Good morning, and welcome to BMO's North American Commercial Banking Investor Event. I'm Jill Hominek, Head of Investor Relations. We're coming to you live today from Toronto, Chicago and Dallas Fort Worth. Thank you all for joining us. We have an informative session this morning.
Daryl White, BMO's CEO, will provide opening remarks. You'll then hear from Dave Casper and his commercial banking leadership team. And then from later in the day, we'll hear from Pat Cronin and the Enterprise Risk Management team. Each presentation will be followed by a question and answer period where we will take questions from preregistered analysts and investors. Daryl will join the Q and A after the risk presentation.
Tom Flynn, BMO's CFO, will wrap up the morning with closing remarks. On behalf of those speaking today, I'd like to note that forward looking statements may be made during this presentation. Actual results could differ materially from forecasts, projections or conclusions in these statements. I would also remind you that the bank uses non GAAP financial measures to arrive at adjusted results. Our presenters will generally be referring to adjusted results.
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 third quarter twenty twenty report to shareholders. Before we get started, I'd like to take a moment on behalf of BMO to acknowledge Orange Shirt Day. Orange Shirt Day is held every year in Canada on September 30. It recognizes the legacy and impact of Indian residential schools and educates and promotes awareness about the impact this school system has had on indigenous communities for more than a century. With that, I'll now turn it to Darrell White to open today's session.
All right. Thank you, Jill, and welcome, everyone. And thank you all for connecting with us today virtually. This is a discussion to profile our North American commercial bank, which is a great business for BMO. It is a top tier business in North America.
In fact, it's in the top 10, which is a position that is coveted by hundreds of competitors. And it is the only at scale, fully integrated commercial bank on the continent. This is an important discussion today, an important event for us because it's important for all of you, our shareholders. It's our time to spend time with you to pull back the curtain a little bit and to look into the nuts and bolts of this business and to explain to you why this business has been so successful in the past and at the same time, why we are so confident in its future. So when you leave here today, my hope is that you go away with two things.
First, the fact that the strength of the North American commercial business at BMO is a key differentiator. And second, the way we manage risk around this business is a competitive strength. And that's based on our historical track record, it's based on what we see today, and it's based on what we expect for the future.
So we'll talk a little
bit today about the secret sauce that makes this team work and makes this business work. And you will see in that the actual teamwork between the frontline professionals and the risk experts. Because this is a franchise that has been built through sharp execution, through strategic acquisitions and disciplined risk management. It's a business that thrives on expertise, on the quality of our clients. They choose us and we choose them and on our reputation.
And reputations, of course, aren't built overnight. They're built one client and one deal at a time. And this business has been built over many, many decades, and the relationships within them are also measured in decades. The experts that you will meet today are the key. The reputation is the result of delivering on a strategy and serving those clients through the cycle.
The North American Commercial Bank at BMO represents about 30% of total bank revenues and its strategic reach as a referral benefit that extends to other businesses. And this is really significant. So I'm going give you a couple of examples. First, in capital markets, in the first half of this year, referrals from the commercial bank were up 150% and left leads were up 130%. In wealth, in many of our locations, we have co located wealth advisers and commercial bankers.
You're going to hear later in the agenda our commercial banking review of our expansion into Dallas Fort Worth from Todd Singer. In Dallas Fort Worth, we have followed with a private wealth offering. And in private wealth, we have closed business from every single commercial banking relationship manager in the market. In the Canadian personal and business banking, we've got 95% of our successful bank at work program participant referrals coming from the commercial bank. So those are some examples, and we'll show you today that each of our businesses benefits from this robust, leading, cross border commercial bank.
And it has real impact. The North American Commercial Bank at BMO is one of our best return businesses, and we expect that returns will continue to grow. If we look at ROE through the business cycle from 2015 to 2019, while we grew the business, while we were growing the business, the ROE improved from 17.9% to 19.3%. On efficiency, this business is consistently accretive in its contribution to the bank's overall efficiency ratio. So as we continue to make strides to increase the profitability of the business, we will continue to do that despite it already being one of the lowest efficiency businesses, and it's getting better as we grow.
I talked earlier about it being a North American integrated offering. An example of that, close to 2,000 cross border treasury payments solutions clients come from this business. And that growth is up 6% in 2020 despite a tricky operating environment that we all know. And we plan over time to continue to allocate capital and resources to commercial banking as the recovery develops and as we accelerate our bank wide focus on emphasizing ROE. At its core, the North American Commercial Bank is proof.
It's proof of the consistency of return that you, our shareholders, should expect. I'm confident in our strategy, and I'm particularly confident in the leaders that are delivering it and will continue to deliver it. They are the reason that our clients rank us at the absolute top of client loyalty scores. And they are the reason that we have an unrivaled track record of client success and risk management client success and risk management. So today, you're going to hear from a group of leaders first in the commercial bank that together have over one hundred and seventy four years of BMO experience.
Nobody embodies the spirit of BMO commercial banking like Dave Casper. The emphasis on culture, the customer focus, the dedication to profitable, sustainable growth, and he is the best risk manager I know in commercial banking. So Dave, I'm going to throw it to you in Chicago, over to you and your team.
Daryl, thank you. Our team has been looking forward to this opportunity for a long time. We were originally set to do this, I think, in April. And as you know, that had to get postponed. But we're really happy to do this.
We're proud of this business. We're really glad for the chance to give you, as Daryl said, a little bit more of an in-depth look at how we built it. We built it intentionally, and we built it in a disciplined way over time. The team will give you a perspective also about what lies ahead. So our last Investor Day was October 2018, just shy of two years ago.
And despite the fact that the world has changed in so many ways as a result of COVID, I'm really proud to say that you're going to hear from the same management team you heard from them with the same strategy. And that strategy is not two years old, it's far past that. We're the seventh largest commercial bank in North America today. We're number two in Canada. We're number one in the state of Wisconsin.
And we're number two in the city of Chicago, having come from number four to number three to number two. And all of that growth has been without an acquisition by BMO in the Chicago area since we bought Paris Bank in 1984. You'll also hear that we're increasingly more relevant in all of our specialized businesses. We're much more of a market participant than we would have been ten or fifteen years ago in all these business, and that's an important part of our growth. So how do we do this?
First and foremost, we are really in the business of acquiring clients. We look for really strong management teams. We look for clients and management teams that have the ability to adapt to an ever changing market, and that's certainly been the case over the last six months. We want management teams to have skin in the game. And we want companies where we can actually be relevant to them, relevant to their strategy, relevant to their strategy to grow their business over time and grow the value of their business.
It's a strong franchise, but it's built on local presence in every geography, backed up by very deep sector expertise and a great set of solutions that meet the mid cap, mid market base we have. Our goal is to be the lead bank to our customers or the sole bank. We want to be with companies that have long views. We want to be with them through the long term and through the cycles. And we have found increasingly that when you support a company during the tough times and cycles, and every company has them, you oftentimes have a client for life.
That's our goal. It's a combination of smart bankers with really deep industry insights that leads to what Daryl has already mentioned, and you'll hear again, the real strong customer loyalty that we're so proud of and allows us to deliver market above market growth while not compromising on our risk appetite and always, always, always mindful of really the number one commercial rule for as long as there's been a commercial bank, diversification. Diversification in clients, diversification in industry sectors and even diversification in geography. Over the last ten years, we really have built and grown this commercial franchise. We've tried, as I've said, to be consistent, disciplined and deliver value long term value for our shareholders, as Daryl has mentioned.
Daryl was quite nice in talking about the role of the commercial bank to all of BMO. Let me make two points out of that. First, this team is proud of that and proud of our ability to help grow BMO's shareholder value. But we're never complacent, and we still think there's a lot to do. We have really strong productivity, but I know we can be more productive.
I know, as good as our talent is, that we can continue to grow it, retain it and develop it. And we are always, through all of our businesses, striving, thinking about how we can make what how the client interacts with us more simple, easy, whether we're delivering products or advice. That's going to lead to better returns for our clients, which will ultimately be better returns for BMO. And second, just quick point, the slide goes for ten years. But the point is, and I think you know this, that BMO has been really refining its commercial presence and its strategy for over two hundred years.
We have always had a commercial focus as a bank, and we've always seen it as a strong foundational business upon which we can grow. As you can see in the slide, we talk about a couple of things and we show some numbers. But let me bring a little bit of that to life. Since we put these businesses together, we brought businesses on both the North and the South, and we've aligned them organizationally. Wherever there's a trend that's similar in Canada and in The United States, we put them together.
A good example of that a good a great example of that is our auto business, our tour plan business in The United States, which we started about ten years ago. That's a great business. That would never have even got off the ground if we hadn't started with an outstanding foundation in Canada. We're a lead leading in terms of providing capital and floor plan finance to that group of clients. Now we do it across North America.
Now most of our growth has been organic. We've made a couple of key acquisitions, which we've talked about before: M and I in 2011 and the Transportation Finance business, which we bought from GE Finance in 2015. During this time, we've also expanded our sector coverage, our product capabilities in both Canada and The United States. The symmetry that I talked about in The United States with our auto finance business continues as we think about what we did with our equipment finance business. And that's a business which we really provides financing for our clients when they're building up and they're expanding their capital expenditures.
That business was started with M and I when we purchased it. We expanded it in The U. S. And then we took it to Canada, where it's now growing and expanding there as well. We've leveraged our cross border capabilities also and integrated customer solutions across all of our businesses.
Now why is that important? Why is it important that when we talk about our cross border business as such an important business, here's why it's important. Whether you are a Canadian client growing into The United States or whether a U. S. Business that wants to expand into Canada, having a bank that has the same lending platform, that has the same treasury management platform, It has the same management team.
It has the same strategy. It believes if you're a good client in Canada, you are, by definition, a good client in U. S. Or vice versa. That's what makes different.
That's what makes BMO the go to bank for commercial clients doing business on both sides of the border. Now we've been doing this since we purchased Harris Bank in 1984. We've made lots of mistakes along the way. We're well past that. We've refined this, and our teams find that as one of the many special aspects of our business.
Members of my management team are here today to bring life to the story. You'll hear more from them about all these businesses. They're going to share their insights on how we've achieved the success. They'll talk about how we built the business. I think you'll sense their confidence in the future.
We're going to start in Toronto with Christine Cooper and Naveen Herci. They run our diversified and our specialty businesses, respectively. They'll profile the business, how they see the market today. Then we're going go all the way to Dallas. And pardon the pun, Dan Clark, we'll have a brief truck stop with Dan.
Dan has been in this business financing trucks and trailers for over forty years. And that business really bridges both our U. S. And Canada business. Then we're going to transition back to our pure U.
S. Businesses that are run by Dan Marzalak and Ray Whitaker on the specialty side and the diversifieds, respectively. They'll be joined by Todd Singer, who runs all of our expansion markets. And he'll talk a little bit more about how this works, and he'll specifically talk about Dallas Fort Worth. One last point before I turn it over.
For a lot of reasons, we wanted to really focus on some of the lending aspects of our customer strategy, but that's hardly all we do. Two of my direct reports who are critical to our business are going be around for our Q and A, and they're here today. Many of you know Sharon Hayward Laird. She's done many jobs with MVAK. But in my view, her best job is what she's doing now running our treasury payment systems.
She has really brought life to that business, such a critical part of our business. It really is the glue that keeps clients when we have great technology and great service for operating services. That's what makes us special. Her team has done a great job. We've been peer leading in growing our deposits and peer leading in transactional services, all of that under Sharon's leadership.
And the investment we make in that business really does provide the glue to keep these relationships going. Speaking of glue, my COO, Dawn Fiesta, is right beside us. Her team really does keep the glue going and keeps our client facing people, the people that work for the people you hear from today, keeps them out of the market, gives them the resources, gives them the front end technology, which is critical so they can be with clients and do their jobs. So with that, I'm going to turn it over to Christine Nadine back to Toronto. Christine, you're up first.
Okay. Good morning, and thank you, Dave. Today, I'm going to talk to you about two key components of our North American commercial business that reflect the foundation of how we've been able to successfully grow across our entire platform, our bankers and our clients. To start with some background on our Canadian business, our geographic footprint and business mix are diverse, with coast to coast local coverage, significant national industry and product expertise and about 18,000 clients. With over two hundred years as a leader in commercial banking, we currently have number one lending market share in Atlantic Canada and British Columbia and number two share nationally.
We've been deliberate about growing in Ontario, where we have the largest opportunity for market share gain. In 2020, our Canadian commercial business was recognized by World Finance as the best commercial bank in Canada for the sixth year in a row. And our story starts with our people, the people we choose to work for us and the people we choose to be our clients. Our talent continues to be a core strength and competitive differentiator. At the investor event in 2018, I relayed a conversation with one of our clients where he told me that BMO has the best bankers on the street.
That hasn't changed. I mentioned this again because it's something that I hear regularly. Top tier client loyalty is a core element of our success. We just completed our annual client loyalty survey. The majority of our clients rated us a 10 out of 10.
And the comments noted that their relationship with their banker was foundational to the rating. To quote a client on why he recommends BMO, the people, relationships are key, especially in a year like 2020 with the pandemic, oil price war and resulting economic fallout. It is reassuring to know that BMO has outstanding people from top to bottom. Additional direct client verbatim has been included on the slide material that is running today during breaks. How we recruit and develop our talent sets us apart.
When we hire, we're looking for smart, diverse individuals seeking to be career bankers. They need to understand BMO's core principles of creating positive change for our clients and our communities. Our average banker tenure is twelve years, with many bankers having twenty or thirty years of experience demonstrating long term commitment. Our bankers work with clients to understand their business, ask forward looking questions and bring new and different ideas. And our bankers are strong relationship managers with astute credit skills.
