue environment is going to be more challenging than the last 5 years, but yet you're looking for as meaningful an improvement in the efficiency ratio over a much shorter period of time. All of this to really get a -- I mean what is your level of confidence in this 58%?

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Thomas E. Flynn, Bank of Montreal - CFO [61]

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It's Tom. So I would say we are focused on the delivery of the 58%. I won't quibble with your numbers, but I will say ours are a little different. So since 2015, the adjusted efficiency ratio is down 410 basis points. You might cut the number slightly differently, but the adjusted number is down by 410 since 2015.

And as we look forward, we're going to be focused on growing the business, investing where we see opportunity and being very aggressive on expenses elsewhere. That will drive the low expense growth that we've talked about for next year. And then over the last 3 years, we and others have had a very significant level of investment in technology.

And our tech spend, as we've talked about, has been growing at a double-digit rate on a base that's north of $2 billion. We expect that level of spend to moderate as we go forward. And that's because we've got good capabilities in place. We've made lots of investments, and we think we can afford to, with that, dial down the growth a little bit, which will help. But some of the savings that we generated from efficiencies absolutely went to funding in effect that technology spend.

And you hear us talking about our diversified business mix. We do like the mix we've got. It's roughly 40% P&C Canada, 20% across U.S. banking, wealth and capital markets. And we do think we've got upside in the Capital Markets business coming from the investments that we've made in the U.S. We think our wealth business will have good growth as we look into next year and good operating leverage. And as we look at relative performance in the P&C businesses, we feel good about heading into next year. So I wouldn't say the target is an easy target, but we think with all of the things that we've got underway, it's one that is with a lot of hard work achievable.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [62]

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And the top line to get to that efficiency ratio, you're not implying -- you're not suggesting anything special about the top line, just sort of your standard maybe 5% top line growth you're suggesting would be sufficient.

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Thomas E. Flynn, Bank of Montreal - CFO [63]

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That's correct. Like mid-ish single digits top line.

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Operator [64]

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We have time for one last question, which will be from Darko Mihelic with RBC Capital Markets.

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Darko Mihelic, RBC Capital Markets, Research Division - MD & Equity Analyst [65]

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I just wanted to revisit the Capital Markets business, and I'm looking specifically at your supplemental, and I'm looking at Page 11 in the sub pack. And what I'm looking at there is the trading component. And if you look at line 20, it's bouncing around all over the place this year from $81 million, $294 million, $122 million, $203 million. I'm just wondering -- I don't get this granular in my model, but I am looking at this overall and I'm wondering, is this KGS-Alpha? What's causing the volatility? And how should I think about trading going forward from here? Is this like the new run rate, the new normal? Or should we expect significant growth here on the interest rate side and overall total trading?

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Daniel Barclay, BMO Capital Markets Corp. - CEO & Group Head [66]

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It's Dan here. Yes, and I think the dynamic, when you take a look at some of those quarter-over-quarter numbers, is there's an impact in what we call our structured note business. And that structured note business, when we look at the way we trade, sometimes shows up in equity, sometimes shows up in interest rates. And so that's what's driving a lot of that quarterly volatility.

As we look forward, I think an average over those quarters is probably the right way to look at it. And we do anticipate growth. We have made the investment in KGS, our securitized products business. We continue to make investments in that and do see meaningful growth coming from it over the next 24 to 36 months.

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Darko Mihelic, RBC Capital Markets, Research Division - MD & Equity Analyst [67]

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Okay. Meaningful growth, how would you characterize meaningful growth?

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Daniel Barclay, BMO Capital Markets Corp. - CEO & Group Head [68]

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I think for us, as we've talked about on Investor Day, we're looking for a U.S. platform to grow at kind of a 10% revenue CAGR, and I think that would be consistent with that.

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Darko Mihelic, RBC Capital Markets, Research Division - MD & Equity Analyst [69]

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Okay. Quick question, last one, I promise it will be fast, going to the U.S. P&C business.

Dave, what might help us is -- just going back to Gabe's question about loan growth, because I understand that your business is really in about 8 core states and then you have some specialty sectors. What would be great to know is the growth that's happening, say, outside of a couple of core states. So if I were to say core states for you, I would always think of Illinois and Wisconsin. And if I think about this over a 5-year period, how much growth has come from the other states and/or the specialty sector? And I don't expect you to have these numbers at your fingertips, but it'd be very helpful to know kind of what's driving that growth? And then the question circling back is why does it moderate? If you are growing in specialty in these other states, why does it actually have to moderate?

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David Robert Casper, Bank of Montreal - Group Head of North America Commercial Banking [70]

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So good questions, Darko. The first part is, the growth has been really a national business for a long period of time. We absolutely do business in those core states on the commercial side that we have and we have for the last 20 years, despite where our people may be and all these specialized groups and in some -- in geography. We're out in the marketplace all the time. So I would say well over 50%, well over 50% of where the loans are actually booked, but where the clients are, is outside of that core business and has been and continues to grow.

And for example, our asset-based lending business or our dealer finance business or our food and consumer business, that's a national business and continues to go. The reason I think it will -- I don't think it will subside because we've exhausted all of our opportunities. I think it will subside to some extent, if it does, just based on the general economic view. So not a slowdown from our standpoint other than just what I think would be slower economic growth in the U.S. Does that help?

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Darko Mihelic, RBC Capital Markets, Research Division - MD & Equity Analyst [71]

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Yes, it does.

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Operator [72]

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Thank you. This concludes the question-and-answer session. I would now like to turn the meeting over to Darryl White.

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William Darryl White, Bank of Montreal - CEO & Director [73]

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Thank you, operator, and thank you to all of you for your questions. In conclusion, as I mentioned earlier, we're going into 2020 with good momentum in all of our businesses. Our commitment to our strategic priorities and key areas of focus will continue to guide us as we build on the decisions that we've made, and the foundation we've established to the position that brings the bank forward with continued good performance.

All of our employees are united in our ability to compete effectively, serving our customers, shareholders and communities well. Thank you for joining the call today. We wish all of you the very best for the holiday season and a successful year ahead

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Operator [74]

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