Tannenbaum, Group Head of Capital Markets from Bank of Montreal. Alan, thank you for joining us this morning.
No, thank you, Darko. Really a pleasure to be here. As we've talked about this morning and in my other discussions with Canadian banks, there's a bit of a ROE arms race going on, and BMO is no different. Yours is a little interesting. At our conference in January, Darryl White had mentioned 15% ROE exiting 2027. You're a big part of the earnings—
At Bank of Montreal. I think the first thing is, how does your business fit into that ROE journey? What are you targeting? We'll launch with that—little open-ended—and then we'll dive into some details. Perfect. Fit into that 15%?
fit into that 15%?
You know, as you've heard, Darko, this is such an important theme for us, and Darryl's been very outspoken in terms of the ambition that every division has to play its part. For capital markets, we certainly have a role to play. If you look at our recent performance, our ROE in the first quarter was 16.8%, which, after adjustment for the severance charge, was down from 17.5% for the quarter. We're very pleased with this and feel like over time we have to deliver an ROE consistently north of 15% over a cycle. That will obviously fluctuate given market conditions. What you're seeing is our effort to balance growth with return and being very mindful that as we grow our businesses, we're growing profitable businesses.
You know our business well. There's a big mix of businesses. Not every business at every point in time is going to achieve an ROE like that, but you've got to have that North Star of delivering consistent ROE performance above 15%. We believe that's possible and achievable in capital markets.
To be clear, I think one of the things that this last quarter highlighted is that Canadian banks all have a different way of allocating capital to their segments, okay? We just saw it happen at Bank of Montreal. You actually upped the level of equity for your business. 15%, I think you're using 12.5%. Is that the right number?
Yeah.
for your business. 15%, I think you're using 12.5%. Is that right, the right number?
Yep.
12.5%, CET1 is being allocated to your business, and you're shooting for north of 15% from that.
Correct.
With that as the backdrop, let's talk a little bit about some of the strength that we saw in the quarter, in particular, think about the revenue growth.
Mm-hmm.
There's a lot of ways to think about the revenue growth. It was good, it was solid, but relative to Canadian peers, maybe not so much.
Yes
Maybe you can touch on what you're seeing on the revenue front, and then we can talk about the businesses that you're trying to develop.
Sure. No, appreciate that. I'm gonna characterize our revenue growth for the quarter on a year-over-year basis, and then more broadly over the last couple of years. I'm going to slightly disagree with you and say that the quarter was very strong in light of the fact that the first quarter of last year was our previous strongest quarter, an exceptional quarter. We had revenue up 43% on a year-over-year basis. The comparison for us was very difficult, and we knew that going into the quarter. Candidly, I was very pleased that we were actually able to outperform what was an exceptional first quarter of 2024—sorry, 2025—with that strong quarter.
Where I would also characterize, as you know our business as well, typically the first quarter of the year for Canadian banks is a strong quarter, with many of the funding opportunities at calendar year-end presenting themselves. What I felt great about for this past quarter for us was that we really had a breadth of performance across our businesses, right? To me, that's what you're looking for is consistency across a range of businesses that are doing well. It's great to have a couple of businesses really doing exceptionally well, which we had, which I'll touch on. What you really want to avoid is businesses underperforming, right? Because that's really what can drag your overall performance. When I think about the quarter, we had consistency across our range of businesses, whether it was in our markets business.
It wasn't just concentrated in one area. We had outperformance in equity derivatives and equities. Our commodities business did well. Our financing businesses were good. You had good breadth across global markets. At the same time, we had real strength around our advisory business and our ECM businesses in investment banking, right? This is part of what we've wanted to see, which is an expansion or a better breadth around the M&A business, particularly in the U.S., which has been more concentrated in very large transactions, which are less in our wheelhouse versus mid-size transactions, where we can really capture better share. Good breadth across our businesses.
When you talk about growth overall, you know, I would acknowledge that, I feel we've been through more of an investment cycle over the last few years in our business. We've built out a rates business. We've built out a bunch of international capabilities, which allows us to distribute our North American content and product internationally, candidly, in many cases at higher margin than what you can do in North America. As I look forward, clearly one of the expectations of our business is that on the revenue growth, not just the ROE, we will be more in line with our peers.