As a general practice, we rotate team members through various business lines, including our risk management groups. And strong bankers bring in strong clients. We are in the customer acquisition business. We don't see our business as a balance sheet of loans and deposits. We see it as a portfolio of clients who we've chosen as partners, partners in building our business as they grow and build their own businesses.
We have a long standing reputation of standing by our clients and managing successfully through operating cycles. Our average client tenure is sixteen years, but we have some clients who go back over two hundred years. And we have continued to selectively add new quality clients to our books over the last six months. And we also view collaboration across our lines of business as a strategic priority. Daryl referenced this earlier.
In Canada, our focused approach to pursuing full lending and deposit relationships has positioned us as either sole bank or lead lender on over 90% of our portfolio. But we view a truly successful relationship as one where the client is a client not only of our commercial bank, but also a retail or wealth client and when there is a transaction need, a capital markets client. Over half of our customers are also clients of other areas of BMO. Since the pandemic began, our bankers have gone above and beyond to put our customers first and help them navigate these challenging times, working together with them to identify opportunities and solutions. We have been leveraging digital collaboration platforms to engage more frequently with our clients and prospects.
We are delivering more thought leadership, more expertise and more digital solutions through our award winning online banking for business platform than ever before. As a result, our relationships with clients have been solidified and strengthened through this difficult time. And now I'll turn things over to my colleague, Nadeem, who will further unpack our differentiation strategy and ways that we win in a competitive market. Nadeem?
Okay. Thanks, Christine. I'm going to speak to how we have successfully grown our portfolio with strong returns, loyal clients and all within our risk appetite framework. And this growth is completely aligned with what we articulated as our strategy at Investor Day back in 2018. Now our strategy is three pronged: first, geographic focus.
We have local relationship management and local decision making, both in first and second line in all the markets that we serve as best as possible, because local decision making is an absolute differentiator. Now, this looks a little bit different in Canada than it might in The U. S. In Canada, we have offices throughout. But Ray and Todd will be up in a little bit and talk about The U.
S. Opportunity. Secondly, we have deep industry and sector knowledge, and we leverage that core capability in how we serve our clients, bringing new ideas to the table and thought leadership. And finally, we bring the entire suite of BMO capabilities to the table, including personal, wealth and capital markets. And our sales force is always incented to do the right thing for our clients.
Their scorecard considers not only revenue and commercial, but referrals and revenue throughout the entire enterprise, and not to mention client experience scores. So this way we don't push products, we provide solutions to our customers. And by measuring those behaviors and providing rewards for enterprise solutions, we ensure that the interests are absolutely aligned between our clients and our sales teams. Now, getting this right is not easy. But if you have seasoned bankers who understand the merits of an enterprise solution and with whom we've shown how we reward that behavior over time, we'll create the right outcomes.
Let's go back to our vertical and industry sector strategies. Our growth has been dependent on some strategic choices around 13 specialty businesses and industry verticals and in our ability to build scale around those, leveraging our integrated North American platform. And one of the core strengths of having a North American integrated platform is diversification. No one portfolio represents plus or minus 15% of the combined North American platform. And there are many examples that we can talk about where we've leveraged core expertise on one side of the border to create opportunities on the other.
And Dave touched on this. Some great examples are asset based lending, equipment finance and auto finance. All three of these businesses, both North and South, have benefited from increased customer base and share of wallet leading to extremely strong growth. And where we choose to compete is absolutely deliberate. We look at demographic shifts and industry trends.
We look at complex credit needs and how we fulfill those needs for our clients. And then we look at how do we build economies of scale around all of this. And it's not just economies of scale to lower the cost to serve. It's about building expertise because expertise leads to market share growth and better risk management. At the end of the day, our goal is that we want to be a trusted partner to the industry we serve, not just another banker.
Near this, we have outpaced the competition in expanding our commercial relationships. And our recipe for success is attracting top talent, developing that talent, and retaining that talent, and then structuring to our risk appetite framework while providing holistic customer solutions to create long term and loyal clients, all while remaining market relevant on structure, pricing and risk. As a proof point, over the last five years in Canada, we have led 118 syndicated multi bank transactions. Every single one but one failed to clear a market, and the one that failed was due to extraneous market circumstances. Now, of course, the new normal means that we have to be agile, we have to think about where we want to hit the business next.
So as an example, we have launched our technology and innovation banking vertical. This is to support high growth tech companies and their shareholders. And this is truly an enterprise vertical as it covers Canadian commercial, U. S. Commercial and capital markets on both sides of the border with one common leadership and with strong alignment with the private bank.
We already have strong momentum against the competition and significant opportunity for growth. Now I'm going to turn it over to Dan Clark, who leads our transportation finance business. This is our largest North American business. And I'll just say that Dan and his team and the entire business embodies everything that Christy and I have talked about so far: extremely loyal clients, extremely strong talent and an enviable market position. And the cross referrals between our businesses has been absolutely excellent.
As an example, recently, we won the commercial business of a thirty plus year transportation finance client that had their commercial and wealth management business with another Canadian FI for over forty years and two generations. But due to their credibility, the industry expertise, and frankly, the ease of doing business with Dan's group, we were able to leverage that relationship and create and earn the opportunity to bid for their commercial and wealth management business, and we won their entire banking suite of products. And this story repeats itself over and over again. So with that, I'll pass it over to Dan Clark, who's going to join us from Dallas, Texas. Over to you, Dan.
Thank you, Nadim. Well, I'm going to talk to you a little bit about the transportation business. We've been specializing in transportation for over forty five years. As Dave said, I've been with the business over forty myself. We service all three segments of the industry: OEMs, dealers and end users and have a leading market position that is built around four value props.
First of all, I would say, is our industry expertise secondly, our speed to market. In fact, our system allows us to go from credit submission to funding in the same day. No competitor in the market is even close to that. Third is the long tenure of our management team. And finally, the experience and size of our sales team, which is located across North America and very importantly close to our customers.
As you're aware, over the past year, the industry has been stressed, and we have seen elevated PCLs during this period. We tightened how we brought in new business, which ensured a quality portfolio with good margins. And now we're seeing PCLs moderate from their peak into Q. As a quick background, the transportation industry saw an imbalance beginning in the summer of 'nineteen. After two years of record truck sales, the supplydemand balance of trucks to freight was upside down.
In late February of this year, we saw this balancing out with everyone feeling by late 2Q, the economies would shift in favor of the truckers. Then, unfortunately, COVID hit, and we had to work through a near complete shutdown industry. It's the first I've ever seen, but the business recovered very well. Fortunately, freight started coming back in late May, and the market has continued to improve month over month since. In fact, it's amazing that freight rates are up now 15% to 20% above pre COVID levels, once again showing the strength of the industry.
One of the keys that has contributed to our growth is our sizable sales coverage. We have a commercial team of 110 people located throughout North America and leverage this footprint to gain market share and more importantly to know our customers. In addition, we act as a captive for Navisar International, which is one of the four Class eight truck manufacturers in North America and have been doing so for thirty years in Canada and ten in The U. S. In addition, we continue to expand the cross sell of other banking products.
This continues to strengthen our competitive position and our profitability overall. We also benefit from our competitors exiting the business during a downturn. Despite tightening our credit box, we've seen gains in market share and less price competition. In fact, our new business margins have increased consistently over the past year. Our expertise goes beyond providing financing to OEMs, dealers and end users.
We also provide thought leadership and advisory support. As an example of this, a customer I have personally known for over fifteen years had outgrown his bank in the Northwestern U. S. He approached me and despite being out of BMO's U. S.
Footprint, by coordinating with my peers, we were able to provide him a complete banking solution that not only solved his current needs but his growth projections for years to come. This was a real win for the bank. You might ask, you know, what is your competitive advantage or how do you price as a market leader? And I'd answer first, as I've talked about, is our industry expertise. That is very important.
Secondly, our ability to leverage our auto decisioning model's accuracy and speed. This allows us to price a risk, which is very important, and to be the first yes the customer receives. And finally, with a large part of our business being highly automated, we continue to achieve higher operating leverage through scale. Looking ahead, we want to diversify our product mix by increasing our dealer and structured transactions. This will allow us to improve our portfolio during future economic cycles and increase our returns.
We also plan to diversify into adjacencies such as construction equipment, focusing on inventory finance and dealer lease rental. One thing is for sure, we know dealers and we know we can leverage that here. This will not only offset economic cycles of transportation but will provide a future growth engine for the business. One of the advantages of being a specialist in transportation is knowing when to make adjustments. We know how and when to adjust the risk box.
We have flexibility in our auto scoring models to move quickly. We're able to increase margins by leveraging our market position. And finally, we know the industry and continually monitor industry data to adjust as needed. An example is how we utilize our syndication team to reduce portfolio exposure. In the summer of 'nineteen, we saw a soft market approaching within the industry.
So we put together $350,000,000 of our portfolio to sell to other institutions. We sold this to reduce our portfolio risk, but we also received a nice gain on sale. This gave us confidence of our pricing power. Dave?
We're coming back to Chicago. Before I introduce the next group, I just want to remind everybody, we're really here to answer your questions. So if you're a preregistered analyst or investor, please go on the app, put through your questions. We want we have plenty of time to go. So as we're back in Chicago, and I'm going to introduce three of our U.
S. Leaders, Dan Marzalak and Ray Whitaker and Todd Singer. They're going to give you a bit more of the story on The U. S, just as Christine and Nadine did in Canada, and specifically kind of an eye toward how our growth in The U. S.
Has happened over the last ten years and a little bit more of a deeper dive into our portfolio. So I think first up is Dan.
Thanks, Dave, and good morning. Today, with my time, I will go over three areas for U. S. Commercial. One, will give an overview of the business.
I will do a deconstruction of our growth in The U. S. Commercial since 2010. And I'll go into a little further detail in terms of our specialty sectors and how they've
been a contributor to our success. In terms of
the highlights for U. S. Commercial, we are in 11 of the top 50 metropolitan areas in The U. S. And that's probably the biggest distinction between us and the business that Nadim and Christine manage in Canada, where they have a national presence.
After that, we're very much similar. We also have 13 specialty sectors. We have 12,000 clients. We have a very diverse portfolio. No specialty business represents more than 13% of our portfolio.
And we're the lead bank or sole agent on 87 Percent of our relationships. In terms of our growth since 2010, we've generated strong growth, as you all know. Ray and Todd will go into a little bit more of it in terms of how our combination of geographic presence, our industry specialization and our product capabilities contribute to the high customer acquisition and high customer retention of our business. Our growth has been organic, but it's also been in part due to acquisitions. If we jump to 2010, we had $12,700,000,000 in loans.
Dollars 20,000,000,000 or 34% of the growth has come from our low loss given default businesses of asset based lending, equipment finance and dealer finance, and also from our high quality investment grade businesses such as financial institutions, institutional markets, mid core lending, and subscription lending. 21,000,000,000, so a little bit more, or 36 percent of our growth since 2010 has come from the acquisitions of M and I and Transportation Finance, as Dave mentioned. Our commercial real estate business and our sponsor finance leverage lending business have also grown at a slower rate than the rest of our portfolio. And those are now being managed at a stable level. In terms of the balance of the growth that's come across the rest of our sector specialties and our geographic businesses, they've accounted for 14% of the organic growth in the portfolio.
One thing that's really interesting on it in terms of the growth, in 2014, 40% of our portfolio was in investment grade quality. And today, it's 46 So as the portfolio has grown, the higher quality portion of our portfolio has grown at a faster rate. In terms of our industry specialties, it provides us three key advantages: one, higher customer acquisition retention two, better risk management and three, enhanced economics. Our 13 specialty businesses provide us great sector and product expertise on a national basis, and that allows us to acquire more customers. Our customers and prospects, they want ideas.
They want thought leadership. They want trustworthy advice. And they want solutions that are tailored to their needs. Our customers have confidence that we help them grow and manage their business because we have that expertise. For example, when the pandemic hit, we created over 150 thought leadership pieces consisting of online papers, webinars and podcasts that covered a range of industry issues and economic issues.
And we did that so our customers, our owners, our executives, they could better understand the issues and better manage through this. In terms of risk management, having this expertise yields better results. We understand the underlying risks better than a generalist banker. That's our belief. We truly believe that.
We intimately know how customers perform through cycles, as we do in our commodity businesses such as food as well as asset based metals. We often know their customers, their suppliers, their competitors. And when we know the whole ecosystem, we're better able to pick which clients are going to do the best, and we can finance them and leave the others to our competitors. We can also adjust our portfolio. Based on industry outlooks and indicators, we can either dial up or dial down what we're doing in the portfolio.
We've intentionally grown our low loss given default businesses of asset based lending and equipment finance. We dialed down, for example, in certain real estate subsectors ahead of this downturn. Multifamily, for example, when we saw an overheated market in certain sectors, we dialed down what we were going to do and managed down that portfolio. We maintained consistent exposure in our sponsor finance leverage lending business because that's also a risky business. And we managed it through distributing amounts above our hold size as well as being very, very selective in terms of which customers we wanted to finance.
As I recap, commercial real estate represents 13% of The U. S. Commercial portfolio and sponsored finance, 7%. And then finally, we have strong risk alignment with our partners in risk. We have dedicated risk officers for all of our sector specialties.
They know the nuances of those industries and products as well as we do, and we work together really well. Together, we set the risk appetite. And then also from an incentive standpoint, all of our bankers are on an incentive system that includes a risk performance and a compliance component when determining year end annual compensation. In terms of enhanced economics, our sector expertise leaves us in the pole relationship position. We garner the lead arranger of sole bank in 87% of our lending opportunities, that's measured by number, and 73% of the relationships as measured by loan commitments.
