Earnings Call: Q3 2018

Aug 28, 2018

Good afternoon, and welcome to the BMO Financial Group's Q3 2018 earnings release and conference call for August 28, 2018. Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead. Thank you. Good afternoon, everyone, and thanks for joining us today. Our agenda for today's investor presentation is as follows. We will begin the call with remarks from Darryl White, BMO's CEO, followed by presentations from Tom Flynn, the bank's Chief Financial Officer, and Surjit Rajpal, our Chief Risk Officer. After their presentations, we will have a question and answer period where we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one or two questions. We have with us today Cam Fowler from Canadian P&C and Dave Casper from U.S. P&C. Pat Cronin is here for BMO Capital Markets, and Gilles Ouellette is representing BMO Wealth Management. On behalf of those speaking today, I note that forward-looking statements may be made during this call. Actual results could differ materially from forecasts, projections, or conclusions in these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall bank. Management assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tom will be referring to adjusted results in their remarks unless otherwise noted as reported. Additional information on adjusting items, the bank's reported results, and factors and assumptions related to forward-looking information can be found in our annual report and our third-quarter report to shareholders. With that said, I will hand things over to Darryl. Thank you, Jill, and good afternoon to everyone on the call. The strong financial results we announced today reflect continued positive momentum through the first nine months of the year. Net income for the third quarter grew 14% from last year to $1.6 billion, and earnings per share grew 16% to $2.36. Return on equity improved to 15%. Performance was driven by good diversified revenue growth and the benefit of ongoing efficiency initiatives that together delivered strong total bank operating leverage of 2.9% with positive operating leverage contribution from each operating group. Credit performance continues to be very good, reflecting our well-diversified loan portfolio, deep understanding of our customers, and a good economic environment. We maintained our strong capital position, increasing our CET1 ratio to 11.4%. Each of our operating groups performed well this quarter. Canadian P&C is delivering good and steady revenue and earnings growth driven by momentum in our commercial business where loans grew 11% and deposits grew 8%. While the borrowing needs of our retail customers are moderating, we continue to attract new customers and expand relationships, particularly through our digital channels, which account for over 25% of sales this year, and where we've seen an increase in mobile users of almost 20%. The U.S. P&C had another strong quarter with earnings up 34% from last year. Pre-provision, pre-tax earnings were also up a strong 15% as we continue to deliver leading commercial loan growth and expand our personal deposit franchise. Wealth Management had good underlying growth across its diversified businesses and positive operating leverage with particularly strong performance in full-service investing and private banking. As expected, we saw resumed momentum in Capital Markets going into the second half of the year with good growth in client activity in most of our businesses and strong operating leverage in Capital Markets of 4%. Moving now to our overall U.S. segment, where we've been focusing on accelerating our growth. Earnings are up 30% from last year, led by U.S. P&C, which year-to-date has increased revenue by 10% and improved efficiency by 370 basis points. Contribution from the U.S. segment has increased to 28% of the bank's total earnings this year, up from 24% in 2017. This performance is a testament to the strong reputation and trust we have within the U.S. market built over many years by our outstanding employees who consistently put our customers first. It's a source of great pride that customers rank BMO Harris Bank second among the 40 largest U.S. banks in the American Banker 2018 Annual Bank Reputation Survey. On efficiency, another priority we've been focused on, we're making steady progress through the combination of cost reduction and revenue acceleration initiatives. It's a concerted effort that spans businesses and processes in all parts of the bank, coordinated by a central team under the direction of Luke Seabrook. As we do this, we're optimizing expense resource allocations, including in areas such as procurement and real estate, and making the investments needed to generate growth for the future. Year-to-date in constant currency, our technology-related expenses have increased at a low double-digit rate while all other expenses have increased at around 2%. There are a number of examples of where these investments are making measurable progress in customer experience and business efficiency, leading to stronger loyalty and revenue opportunities. So far this year, we've opened seven smart branches in Canada, building on our experience in the United States. They offer smaller square footage and open concept design and an improved customer service. For the many customers who call our contact centers every day, we've introduced voice recognition authentication technology that reduces wait times and is more secure. In U.S. P&C, we're piloting a completely redesigned digital banking platform, which offers an enhanced desktop and mobile experience and improved functionality. We expect to roll this out for all of our personal customers in the U.S. later this fall. We're also exploring transformational technologies. Earlier this month, BMO