All right, great. Thanks. For our next presentation, we have Bank of Montreal. Coming from Bank of Montreal, we have their Chief Financial Officer, Rahul Nalgirkar. Welcome, Rahul.
Thank you.
Maybe let's get started on the macro. Can you give us an update on the economic environment in Canada, especially in light of recent tariff negotiations and the ongoing investment summit. You also have a eerie perspective on this subject with large commercial businesses on both sides of the border.
Sure. First of all, thanks for having us, and thanks for hosting us here. As we think about Canada and U.S., it's been a long-standing relationship and partnership which lives over decades. That's what's made the North America a pretty strong economy as well in general, if you think about it. While there may have been some uncertainties with the recent trade discussions, I'm optimistic as we look beyond where things would proceed with this. If you think just near terms, you asked, what is it looking like. Clearly, there's a lot of discussion on demand. There's continued demand.
Loan closings this year are almost double of what it was last year, coming out of a lot of slow 2025 . Pipelines are strong. Conversations are strong. I think what clients are looking for is that little bit added confidence towards the end as the negotiations find closure. As you think about BMO being a top five commercial bank in North America, we're very strategically positioned to help clients in their needs, whether it's cross-border, whether it's supply chain, whether it's export. I think that's where we've been focused on how do you help the clients proactively and also use this as an opportunity to, in fact, acquire new clients on both sides of the border.
Great. I think if you look at recent earnings in Q3, demonstrated double digits year-over-year growth in revenue, PPPT, net income, EPS. Any other key takeaways from earnings you'd like to highlight for investors? How are these trends shaping up for 2027?
Sure. Third quarter was another strong quarter for us, and the results demonstrate the continued progress and execution which we have been doing on our path, which we laid out at Investor Day. If you see seven quarters in a row, when we started this journey in the end of 2024 at ROE of 9.8%, now we finished at 14%, almost up 220 basis points so far this year, and it's been broad-based. It's not just coming from one particular unit. All the four unit sub-segments for us are contributing 50, 60 basis points each of this expansion of 220 basis points we've had this year.
So broad-based and also largely coming from core operating performance. We've seen strong performance in revenue was up 11%. PPPT was up 13% and record at CAD 4.5 billion. All four of our units printed record PPPT. ROE of 14%, ROTCE of 18%, and EPS growth of 22%. So feel very good about what these results demonstrate, the results of our execution. That gives us the confidence as we think about the next phase of the journey towards 15% exiting 2027.
Okay. Throughout 2026, Bank of Montreal has made steady progress towards reaching its 15%+ ROE target, inclusive of a 12% U.S. banking ROE, with 3Q generating 14% overall and 9.8% in the U.S. Can you discuss some of the drivers for that ROE expansion? How much is structural improvement versus cyclical market conditions? Can you update us on the timeline to achieving your return targets?
Sure. A part of this is also related to my previous response, where a lot of this growth, majority of the improvement is all coming from core operating performance, and it is broad based. Where we have come along within core operating performance includes the improvement in returns of our U.S. business. It also includes broad-based growth of our Capital Markets, Canadian Wealth, and Canadian Personal business as well.
As we think about the remainder of the journey from here onwards to the 15% target which we have, I think about 50%, 60% comes back from core operating performance, continued strength in the P&C businesses on both sides of the border, and the strength which has been demonstrated both in Wealth and Capital Markets. The remainder portion we expect as credit normalizes, as we continue to optimize our capital, the remainder to come from that so it' s a combination of largely dependent on core operating performance from fees, from deposits, as we better squeeze the dollar of capital for more fees and deposits. That is how we look at it.
Great. Maybe drilling down into the U.S. banking business. Now that the bank has optimized the loan portfolio and divested certain businesses, where are the areas resources will be redeployed, and how are you positioning for growth opportunities going forward?