Is that investment cycle slowing down? Are you tapping the brakes? What is it that you're working on? Maybe you can touch on—
Yeah.
Just to give everybody a reminder, like the breakdown of your business U.S., Canada, and sort of where your focus was.
Sure. Great question. I'll start just with geography. 40% of our business today is in Canada, 50% is in the U.S., and 10% is international. We're very well-positioned in Canada. That's our home market. We are all things to all people in Canada, and we'll continue to be. What I mean by that is we cover large, medium, and small corporate clients, all flavors of institutional investors, and we traffic in every product, right? That's our positioning in Canada. We compete with another bank, blue bank, to be number one at everything every day. That will continue to be our agenda. In the U.S., we have a more focused platform. We're differentiated from Canada. We don't have to be all things to all people.
As a result of that, we have to make strategic choices and align in businesses where we feel we can have a leading market share. The way we think about this is, if you're in a business with less than 2% market share, you're gonna have a hard time achieving real profitability. It's not perfect everywhere, but think about businesses where you can achieve at least 2% share, and then have the right amount of breadth to be relevant. This to me is a very important point that if you go back five years, Darko, we didn't have the breadth of products to be relevant enough to both our institutional investors and our corporate clients. The investment we've been going through is that build-out of breadth. When I focus on rates, it's pretty straightforward, right?
That allows us to provide hedging products to our corporate and commercial clients. Without a real rates business, your quiver of arrows to go and attack the opportunity set from the corporate and commercial client is more limited. Sitting here today, we feel that we've built out enough of the breadth. Doesn't mean that there aren't things that we may do in the future, but we're no longer lacking a product capability, which allows us to compete. The next phase of our growth is about getting deeper and stronger in things we already do. I'll give you an example. We're not in the power trading business, right? We did an assessment of what would be the cost and the value and the J curve of that investment for us to invest in power trading, and we decided, you know what?
We don't need to do that. It's not critical enough to any of our client bases that it's an impediment to our success. I just use that as one example. Going back, we now have the breadth of product that we've built out over the last few years. The continued investment is in deepening the capabilities, right? I'm not suggesting it's no investment, but from a scale perspective, it's less around creating new products. Now it's investing candidly in the technology to be able to scale those businesses, to become more efficient at how we process those businesses. Some of the investment, as I mentioned, is international. We've just made a big investment in our office in Tokyo, which allows us to distribute our North American content into a very lucrative market there.
Those are kind of the extensions as we look forward.
When we think about, you know, you need at least 2% sort of market share.
Mm-hmm
What are your goals to sort of penetrate? I mean, like, where is your strongest market share right now in the North American—
Sure. If I were to take any one example, Darko.
Yes
It's if we can take our metals and mining franchise.
Mm-hmm
As the gold standard, the template for what we can do in other areas, that would be our goal, right? This is a business for context would have been roughly a CAD 50 million business 20 years ago, is now well north of CAD 500 million for us. If you looked at that business historically, it was very limited to doing equity capital raising for mining companies, really gold companies, and some M&A advisory. Look at that same group of clients today, our most profitable and best clients, we're doing on average 6+ products with them.
Mm-hmm.
We're helping them hedge their commodity prices. We're lending money to them. We are doing their transaction processing and cash management. We're hedging their interest rate risk. We're advising them on M&A. We're doing bond deals for them. We're doing equity deals for them. We have the full suite of products aligned with that client base. If we can replicate that two or three times, huge value add to us. The places that we're focused on for the second and third areas are the financial sector, primarily insurance companies, right? That's where we see we have the potential. We have the skills and the potential and the client base that's willing to partner with us, where we think we can create a similar type of ecosystem.
Mm-hmm
With insurance companies. The third would be industrial companies, which really plays on the strengths of the bank, right, as we talk about thematically, and I'm sure we'll come back to this, the opportunity set with our commercial bank.
Mm-hmm
Which is the core strength of our bank. Think about the hundreds and hundreds of industrial companies that we have relationships with in the commercial bank. The ability to wrap our product set around that client base, we see as a huge growth factor for us. Those would be the three areas.
Yeah, I mean, that. I mean, you think about the Midwest sort of thing, like, there's gotta be a whole host of commercial clients there that are ready to sort of graduate to the corporate size. I mean, what size would you be working with? I mean. There are some verticals in the bank that were legacy Harris Bank and Bank of the West is strong.