This enables us to capture more revenue through enhanced fees, treasury management services, deposits, and cross sell of all the other bank products. We ask our teams to deliver more than just basic loans and products. Nadeem and Christine talked about that. And we ask our teams to actually get paid for providing the service of advice that our clients desperately want. And now I'll turn it over to Ray and Todd.
They'll go through our geographic expansion, including our progress to date as well as future expectations.
Thank you.
Great. Thank you, Dan. So in all of our geographic businesses, we have experienced bankers, bankers that are deeply rooted in their communities. And they drive and build long term relationships with businesses and the business owners within those geographies. Now, the way that they do that is in a number of ways.
They leverage their deep and broad networks. They leverage their deep business and financial experience. But what they also do is they leverage the vast resources and subject matter expertise that we have here at BMO. They proactively engage with our industry specialists, as Dan has talked about. They work closely with our product specialists, especially in our treasury products business.
They work cross border seamlessly with their colleagues in Canada. And they work collaboratively with their colleagues in BMO Capital Markets, in wealth management and retail, all to bring proactive, valued advice to their clients and to their prospects. And it's this. It's this collaborative culture and effort between those local relationship driven bankers and those broad subject matter experts that truly is the differentiator for us in the market and allows us to grow as we have in the past and into the future. We are extremely proud to have strong market share here in Chicago and in Wisconsin.
We know what it takes to achieve and maintain strong, competitive commercial banking products, services, and advice that truly differentiate from the rest of the industry. It's that trust. It's that relationship that we build with our clients over years, and in a lot of times over decades, that provides that strong competitive advantage. Here's the other thing that it provides us. It provides us an incredible depth of knowledge and understanding and historical perspective of the clients that we serve.
That allows us to provide the best possible advice for their business needs, but also allows us to best understand how they manage their business and, importantly, allows us to minimize future losses. In these flagship markets of Chicago and in Wisconsin, these are our deepest and longest relationships. And it's because of that brand loyalty, that brand reputation, consistency, the reliability that we've shown over decades that allows us to take advantage of opportunities in these core markets, like hiring experienced bankers to join our already strong team or continuing to win those long term targeted prospects. Now outside of Illinois and outside of Wisconsin, we have our expansion markets. And you will shortly hear from Todd Singer, who leads that business for us.
Now our expansion markets are newly created offices or the offices that have yet to achieve market leading share. Now many of these offices, as you've heard earlier, are supported by wealth and retail networks. And that's really important. But in absolutely every one of these offices, every one of them, they benefit and are able to leverage the existing BMO clients that we have that are headquartered in those cities, but are covered by those industry specialists and those industry verticals that you've heard so much about today. We purposely add into each of these local markets subject matter experts in the industries or product experts in order to continue to combine that localness with that subject matter expertise.
And in each of these new markets, it is critical, critical for us to onboard the most respected, strong, stable clients in those markets. It's those initial clients that set the tone in the market for how BMO is viewed. Now, at our last investor conference, I mentioned that we would be opening new offices across the country. And since then, we have opened an office in Los Angeles. And we continue to look for other cities to expand.
We are in 11 of the top 50 MSAs, as you've heard. And so there's lots of room for us to continue to grow and expand. We're patient, and we are constantly talking to top performing bankers in a number of cities that we've targeted, waiting for the opportunity to have them join BMO. And so with that, I'd like to turn the presentation over to Todd so that he can share with you our experience in the Dallas Fort Worth market. Todd?
Thank you. Pleased to be with you today to share more about our opportunity in our expansion markets. I'm going to use our experience in Dallas and Fort Worth to demonstrate how we have built and how we will continue to build our expansion markets business. In 2016, when we decided to build off our strong transportation finance presence in North Texas, we reached out to our existing clients to get their input and assistance in helping us build out our talent strategy. As we have done in all of our geographic expansions, we leveraged our client network to help us identify what top talent looked like, given that they live in the market and they know the market.
Their recommendations and engagement on who we should hire, why we should hire them, and their involvement in the recruiting process was critical as we developed our talent slate. Our position of strength is why top talent is joining us. It is not often in banking that top talent has the opportunity to be entrepreneurial and build a business. We give them that opportunity. This, coupled with the fact that they have the opportunity to join an organization with the most stability, strength, size and dedication to the middle market segment resonates.
This has enabled us to attract top talent from our major competitors. This approach has led to good growth. Today in North Texas, we have over eight different specialty business lines, allowing us to show the scale and the expertise we need in order to win. We have added over 140 commercial relationships in the past four years, with 85% of them being sole or lead left opportunities, with many of these opportunities coming to us as a direct result of our existing net promoters connecting us with their business network, demonstrating the importance of strong client loyalty. We spend a significant amount of time on our new client acquisition strategy with a correlation to, at all times, does our network know the company, can they attest to their character, And can they help us in our marketing efforts?
We have, and we will continue to build our business in a prudent and strategic manner. This is evidenced by the fact that our weighted average risk rating of our new North Texas market is accretive to our commercial portfolio with varying industries represented. There has and will continue to be market dislocation due to disruption amongst our competitors in North Texas. Our opportunity is as strong as ever to capture market share in a disciplined fashion with our focus on high quality companies that our teams know well. Oftentimes, Dave will say, if you find great talent, you will find great companies to bank.
This is the recipe we have followed in our expansion markets business, and we have replicated the process I described in North Texas and our recently opened offices in Atlanta and Los Angeles, where we are seeing early signs of success. Dave, back to you for some additional comments.
Okay. Thanks, Todd. And before we wrap it up and turn it over to questions, let me make a couple of points. The success any success we've enjoyed is due to this team, the team in Dallas, the team in Toronto and all across Canada and The U. S.
Is the secret sauce. Daryl mentioned the number of years and how long we've been doing this. And I think I probably have the lion's share of that. But as important as experience is, and it is important, what's actually even more important is how this team across our businesses and across our geographies has really dedicated themselves to this client first mentality. Put the client first.
It sounds trite, but it's really how we do it. That's our culture, the long term approach. That's what's allowed us to grow the business. And that's the pride that I think we always have. This team is really does work well together.
This is my management team. They end up oftentimes finishing each other's sentences. That's how more times than that, they end up finishing mine, which usually turns out to be a good thing. But what's really more important is and you've heard it, they love. They just love to develop talent.
They love to attract talent so that they can attract client relationships. They love that. They love the hunt. They love winning new opportunities as long as it takes. One thing they don't love, they really hate, they hate losing money.
I hate losing money. It's part of our business, but I still hate it. And when we do, we learn from it. So what's really important, and Dan mentioned it, and you'll hear more about it, what I think sets us up is this group owns the risk. They own it.
They feel it. They know it. Shortly, you're going be hearing from Pat Cronin and his team. There is no better, far none, in North America, no better risk team than this group. They're a huge part of our success.
But let me say this: There literally are not enough risk officers in the world, much less North America, to combat a first line like this line that does not feel they own the risk. It wouldn't happen. Owning the risk and having the second line like we have is critical to the long term success. So looking ahead, I think we have a tremendous opportunity. We really are in an enviable position to continue building on a strong foundation.
Really strong capital base very experienced, thoughtful bankers consistent approach to providing capital and treasury solutions and advice, which allows us to continue to strengthen our market position in our core markets selectively enter new markets and continue to grow our specialty businesses where we have a unique offering and a strong risk management expertise. So with that, I turn it over to Tom Flynn, who is going to drill us with questions. Thanks, Tom.
All right. Thank you, Dave, and thanks to your colleagues as well for that great run through of our outstanding commercial business. We are going to go to Q and A now. And as a reminder, we'll do the Q and A in two sessions. So this session will be focused just on the commercial business.
And then after the risk presentation, we'll have a Q and A on risk, and Daryl will join us for that as well. And, we'll have about twenty five minutes for this session, and after that, we'll have a five minute break. I will moderate. As much as I would like to drill Dave and the team with questions, I will be taking questions from preregistered guests who have submitted those. And I will act as your moderator, and I hope to have a better go of that than the moderator that we saw last night in the presidential debate.
So going to our first question. Question is, when you think about the growth outlook for the business over the next few years between Canada and The U. S, where do you see higher growth prospects? How much will be via deepening existing relationships versus entering new markets or verticals?
Well, I'm going to take a quick stab, but I think I'm going let Ray and Christine mention that, too. They're very competitive, so it'll be interesting to see where they think the growth is. I think we have really good growth prospects on both sides of the border, Tom. They will not be as strong on the loan side, for a while just because of the what's going on in the economy. But we continue to grow our client acquisition.
And we're happy if it's not a loan. We're happy to have the deposits. They'll borrow when they need to borrow. I think in both markets, we have really good opportunities. We have different opportunities, as Dan mentioned, in terms of expanding across more in The U.
S. We have more ground to cover. But there's still great market share opportunities in both. But I want to flip it to Christine and Ray and see if they've got any additional thoughts.
Thanks, Dave. I would reinforce a couple of things that we said. We are a diverse business, so we do want to continue to grow in a diverse way, and we continue to think that there are lots of opportunities to do that. And we do that in a couple of different ways. One is by growing with our customers.
So choosing and partnering with good customers who are going to grow is a way that we go. Then also looking for opportunities to grow our share of wallet with those customers, working with partners and, you know, particular focus on deposit and our TPS business and really growing in a balanced way, diverse across the customer base and growing with our good, strong customers.
Christine, that was a great start. And I'll focus on where we're looking to grow from a prospect standpoint. And when you look at these 13 industry specialties, we see growth aspects in almost every one of those, which is great to have that diversity of growth opportunities. We're absolutely continuing to grow those new geographies of Dallas and Columbus and Atlanta and Los Angeles. And their growth is, as you might imagine, exponential year upon year.
But they are starting from a smaller base. We're also looking to, as I mentioned, continue to expand in additional cities. And those are really the seeds that we're going to plant today or tomorrow or the day after that will grow into substantial businesses five, ten, fifteen or twenty And so it's exciting to have the growth opportunities here in the short run, but also planting seeds for growth in the future.
All right. Great and in-depth answer. Thank you for that. We've got a lot of questions coming in. So let's go to the next one, which is from Meny Grauman.
And the question is and I think this will be of interest to lots of people how is the recovery progressing? What are your clients telling you? What is coming back faster than expected? And what is coming back slower in Canada and The U. S?
So we all talk to a number of clients. The recovery in both sides of the border is coming back faster than I thought. If it is a K, we don't have a lot of the downward portion. I think what I've heard and what we've all heard from our clients is a couple of things. They've dealt with lower revenue, but they've dealt even faster with fixing their expense side.
They pulled back on CapEx. They've sometimes pulled back on acquisitions, but they haven't stopped focusing on the long term, and they really have become a little bit more conservative in terms of bringing down their debt, having their receivables inventory come down. But they're definitely focused for the future. And I'd say I'm pretty confident, I really am on both sides of the border, that things will be better than what we've expected. We're still planning for tough times, but better.
And most of our clients are actually doing as well or even better. There's some great examples that we could talk about. But the short answer for me and I know we've a lot of questions, so I don't want to filibuster this is short answer is I think it's going to be better than we expected. There'll be some issues. We're preparing for those.
But there's no industry that's doing worse than we thought,
why don't we keep going? I think that was a good answer. And you'll see other questions will get into depth in different places. So I think that's good. Next question is from John Aiken.
And the question is, in growing out your U. S. MSA footprint, are you beholden to REPRESENTATIVE:] your current footprint?
Or would you be willing to grow further afield than simply into adjacent states?
Great question, John. And no, the answer is no. Unlike our retail business, where even there, we've proven through earnings business, you don't have to have a branch to have clients deal with us on the retail side. It's even more possible to do that on the commercial side, particularly where we have strong industry expertise that is national in scope. It's not an issue in Canada, obviously.
But in The U. S, certainly our move into Texas, our move into Los Angeles, we're not beholden on our footprint at all. What we are beholden on is having good client people that will refer business and help us to grow that business. So that's the real story here. So we'll grow in the markets where we where it makes sense and where there's real opportunities, but we're not beholding on branch footprint on the commercial side.
All right. That's great. Next question is from Paul Holden. I think it's an interesting question. And it is as follows: How is banker compensation structured to balance growth objectives with risk ownership?
Well, it's a very important question, and it's one we think about all the time. And as it was mentioned, I think, earlier in Dan Marzalek's comments, it's critical that all of our bankers, A, own the risk B, understand that while we will make mistakes, we can't make stupid mistakes. And there's a component where as far as the long term view of how someone gets paid, we look for all of our bankers to have that long term view. And if there's a tendency for them to really think outside the box in terms of bringing in other client areas, wealth, capital markets. That's what we like.
We like them thinking about what's important for them. That's how they get paid. It's a discretionary system in the commercial bank. So we really do have good judgment. But we also look as we do in all the scorecards.
So it's well thought out, long term, and we really do have we have an equity component for our key bankers that keeps them thinking about the long term, and it's tied to the BMO stock. Does that help, Tom?
Yes, that's great. Thank you, Dave. Next, we have a question from Ebrahim Poonawala. It's a market structure question. And it goes as follows: The strength in capital markets, including tight credit spreads and growth in private equity backed debt funds have challenged growth in traditional bank commercial banking, particularly maybe in The U.
S. Can you discuss the competitive landscape, starting with The U. S. And in Canada, these lines?
Well, I think you're speaking to nonbanks and how they have become a bigger part of the business, in Canada and The U. S. It's a factor, but it's really not a big factor for what we're trying to do. Keep in mind, the clients that we're trying to acquire want more than just a lender that might be a hedge fund or backed by some private equity. They participate in the market, but they may participate in the deal that we lead, but they would not be leading the types of companies that we're working with.