Sure. Listen, we're very pleased with the progress which our U.S. banking has shown so far. ROE of 9.8%. I think the one thing I would point out is that's ROTCE of 17.3%. That's important to note on return on marginal capital. That's 90 basis points of ROE improvement year-over-year. These results demonstrate the impact of our deliberate actions. We deliberately, five, six quarters ago, unified the operating structure to bring all the business together under one umbrella. There's been very strong core operating deposit growth. TPS fees have grown about 14% year-over-year. Strong operating leverage. Capital has been optimized as we looked at businesses which didn't meet our risk-adjusted return expectations. PCLs have normalized, and we have had significant upgrade in talent and reinvestment in tech across the board.
It's a very all-rounded story in terms of what these results reflect in terms of these deliberate actions. As we look forward from where they are at around 10% to the remainder of 12%, I broadly think about the remainder of the journey as almost a third, a third, a third. As I say, coming from fees, a third coming from deposits, and a third coming from all other actions, including cost and capital, as we continue to invest and allocate capital to relationships and businesses which meet our risk-adjusted returns through the cycle, and also our growth expectations through the cycle. That's how we've been very deliberate in our capital optimization and our liquidity optimization, and also mix expense.
Great. Another major factor in the ROE expansion story has been continued strength in capital markets.
Yep.
Maybe can you discuss how you are positioned within capital markets relative to other Canadian banks?
Sure. If you think about capital markets business, again, a very strong result so far this year, printing almost CAD 900 million PPPT every quarter. Feel very strong about it. While the markets have been constructive, the story here is largely structural and represents the results of our deliberate investments over years. We have been very deliberate about allocating capital. We have been deliberate about expanding in tech and talent of a lot of product capabilities. Then also very deliberate about how geographically this is dispersed. 48% of the revenues are from U.S., 41% from Canada. A lot of capabilities, as I was mentioning, which we have evolved over the years. First quarter was dominated by commodities. Third quarter was dominated by the equities.
As the market and the situation presents itself, we have diversified and expanded our capabilities so that as we think about the future and as we think about sustaining strong performances through the cycle, it helps us to get there. So the floor has risen. While I do recognize markets have been constructive, there is a lot to do with the deliberate actions.
Sure. Returns have also been strong kind of Canadian P&C and Wealth.
Yeah.
Are there any trends there that you would like to touch on?
Yeah. What I would mention is those two are our highest return businesses. Canadian P&C had an ROE of almost 23% and Wealth of about 42%. As I deconstruct each of those businesses, very pleased with where we are seeing growth. If we talk about Canadian P&C, 7% deposit growth, 3% loan growth, 13% TPS growth. Strong ROE performance year-over-year improved at 23%, was up 300 basis points year-over-year. So core operating performance business in general focused on deposits, focused on fees. A lot of good improvement there.
I think the last leg which we are looking at is as we get past our optimization on the consumer unsecured, as we look at growing the mass affluent and the premium book, that's a big focus of theirs as that then allows us to raise our ROEs in this segment beyond 23% to our medium-term target of 25% and plus. As I look at Wealth, a very strong performance, PPPT of CAD 620 million. If we were having this conversation three years ago, that was in the mid CAD 300 million to high CAD 300 million.
So that reflects a lot of strong performance which we have had over the years, especially in asset management business, where we've been a leading provider of many products like ETFs and mutual funds and so on and so forth. Again, reflecting deliberate investments we have made in that business. Then feel strongly about how those two high ROE businesses are also growing and contributing to capital generation.
All right. Let's move on to credit and kind of start with performing PCLs. After materially improving over the course of the year, performing PCLs have been relatively flat sequentially. Did your guidance include the potential impact from higher tariffs? If the tariff policy is enacted and maintained, that would imply gradually higher PCLs heading into 2027?
Sure. So what I would mention is we enter fourth quarter with a position of strength as far as credit is concerned. We have a reserve coverage of 69 basis points and feel very well positioned for that. Watch list gross impairs are trending in the right direction, trending down. We have a diversified exposure base. As we look at the fundamentals of the customers, they are pretty strong, especially the commercial customers. As you put it all together, we feel good about it. I think to also answer your question, a lot of the tariff-related activities which are there as we look at our performing PCL, we try to factor in certain scenarios based on economic scenarios and also some expert judgment. A lot of that gives us the comfort in terms of where we are entering into fourth quarter.