Capital Markets piloted a fixed income issuance transaction using blockchain technology, the first of its kind in the Canadian marketplace. Across the bank, employees and leaders are mobilized against our strategic priorities. We are committed to doing things differently, positioning ourselves to compete in an evolving ecosystem. The progress we are making is evident in our financial results. We believe there is significant potential across our markets to leverage our competitive position, our strong reputation, and our growing customer base. We will be providing further updates on our innovation and growth agenda at our Investor Day on October 24, and we look forward to meeting many of you there. I will now turn it over to Tom to review the quarter's results. Thank you, Darryl. My comments will start on slide 8. Q3 reported EPS was $2.31, and net income was $1.5 billion. Adjusted EPS was $2.36, up 16% from last year, and adjusted net income was $1.6 billion, up 14%. Adjusted return on equity was 15% in the quarter. Strong performance was driven by good revenue growth and positive operating leverage across all businesses. Adjusting items this quarter are similar to past quarters and are shown on slide 24. Turning now to the quarterly results in more detail. Net revenue of $5.6 billion was up 7% from last year. Net interest income increased 3%, and net non-interest revenue was up 10%, with increases across most revenue categories. Expenses were well managed, up 4%, with higher technology investments as the single largest contributor. As Darryl said, excluding technology-related spend, year-to-date expenses were up about 2% in constant currency. The efficiency ratio improved 180 basis points from last year to 60.3%. Net operating leverage was strong in the quarter at 2.9%, reflecting good revenue growth across businesses and continued focus on expense management while investing in technology at the same time. The effective tax rate was 22% and was 25% on a TEB basis, both modestly lower compared to a year ago. Moving to slide 9. The common equity Tier 1 ratio was 11.4%, up 10 basis points from Q2. As shown on the slide, higher retained earnings was partially offset by higher risk-weighted assets from good business growth and the impact of share repurchases. We repurchased one million common shares during the quarter, and over the past year, we have repurchased a total of 10 million shares while maintaining a strong capital position. Moving now to our operating groups and starting on slide 10. Canadian P&C net income was CAD 642 million, up 5%. Revenue growth was 5%, driven by continued momentum in the commercial business, with increased non-interest revenue and higher margins. Total loans were up 4%. Personal loan balances were essentially unchanged from last year, which reflects our decision to reduce participation in the third-party mortgage market. Mortgage growth through proprietary channels was 3%. Commercial lending growth was strong at 11%. Total deposits increased 4%. Personal deposits were up 1%, reflecting 5% growth in checking account balances and a reduction in broker term deposits. Commercial deposit growth was good at 8%. NIM was up one basis point from the last quarter. Expense growth was 4% and operating leverage was positive 1.1% in the quarter. The total provision for credit losses was CAD 137 million and includes a CAD 17 million provision on performing loans. Moving now to U.S. P&C on slide 11, and the comments here speak to the USD performance. Adjusted net income of $288 million was up 34% from last year. Pre-provision, pre-tax earnings growth was strong at 15%. Results reflect continued momentum in the business, positive operating leverage, and a constructive environment. The benefit from lower U.S. taxes was $31 million in the quarter. Revenue growth was strong at 9%, largely reflecting deposit revenue and loan volumes. Average loan balances increased 12%, with strong commercial loan growth of 13%. Personal loan growth largely reflects the mortgage portfolio purchase in Q1. Deposits were up 8%, with growth in personal of 11% and commercial of 2%. Net interest margin was down 6 basis points from last quarter due to loans growing faster than deposits, continued loan spread compression, and lower interest recoveries, with these partially offset by improved deposit revenue. Expenses were up 4% and include some items we do not expect to recur. Operating leverage was positive 4.2% in the quarter. Total provisions for credit losses were $31 million and included provisions on impaired loans of $42 million and a recovery on performing loans of $11 million. Turning now to slide 12. BMO Capital Markets net income was $303 million. Revenue of $1.1 billion was up 5%, reflecting stronger revenues across both trading products and investment in corporate banking, and expenses were up just 1% from last year. Pre-provision, pre-tax earnings growth was 12%, and operating leverage was positive. The provision for credit losses was $7 million in the quarter. Moving to slide 13, wealth management net income was $301 million, up 6%. Earnings in traditional wealth of $212 million were up 3% as underlying business growth was partially offset by a legal provision. Excluding the provision, earnings growth would have been double digits with particularly strong contribution from Canadian Wealth Management, which delivered year-over-year revenue growth of 11%. Insurance net income was $89 million, up 15% from last year, reflecting underlying growth and the benefit from market movements. Expenses increased 6%, largely due to higher revenue-based costs and technology investments. Operating leverage was positive 1.1%. Turning now to slide 14 for corporate services. The net loss was $57 million compared to a net loss