So it's a factor, but frankly, it's not impacting us any great deal, either in Canada or in The U. S. And I'd open it up for any of my colleagues to weigh in on that because they see them as well before we go to the next question.
Dan, do you? Just real quick. I think we see it most in terms of our sponsor finance leverage lending business, where we're a bank, but many of our competitors are non banks. We actually play with them a lot, meaning that they're in a lot of
our deals where we're a
lead arranger, but we're also doing the same thing. Steve Isaacs, who runs that business for us, has $4,000,000,000 of partnerships with firms that you're describing right here in terms of non banks, where they're, on an organized basis, participating in our transactions. And so we're actually trying to be the same type of money manager that they are, but we're also playing for our own balance sheet. So it's really a fairly narrow portion of our business that's impacted by the nonbank lenders.
It would be very rare, if ever, where we would participate in a nonbank lenders deal, but it's quite likely that they would buy a piece of ours, which is great. That's fine. Okay, next question, All
right. That was a good answer and interesting to hear about how you partner with some of those firms in addition to competing with them. I have to say I'm feeling a little bit like a university professor here asking questions out to the class. So this is kind of fun. Next question is from Gabriel Dechaine, and the question goes as follows: Do you think commercial loan growth will lag the recovery, especially if it's a slow one?
Slide four suggests this could disproportionately weigh on total loan growth, given that commercial revenue has had a higher CAGR than the rest of the bank over the last year or two.
Well, I think that it probably won't lag the recovery. We're already starting to see signs in one of our leading indicator businesses, which is Dan Clark's business, where commerce is really dictated every day by transportation and trucks moving across Canada and The U. S. I do think if the question is, will it be slower? Yes, you can't have the GDP drop that we've had in Canada and The U.
S. Without having that impact. But I actually think, just as it was in 2010 and just as we expected, at the end of the day, it will be a commercially led recovery. Now it may lag a little bit, and it will take time for clients to rebuild their inventories. Our car dealer business is a great example, where for a while, they had huge inventories, and now they can't get any.
And that's building back up, car sales are starting to pick up. But in all of our businesses, I think we are seeing starting to see I hate to say green shoots, but I actually do see that. So I think it will start leading. I think it will get better. But I'm not predicting certainly not predicting the types of loan growth that we've seen or the industry has seen in the near term.
I think that was actually Tom Flynn's question that he gave at the gate.
That was not my question. That was legit. All right. Next question is from Darko Mihalik, and it goes, please describe how the restructuring efforts that BMO has engaged in to improve efficiency over the last five years have not adversely affected this business. Talent is one example of that.
And if you could talk a bit about how our continued focus on efficiency improvement won't impact the business as well.
Well, it absolutely won't. That's a great question, Darko. The commercial business, as it is, I think, every bank would have a lower efficiency ratio than a retail business. There's more revenue per client. But there's still and the restructurings that we have had, have had really zero impact on our business in the commercial business.
We've certainly moved some things around. But our opportunities and I'm going to actually let Dan talk about one specifically. Our opportunities are more on being more efficient in the back office. Our end to end opportunities are still significant. Dan Clark talked about how quickly they, in their business, in the transportation finance business, can move from request to decision in twenty four hours, less than that.
With a larger commercial loan, you can't do that, but there are some really good opportunities. And it's bear with us. I think you should talk about that, maybe either Dan or Nadim or both, because there really are good opportunities.
Yes. I mean, could start with Nadim and I Nadim, you could join in. Nadim and I co chair a committee that is organizing complete end to end redesign in order to get faster throughput, more automated decision making with the rest of the commercial business units. So it's a multiyear program. We're halfway into it.
We're seeing faster turnaround times. We're seeing lots of work being taken out of the system, so that helps from an efficiency standpoint. And, you
know, the
other part is well, I don't want to monopolize. Nadeem, you want to finish off?
Sure, Dan. I'll just add that, you know, when we talk about end to end, this is not just about technology. This is about starting off with understanding our processes, things that have been around for twenty, thirty, forty years, taking a hard look at do we still need these processes in place that still make sense? Can we simplify or can we eliminate? And the whole idea is to create more time for our bankers to be on the street, adding more clients, being in front of our clients, getting more share of wallet while taking away the administrative burden that we have in the back office.
So by doing that, making sure we have role clarity for our folks on what they need to do, how they get rewarded, when they get rewarded. And then after we know that, then look at technology and how we can use technology to help enable and continue to automate these kinds of processes. Taking that approach over a period of time, we expect will create a lot of efficiency. But that efficiency is about creating more capacity with our existing people to be on the street talking to our clients because that's where we want our people to be.
Okay. That was great. I think that was really good color against the different parts of the business. Sorry, Dave, you want to get in?
I was just going to say, just to pull it back to Darko's question, too, we have very good efficiency within this business. We really do think it will be accretive to what we're doing within all of BMO by doing this. So I think it's a great question, and I think our team feels there's still lots of opportunities.
Okay. Next question is from Scott Chan. Question is, what is your ROE target in the commercial business over a market cycle? And are there any differences between The U. S.
Business and the Canadian business?
Great question. So at BMO, we have a long term goal of being at 15% ROE. The commercial bank has been accretive to that. We expect it to continue to be accretive through the cycle. There will be quarters where we'll have higher PCLs.
But if we think about through the cycle, we expect to be accretive to that 15%. Between Canada and The U. S, I'm not giving away all of my state secrets. So I'll let Tom talk about that if he wants to. But I would say in both markets, in Canada and The U.
S, we have good ROEs through the cycle, and we expect to continue to do that. That's the way the only way to do that really is by acquiring good clients that are doing more than just one or two products.
Yes. And I'd just add quickly that the ROE is very attractive in the business overall. It's a North American business. And in its parts, the ROE is a little bit higher in the Canadian business, but The U. S.
Business is very attractive in its own right. So we feel good about the returns very good about the returns in both. Next question is from many as well. Dave, I'll throw it out to you and the group. And this might bleed a little bit into the risk session as well.
So I guess keep that in mind as you take it. Question is, one vertical that is facing a lot of uncertainty is commercial real estate. What is your outlook for the office market right now? What about shopping centers? Can you discuss sticking with your clients through tough times and what this looks like right now?
So I'm going to toss that over to Ray and Nadim, who have the real estate businesses in their respective markets. I would say, in general, we can talk specifically about office. But the beauty of our business really is we are pretty diversified, and we don't have a big single risk factor in any of those. But I think our outlook is muted. And there are certain parts of the business we're really not growing today.
It's not a huge problem, but it's an area we're watching pretty quickly. So Ray, maybe I'll go to you and then over to Nadeem and anybody else that wants to participate.
Sure. I'll start. And then, Nadim, I'll kick it over to you to talk about Canada. It's a great question. And certainly, here in The U.
S, we believe that we're off the trough, off the bottom of where the real estate market had trended in most all of the sectors. There are still some, as you might imagine, in the hospitality sector that are still trying to rebalance themselves. I think you mentioned the office sector, again, is trying to figure out what the new normal looks like in that sector. And that's only going to occur over time. But we are seeing development activity picking up.
We're seeing that investors and developers have readjusted their expectations. We're seeing that the bank markets have as well. So we're starting to see structures now getting done and being committed to. We certainly have seen strength in industrial. We've seen it in warehouse as another.
We've seen multifamily in certain cities and in certain states that have still been robust, which is good to see. Rents have continued to stay strong in some markets, which was actually a surprise to us. We continue to work with the clients that we do business with. It goes back to that diversity. It goes back to that client selection, the investors that we work with.
We have been pleased with the support that they've provided, some of the troubled deals that are out there. And we do think that it will get better into and through 2021 here in The United States as it relates to the commercial real estate business. Nadeem, you want to talk about Canada?
Sure. Thanks, Ray. Similar story in Canada. In terms of office and retail, for sure, those are two sectors that we are cautious about for obvious reasons. But we operate real estate within a cap.
And within that cap, have subcaps, and retail and office is part of that. We are nowhere near those caps. And as a percentage of our portfolio, office and retail would be the smallest component that we have. And any exposure we do have, especially in the office market, is well backed by secondary recourse. So of course, cautious about that market, but not worried about what we have in our portfolio given the size and the relationships that stand behind it.
On a developer basis, we continue to lend into the Canadian market for developers. Our relationships are mainly Tier one developers, long standing relationships, well heeled clients, strong balance sheets. And in Canada, our deals are supported by secondary recourse, and it's meaningful recourse. So we've continued to let into the market. We've seen builders be continue to build, but maybe not at the same pace as they were before.
This has helped curb some supply, which I think we'll see the effects of in the long term. Canada has a very strong immigration, and that has, of course, led to some of the housing demand that we've seen. Immigration is at a pause right now, but I believe that is short term. I think we're going to continue to see that. And there's usually a two to four year lag of immigration to when houses get built and bought by the individuals coming in.
So we've seen the benefit of that over the last ten years. There's been a slight pause, but demandsupply is good across the country. Markets like Vancouver, Toronto, Montreal, all still doing fairly well. And so yes, I don't think the curve is going to be as steep as we've seen before, and it might have some blips along the way as we get through this pandemic. But long term, I see still positive fundamentals for the industry with a curve that might be not as steep but still positive in the longer term.
Okay, great. Thank you for those comments and the color on the commercial real estate sector. Next question relates to the low rate environment. And the question is as follows. We note that you've upgraded the investment grade portion of the portfolio to 46% over the last few years.
And as you think through operating in a lower rate environment, will you have to go down the risk curve to generate the kind of economics that you're after?
No, I don't think so. The businesses we're in and whether it's investment grade or not, I mean, we have to attract for us to grow there, we have to attract an overall return on equity that's acceptable. I don't see us having to jump up the risk curve. We've got businesses which we know have a higher loss rate. We price those appropriately so that we've got, I think, the right balance.
And within each business, we may move back and forth. But I think the real question, and I think it's driving to what you're asking, is our overall business today, we're flush with liquidity. We're not paying much for those balances. Clients like us, and they like to keep it with a safe bank. And over time, we'll grow that.
We'll grow this back. We'll grow the loan business back, but we're not going to really stretch. It's just it's not the way we want to grow this business. We'll always take risk. We like to have a couple of ways out, and we'll always bet on really good management teams.
That's been our experience. Regardless of the industry, if the client actually has an interest in paying you back, which ours do and works with us, we'll get through almost anything. And I think this is a this period is a really good example of that.
All right. Great. Next question is from Meny, and question relates to linkages across different parts of the business. So can you comment on the extent to which customers in the commercial banking business cross the Canadian U. S.
Border? So the extent to which Canadian clients do business with us in The U. S. And vice versa, how that's changed over time? And same kind of a question on the wealth side.
How common is it for us to have linkages between wealth and commercial and how has that evolved over time?
Any one of our members of management can handle that better than I. So Christine, why don't you start, talk about situations where you've dealt with companies on both sides of border. And Ray and Todd, if you want to jump in, you guys should talk as well. They're all great stories.
RAYMOND Certainly. It's a huge important part of our business. I mean we think we can really differentiate by looking after a customer on both sides of the border. It's very common in Canada for a company to consider how they're going to sell into The U. S.
Market or work in some way with The U. S. Market. So our ability to have things like single sign on for our customers through our TPS solutions and other ways really encourage that kind of business, and it's been growing. And so there's already a very high percentage of our customers that deal cross border, and it's growing.
And the same thing for our wealth and capital markets business. I referenced in my piece that we have over half of our customers that deal with one other area of the bank. And that continues to grow as we continue to work more closely together and align North South and across our partner groups through collaboration. So a joint coverage strategy earlier, Dave talked as well about a colocation strategy that we have with partners. So that really enables us to collaborate well and provide holistic solutions and tailored solutions for our customers.
And going back to the previous question as well, not competing on price, we're really competing on providing that customized tailored solution for our customer through expertise and advice. And that involves all of our partner groups, not just the commercial bank and not just the Canadian commercial bank, but also The U. S. Expertise as well.
Thanks, Christine. Ray, you want to add on?
Sure. That was well said, Christine. I'll talk just quickly about wealth here in The U. S. And over the last over five years now, we've had initiative with our wealth partners to continue to provide a better client experience and to be best in class with that linkages that you talked about.
And we've absolutely seen that progress. A number of our businesses, there are 100% of our bankers have referred opportunity to our wealth partners. And in wealth, we've seen our wealth partners increase their participation over 50% of opportunities back to commercial, which is great to see that trust and relationship being built up across the businesses. But if you think about a privately held business, whether it's in Canada or in The U. S, the wealth of the owner is primarily tied to the success of the business.
And so we have to come to them with holistic solutions on how we can help that business end up driving a higher value, which obviously, directly or indirectly, increases the wealth of the family. And you have to provide those services. We find out that we find that our longest and best and deepest relationships and stickiest are the ones where we have not only the commercial business, but also the wealth in the advisory business of that client.
Hey, Ray. This is this cross border is great, and it's one of our secret weapons. I don't see Sharon, but I'm hoping she's hiding there because Sharon has really got one of the best parts of the business in terms of cross border. So Sharon, maybe you could just talk about how we win that.
Yes, sure. Know, Ed, when we have companies that come to Canada from The U. S. Or from The U. S.
To Canada, it's really helpful to them if someone can talk them through the differences and how they pay and get paid, manage their money and see everything in one place. And we've really used that expertise. We have a specialized group that both on the service and on the banker side that does that so that clients really see the benefit and we get really positive feedback at being able to help walk them through how they can be successful on both sides of the border. And then for us, we've really invested in simplifying our technology stack, eliminating systems. I think we've eliminated about five that used to run separately in Canada and The U.
S. Over the last few years, and that has a really positive impact on efficiency as we move forward.
Thanks, Sharon.