Yeah, you know, it's a great question, Darko, and you know, we tend not to think about it as size anymore. Historically, we had very clear lines that if it had CAD 50 million of EBITDA and above, then it had to go to the corporate bank. If it was CAD 500 million of revenue, then it had to go to the corporate bank. What we've learned over time is that it's not about the size of the company, it's their desire and proclivity to use capital markets products, right? There are actually some very large clients that they're family-owned, they're not selling their businesses, they don't want to raise any equity, they want bank debt, not public debt, and there's really not that much to do with them.
Sitting in the commercial bank actually is a perfectly good place for them. I'll go back to the theme, and this is a real world example. We have in the commercial bank a company that you would define that way that's in the air conditioning business. It turns out they buy a lot of aluminum. We now are working with them, and we're hedging their commodity exposure. We're financing their aluminum, which they're using in production, and they become a highly profitable client for capital markets when the lending relationship and the core relationship still sits in the commercial bank, right? It's that partnership, Darko, and that's, to me, the unlock for us, is not necessarily this is mine and this is yours.
It's the culture in the organization of partnership and collaboration and understanding that, and you've heard this from Darryl, repeatedly, and the only way you're gonna get to a 15% ROE is if you don't focus on the net interest income, right? You have to start with the net interest income and turn that into non-interest revenue, and we're the partner that can help unlock that and drive that return.
You guys are gonna be having an investor day shortly. I'm sure you'll feature in that investor day.
Depends on how I do today.
No, as I sit back here and I think, like, in Q1, your PPPT was CAD 893 million, well above the CAD 625 million sort of quarterly target you guys used to talk about. You know, there's a constructive environment, and I get that. The reality is you've exceeded that target for five quarters in a row. Why was there some caution on not extrapolating that result for the rest of the year?
Yeah. I'll clarify a little bit in the extrapolating versus, you know, expectations. When we look back over the past 5 quarters, our average PPPT is around CAD 750, right? We think of that as a run rate that we should be able to sustain, and to me, is a good target to set for the team, right? On a consistent basis, and as you say, there'll be quarters, and the environment is particularly constructive, where we should and expect to exceed that, but there'll also be quarters where it will be more challenging. We think of that CAD 750 number as a more sustainable level on a go-forward basis. What I was suggesting is that I wouldn't necessarily extrapolate the first quarter for each of the 4 quarters for this year.
You know, to preempt you a little bit, we continue to see very good momentum in our business in the second quarter, absent the last week, which we'll see what the impact is on our business over the coming weeks, given the dynamics in the Middle East and the potential impact on markets and transactions. So we see good momentum, but I wouldn't necessarily assume that the strength of the fourth quarter will be present in the fourth quarter of this year.
This morning, I had the pleasure of sitting in on a Citigroup conversation, and it was Jane Fraser, the CEO, and she basically said, "You know what? Investment banking looks like it's 15% year-over-year in Q1, and markets 15% year-over-year in Q1." It sounds like everything's just marching on. Can you talk to your business? Would that be similar kind of growth rates or over at your business or?
You know, I'm not gonna give specifics on the growth rate, but as I indicated just before, our second quarter has started strong. We have good momentum around our businesses. You know, the markets businesses are harder to predict, right? Because if there's volatility, they tend to do well, and the banking businesses tend to have more challenges in a volatile environment. But if I look at our pipeline, and this is the visible part that you can see, and whether it's our M&A pipeline or our financing pipeline, a committed financing pipeline, it's as strong as I've ever seen it, right? You've got real momentum. You know what? I'm curious to see if you reflect back a year ago, right?
If I were sitting here a year ago, I would have been similarly positive and optimistic, right? We had a fantastic first quarter. Everything was great. Everybody, I think somebody said, what was it? You know, animal spirits had been unleashed, and then somebody unleashed some tariff dynamics, which really put a damper on the market. It's still too early from my perspective to really gauge what impact the war in Iran is going to have and in the closing of the Strait of Hormuz on markets either, medium-term or long-term. If this goes away quickly, I will continue to be very positive. If this dynamic extends over a longer period of time, it will start to have a negative impact on our business.
How should we think about any near-term impacts? I mean, oil and gas, how prevalent is it in your cap markets business? Is this something that we should be keying on here at all or?
