All right. Welcome back, Piyush Agrawal, BMO's Chief Risk Officer. Your second time at this conference, so
Second time. You missed me last year, but I'm back.
Yeah. Last year was Liberation Day. I forget 2024. What was going on then?
There was-
I'm sure there was something.
Tariffs.
Tariffs, yeah. It's kind of the different version.
Some
... of the same story. This year, of course.
Yeah
Well, the big event is what's going on in the Middle East in the last few weeks, which, you know, begs the question, 'cause Q1, you give your latest outlook for the world, and we know things can happen, and things happened. You know, given the situation that we're in today, you know, what new risks are you evaluating now, exposures.
Yeah
you know, what sort of impact could this situation have on your credit outlook?
Sure. Well, Gabriel Dechaine, thanks again for having me. It's wonderful to be back in Montreal. I think, you know, from a CRO perspective, we track a host of issues, both in the emerging and material risks, and we have a very good structure around how we manage through those. As the audience knows, I think geopolitics has risen to the top, and it's something that is high on our minds given what's been going on in the Middle East. Starting out, I think I wanna acknowledge the human casualty of war, and you're seeing that impact our communities, our employees, so that's a big deal.
I think going beyond, while we've got a very good playbook and we've been looking at these kinds of risks for a long period of time, it has risen, and right now where we stand, it's something that is hopefully a short-term impact or maybe transitory and goes away in a week or two. 'Cause if it stays longer, I think it will have more cascading impact to all of us and, you know, there'll be winners in terms of the oil export nations, but then you have challenges as you're beginning to see, especially as you're seeing the news around Asia-Pacific and Europe and some of the economies and what's happening in terms of fuel and gas rationing.
You know, stepping back, while Canadian GDP as an oil export country is good, the impact of oil shortages or the oil price and many of the other raw materials that we don't talk about for food production or even for agri like sulfur and ammonia, will have inflationary impact. The hope is that this thing solves in a week, 2 weeks, and hopefully, you know, we don't have to make much changes. If it continues for a month, then I think it changes the macro nature for the future for quite some time. I think the range of scenarios is broad. Within that, I think we've got...
I believe we have very good capital and liquidity and a strong risk framework to manage through this, but we will have to recalibrate our expectations depending on the durability or, how long this crisis continues.
Right. I won't hold you to it, but I'll still ask the question. It seems like this is the kind of environment where, you know, the performing provision is gonna get a bit more scrutiny than it normally does, at least from people like me.
Yeah
The expectations are changing on the fly. We've had two periods where, you know, where performing provisions were really increased.
Yeah.
You know, 2020, March timeframe, and then Q2 of last year following Liberation Day. Now one was, I don't know, 10-15 basis points type of situation, and then the other one was, 100. I forget exactly.
Mm-hmm
Very big.
Yeah
noticeable.
Yeah.
Where do you think we?
Yeah
you know, based on what you know today, where would we fall on that spectrum, if at all?
Yeah. No, you're right. We're coming from a position of strength. We have about CAD 4.6 billion of performing provision, 69 basis points. Just to, you know, reset for everybody, it's been 15 quarters we've built, and we were at one point, our low point was low 40s. From low 40s to 69 gives us immense resiliency for anything ahead of us. My base case continues to be the same, which is I've said in an economy that's improving and our portfolio quality that gives me, a lot of confidence that is also improving after a few quarters of risk-weighting migration. I don't see any large builds even as we grow because there are offsets, and I don't see any releases because of the amount of uncertainty.
I mean, one of the things we've been talking about, the most certain piece is the amount of uncertainty in the environment, and that continues for some time. I think our performing provision at 69 basis points is going to be neutral-ish through the year.
Okay
Just given this environment. I'm also conscious and, you know, as we get into the first quarter or second quarter end, earnings, you'll have a better sense going in, is what happens from the event we just talked about in the Middle East. If it's a short-term exit, I think that scenario remains unchanged. If we see this war continue for 3, 4 weeks, I'm certain it's gonna change the macroeconomic outlooks for both the U.S., Canada primarily, 'cause it will have an impact, and then we'll have to recalibrate that expectation and come back. If you do see anything, you'll probably see it in the performing PCL first.
Right.
you know, we've been through these kinds of situations of uncertainty like the tariff situation, and we built provisions gradually till it came to a decent point, and I think, you know, that's the way I'm thinking about performing. Starting point already very strong. Our portfolio drivers in terms of quality and our expectations very positive, I would say generally speaking. It's this uncertainty element that I think everybody will have to recalibrate to, depending on how this goes on for the next 4-5 weeks.
Okay. That 69 basis point performing provision, something that we're still talking about, but just not as intensely as before. The CUSMA-USMCA renegotiation risk, had you felt like you covered yourself off for, you know, what kind of scenario?