All right. Thank you all for that answer. I was actually hoping to have a lightning round at the end of the Q and A. And that last question was a bit of a doozy, and we used up a lot of time to give color in a great way on how we operate the business across different dimensions. So that concludes the Q and A.
We weren't able to get to all of the questions. But for those that we didn't get to, we will follow-up offline. And we'll now take about a five minute break and come back at 10:30 with Pat Cronin, our Chief Risk Officer, and the risk group. So five minute break. Thank you.
Thanks.
Hi, welcome back, everybody. That was a great first session. And in particular, we appreciate all the questions that we got in the Q and A. As Tom said, we weren't able to get through all of them, but we will circle back to you if you have questions that were unanswered. And remember, we've got another Q and A session at the end of the risk session, which I will join, so you can submit your questions on the app for that session any time.
At this point, it is my privilege to introduce our next team of BMO experts to lead the risk session. And this session will be led by Pat Cronin. As I was watching Nadeem Herjee present before, I was reminded that Nadeem was a senior credit officer before he took on his role as running one of our biggest commercial businesses. I've worked for Pat for decades, who, as all of you know, had business roles becoming before becoming our Chief Risk Officer. And in all the roles that I've observed Pat in, I've always seen an exceptionally sophisticated understanding of risk and an ability to operationalize his knowledge.
Pat is one of the very few people who has a unique understanding of business sophistication and risk acumen at the same time. He's been a steady hand for BMO for his entire career, particularly over the last couple of years as our CRO and particularly in this unique 2020 environment. Pat leads an exceptionally seasoned and experienced team that you heard Dave talk about earlier. And you'll hear from them today as well, our senior commercial credit officers, Dean Anastas, who is here in Toronto and Mike Wood, who is in Chicago as well as Jim Gallagher, who is here with us in Toronto as well, who leads our special accounts Management Unit. I said to you at the beginning that the commercial bankers had one hundred and seventy four years of experience spread across the seven of them.
So this group of four is comparatively young, with only one hundred and eleven years of experience between them. But like the North American commercial banking team, the risk team is fully integrated north and south. They manage consistently within the risk appetite, north and south. And they have superior credit monitoring all the way across our portfolios in commercial banking. So my objective is that you'll leave this session with a better understanding of what's behind it, what's behind it when we say that the risk management approach based on our track record and our expectation of the future is defining, and it's a differentiating competitive advantage for our bank.
So with that, I'm going to turn the session over to Pat.
Thank you very much, Daryl, for those kind words, and good morning, everyone. There are definitive conclusions to be drawn from our long and proven track record about performance with respect to credit risk management. And so I want to leave you with six key messages today. First, we have a very strong risk culture here at BMO. You've already heard Dave and all of his colleagues talk about it.
You'll hear us talk about it a lot as well this morning. And that includes a very well defined risk appetite, a well tested and intensive credit risk management process that served us well over long periods of time. Second, we're comfortable with the risk profile of a heavier weighting to business lending. Our greater weighting to business lending is by design, and that's founded on our experience that business lending has lower loan loss rates than consumer lending over long periods of time. Third, as you also heard Dave say, we are very strategic about diversification.
Maintaining proper diversification is core to our lending principles. And by the way, it also pays off when sector issues hit like oil and gas in 2015 or even when broader issues hit like COVID in 2020. Fourth, loan structure is just as important as who you lend to. And of course, while elevated levels of impaired loans are troubling, what ultimately matters are loan losses, which are a function not only of impairment, but also on how much we recover on an impaired loan. So loan structuring is one of the reasons that we outperform our peers on the impaired PCL rate despite having a similar proportion of our business loans going impaired.
Fifth, we are diligent about stress testing. We're in the risk taking business, and we're not always going to get everything right. And so we think it's critical to understand what could happen, what the range of outcomes could be, what the tail risk exposure might look like should things go wrong. Sixth, our recovery expertise here at BMO drives lower loss rates. Now we believe the surest way to maximize impaired loan recovery is to get the customer back to performing status.
That is our primary strategy post impairment, and we're very good at it. But when that's not possible, we're also very good at maximizing recovery value. And both of those are true because we have a specialized team that Jim Gallagher leads that works in close partnership with the businesses to maximize impaired loan recovery. Now with that said, results are what matters. And so I'm going to show you the result of all those things that I just talked about.
Strong risk culture, smart mix and diversification decisions, stress testing for tail risk, sweating the details on loan structures, and building up a world class recovery team all adds up to this track record. For the majority of the past thirty years, we've outperformed our peers when it comes to the impaired loan loss rate. For the past thirty years, our average impaired loan loss rate is 38 basis points. And over the past thirty years, our impaired loan loss rate has only gone above 100 basis points once, twenty eight years ago. So I'm going to start with risk culture and our credit risk management process this morning, because to me, this is the most important message that we'll deliver today.
To put it more directly, we would not generate that thirty year track record that I just showed you without a strong risk culture across all three lines of defense. And we see risk culture really as the combination of three key things. First, every risk we take starts with a clear and consistent risk appetite. And you'll hear a lot more about this from Dean and Mike, but both the line of business who are originating the loans and the credit risk officers that are approving them know precisely what fits within our risk appetite by sector, by product type and by risk rating. Maybe I'll put it even more simply.
When you've been a leader in the commercial lending business for as long as we have, you have a pretty good idea of what you like and what you don't like, what works and what doesn't work. You also know that you do not change risk appetite lightly. We don't change the way we do things in order to chase opportunities or drive growth or because the market happens to be getting more active. That's most likely procyclical from a risk perspective, and it's certainly a red flag for risk culture. We also don't have different risk appetites, policies, limits, processes for The U.
S. Versus Canada. We have one harmonized and consistent approach in all of our markets. Now we segment our risk appetite into many granular expressions. But at the top of the stack, we express our credit risk appetite in terms of an impaired loan loss rate.
And that's defined as PCL on impaired loans as a percentage of gross loans. Or more simply, what percentage of loans can you tolerate writing off? And our risk appetite for that impaired loan loss rate is set by the BMO Board of Directors, and it's expressed in terms of a green, yellow and red range. Our green range is 18 to 35 basis points. Our yellow range, which means still within risk appetite but warrants some deeper scrutiny, is 35 to 50 basis points.
And it's not until we see the impaired loan loss rate going above 50 basis points that we would call that the red zone and would represent losses above which we would expect, given our risk appetite. The second important part of risk culture is personal accountability for credit decisions. Now as you heard Dave say very clearly, the first line owns the risk, and they're accountable for the outcomes. And to properly exercise that accountability, we require the credit risk decision makers in the first line to be what we call credit qualified. That means that they've gone through formal credit risk training.
And as a matter of fact, many have actually worked in the risk department, some for many years. And Dean will talk a little bit about that further, I'm sure. We then allocate discretionary limits to those first line decision makers. So they own the decisions in the truest sense. And those limits are based on their level of seniority and their level of credit expertise.
And if those first line decision makers don't exercise their authority properly so in other words, we take an unexpected or an avoidable loss they can see those limits reduced, or they can either lose them altogether. The third part of culture is having two equally strong and effective lines of defense: making decisions independently, challenging each other, of course, but also working in close partnership. Now you just heard me describe the experience of the first line credit decision makers, which is excellent and, I think, the highest industry. But that first line is independently and challenged independently assessed and challenged by very seasoned credit risk officers in the second line as well. The second line is, in most cases, embedded locally with the businesses so we can truly understand the geographic nuances and the client specific idiosyncrasies of local markets when we make credit decisions.
And we have a large and very strong team of seasoned second line credit risk officers. Many of them have come from the businesses from the business themselves, which we think actually makes them better credit risk officers because they understand the businesses and the clients as well as risk. And then they often rotate back into the business. And consequently, we now have many frontline bankers who work in the risk department with formal risk training. I'd now like to turn things over to our two most seasoned and most experienced credit officers: Dean Anastas, our Head of Corporate and Commercial Credit in Canada and International and Mike Wood, our Head of Corporate and Commercial Credit in The United States.
Dean and Mike are going to walk you through our credit process. Because as you heard me say at the outset, that process is a big part of why we consistently get the credit results that we want and why we consistently outperform our peers with respect to credit risk management. So with that, Dean, over to you.
Thanks, Pat. Just before Mike and I walk you through our credit processes, I'd like to expand on our risk culture and how we got to where we are today. Seven years ago, we made a strategic choice about how we would manage credit risk based on the principle of managing risk by risk type. This was a departure from the management of credit risk at the line of business level. Over the seven years, Mike and I have worked as one to harmonize our systems, processes and policy framework using best practices.
This helped us get to a place where we now operate as one bank across all wholesale business activities in Canada or The U. S. And small business or large corporate. There are fundamentally no material differences in how we operate from a variety of perspectives. Risk, risk appetite is risk appetite.
Data collection, all of our wholesale lending data, regardless of the line of business, is on a common platform. And talent management, risk culture exists within people. The
seven
year journey has been an important part of embedding our risk culture throughout our wholesale businesses. During that time, we've actively rotated talent between first line, second line and SAMU, and are now at a point where there are senior leaders in every wholesale line of business that have rotated through credit at a senior level. When we talk to our first line colleagues about credit risk, risk appetite or risk reward, we are talking the same language. This defines risk culture to its core and has allowed us to grow responsibly. Now I'd like to turn it over to Mike.
Okay. Thanks, Dean. I'm going to take the next few minutes to talk about how BMO originates and manages commercial credit. I'll focus on four components of our process that I think are critical to the growth we've achieved and critical to the strong asset quality results we've had over many years. At BMO, it all starts with defining our risk appetite in industry sectors and products.
For our existing businesses and any new business or product that we decide to enter, we start by the line of business and risk jointly establishing our risk appetite. Those definitions of risk appetite are referred to internally as our financing guidelines. And a typical financing guideline would address things like counterparties, desired credit structures and financial metrics of the borrowers that we would be pursuing. We have over 85 financial financing guidelines for our commercial business. And we believe that the clarity we put into setting our risk appetite and doing it before we actually pursue new business allows our bankers to pursue the right opportunities, to act with confidence when they're in client facing situations, and it minimizes waste that occurs when you spend a lot of time and money pursuing transactions that ultimately don't get approved.
A second key attribute of our process, and Pat alluded to this, is personal accountability in credit decisioning. We operate a signature based approval system. We don't use credit committees within the commercial business. The lines of business own the risk. They originate, assess and recommend transactions.
And the risk team reviews and approves those transaction. And risk also provides oversight of the process and the portfolio. As Pat indicated, the line of business personnel and risk personnel have delegated authorities to recommend and approve transactions. Those limits are delegated based on the skills and experience of the people. And again, as Pat indicated, we do hold people accountable for the decisions they make in the credit process.
I believe Dean will expand on this a little bit in just a moment. Another important feature in our process is the screening of new transactions. While we take a lot of time to define our risk appetite, we recognize that not all deals fit neatly within our guidance. So early screening of opportunities allows us to ensure that we're pursuing things that are on strategy, that have acceptable return attributes and acceptable risk metrics. This helps with our efficiency.
Between the financing guidelines to define our appetite and the screening activity, we find that many deals are declined long before we invest a lot of time and energy in the deal and certainly before they enter the formal approval process. When we do deals that might have an attribute that is outside our stated guidance, it could be a credit metric or a structuring aspect of the deal, We capture those transactions as exceptions. We have elevated approval levels to do those deals. And Dean will talk a little bit about the portfolio management and oversight we bring to our exceptions. The final component I wanted to talk about for a moment is monitoring.
The lines of business and risk review and migrate the risk ratings of our portfolio as our client performance evolves. We are very proactive in engaging with our special accounts group. Jim Gallagher will talk in a minute about the mandate of our special assets group. We believe that this early identification and engagement with SAMU special accounts group, is critical to our credit culture within the bank. While at times it can result in us accelerating the recognition and reporting of watch and impaired balances, we think it's fundamental to working with our clients to address issues early, to help them return to financial health.
And when that's not possible, we think early identification and engagement with special accounts group leads to lower losses for BMO. So now I'd like to turn things back to Dean in Toronto, who will expand a little bit on some of these process issues and touch on some portfolio management topics. Dean, over to you.
Thanks, Mike. And I'd like to pick up where Mike left off on BMO's approach for originating and managing commercial credit. I'll focus on our monitoring activities, which are done at four levels, from macro to micro and all equally important. First, at the enterprise level, where our wholesale loan book includes exposures in both corporate and commercial. We actively manage diversification across the wholesale loan book by industry, industry subsectors, geography, single name and growth.
To do this, we set enterprise industry limits, which are measured on a notional and economic capital basis. Industry limits are reviewed regularly by our first and second line business leaders and communicated up to the bank's risk management committee, which is made up of our most senior leaders in the bank, and our risk review committee of the Board. Setting industry limits is informed by rigorous stress testing. Stress tests typically include both a one in-ten year and a one in-one hundred year stress scenario so that we can understand the effects of a normal economic downturn as well as a major tail risk event. Second, at the portfolio or segment level.
We follow a similar playbook. We establish a risk appetite in our financing guidelines, and we get pretty granular about describing what we like and what we don't. As Mike discussed earlier, we have multiple financing guidelines covering industries and products. An example of an industry is commercial real estate. And within CRE, we have a financing guideline for builder developer, one for investor owned properties and one for REITs, as each have different risk attributes to consider.