No. You know, the good news. As we think about businesses, particularly our commodities business, whether it's oil and gas or gold, we tend not to be a directional player, right? We're not trying to make money because a commodity is going up or down. That is not our business, right? That's not our skill set. That's not what we're paid to do. We're paid to finance the commodity. We're paid to hedge the commodity. We're paid to, in some cases, move and deliver the commodity. We get paid fees for all of those things. Ironically, as you know, one of the beauties of our business is that the fees are sometimes paid in percentages. If the asset goes up in value, think gold, and we're charging the same percentage, our fees go up, right?
It's a very positive momentum there in some of our businesses. When I think about the impact of what's happening in oil markets or equity markets or fixed-income markets, after a surge in activity where people are trying to reposition or exit positions, what ends up happening is that candidly people sit on their hands and they wait, right? Our corporate clients are less active. They're like, "We don't know. Let's wait. We're not sure how constructive financing markets, so let's delay a financing." You know, to us, that's what really causes challenges, right? Because as you appreciate for our business, it's not just the financing, right? There's the hedging on the back of the financing. There's the trading of the new issue.
There's all of this value that's created for our business because we are active, and if, as a result of these events, general activity levels decline, that will hurt us.
Earlier you mentioned tariffs, so I just wanted to sort of come back to that. I mean, how do you navigate through that in 2026, and what's your best read on that situation for Canada?
You know, it's really fascinating. Again, I compare it to last year. The whole tariff environment created huge dislocations for our business. Like literally we had files that went pencils down on M&A transactions because there was such lack of transparency on what the impact would be. We saw a number of clients defer, delay, and we saw a number of clients who had real operational issues, right? You know, it was the first time I ever actually met with a client and they asked us to source some product for them in the U.S. and asked if we could help them with relationships to help them source product as opposed to financing, right? You really saw the angst and the stress in the system last year.
Fast-forward to this year, I feel like people have moved on, right? People are like, "Listen, we've got tariffs. It's unclear what they're going to be. You've got the whole USMCA renegotiation that's coming, but we have to get on with business," right? If you look at the tariff structure with the U.S. today, while it may not be as good as it was before, the overall tariffs for Canadian companies are still in the single digits, high single digits in many cases. And we're not seeing it as a deterrent for doing business. To me, that's the real message, that it's frustrating and, who knows what will come out next. Today, it's not standing in the way of people transacting.
Interesting. You know, I touched on this very briefly with some of the other banks, but I mean, it's very topical today. I'd like to touch on AI. Really, I mean, we see it touching cap markets as businesses. My question for you is: How do you view it, first of all? How much investment are you making in this business?
Mm-hmm.
How do you see it transforming your business? What are your clients saying on the use of AI?
Yeah.
How are they approaching it? There's a lot in there.
Yeah. There is, and I'm actually gonna expand a little bit and break it into two pieces if you don't mind.
Sure.
First is the commercial opportunity for us, right? I wanna start with that, which is, there is a huge investment cycle going on, and our job is to capitalize on those flows and participate, in a measured way. In this particular case, I feel great about how we've approached it, we put together a cross-disciplinary team, right? I'll take a little bit of credit because what started to happen is that you saw the incoming demand showing up, right? The technology banking team wants to lend money to AI companies that are negative cash flow. The real estate and data center team wants to lend money to data center companies. The financial sponsor team wants to lend more money to financial sponsors who are building data center businesses.
The P&U team, they want a lot of money because all of these electric utilities are now going through an investment cycle, and this is an opportunity for us to get in front of that. One of the things we did is we pulled all of the teams together in one room and then included all of the product people, right? Because embedded in there is a bunch of asset-backed financing. There's CMBS. There's all types of equity and equity derivative and fixed income investment priorities. To me, what was critical here was for us to size the whole opportunity, not just the prize. They were very good at figuring out how much money they thought we could make. Then getting that team to sit down and say, "Okay, what are you asking for from a bank exposure perspective? How does that feel, right?