We had said that we expect our fourth quarter impaired to be in the similar range as what we had in the third quarter, which was in the low 40s. Heading into next year, think path down towards the mid to high 30s as we think about 2027. Just to elaborate on your point on what does the tariff mean, at this point of time, it is a manageable percentage of direct exposure and very immaterial size of the book.
This does not present any credit build or credit data point at this point of time. More what we are focused on is the secondhand impact, the secondary impact of what it means to the broader macro, and that is what we are closely watching out. But we feel pretty good about where we are entering the fourth quarter. Both are reserved, both are impaired in the direction of underlying credit.
Maybe to going further, gross impaired loans continue to move lower in conjunction with the decline in formations. Any particular factors that were driving this decrease, or noticeable differences in geography or segment? Do you see gross impaired loans reaching a bottom in the near term?
Gross impaired this quarter were 97 basis points, so came down about 4 or 5 basis points quarter-over-quarter. The watchlist trend, the gross impaired trend, has been pretty broad-based and heading in the right direction, declining both in commercial and consumer business in both sides of the border. I think as we look forward, overall, I think we are focused on Canadian consumer, how that evolves over a period of time. But largely, the strength is coming from improvement in watchlist and gross impaired on the commercial side, which is a bigger portion and a predominant portion of our business. We do expect that to happen, and that is correlated with our guidance at which we had provided for our mid-30s, high 30s impaired being correlated as those underlying trends are running positive that supports our impaired outlook as we look in the future.
All right. Then you highlighted ongoing investments in technology, digital innovation, including the rollout of Gen AI tools for advisors and customer self-serve capabilities. Could you elaborate on how these initiatives are translating into tangible cost efficiencies or revenue opportunities in the near term? Are you starting to see scalable benefits from your digital transformation in terms of operating leverage?
Yeah, sure. As we think about AI, we got very strong momentum and pretty excited about what it means in terms of our opportunity for efficiency in both revenue growth in all our businesses in both the countries. I think broadly, before I answer that question, AI to us is we look at it in a couple of different ways. How we are basically personalizing the client experience, how we are augmenting this for our employees, and how we are automating our processes. And I think that is the big part because AI is not just a tech project, but it is a fundamental rewriting of your business model and processes. From that standpoint, as we look at it, there is lot already benefits which we are seeing. Now, earlier part of the phase in this journey, it is going to be more on the efficiency side.
But as time progresses and as some of these tools have their impact, it will start yielding into revenue growth. We already have revenue growth impact, but it is more coming on the efficiency side right now. To give you some examples, you asked for it, in our insurance business, we have this tool called Smart Decision, which has cut down the underwriting time from many weeks to a couple of minutes.
As we look at customer complaints and customer disputes, when we look at completely reorganizing the end-to-end journey with agentic tools, that speeds down not only the time for resolution, but also the quality of customer experience and also credit for that matter. So there are a lot of these benefits which we are seeing, and that gives us the confidence about the CAD 1 billion PPPT benefit which we had talked about achieving by 2030. [inaudible] that progress.
One thing we really have not touched too much on loan growth.
Is there any areas you can maybe discuss, like compare commercial loan growth opportunities and consumer loan growth opportunities? And then how would you compare the opportunity in the U.S. versus Canada, especially this past week we have had the Canadian Investment Summit going on.
Yeah. Sure. Maybe I will start with Canada and then go to the U.S. I think in Canada, there is a lot of good dialogue with this summit, which is going to attract a lot more capital. I think there are already discussions on special projects like defense infrastructure, which is there. What makes us feel very good is being a dominant commercial player in Canada positions us well to serve the clients in that need and as that capital is coming into the country, how do we help with those investments and also grow our own business and revenues as we see those areas specifically. Canada, though, what I would say is, coming out of last year, which was relatively slow, we have seen in Canadian commercial low to mid-single digit loan growth. But the pipelines and the closings are very strong.