Take, for example, the investor owned financing guideline. First, we define what it is, namely credit risk exposure to obligors that own commercial real estate properties intended to generate a profit, principally via rental streams from leases with unrelated third parties. Then we define our risk appetite by quality of obligor, property type, whether there's recourse to the owner or not, and finally, key metrics to measure credit risk, including loan to value, loan to cost and debt service coverage, which can differ by property type and whether there's meaningful recourse. Finally, for those transactions on the edge of risk appetite or outside of
it,
we articulate elevated sign off requirements in both first line and second line. Then we manage exceptions to a strict threshold. When we hit that threshold, discussions commence between senior leaders in the business and credit to determine if the financing guideline is too tight and needs tweaking or if the business is focusing too heavily on opportunities outside of risk appetite and therefore needs to adjust its behavior. Risk appetite at the portfolio or segment level, again, is informed by stress testing. Using a one in-ten year and a one in-one hundred year stress scenario, we measure the last three years of net income after tax, NIAT, compared to the cumulative three years of stress losses.
We think hard about industry sectors that have a ratio of NIAT over stress losses of less than one. We think this is a good way to think about our risk appetite and strategically manage our way through economic cycles. Third, at the transaction level, Mike has already walked through our thought process, so I won't repeat. But safe to say our monitoring tools are extensive and are used throughout the life of the loan from origination through to collection. And lastly, at the individual performance level, before anyone can recommend or approve a credit submission, they must demonstrate credit risk proficiency, be formally qualified and given a discretionary limit.
This applies to our first and second line officers. Proficiency is measured by experience and demonstrated skills in assessing credit risk and structuring loans. Discretionary limits are then assigned accordingly. And all of our wholesale businesses have demonstrated high levels of credit skills. We also conduct annual reviews on all of our people carrying discretionary limits to determine if limits are still appropriate, require amendments up or down, and whether additional coaching is needed.
The metrics used to evaluate our people include the quality of submissions and decision making, speed of identifying issues at the borrower level and addressing them, timeliness of account reviews and evaluation of specific borrower loan losses, if any, to determine if the loss was avoidable or unavoidable. Now I'll turn things over to Jim Gallagher, who will talk about how we manage our borrowing customers that may be facing some headwinds.
Thank you very much, Dean. I'm Jim Gallagher. I head up the bank's Special Accounts Management Unit, or SAMU, as we call it. And I have four key messages for today: who we are, what we do, how we do it, and what we've done in response to COVID-nineteen. SAMU is a specialized group within risk that manages underperforming commercial and corporate customers with loans in excess of $1,000,000 This includes everything from family owned businesses to large corporates in every sector and region in which the bank operates.
Our team consists of 170 dedicated, seasoned and experienced commercial lenders drawn from all parts of the bank. In addition, we have identified and seconded numerous individuals from other parts of BMO to help us in response to COVID. Our mandate is to work with commercial customers who are encountering challenges and help them return to profitability. But where this is not possible, we seek to minimize loan losses. We are not a workout group.
We get involved in stress situations early to help our clients through challenging situations. We are particularly proud that the majority of the customers we deal with, we are able to get them back on their feet and return management of the account back to the line. In addition, we act as in a consulting capacity for the operating groups to help in structuring and advice when requested. How do we do it? We work with the frontline to early identify any problem accounts and portfolio trends.
By engaging early, we're able to help our clients develop appropriate action plans to return to profitability. This is fundamental to our culture of working with our customers through good times and in bad. And ultimately, over 60% of our customers are transitioned back to the operating group. Also, by getting involved early, we're able to improve our structure and collateral. This gives us more alternatives to correct the situation and ultimately leads to lower loss given defaults in the event that the loan does become impaired.
We work with our clients to develop customized action plans to address their specific needs. We engage appropriate expertise, restructure credit facilities, and establish key milestones to return profitability to our clients. Where that option is not viable or if we have concerns about the underlying business or management, we will seek to minimize losses by exiting the relationship. This can be achieved by refinancing elsewhere, sale of the business as a going concern, sale of the debt instrument, or foreclosure or liquidation of security and realization on guarantees. Although no one anticipated COVID and the impact it's having on the economy, we were ready for this.
We already had in place a clearly articulated game plan to deal with any sudden and unexpected deterioration in the loan portfolio, whatever the cause may be. As you've already heard repeatedly, for years, we had made a conscious decision to rotate people through SAMU to build out enterprise expertise in dealing with distressed loans and restructurings. This has two benefits. First, it leads to better, more well rounded bankers that are better capable at structuring transactions at origination to minimize losses in the event of deterioration of credit. And second, it allows us to develop a deep talent pool that we can draw upon quickly in the event of a sudden and material deterioration in the economy.
At the time of the COVID crisis began, we had over 100 ex SAMU employees working in other parts of BMO. Immediately upon COVID, we put our game plan into action. Working with the line, we identified many individuals to transition to SAMU as required, representing an increase in account management capacity of 50%. Most of those individuals had previously worked in SAMU or had significant credit experience and were able to hit the ground running. Currently, we have ample capacity to deal with the inflow that we have been experiencing, but we're also ready to add more capacity if required.
So key messages, we were prepared for this and have been preparing for years. We had a game plan in place with a clear action plan, which we immediately implemented. We are fully staffed with experienced professional talent, and we have capacity to handle more volume if required. And with that, I'll turn it back to Pat. Great.
Thank you very much, Jim. So we've talked about the main reason that was outperformed when it comes to credit risk: our risk culture, which includes our risk appetite, our people and our processes. So turning to the second reason why BMO was outperformed, our heavier weighting to business lending. Now as you've heard from our business colleagues, commercial lending has attractive returns. It certainly has good growth prospects.
But from our perspective, it also has attractive risk characteristics. And as I said at the outset, our experience has been that business lending generally has lower loan loss rates than consumer lending. And you can see that pretty clearly from the chart on the right hand slide the right hand side of the slide here, that business lending has driven lower impaired loan loss rates in every year of the past decade, save one, twenty twenty. And what we're seeing this year is not surprising. Business lending will likely experience higher losses than consumer lending during a severe economic downturn.
We saw that in 02/2008, and we're seeing that again in 2020 due to COVID. And we fully expect that we'll have higher business loan loss rates than consumer loan loss rates over the next twelve months. However, we also expect that over the next ten years, we'll see an average lower loss rate in business lending versus consumer. The third reason that BMO has outperformed when it comes to credit risk is consistent diversification. We've maintained that at the business and government level and in the sub portfolios like commercial banking.
And this, too, is by design. I'll draw your attention to the pie charts in the lower right of this slide, which is the current sector breakdown of our current business and government lending activity by notional exposure. And you'll see that no one sector is greater than 20% of our loans. The largest sector, services, is itself an amalgamation of many subsectors, some having little correlation to the others.
Now it would be tempting
to think that the relatively high business loan growth rates that we've seen over the past five years would come at the expense of diversification. And there certainly are sectors where it is very easy to grow if you're willing to concentrate your exposure. But as you can see, from the 2015 to the current quarter, despite two years of healthy high loan growth and a fairly healthy five year CAGR as well, our sector diversification has not materially changed. That has been by design. Now coming back to the loan growth just for a moment, you'll see in the upper right there our five year growth rate in business and government lending.
And while we certainly did have two years where we grew faster than the market, we also had several others where we grew slower, leading to a five year CAGR that's fairly similar to our peers. And when we drill down into the Business and Government segment to isolate just our commercial portfolio, we see exactly the same things with respect to diversification. So again, despite healthy commercial loan growth rates over the past five years, our sector diversification remains largely unchanged. And the other thing you might note from this slide is the geographically balanced nature of the loan growth as well since 2015. Now we did have strong loan growth in 2018 and 2019.
And again, it would be tempting to assume that this came from an aggressive push into The U. S. Market. And while we did see attractive growth opportunities in The U. S.
Over those two years, leading to an almost 15% CAGR in our U. S. Loan book, we had the exact same growth rate in Canadian commercial over those same two years as well. We also didn't materially change our loan hold sizes in commercial banking over this period. Currently, the average loan size across all of our commercial businesses is roughly $24,000,000 So our total lending exposure is spread across many discrete borrowers.
So you can conclude that we didn't drive commercial loan balances by disproportionately growing in The U. S. Or in any specific sector, or by dramatically increasing our hold sizes. The only remaining question is whether the growth came at the expense of credit quality. And the answer to that is no.
And let me walk you through why I say that. One of the things that we watch very carefully is, in commercial lending, is the weighted average probability of default of new borrowers.
And as you can and you
can see several things pretty clearly from this chart in the upper right. First, new borrowers have had a lower weighted average probability of default consistently over the past five years relative to the existing portfolio. Second, the weighted average probability of default of the new borrowers themselves has remained very stable throughout this period of time, ranging from a low of 64 to 66 basis points over the past couple of years to a high of 76 to 78 basis points in 2016 and 'eighteen. That is what you would expect to see when risk appetite and credit origination practices are consistent and stable over time. Now with that said, averages can mask pockets of problems.
So we also disaggregate the credit quality into risk rating buckets, and we watch how those evolve as well. If you look at the lower right chart, you'll see that every one of the risk rating buckets has been very stable over the past five years as well. Most importantly, the percentage of the portfolio that is in watch list or impaired is the exact same as it was in 2015. Again, that is what you would expect to see when risk appetite is clearly expressed and stays consistent through time and the risk culture is strong. Now it's clearly important to watch the metrics that I just walked you through, but the real test is, of course, the actual results.
How have these new borrowers performed with respect to impairment and PCL? And as you can see from the upper right hand chart on this page, the new borrowers that we lent to through 2018 and 2019 have not disproportionately impacted our impaired loan balances. At the start of this fiscal year, new commercial borrowers that were brought on during 2018 and 2019 made up 25% of the overall portfolio. And through the first three quarters of this year, those same borrowers, the ones that came on in 2018 and 'nineteen, averaged roughly 8% of our impaired balances and 13% of our PCL. So that's what the risk team is seeing so far with the commercial portfolio: stable credit quality, moderate loss rates.
And going forward, we have no plans to change our credit risk appetite, so we would expect that to continue. But we also stress test this portfolio regularly to understand what could happen should the environment get much worse. And as you've heard from Dean, we look at both the absolute loss and the capital demand under stress conditions, and then we assess the ability for those impacts to be absorbed within the earnings power of the segment being stressed. And we, of course, stress test the portfolio at the aggregate level across all our credit books, but we also stress test at the sector level and even the subsector level. And we don't just use one or two canned scenarios.
You can see from the example here on the right hand side of this page, and this is a real live example for our CRE portfolio this year, we'll stress test even subsectors under many different scenarios so we can truly understand the tail risk, and we can take appropriate action should we see any real probability of those scenarios unfolding. And as you heard Dean say, we do also use those stress tests, amongst many other things, to shape the size of the exposure that we're comfortable with as a company. As a general rule of thumb, we think that if our risk appetite is sized properly, the net income from the segment being stressed should cover the losses from the segment being stressed under extreme but plausible conditions. As I said at the outset, loan structure is another very important reason that BMO outperforms when it comes to credit risk. Of course, we are very diligent when we build relationships to select clients that have a probability of default that's consistent with our risk appetite.
But we work just as hard to structure the loans themselves to minimize losses in the event of impairment, specifically by making sure that we have good asset coverage. Now we are very good cash flow lenders, and that's usually our primary source of repayment. But we almost always have a secondary source as well with asset value or even specific segmented hard collateral. And we lean more heavily into loan product types that experience lower losses when they become impaired:
asset flow, equipment financing,
loans against uncalled but committed capital, real estate secured loans. All of these have very low loss rates when they become impaired. And those loan structures can really make a difference, particularly in periods of acute stress like we're seeing right now with COVID. And here's an example. In the third quarter of this year, approximately $262,000,000 of our total commercial formations came from loans backed by assets or specific collateral.
That's 31% of all the commercial formations we saw in the quarter. And against that $262,000,000 of formations, we took no PCL. Same story in Q2, where we had $152,000,000 of commercial formations and asset backed loans. That was 20% of all the commercial formations we had in that quarter. And against those impaired formations, we took PCL at a rate of $0.10 on the dollar.
That's why loan structure matters. That's why we sweat the structural details. And that's part of the reason that we have lower PCL rates than our peers, despite having similar impairment rates. And structural protection isn't just limited to collateral. It also means that we're at the front of the line when it comes to recovery.
Right now, in our commercial lending books, we have virtually no second lien or junior positions with our customers. Stating the obvious, but that matters when it comes to recovery on defaulted loans. Now you can really see the benefit that loan structure provides quite clearly on this chart on the right hand side of this page. And this shows what we've actually taken in terms of PCL each quarter as a percentage of the impaired formations in the quarter. And while it can certainly vary from quarter to quarter, it's averaged $0.30 on the dollar over the past three years for all the impaired loans that we've seen in commercial lending.
So as you think about what our real loss is in this business, you really have to think about it as a function of two things. First, the probability of default, which we showed you on one of the prior slides, which has been quite stable over time and has ranged between seventy five and ninety basis points over the past six years. Second,
how much do we expect to
lose when default actually happens, which, as I just showed you, averages about $0.30 on the dollar.
So when
you put those two things together, probability of default and loss given default, you get the expected loss rate. And in this case, when you do that math, you'll see that our expected loss rate right now in commercial comes out to 25 basis points, or almost exactly what our actual average loss rate has been in business lending at BMO for the past fourteen years. Again, that's not a surprise when risk appetite remains stable and is clearly understood. The last thing I want to talk about today is COVID, how we're seeing it impact the portfolios as well as giving you a
little bit more up to
date information with respect to utilization rates, credit migration and payment deferrals. Now I said after Q3 that we were cautiously optimistic based on what we were seeing after two quarters of COVID impact. And here's why. First, I said that because utilization rates of committed facilities have returned to pre COVID levels after really peaking late in the second quarter. Well, as of mid September, our average utilization rate sits at approximately 32% across both commercial and capital markets, with only one industry sector being above 38%, That's agriculture, which has been stressed in The United States since well before COVID.