Yeah. We run multiple scenarios.
Yeah
In this, the base case is CUSMA will get renegotiated. There is uncertainty around it, but you've got to put some assumptions around what your expectation is. The base case is it will get renegotiated, and 85% of Canadian exports will continue as is, so in a very BAU format. You also have to take into account the 5% scenario. Those are in our weightings. We cover those. I think at this point, I would say my best case or my base case actually is a static or stable CUSMA even after renegotiation.
Okay.
Again, lots of variables given who the parties involved are.
Yeah, no kidding. I guess the performing provision question, last one I'll have on that, and it's, you know, as unfathomable as it is today, but, you know, we were talking about releases not too long ago. Setting aside this major
Yeah
global event, what do you need to see before you would do anything like releasing provisions right now?
Yeah. I think the biggest piece is going to be in the drivers of what the performing provision is built upon, and that is really starting to see growth back and sustainability in our credit performance. We're beginning to see that. You've seen us deliver some very strong quarters of credit performance from where we were to where we've been stepping down. I think even though our guidance remains unchanged on impairments in the mid-40s, our expectation is that this momentum brings us further closer to our long-term averages as we go through 2027.
Okay. I guess when we talk about performing impaireds, your guidance for this year is to have a ratio that's relatively flat versus 2025, albeit improving over the course of the year.
Again, I'm gonna go through the base case. Q1, 44 basis points, and through the year our guidance is exactly that. Just to break it up, if you think about where we are across our portfolios and the economic implications, let me try retail and wholesale separately. I'll begin with the U.S. U.S. retail should be similar to what you saw in first quarter. Commercial in the U.S. continues to improve. We had a very strong performance in Q1. Some of that was also outsized recoveries we got, which we were expecting on the back end. Those may not repeat in one or two files, but overall our gross write-offs in the U.S. should be in line or better than Q1, except you won't get the benefit of recovery.
You might see the U.S. be a little bit flat to a little bit up. Then on the Canadian side, Canadian retail, because of the unsecured and because of what you're seeing in the macro environment, the consumers continues to see some stress. We might have some build in Q2 for retail and commercial elevated, but under control, so flattish over there. Round trips to about a flat to mid-40s as we've been guiding. Because we have a bigger wholesale book, one or two files can move the number. Generally speaking, I'm pretty bullish around, you know, the guidance we've given. Again, I don't expect geopolitical situations to change the short-term outlook.
Right.
As you go into 2 or 3 quarters down, depending on how that flows out, you know, we'll come back and, you know, give you a better guidance.
Yeah, I guess that's. Yeah, it does become a 2027 thing because then it's
It'll take 2 or 3 quarters depending on the industry impact from some of the raw materials and other things that are going through.
Okay. Let's see if there's any other interesting topics here. Private credit. All right.
I haven't heard of that.
Talk about your exposure first, just to kind of frame it a little bit. If we're thinking about the, you know, the most topical exposure, it's where you are essentially funding a private credit company that's lending to mid-market or other entities, and that's about 2% of your loan book, right?
Mm-hmm. Yeah.
Consolidated. What do you do as far as or what comments can you make to say, "Well, that's not gonna be a problem"? 'Cause 2% doesn't sound like much, but, you know, it's a big percentage of the book value. You know, what are some of the characteristics of that portfolio that make it such that we shouldn't be too concerned?
Yeah. You know, it's been in the news, so let me talk about private credit, and I think the easiest thing to do is probably put that in context around what the market misunderstands as non-bank financial credit exposure.
Right.
I'll begin with the headline. Our private credit exposure is very small, and it's not something that keeps me up at night among the many things we talk about. Just for our audience to really appreciate this, we disclose about CAD 68 billion of non-bank financial exposure, right? This is just exposure to anything that's not a bank in the financial space. If I funnel it down, 50% of that is to our subscription call facilities.
Mm-hmm
which we've been in the business for 30 years and had 0 loss on that. It's low risk, high return business. You know, I think we'll be in this for a long time given our expertise in subscription finance, which is lending to private equity funds overall. That's a big chunk that's out. The second piece the market probably misunderstands is to large, you know, I call it finance companies, and finance companies can be mortgage finance companies, could be consumer finance companies, or could be business finance companies. It's this business finance companies that, in my mind, is broadly private credit. These are companies we lend to, who then lend to the end market, to middle market companies in their financing. We do that business directly, but we also do it through our private credit partners.
We've named a few, we've partnered with a few, but we've been pretty strategic about the choices about who to give money to in private credit. The reason I say I'm not worried and why it's small is, we've tried in that strategic nature to have private credit partners align with the bank's thinking around due diligence, around early problem recognition, and the ability to work out, which is not something you see across the private credit space.