As we expect things to progress in time to get more clarity on the trade negotiations, we do expect more pickup from there. On the U.S. side, I think the clients have been very resilient. The activity, similar story. Pipelines are strong. We had 4% sequential loan growth in U.S. commercial. While a lot of that might have been related to some of the backlog on commercial construction and M&A activity side, the underlying growth is still pointing towards a mid-single digit loan growth as we exit the year. So good activity, good loan closing, strong pipelines. I think probably U.S., I would say the client sentiment is a little bit more confident than in Canada. But with the negotiations finding place, we expect that to level out.
Great. Maybe similarly, if you could touch on competition for deposits and the potential in the U.S. where possible rate hikes tomorrow. In Canada, I don't know how they'll react when they see what's going on in the U.S., and maybe talk about what the competitive environment looks like for deposits.
Sure. With the rate environment where it is, there's a lot of activity which is going on in deposits. I think what we are focused on is our deliberate strategies to grow core operating deposits. I think in totality, if you look at our third quarter results, while it may look like that we were flat year-over-year on deposits, if you unwrap the details, our core operating deposits were up for the total bank 8% year-over-year. We were very cautious to deliberately run off CDs in the U.S. and term in Canada to meet the requirements of the balance sheet as loan growth was muted. A lot of deliberate focus on putting talent, putting product capabilities, putting technology behind core operating deposits, and then our results show that.
We've taken market share in everyday banking in Canada, in savings accounts in Canada, or we're looking at California on the retail side or even commercial on both sides of the borders. There's a lot of data points which show how we have taken share. So that is how we look at our core deposits. There will be competition, whether it's because of the rate environment or whether it is because of the loan growth picking up. But I think where we are very much focused is on improving our deposit mix through these deliberate actions. The competition is what it is. It's a rational competition. The pressures will always be there. It's one thing or another at any point of time, but we are playing this game more to have good results through the cycle and significantly improve our deposit mix.
When you're kind of summing up the loan growth and deposit growth dynamics, maybe we can talk about the NIM expectations for both the U.S. and Canada over the near term. Do you think you can still maintain NIM expansion, even assuming deposit growth trails loan growth and potentially rising interest rates?
As we look back 2025 into 2026, there was a lot of NIM expansion which we experienced in both the countries and at a total bank level, and that reflected lot of benefits from the ladder reinvestments. Also, as I talked about core deposits being up 8%, our deliberate actions in improving our deposit mix. A lot of that contributed to the expansion year-over-year. As we look forward, the magnitude of that expansion is not going to be there because as the story we were looking back into many years, loan growth was absent. We optimized the funding cost and also the loan balances where we had capital deployed to grow NII through NIM expansion. As we look forward, we do still see the benefits of ladders and deposit mix improvements, which we are doing to continue to help us.
But we do also recognize loan growth has picked up and you just previously asked about the competition on the deposit side. I do expect those tailwinds and headwinds to keep the NIM in a resilient fashion and not have the kind of expansion which we have seen previously. But our focus shifts more on continuing to have NII growth with loan growth and seek NIM stability. NIM to me is an outcome, right? As we think about supporting relationships, enhancing returns, and looking at relationships capital deployment which meet our risk-adjusted returns. NII growth to us is what means in terms of ROE expansion and EPS growth, and NIM stability in the shorter run is what we look at.
Great. Maybe moving on to capital for a little bit.
BMO's CET1 ratio remains strong at 13%, even after repurchasing 3.8 million shares in third quarter, leading you to announce a new program for 25 million shares. Still, OSFI as well as the domestic stability buffer of 50 basis points, resulting in a lower CET1 ratio requirement. In addition, your CET1 is expected to benefit about 50 basis points from the impact of recent divestitures.
Yep.