Second, we were cautiously optimistic because credit migration had been slightly more modest than we were anticipating. As of mid September, net negative credit migration continues to be slow across our commercial businesses. Net negative migration peaked in April and has been declining steadily ever since. We saw minimal net negative credit migration in August, and we're seeing the same through mid September. The amount of negative migration observed within the segment of new borrowers from 2018 and 2019, so that period of high commercial loan growth, is generally better than what we're seeing for borrowers brought on prior to those two years.
As of mid September, our percentage of loans impaired is roughly unchanged versus Q3. Our percentage of loans on the watch list is roughly unchanged versus Q3. Our percentage of loans in the two lowest categories of sub investment grade is largely unchanged versus Q3. I strongly caution this could, of course, change between now and the end of the quarter, but that is what we, as a risk team, are seeing so far. Third, we were cautiously optimistic because only a modest percentage of loans coming off payment deferral were going delinquent.
Our experience in commercial with expiries of payment deferred loans continues to be encouraging. Of the roughly $25,000,000,000 in loans that have been given some form of payment relief, as of mid September, approximately $16,000,000,000 or 64% have now come up for expiry. So we have a very good data set to gauge the potential for default. And so far, what we've seen is roughly 8% of expiries are extended for a second round of payment deferral, typically for an additional three months. And of the ninety two percent of expiries that did not get extended, the vast majority of those have resumed payment.
The delinquency or default rate amongst those loans that were not extended currently stands at roughly one point seven percent across all of our commercial businesses as of mid September. Now we do expect that rate to rise since the loans that remain on deferral are likely a lower credit quality relative to those that expired. Now that said, with roughly $10,000,000,000 of loans remaining on payment deferral, even if those loans saw a 5% default rate, so significantly above what we're currently seeing and especially factoring in the expected loss given default, I'm sure you'll conclude that the PCL impact is more than manageable. Lastly, turning to the COVID impacted sectors that we highlighted in our Q3 disclosure, we'd just like to give you a little bit more updated information. And this data is for North American commercial only and is as of mid September unless otherwise indicated.
And what you can conclude from that little blue chart there in the middle of the page is the following: We've reviewed and updated our risk ratings for roughly eighty one percent of the borrowers in the impacted sectors. With 31% of all balances seeing net negative credit migration, you can conclude that we've been disciplined about recognizing the credit migration that's occurred so far in these books of business. With 2% of the loan balances across those impacted industries being impaired, you can conclude that impairment remains manageable and likely reflects our prudent approach to lending across all businesses. And more importantly, we've also seen a fairly modest amount of PBL so far, reflecting both that prudent approach to lending and the strong structures that we've talked about. Now with 6% of the lending balances of those impacted sectors currently sitting on the watch list, we do expect more impairment is still to come.
But if you again apply our traditional loss given default rate to these balances, you'll conclude again that the potential for loss is clearly manageable, especially factoring in our current performing loan provisions. Now there are, of course, other subsegments of the portfolio that can and likely will be uniquely affected by COVID and broad segments of our credit portfolios that will be affected by the general economic weakness. We are actively monitoring all segments with stress tests, borrower level impairment forecasts and countless meetings with our business colleagues and the customers themselves. And all of that is reflected in the overall loan loss guidance that we provided at the end of Q2 Q3, excuse me. So to recap what you've heard from the risk team this morning.
Since the end of Q3, we have not seen anything that would cause us to change our guidance or the cautious optimism that we expressed. We do expect credit conditions to remain under stress. And likely peak stress and peak impairment is still to come in the next fiscal year. With that said, we remain comfortable with the credit risk profile of our commercial business. Both the longer term and the recent credit risk performance of this segment has been well within our risk appetite and consistent with our expectations, given the broader credit and economic environment.
The strong commercial loan growth that we saw during 2018 and 2019 has not led to a deterioration in credit quality, nor has it disproportionately contributed to impairment or PCL this fiscal year, even under acute macroeconomic stress. And all of that is a function of the key messages that I outlined at the outset and that the risk team has detailed throughout this presentation. Our outperformance in credit risk management is demonstrable. It's driven by a very strong risk culture, robust and consistent credit processes, an excellent recovery team, healthy diversification, diligent stress testing and lending structures that have proven to drive lower loss given default. And the results show that.
We now have a long and consistent track record of disciplined commercial lending and a long and consistent track record of outperformance on credit risk management at BMO. Hopefully, today has given you a little bit more perspective as to how we do it. So that concludes my formal remarks. I'd like to turn it now to Tom for some Q and A.
All right. Thank you, Pat. All right. Thank you, Pat. That was great.
I think that was a really good deep dive overview of our approach to risk and the way we manage it. And we're now going to go to Q and A. So this will be another twenty five minute session for Q and A. We have, in addition to Pat, Darryl here up front with us. So Darryl is open for questions.
And I'll direct some questions as well to Dave Casper in Chicago to help out as it makes sense. So you've got the group of us. So first question, Pat, will go to you. Question is from John Aiken, and it is as follows: Your long term PCL ratio of 38 basis points is in the yellow range of your Board's risk bands. In your discussions with the Board, are they comfortable with this?
Or are you looking to move into the green over
a long term cycle? Well, first, thanks for the question, John. And I'll stress what I said earlier in my comments. The yellow range is still within risk appetite. And so the short answer to your question is, yes, the Board is comfortable.
With that said, what yellow means is we unpack what's going on with some deeper investigation to understand what's driving it. And on the basis of that investigation, are we still comfortable with our risk exposure? And as I've said in my comments as well, as we dig into the portfolios, we understand what's driving our losses, we stress test for further losses, we remain comfortable that the 38 basis point number is within our risk appetite. And as I said as well, it doesn't really drift into the red zone until we get above 50 basis points. And those things are sized based on an understanding of what conditions will look like over time.
And so if from time to time you don't drift up into the yellow or maybe even to red when you have really extreme economic conditions like we're seeing now, then it's likely that your risk appetite is maybe not calibrated quite right. You should breach some of those limits when you get into extreme conditions like we're seeing right now. So yes, the Board remains comfortable as we do as a risk team, as we do as a leadership team here at BMO.
All right. Thank you, Pat. Next question, I think it will be good to hear from both Dave and Pat on. And the question is, how challenging is it to make a new commercial real estate gain sorry, a new commercial real estate loan today? And from a risk return perspective as well as from a structuring perspective, kinds of things are you considering?
So Dave, as the first line maybe makes sense for you to start, and Pat, you can follow.
I would say it's challenging, but to back it up, we wouldn't make the loan until an investor or developer comes to us with a particularly a new idea. And today, just given the uncertainty, there isn't as much capital flowing into the real estate market in The U. S. Or Canada as there would be before. They still have to make their returns.
We're going to be more diligent than ever, as are they. We're going to require a big chunk of equity. So there's a lot of uncertainty. It makes it challenging. That said, I think there will be opportunities.
We are, as we said in The U. S, we're certainly well underweight most of our regional competitors in terms of real estate loans. So as the market comes back, there will always be some opportunities. We will not be in a position where we have to jam down our exposure because we're overexposed, and there will be some opportunities. Office is very challenging today, but I would say we've seen, certainly with brand new offices, as they lease up, even if they're not finished with construction, we don't have that exposure.
But they will be they will attract more tenants. As leases run off in other places, Companies will need less space, but they will want new space, best in market, best in class HVAC systems, touchless elevators, etcetera. So there will be some opportunities. Today, short answer, it's challenging.
So you've heard Dave talk about how challenging it is to originate. Maybe I'll just make a comment on how we feel about approving. And I would say our view hasn't really dramatically changed. And I say that because, you know, CRE is another one of those sectors where I would say we're cautiously optimistic. And what we're seeing so far would be actually very low impairment.
We're running impairment rates in our CRE portfolio in and around 15 basis points, so quite low. PCL has been very low, almost nil, likely reflecting that low impairment rate plus really strong structures. Seeing really good results for loans coming off payment deferral and CRE. They're running default around 25 basis points, so well, well, well below the average we're seeing across the rest of the portfolio. And then maybe drilling a little more micro, we're actually seeing really good trends in terms of rental receipts as well.
If I look across all of the different CRE segments, we're seeing rental receipts in the 85% to 95% of normal levels across pretty much the entire portfolio. So from our perspective, the segment is actually holding up quite well. And then as we look forward, to the extent we do originate new loans, CRE loans are actually very well structured. For us, outside of the REIT portfolio, the vast majority of all our CRE loans are secured, and loan to value typically runs in the 55% to 60% range. So we're not naive enough to think there won't be asset erosion in the segment, but you'd need a fair bit of asset erosion in the future before we would start to take losses.
And the sector is actually quite diversified for us across all the different CRE property types. So we think that provides us with a lot of protection. Our largest exposure is to multifamily, which we think the medium and longer term trends are quite good for. So from a risk appetite perspective, maybe to Dave's comments, the only thing that we're looking at, at the moment is office. We have a relatively low proportion of our portfolio in office exposure.
We think we lend to extremely high quality landlords that have been through cycles before and understand how to manage stress. We think the stress will manifest over the course of time. So we've got time to work with our clients to help them to transition to a new model for office. And so we're comfortable continuing to look at opportunities that Dave's team originates.
Okay, great. Appreciate the color on that from both of you. Next question is for Daryl, and it's related to capital allocation. Question is, you've noted the overall relevance of North American Commercial to the entire bank. On capital allocation, canshould the bank allocate more resources to the business?
And how might this change over time?
Okay. So thanks for the question, and it's a really good one. I guess here, Tom, I would start by reminding of the portfolio diversification strategy that we really like. We like the geographic diversification. You've heard me talk about 35% of the bank's earnings from The U.
S. You've heard me talk about the diversification as between businesses. And I think that we're continuing to see through this environment, we're seeing the benefit of our diversification and the actual earnings that we see in the bank. And I would expect that to continue going forward. Would we continue to allocate capital to this business or any other business?
There, we make decisions every day, every year on allocating capital to the businesses that we think can drive the objectives that we've got. Are they on strategy? Are they accretive to the overall objective of the bank?
And are they
able to help us meet our objectives to improve our ROE and decrease our efficiency? So in the last couple of years, you saw quite clearly that the commercial bank was able to help us do all of those things. And I have a point of view that the business recovery, whenever we get there, it may take time, and we're not calling it yet. You heard some comments from Dave earlier, which I agree with. The business recovery will come.
And when it does come, we see real opportunities in this business. In the meantime, I think that we'll see a little less capital allocated to this business, but it's mostly demand driven. We actually don't see the same demand for the product today as people are waging against the uncertainty. But as soon as we see the release, it feels like a couple of years ago when we saw a release in the commercial business, we'd have no problem increasing our allocation in this business, to a point. I don't like talking about artificial barriers, but to a point because the opportunities will be there to drive the ROEs that Dave talked about earlier and to continue to drive the efficiency ratio at the bank down and all within all of the parameters that Pat talked about before.
All right. Thank you, Daryl. If I can ask a question back to Pat, and this is from Darko. Question is, as loans become impaired, why assume LGB is stable? Many assets will be foreclosed upon and sold at the same time, which could impact asset values.
Why is the current LTV not somehow over or understated?
Yes. That's a great question. I you know, I think, first of all, the track record that we showed you around LGT at $0.30 and the dollar, you know,
if you go back and you can
do this by going through the sub pack and look at this for yourselves, but I think, you know, you'll find out that, that isn't something that's a phenomenon of the last three years. You know, if you look back over the better part of the last decade, you know, that has been a pretty consistent loss rate for us. And why am I comfortable that it's going to hold going forward? It's because of what I said. We lean quite heavily into structures that lend themselves to low loss given default.
And, you know, there's obviously a chance that the mix of impairment could change away from some of those secured type loans. But I will tell you that, we tend to lean much more heavily into security and asset backed and segregated collateral for loans that are riskier. And so to the extent that we're going to see riskier loans likely bubble up into the impairment bucket, it's actually a higher likelihood that they'll also have security associated with them. For instance, in the third quarter, we had two formations from the retail sector, very large chunky formations, and both of those were ABL structures for which we took no PCL. And so, you know, that's what I expect to continue to happen.
Of course, there are going to be other borrowers where the LGD is higher in some segments. But I think as long as impairment unfolds in the sectors where we expect, with the types of structural protections that we've embedded across all of our loan portfolios, I would expect that, you know, it won't be exactly $0.30 but it's going to be within that range, which is what we've seen over the better part of the decade.
All right. Thank you, Pat. Next question is for Dave on transportation finance. And the question is, this business has grown by about $2,000,000,000 in balances over the last few years. Given the credit experience, why would the bank continue to target this sector for loan growth?
Well, first of all, it's been a business that since we've acquired has grown steadily and probably increased a little bit more growth wise in Canada than in The U. S. We like the business for a couple of reasons and we like it through the cycle. The business has a higher risk, but also has a higher return. And through the cycle, we've maintained that.
It's not targeted to grow any faster or less than any others. It's basically based on the demand. I think there will be demand increasing over the next two or three years, but it will be slow for a period of time. And again, we like the diversification. And we like that business because it crosses into all of our businesses and touches our diversified business, our businesses in Canada and The U.
S. And we just think it's a well run business. It's a leading business. So we're always going to be able to pick and choose the best clients. So we like it.
It's not going to grow any faster than others. It might even grow slower, But it's still a good long term riskreward business for us. UNIDENTIFIED Okay, that's great.
Thanks, Dave. Next question is for Daryl related to business mix from Abraham. Question is, from a business mix standpoint, do you see U. S. Operations continuing to increase as a percentage of consolidated EPS?