of $85 million a year ago. Results were somewhat better than trend due to positive items in the quarter, none of which were individually significant. To conclude, results in the quarter were strong, and we remain focused on achieving our financial targets for the year. With that, I will hand it over to Surjit. Thank you, Tom, and good afternoon, everyone. Starting on slide 16, the provision for credit losses on impaired loans was $177 million, or 18 basis points, flat compared to the prior quarter. The total provision for credit losses was $186 million, which included a $9 million provision for credit losses on performing loans. In Canadian P&C, PCL on impaired consumer loans decreased $22 million with lower credit losses across all product categories. As noted last quarter, losses in Q2 were higher due to a one-time adjustment. The PCL on impaired commercial loans increased, reflecting lower recoveries. PCL on impaired loans for U.S. P&C were down both in consumer and commercial portfolios. The reduction in consumer loans was largely due to recoveries in the HELOC book. In the commercial portfolio, we saw lower provisions across all business segments. Capital markets PCL on impaired loans was $3 million compared to a $16 million PCL recovery last quarter. The net $9 million provision on performing loans is comprised of a number of factors. We modestly increased the weighting of our downside scenario due to trade concerns. However, the impact of this was offset by model and data adjustments. The remaining factors of volume growth, migration, and updated macroeconomic inputs combined for the $9 million PCL. Turning to the next slide. The GIL ratio decreased 3 basis points to 53 basis points. On slide 18, delinquency and loss rates for the Canadian residential mortgage portfolio remained stable. In summary, our well-diversified credit portfolio continues to benefit from the good economic environment, and I expect our PCL performance to remain strong in the coming year. I will now turn it over to the operator for the question and answer portion of today's presentation. Thank you. If you have a question and you're using a speakerphone, please lift your handset prior to making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Steve Theriault with Eight Capital. Please go ahead. Thanks very much. A couple for me, maybe starting with the U.S. business for Dave Casper. There's a lot of moving parts with the margin and maybe a bit surprised to see that magnitude of a decline with the higher short rate. So maybe could you give us just a bit of an order of magnitude with respect to the moving parts, and given what you know a bit of an near-term outlook for the margin with- Sure. Q3 as a jumping-off point? Sure. Right. We were down NIM about 6 basis points for the quarter. I would note we were up 7 the quarter before. So kind of flat for the last two quarters, and it just indicates that it does move around a little bit. But the big issue, and we talked about this before, the loans grew at 3% for the quarter and the deposits grew at 1%, so that does have a negative impact on NIM. If I unpack a little bit more, we had the interest recoveries in the second quarter. We did not in the third quarter, so that actually accounted for half of the diminution. But there were other things too. The rates helped us. Rates absolutely helped us, but that was then offset by larger loans and some diminution in spread. Not significant, but some of that as well. You pull it all together, that hopefully unpacks it for you. As it relates to going forward, I would expect a couple basis points increase in the next quarter, and that is assuming that we do have an interest rate increase in September. Does that help unpack it for you? That is helpful. A rate increase and kind of steady state competition and growth rates. Yep. Yeah. Okay. Thanks for that. Secondly, turning to Capital Markets, definitely a better quarter, a little bit of a bounce back quarter there overall, but we are not seeing that come from the U.S. business. The revenue looks a little bit better. Expenses shrunk for the first time in a while, so making some headway there. Just wondering if you can talk a little bit about what it will take to turn that momentum around and get it back to the growth rates we were seeing. I think the contribution was up to around CAD 80 million a year ago. You have talked about getting that back to those sorts of levels, but wondering, do you need to go after the expenses a little bit more, or is it just you need the revenue tailwinds to help from here? Yeah. Thanks for the question. The short answer is it is definitely a revenue growth story that will get us to where the kind of levels you are talking about. At CAD 41 million in net income for the quarter, that was definitely softer than we would want to see. As you commented, it was partly a revenue story. Revenue was modestly lower than the average of the past six quarters, and that was really reflective of a fairly soft M&A environment for us. The overall market was reasonable, but our M&A experience was a little bit weaker this quarter. It was offset by some pretty good performance in our trading products businesses, which we expect to continue. The other driver of the softer number this quarter was PCL. I am sure you noticed that we had 13 million USD of PCL in the quarter, which is above average relative to when you look at the past six or eight quarters. That is skewing a little bit of that comparison you are looking at. Lastly, as you pointed out, expenses are running a little bit higher than you would expect given the revenue line. Some of that is us continuing to invest in growth in that business. We are still seeing opportunities to acquire talent, particularly in our investment