Given the situation, what do you think is an appropriate level of capital to run the bank, and how quickly would you look to get there?
Yeah, sure. As you alluded in your question, we closed the third quarter at 13% CET1, and then we have pending transactions, which will add another 50 basis points of CET1 to that. We look at that as our starting point. All this we put through our capital framework. We have a pretty robust approach in terms of we are looking at, obviously, the first deployment of capital is for organic growth and meeting the loan demands. That is part of our framework. We look at how much capital which we are generating. As our ROE is improving, our capital generation every quarter is now north of 30 basis points. That is one part of the equation. We also look at macro and geopolitical scenario.
Obviously, we have a different outlook as we look forward, given these trade uncertainties and what's happening in the Middle East. That kind of all comes into the macro geopolitical bucket. Then we'll also look at what's the regulatory expectations and the peer benchmark, where they are. Capital returns being the last part of the equation. When you look at all these pieces together, is how much we are generating with the primary objective to deploy for growth. We look at where we are, taking all these things into factor. Given all of this, we do still feel that the 12.5% and 13% operating range, which we had talked about, still feels judicious and prudent. Just allows us to have some more buffer in terms of what's happening with the environment and macro and operate with prudence.
Now, we have been operating on the higher end of that range. We might be comfortable to come slightly below that end as we see good loan demand, which meets our return expectations, or we return shareholders to the capital. Sorry, capital to the shareholders, in terms of where we think to operate. So at this point of time, we are just not thinking about changing the range. We might just come down from the higher end of the range a little bit if we think that is where we would want to go.
Great.
But that is something which we look at on a quarter-to-quarter basis and month-to-month as the macro and the geopolitics evolve.
When I guess some investors start looking at the higher capital levels and higher valuation levels in Canadian banks, they start to speculate potentials for acquisitions. How do you view inorganic growth opportunities in the current environment? Is there any differences between the geographies when you evaluate them?
Sure. I would answer that question in two parts. One is, obviously where you may be alluding to is U.S. Bank M&A, and the other is all else tuck-in good acquisitions. U.S. Bank M&A is not a priority for us, for the record. We have a task cut out to achieve higher profitability in California, where we had Bank of the West acquisition a few years ago, and that's where we are focused on. We are not looking to open any new footprint or any geography, but our heads are doubling down on achieving our path to 12% in U.S., which is 18% ROTCE. As we think about non-U.S. bank, we look for tuck-ins from time to time to expand our capabilities in various fee businesses. Last year, we acquired Burgundy Asset Management in Canada to supplement the offerings which we had.
We felt there was a gap between our private bank and family office, so that supplemented well. Most recently you heard about we acquired a small investment banking team in Australia in metals and mining businesses, which complements very well with our global number one position in metals and mining side. These kind of capabilities and tuck-ins for fee businesses we will look for from time to time as they present itself and if they align with our strategy. Those are where our focus is, but largely our focus remains on organic growth.
Okay, before we open it up to audience Q&A, is there any kind of final thoughts you'd like to leave us with or areas that we didn't touch on?
I think where we leave you with the fact is that we started this journey to enhance returns and accelerate growth way back in end of 2024. A couple of quarters down in the path, I feel good about the progress which we have made, good EPS growth, ROE growth, and also the results speak of the execution on that. Very much focused on that, and that's largely coming from core operating performance. We are not banking on the environment and the market but be more specific levers as we look forward towards our medium-term target of 15% ROE and 18% ROTCE exiting 2027. Very much focused on execution through core operating performance.
Great. I would like to open it up to the floor to investor Q&A. Does anyone have any questions that they would have for Bank of Montreal? I have one in the back. I do not know if we have a mic runner or you can just speak up, I will repeat the question. Sure. Let me just repeat.
Okay.
The question was what are the key levers that you are going to use to improve Bank of the West profitability?