Mm-hmm.
It so happens in the small exposure, we've actually re-underwritten about 75%-80% of all of the loans ourselves, 'cause some of that is on our books, and some of that we've re-underwritten anyway, even though it's on private credit's books. I feel very good about the structure, the collateral coverage, as it relates to BMO's private credit exposure. Outside of that, there is some insurance companies and other exposure. I think the market takes the NBFI and worries about what is in the NBFI book. That's what I was trying to give you clarity on.
Yep.
The NBFI book is the bigger piece in which private credit is a smaller piece, and it's something that is less than 1% of our overall private credit exposure.
The nature of the distribution strategy, if you will, like the other concern is with funds that have investors that are asking for their money back. You have more permanent capital.
Yeah
Embedded in the customers that you've lent money to?
Yeah. I think what you're reading in the press is retail investors-
Yeah
in private credit trying to get their money back, just given some of the news.
Mm-hmm.
You know, the funds we have partnered with I don't believe have the retail credit problem or retail investor problem. Yeah, we're reading about those, and I think some of the news around private credit is probably overdone. Again, over time, the market will figure out if this is a product meant for retail investors, which is why these gating factors have been put into place. I think broadly speaking, you know, over time you'll see whether there's a lot of news around it versus this thing will, you know, play out over time.
I-
They do serve an important purpose, right?
Yeah.
Because, you know, like banks, they have been able to provide credit to the broader capital, to the sector overall.
The capital call loans you mentioned those, the private equity loans to private equity companies just waiting for their investors to give them money, and then they pay you off. What are the safeguards around that lending? You've lost nothing.
Yeah
... ever since you've been doing it, but just wanna...
Sure. You know, private equity call subscription is really short-term bridge facilities.
Mm-hmm
... to LP commitments. What happens is I'm fully secured by the LP commitments. You're actually over-collateralized, and so think of these as short-term bridge facilities. When a general partner makes bunch of equity investments over time, they'll make the call, the LP sends the money. We actually underwrite each of the LPs, and those, the monies are paid out.
Mm-hmm. There's no, I guess, the retailification concerns there, like the-
It's all institutional money, LPs.
Yeah.
30 years of experience for us, and the industry gives us enough empirical evidence about the product and the customers.
I'm gonna ask about software industry exposure, but I'll broaden it out to any industry these days.
Yeah.
The reason I'm asking that is we've seen a lot of software stocks and reflecting the risk of AI and disruption in their business models, going kaput, essentially. Like, what's your exposure? I'm being hyperbolic.
Sure.
What's your exposure to software companies? Beyond that, the bigger picture question is, what are you doing from a risk assessment standpoint? You lend money to companies that are facing much newer risk of, you know, becoming obsolete much faster.
Yeah
... than, you know, horse and buggies did back when, Ford was around.
Yeah, look, I think software, you know, is an industry that's been around for quite some time. It has tremendous offtake, and these are cash flow positive companies, which we all benefit from.
Mm-hmm.
Our overall take towards software is no different than a non-software, which is in the underwriting. A core tenet of underwriting is disruption risk, and so in the risks of each company, and many of them have been around for decades now, we've actually evaluated that. Now, what's happening is in the last few months with AI coming in, there has been a much more, I would say, talk about obsolescence. We do think about obsolescence risk. I would say to you, again, within the granularity of the book, software again is a small number. You know, it's, I'd say a little over 0.5%, so it's not big.
Mm-hmm.
Again, granular exposure to lots of companies. The way you manage this is, you have to go in and talk to clients. These aren't startup companies, these are companies who've been in business. They are cash flow positive. They have a real value add. These are companies and names, many of which you know, you work with, you deal with. Overall, yeah, we continue to evaluate, but, you know, I think they are being also the beneficiaries of AI because they're gonna use AI in their operations to substitute and become even more effective. What we are doing is this client dialogue to really understand how quickly is obsolescence coming. Is this an overnight thing, or this is gonna take a cycle or a few years? I think I'm in the latter camp.
I don't think everything turns tomorrow and AI is the only thing and there's no software. At the same time, we're being mindful about our exposures and looking at what we have. More to come as we learn more. What I would also add to you is the opportunity set that exists because of what's going on. In addition to what AI is doing to software, think of the AI ecosystem. In the AI ecosystem, we've been very good in a very integrated way, thinking about power usage, so therefore, you know, what power companies are doing building our new plants, new transmission, thinking about data centers both for hyperscalers as well as AI companies.
I think that's a great, you know, solution or a new revenue stream as you think about feeding the AI ecosystem through one lens. I think overall, you know, more to come and as AI continues to play out. I mean, we are using AI and testing AI.
Mm-hmm.