Don't think about it as different pieces, 'cause they're all interconnected. How do we think about that risk? How do we manage that risk? Where along that spectrum do we want to place our bets, and how much, right? How much money do you wanna lend to high-risk, high-reward AI companies, recognizing that some of them may go under? How much money do you wanna lend to data center businesses that may be interconnected there, where your return is lower, and so is your risk? Then how much capital do you wanna deploy to utilities whose risk may be lower, but so are the returns, and their risk isn't zero, right, 'cause there's some interconnectedness. I feel really great about that process, and as an outcome, I feel like we have a really integrated strategy.
By the way, and I'll touch on this again, one of the benefits we have is we have amazing resources in a large bank. You've got Kristin Milchanowski , who's our head of AI for the bank. She's actually an expert. She's actually somebody who knows the core technology. When we sit down with her and say, "Here are the companies that we're talking to, we'd love your perspective on whose technology we should be betting on," because that's embedded in some of these decisions. We've got amazing resources we could bring to bear. As a result of that, I feel like one of the opportunity sets over the coming several years that we're gonna capitalize on is the whole AI ecosystem will be an important revenue generator for us.
When you think about growth vectors for our business, to me that, if you put all those pieces together, it's really a phenomenal opportunity. To touch on the second piece, I'm gonna maybe reflect my age here for a minute. You know, when I started in this business 35 years ago, edge for an equity investor was being higher up on the fax list, right? Whoever got the morning notes first from a fax machine had information before everybody else. Like I think about that, you know, when you tell younger people that, they don't even know what a fax machine is, right? We've had the pleasure in our industry, it was fax machines, then it was pagers, then it was cell phones, then it was electronic trading.
You can't underestimate the huge impact machine learning has had on our business, right? As I think about AI, machine learning was the revolution of numbers, right? If you go to any trading desk today, or any of our businesses, they're all electronic. Like, there's no sound. All of our systems have straight-through processing. All of the algorithms that are running our trading. That's machine learning. It's revolutionized our business. It's taken equity commissions when we started from quarters and eighths down to mils, right? Think about that dramatic change because of a technology. It really was technology that changed, that whole side of the business. AI is now bringing that same level, and maybe even greater change, to anything that uses words, right?
This is the next phase of development and evolution of our business, and you can't help but think it's going to have a dramatic impact on what we do. What exactly it'll be will be hard to tell. When we think about it, to me it's in three dimensions. One, are we using these tools to better service our clients and capture market share and more efficiently and effectively engage with our customers? That's number one. Number two, are we using these tools to become better at how we process our business and reduce our cost and become more efficient? The third, which to me will be the next phase, is what are businesses we can build that are AI native that we literally don't have today? Right?
Part of what I challenge our team, and don't worry, I'm not going back on what I said earlier, we have whole businesses we don't have, right? When you say to somebody, "Let's start a business today," they start by hiring people. They start by looking at what somebody else does and say, "How do we do that?" What if there's an opportunity for us to start businesses by saying, "Let's start with a team of six programmers," right? No people, just programmers, and see if there's a way for us to construct a business. To me, that'll be the next dimension of what we're doing. When you ask, what does that mean for us, it means that we're trying lots of new things. Hopefully most of them work, some of them won't. We're investing without being irresponsible.
We're being very mindful of how do we deploy these tools to help grow and shape and change our business? To me, this is gonna be a fascinating phase of evolution for our business.
Maybe we can wrap up here, 'cause we're running out of time.
Yeah
I mean, every time I think about this and I go through these discussions with people, I say to myself, investing in a responsible manner sounds like there's a bit of a, you know, guardrails on your investing.
Mm.
Why? Why not pump the gas and not the brakes?
It goes back to the beginning of our conversation, Darko. We've got to be disciplined. First, we have to deliver on our profitability and ROE targets. We've got to grow. You can't sacrifice your current business for this potential growth vector. It's about being responsible, but I, you know, where we align very much, Darko, is that we're absolutely doing things to free up inside the business dollars to invest in AI, right?
I guess I would differentiate is, we're not going to go, and I'm not going to go to Darryl and say, "Darryl, we need a break on our returns for the next two or three quarters so I can take an extra $100-$150 million invest in this technology and hope it works and hope it pays off for us." To me, it's about being responsible, and to a large degree, funding a lot of the stuff through the business, which we are doing. To me, that's the more responsible way for us to do it for the foreseeable future.
With that, we're out of time, so Alan, thank you so much for.
No
a great chat.
No, appreciate it. Thank you, Darko.
Thank you.