Yeah. I think the one thing that I would mention is just at the outset, we have totally integrated Bank of the West in BMO, and so we do not operate anything in the West Coast as Bank of the West. It is very much unified BMO model North, South, U.S., Canada, and West Coast. So I just thought I can explain that. When we look at the Bank of the West profitability, or you are alluding to the West Coast profitability, it is a subset and part and parcel of our Investor Day target of path to 12%, which we talked about for U.S. banking. And then that is 18% ROTCE. So any profitability improvements on the West Coast is a subset of that. What we have talked about that path, it is basically broken up into three categories.
A third is fees, a third is deposits, and a third is capital cost and altogether. And these areas are broken up between all our three businesses. I think first of all, what we did last year was, like I mentioned in one of my remarks, was we had a unified business structure. We deliberately did it because bringing it in-house, we had reached a scale in the U.S. that it warranted a unified model, go-to-market model, so all the businesses could interact very cleanly and at a speedy pace with each other, whether it was wealth with commercial, it was mass affluent with private bank, it was business banking with middle market and so on and so forth. So we have kind of created that deliberate structure under one umbrella, with the gentleman running that business called Aron Levine.
Within each of those businesses, we have various initiatives to deepen client relationship and also optimize capital. What that results then into all the activities in those businesses is this fees, deposits, and capital and cost, as I mentioned. Just to use an example, in the deposit side, we have TPS fees, which has a penetration of mid-50s to high 50s in the U.S. commercial. Taking that to the mid-70s brings in more fees and deposits.
There is a lot of focus on the consumer side on the mass affluent strategy, which helps bringing in core operating sticky deposit, which adds to that deposit part of the equation. That is how we have it laid out, is the outcome in the path is going to be along these lines, a third of in fees and a third in deposits and all others, but lot of other initiatives under this unified structure across all these business units.
Great. Any other questions out there? Yeah. The question was on the impact of tariffs on small and medium-sized businesses in Canada.
Yeah. I think as we look at the tariff implications, we have been running various models since the discussions started last year in terms of what the impact is. As we look at our book, it is a very immaterial size relative to where our existing exposures are, and very manageable in terms of what it means to what is already on the balance sheet and part of our portfolio. I think where we are more focused on is what is the second-order impact of what does this tariff uncertainty mean to GDP, to unemployment, and if there are going to be any real implications coming out of it, and to counter that, if there are any fiscal and stimulus measures coming out of the government. Those are the pieces which we look at.
As we look at all of those pieces, we really don't see as a credit event based on what we see on this right now. On top of it, as I was mentioning, we come into fourth quarter and next year with a position of strength on our reserve coverage ratio at that 69 basis points, where we feel between how we have modeled that, between how the direction of our underlying credit quality is from an improvement basis, watch list, and impairments, gross impairment, as we look at, we feel very comfortable in terms of where we are, notwithstanding even if there are any second-order implications. That is something which we'll closely watch out and keep talking to all of you on a quarterly basis. We feel comfortable where we are today, but closely monitoring.
Great. Terry?
Sorry, repeat that question again.
Further growth ambitions in the U.S.
I mean, U.S. for us, in a way if I look at it, I'm glad you asked that question because for us, we have a task cut out for each of the businesses, what role they play in our long-term journey to enhance returns and accelerate growth. So higher ROEs, also strong EPS growth and, U.S. for us, and capital markets for us represents that growth story while maintaining a strong margin return on equity. Whether it is Aron's business in U.S. banking, as we look at growing commercial, growing mass affluent, growing private bank, there's a lot of focus there within U.S. As I mentioned, almost 48% of our capital markets revenues comes from U.S. right now.
There's a lot of focus, how do we expand into capabilities which we are already strong in Canada, like investment banking in metals and mining or energy into the U.S., and how do you bring those adjacencies down? So U.S. is a big part of the equation for us as we look at our North Star for elevating returns and accelerating growth across these businesses.
Great. All right. With that, please join me in thanking Rahul for his presentation.
Thank you.
Up next, we have our keynote lunch panel on the future of financial services, which will be hosted by Rodgin Cohen of Sullivan & Cromwell.