Across the bank in many places. I'm doing that in risk, and in some areas, huge success, in some areas, you know, slow.
I guess, like as far as applying that thought process to all sectors now, I guess, is that the way the puck is going?
Everywhere. You know, as you think about risk underwriting or reviews, it's foundational to understand what happens to your industry with AI or any other new technology. That's not changed. We've just changed the name of the new technology to AI.
Mm-hmm.
To ask the question. I, across the board, I have a pretty good sense, and it's getting better as our bankers are analyzing the impact of AI to their client and coming back, and we'll have an aggregate view of that.
Okay. This is a question about your Canadian commercial book, but also I'm gonna tie into a phenomenon that impacted your U.S. commercial book-
Right.
In 2024 when losses piled up. One of the explanations was that, you know, the period of high rates just, you know, just too much of a burden at some point and some companies just ran out of gas.
Mm-hmm.
Understandable. Can we apply that logic to the Canadian commercial portfolio but replace high rates as the, you know, the burden with trade uncertainty? 'Cause, you know, it's been a few years-
Yeah.
We've been talking about trade uncertainty, lack of investment. At some point you gotta think, and we probably already have, just some companies are, you know, running out of gas as well, but for a different reason.
Yeah. Yeah. I think the problems in the U.S. are very different from Canada. I think as we've gotten ahead of the U.S. piece, for Canada, the challenge really became much more of a macro because of the trade uncertainty, because when you've got such a large dependency and trade flow between U.S. and Canada, the sudden, I would say, stoppage or the news items change the sentiment of what's next. Now some of that's getting, I would say, solved through what the Prime Minister is doing around, you know, global relationships with new countries, but the supply chains will take time. It's the sentiment over the last one year that had been slow, coupled with some of the slowdowns across the board. I think that puck is moving now, and over time you'll start to see that change.
There is of course on one side the new challenge of the Middle East, what might happen, and the USMCA renegotiation. But there has been a lag in the cycle of CapEx that's overdue. As we're talking to our clients, they're getting ahead of that and saying, "I think, you know, no matter what the new CUSMA negotiation is, we will have a case to increase production or change our supply chain or improve our supply chain." We're beginning to see pipelines fill up. We're beginning to see loan growth in Canada. You're seeing the commercial real estate cycle in Canada pick up again.
It's been a much more positive story, and I think it's because of the resilience in the overall economy that some of that slowdown or the pause you saw for the first year is now actually going through the logjam and beginning to open itself.
Okay. Just to wrap up on the Canadian consumer.
Yeah.
Historically we, you know, when we think about BMO, we don't really spend too much time thinking about that. However, your credit card portfolio did experience some higher loss rates because of its place in the market. I was surprised in Q1 to see pretty stable losses. Usually after the holidays it picks up a bit. What have you done to sort of mitigate the risks that you were seeing over the course of last year and to yield that result, which
Yeah.
It looked actually better than what I expected to see?
Yeah. Well, we've been doing a lot of work since we picked up on some of the risk factors because the two things that were really impacting the Canadian unsecured was the higher unemployment-
Mm.
The insolvencies. Now, the higher unemployment is gonna continue to be a factor, and it's not right now a tailwind because you saw the uptick in the unemployment to 6.7%. In our base case, we see that coming down quite a bit. Insolvency was the other hard piece to predict. It's at an all-time high. I think it's a 15 or 20-year high of insolvency. So it's showing you some stress in the Canadian consumer because of the over-leverage, because of what's been going on. What we've done is we've actually taken some early action to identify, I would say, almost pre-delinquency customers. The way you do that is through smarter analytics, model updates. We've got things that can now predict insolvency in customers.
These are customers, some of who have never gone delinquent, who've chosen the insolvency route. I think better customers, better engagement with our clients is helping, which is how the loss rate you can see is flattish. We'd like it to come down.
Mm-hmm.
I think in a couple of quarters you'll see that too because there's a big back book. I think the new growth we are seeing in our premium segment has been fantastic. It's meeting all of the risk appetite, hurdles, so that's a positive. We can also take more action. You've seen us take action in the U.S., where we were able to sell some non-performing or lower-rated books. As you think about it, I think there are some tools we can continue to deploy, to help our Canadian consumer book as well.
that the card book, you think that the losses will come down from-
I think.
Because of some of the actions you took last year, like the book shrunk.
Yeah.
looks like a risk mitigation strategy at play.
I think it's gonna continue to actually tick up for the next few quarters.
Okay.
Before you see the decline.
Okay.
So.
Well, that brings us to time, and yeah, a great discussion today. A lot of interesting topics. Unfortunately, with the Risk Officer, we prefer it to be boring, but
That's the job.
Makes for a better discussion.
Yeah. Thanks. Okay.
Thanks, Piyush.
Thank you.