And if so, how do you think about balancing this with the overall bank ROE target? Yes, it's a
good question. Thank you for it, Ebrahim. I would say in the near term, I've said before, and I'll say it again here, we like the mix the way is. So I think the mix is very good. It provides us with the growth opportunity to take share in The U.
S, which is a lot of what you heard about today, and to defend share in Canada. So the mix feels pretty good in the environment that we're in right now. Over time, if you cast your mind out a couple of years beyond that, could we see increasing share of earnings from The U. S? Sure, we could.
But it will depend on the circumstance, and it will depend on us leaning in on businesses where we think, again, we're accretive to the overall objective of the bank, efficiency and ROE. So earlier, when you look at the commercial business, we already have an accretive business that, on both ROE and on efficiency relative to the overall bank's objectives. So if we were able to continue to grow there and by the way, we don't need to do that by acquisition. We're able to do it organically, as you heard today, by continuing to push out and use the skills that we have and attract the best people and attract the best clients in other markets. You could see us do that, and it might therefore creep up slowly in a couple of years.
So long way of saying I'd see it somewhere around stable for the next little while. And as the environment presents opportunities, we'll always look at things that will improve the ROE and efficiency of the bank.
All right. Thank you, Daryl. Next question is from Gabriel. The question is for Pat. It's a detailed question, so I'll let you take it as you like, Pat.
Question is led with a comment, which is that at the end of Q3, 16% of our wholesale loans were classified as Stage two, up from seven percent at the beginning of the year. And question is, what proportion of these loans do you expect to migrate into impaired status?
That is definitely a detailed question. I'll say two things. First of all, I think the you have to assume that not only is the migration from Stage one to Stage two a function of the economic environment, so it's logical you'll see some there. Part of it is the fact that we actually have gone through and done a very significant proportion of our portfolio through our risk a rerating process. And so we've actually gone through most of our borrowers across all the portfolios and rerated them.
And as a result of that, you're seeing probably a disproportionate migration to Stage two in the particular quarter than you might see in a normal quarter. As far as what migrates to Stage three, that's a really difficult question to answer. It really depends in large part on how the trajectory of the recovery unfolds. But that said, as I said in my formal remarks, we've done some really, really detailed bottoms up forecasting around impairment. We've done a lot of stress testing.
Dave has met with many, many clients, as has Daryl. So we have a very good perspective on what's happening out in our client base. And all of that has been baked into that guidance that I gave you at the end of Q3. So to remind you, I said I thought impaired loan losses in terms of the rate would likely be in the 40s somewhere on average over the course of the next fiscal year. And so that's baked and baked into that is our assumption around what we think will migrate into Stage two or even Stage three, sorry.
Daryl or Dave, you speak to clients a lot more than I do, maybe a perspective on what they're saying in terms of how this is all shaping up.
Well, I think exactly what Pat said and what we if my team was all here in Canada, U. S. And Texas, they would say the same thing. We've been surprised at how resilient our clients have been. I shouldn't really be too surprised because we do think we picked more winners.
And the winners see this actually as an opportunity. They're pulling back. They're laying off people. They're managing their expenses. And they're ready to pounce on less disciplined competitors.
So I see, as this thing turns around, they will be opportunistic, as we will, to bank the winners, grow the business, they'll grow their companies, and I think they're ready. Nobody's ever seen this before, but they've certainly seen things that lead to the demand falling off, not to the level that this has, but in many cases, as I've said, on both sides of border, companies have been very entrepreneurial in how they've looked at their business, how they've managed to keep their revenues going and manage their expenses. So I see it coming back, and I see this will be the test of our client acquisition strategy. Did we pick the winners? Did we pick the ones that will grow and grasp onto this opportunity in the years ahead?
In. I allowed to jump in? Jump in. So just something you said, Dave, reminded me the outhouse analogy that you gave. I sort of see what might happen here over the course of the next year, maybe a little longer.
We'll see how long it takes. But in 2017, all of our clients, Dave, in the commercial business, in particular in The U. S, had this pause as there was a known tax reform and fiscal reform coming, but the details weren't known. And so what happened was there was a pause on that pouncing that you talked about, whether it's spending on a capital formation activity, whether it's M and A, whether it's moving harder on a competitor and making investments in order to do that. And then when clarity came, there was a release.
And my own view is, for very different reasons naturally. We're kind of in that suspended animation right now. The loan demand, as you all know, as you've seen across the industry, has tapered off. I expect that will continue for some time as we go through the uncertain phase. But when the business owner decides that there is more clarity, there is more stability, they do move quickly.
And I'm particularly comfortable when I hear Pat's analysis of how we're positioned between now and then and Dave's analysis about how ready we are to take advantage of that environment when it comes. I think we've got a lot of good days coming. It will take a little bit to get there, but it's a pretty interesting formula for us in our mix.
Maybe just one follow-up
The on that as other thing that we're definitely seeing when it comes to both impairment and PCL is that it's actually quite concentrated when it comes to sectors. And so, I'm not surprised to hear Dave say that a large cross section of his clients are actually feeling, better than expected because we're seeing that in impairment as well. And even in migration, where we're seeing heavy credit migration and heavy impairment is quite concentrated in sectors that are very impacted by COVID hotels, restaurants, entertainment and leisure activities, a little bit in manufacturing. But outside of that, we're seeing also broad cross sections of the portfolio that where migration is actually quite low and impairment is, in some cases, very low to nonexistent. And so I would expect that to continue.
Assuming the trajectory of the recovery continues the way it is now, I would expect that to continue. And to Dave's point, see a lot of those clients and other segments to actually turn on to the offensive in terms of the instead of defense. Okay.
That's great. Really good perspectives across that question from different angles. Next question is from Scott Chan. Pat, it's for you. And Dave, you might want to add to this one.
Question is, can you provide examples on loan restructuring and structuring that has led to better outcomes than peers on impaired loan losses for impaired loans over time?
Well, sure. I talked a lot already about structure, and I gave you some specific examples in terms of formations from Q3 and Q2. Some of those came from the retail segment, where we're heavily ABL lenders. Some of those came from other areas like dealer finance, where we're secured. But maybe I'll talk about then the process that happens within the special accounts team that Jim runs.
There, as Jim said, about 60% of those accounts actually end up going back into performing status because we can sell off noncore assets from them for them or we can orchestrate equity injections. And that happens quite regularly. Jim's team is very good at that. And I would expect that to continue, particularly because when we look at the number the type of account that's going into, the special accounts group right now, the vast majority of them are clients that actually just need a bridge to the other side of COVID. The business model is actually quite sound.
The revenue potential is there on the other side of COVID. So we just need to bridge them. And sometimes through asset sales or fixing the capital structure, you can actually repatriate a significant number of those clients back into the business. But that's probably 60% of the tools that we use. The other 40%, probably in this order, would be where the situation is not that dire, there are lots of lenders out there right now that are more aggressive than us that will actually take us out and refinance those relationships.
So we'll take advantage of that from time to time. Often, are able to orchestrate the sale of businesses as a going concern, And that's a very core strength to us, particularly with a bank that's as strong as we are in M and A. That's a really effective tool. And I would say probably the last resort, and actually quite rare for us, is actually just outright liquidation. And so maybe to that earlier question about why we don't expect significant deterioration in asset value from impaired loan sales, it's because we don't actually resort to liquidation very often.
And I suspect that's going to continue, particularly when you look at the nature of the borrowers that are migrating to our special accounts group, I don't see a significant uptick in liquidation because we just have so many other tools at our disposal. And the market for those types of assets actually is quite robust If you look at the leverage loan market, the distressed market, there is lots of capital out there for those types of assets should we need to help our clients with asset sales or sales of their companies.
Okay. That was a pretty full answer. Dave, any quick
or I'd just call out Jim Gallagher's team. They really are creative. They do a great job of figuring out what the right alignment is between the client and the borrower and getting the best outcome. And they do it consistently. And I'm always impressed.
We always get recoveries. Two, three, four years from now, we'll have those recoveries because we write them off quickly, too quickly sometimes, and Pat's quick on that. But we get them back, and that's great. When you write it off, you have a lot more flexibility to just work with the team. So great job by Jim's team on both sides of the border.
So we've got about two minutes scheduled left for the Q and A. We will take a few more minutes for this, given the number of questions we've got. So we won't take a lot, but we'll encroach a little bit into the clock and maybe try to roll through a few questions pretty quickly. So I don't know if we can have a full fledged lightning round, but let's give it a shot here. Question number one in this section is for you, Daryl, comes from many.
And the question notes that just under 40% of U. S. Commercial loan growth over the last ten years has come from M and A. Is M and A likely to be a meaningful driver going forward? And if so, what is looking attractive?
Yes. So many, I'll be as boring as I always am when I get the M and A question. But I'll tell you, when you you're right. When you look back on our history of success in M and A, particularly in commercial, it's been very good. So when we acquired M and I in 2010, we effectively doubled the business in The United States, and we used that as a tool to then begin the integration of a North American business, which you've heard Dave and others talk about through the course of today.
Transportation Finance addition was a great addition as well. I guess I would say the answer today, though, is that it's a very different complexion. If you think about the map that Dave took you through earlier today, I don't see I think you said in your question, are the verticals that you would look to fill in? There really aren't. I mean, we're actually pretty full in terms of being able to service across national industries, across particular industry verticals.
We've got deep expertise in all of them, and it ladders up to the I think Dave said, the seventh largest commercial bank in North America. That's pretty good. You don't need to go out and buy things to fill a hole in your offering when that is your offering. We've got geographic expansion potential, but we're also showing that we can take care of that organically, if you think about the presentation that Todd made earlier. So I've often used the term we don't feel compulsion for M and A.
We don't because the organic strategy works. If, as and when, there's something that is opportunistic and we move quickly, we've proven that we can be good at it at the time. But in the meantime, business leaders are building the business really well. So I hope that's helpful to your question, Mike.
Okay. Thank you, Daryl. Next question is from Darko. It's an involved question. So Pat, I'll ask you to take a shot, but do it in maybe a quicker fashion than you'd like to.
Question is, what percentage roughly of the commercial portfolio represents loans from small business. And this might be an area, question mark, that has a little less disciplined, a little less knowledge of the borrower, and maybe a little less involvement from the risk team, and with that, some higher risk. Do you agree? Sure. So maybe Dave can keep
me honest on the size. If I segment by loans less than $1,000,000 so that's kind of the small end of commercial, that's roughly about 5% of the book. So it's relatively small. And is it going to be a source of losses? I guess, know, that's I can see why people would conclude that.
The other thing but what they should know is that when you get to the smaller end of the spectrum in terms of clients, we're typically not lending against cash flow. We're typically lending against hard security in that segment. And so certainly, they're not going be immune to default and certainly not going to be immune to losses. But given the aggregate size of the book and the pretty strong structural protections we would put in at small end of our lending activity, I think impairment is still going to be manageable.
And I
was to say sorry,
go ahead, Dave. I was going to say the only business that we have really that's under $1,000,000 would be in our transportation finance business in terms of loans. And that is exactly what Pat said. We've always got a truck. And it's a higher risk, higher return business, pretty good loss given default.
So we like that business.
All right. Next question is from Abraham, and it was directed towards you, Pat. Question is, when investors see the loan growth that we've had in commercial, it can make some of them cautious. And outside of seasoned bankers, can you comment on a couple of competitive advantages that BMO has in The U. S.
And in Canada? We spent a lot of time on this. So I wanted to ask the question because it was on the screen, but maybe make a couple of quick comments, Pat.
Yes. I mean, I think it's Dave, it would be best to comment on competitive advantages in the marketplace. From a risk perspective, though, I'll just reiterate what I said in my remarks. We like the risk profile of commercial lending. We've seen our experience has been that we get lower impaired loan loss rates from business than we do from consumer.
We like both businesses, but we're comfortable with the growth we've seen, our current weighting that we've got right now between business and consumer. As I said before, we watch very carefully how the credit quality evolves over time, and we've had a consistent risk appetite over time. And so we watch to make sure that that's what we're seeing in terms of the credit metrics. And as I said in my formal remarks, that's exactly what we're seeing. We're not seeing any change in the risk profile for those new borrowers that Dave's team is bringing on.
And as long and the risk return equation to us seems quite attractive. And so we don't see that as being a trouble spot at all.
All right. Well, why don't we cut it there? There were a few more questions, and we will follow-up offline with those. Sorry, we couldn't get to everything, but, you know, we dealt with as many as we could in the time that we had. So I'm going to wrap up with a few closing comments, and I'll lead with five key takeaways from the session today.
First, we have a real strength in commercial banking at Bank of Montreal. We've grown the business prudently over time. We have experienced bankers who have deep expertise, and we have an unwavering focus on our customers. Secondly, the commercial banking business is a great business. It has good profitability, an attractive ROE and a low efficiency ratio.
Thirdly, the commercial business has broader strategic value to BMO. Our other business groups benefit from the strong commercial business that we've got, And that's true in our wealth management business, and it's true in our capital markets business. And then fourthly, and very importantly, we have a disciplined and integrated approach to risk management. We have a clear, consistent risk appetite. And because of that, and because of the way we run the business, we have a better than peer loss rate over time.
And then to pull back at the overall bank level, we think we're well positioned in the current environment. We thought we were well positioned before COVID hit us, and we like the momentum that we've got in the business. We have a proven consistent strategy. We have diversified resilient earnings and a strong pre provision, pretax profit level. We're delivering on expense management and efficiency, and the balance sheet is strong with a CET1 ratio of 11.6% and prudent loan loss reserves.
With that, we'll conclude the presentation. We appreciate you taking part. We really value your engagement and hope that you found the session valuable. Have a good rest of the day and stay safe. Thank you.