and corporate banking side of the business. That is a long-term growth story and lots of potential there, and so we are going to continue to invest there. In terms of how that is going to turn around, we look at the pipeline certainly for M&A and for ECM, at least for us in Q4 and beyond, as actually being quite strong. We would expect to see revenue growth materially pick up from there. So in terms of getting back, CAD 80 million certainly was a high watermark for us in the recent past. I think you should expect to see a range in the kind of 60-80 zone going forward for the next few quarters. I would point out, though, that overall, despite the fact that the U.S. investment and corporate banking business was a little bit weak, the Canadian side of the business was exceptionally strong. So overall, we do not expect all the cylinders to be firing at any one given time. That is why we have a nice diversified business mix with some really great contribution from the Canadian side of that business, driving what we thought was actually a pretty good quarter overall. That is very fair. Thanks for that color. Thank you. The next question is from Robert Sedran with CIBC Capital Markets. Please go ahead. Hi. Good afternoon. Cam, you have spoken in the past about the participation choices, I guess, as Tom noted in his prepared remarks as well, the de-emphasizing the third-party channels. I am wondering if you can give us a little bit more color about how you look at the earnings and volume growth against that backdrop relative to sort of expectations. More on the personal side, the commercial side is, I guess, less affected by that and also doing quite well at the moment. More on the personal side, how you are thinking about volume and how you are thinking about the way forward. Sure. Thanks, Rob. You will know it is a commercial-driven strategy, and on the personal side, strong emphasis on primary customer growth. Sometimes when you put those two things together, commercial focus and primary customers, we do end up making choices at the margin. Third party you referenced, indirect auto is another one where we sometimes pull back a touch. In terms of how we think about growth in the business, it is a primary customer focus emphasis in three areas for us right now. Number one is on deposit growth, number two, cards, number three, mortgages and RESL more broadly. In each of those categories, to be sure, the focus is on gaining market share. I think you can see in the market share performance of the checking, like on rod, we have got some gains, market share more recently focused primarily driven by an increase in marketing and some new offers we have. On the card side, again, there is modest market share gain, again, driven primarily due to, again, marketing digital yield-enhancing products as well with our small business launch this quarter. On the RESL side, if you put together the focus we have on branch originated, which we do primarily because the margins are thinner on the third party and because there is not a primary customer option for us there. We are actually in line with the market now, and you put the amortizing HELOC in with that, and that is about 4%, which is in line with the market. I think guidance in 1% on the quarter, which would have us probably a little closer to the front of the pack. The focus is on share gains in those three areas that I have pointed to. I am optimistic the performance we are seeing this quarter in those areas has us in a good position. I think a couple more quarters like this, and you will start to see the year-on-year improvement that we expect and will bring us more in line with what you are seeing on the commercial side in terms of relative performance. I hope that helps. It does. I might have thought with that kind of focus that you might be seeing a bit more of a drift higher in the net interest margin, though. Over the last four quarters, it has been relatively stable, which I guess when you are transitioning a business is maybe not a bad result. Am I wrong in thinking the margin should be following that same trend here going forward? I think the margin will, and we are up 6 on the year, 1 on the quarter only. But we've also been doing well in cards and commercial lending, which is contributing to the 1 basis point. But I would expect, as you say, if we keep it up with the deposits, in particular on the checking, that you'll see 2 to 3 basis point gains next quarter, and I expect that type of quarterly trend to continue into 2019 as well. Okay. Thank you. Thank you. The next question is from Meny Grauman with Cormark Securities. Please go ahead. Hi, good afternoon. Just a question on the legal provision this quarter. Hoping to get a little bit more color on the nature of that provision. If you normalize for this, our results in the U.S. are very good. This is kind of an ongoing matter, and there's not much more to say other than the fact that it's not material. Okay. Thanks for that. Then just caught my eye at slide 6, just the digital engagement numbers. Wondering if you could just talk to where you're steering in terms of those three areas that you highlight in terms of sales through digital channels, active digital users, and growth in mobile users. Is there a particular number targets that you're steering towards? Thanks. Sure. It's Cam Fowler speaking. I would say that with respect to digital sales, you see that we've moved from 18% to 25% last year to this year. We set a public aspiration of 30%. We thought it would take us a couple of more years to get there. I actually expect that we'll probably cross that threshold going into next year at some point. So, we may well decide to go beyond 30%, but 30 is the goal that we set. Digital active users, we'd like to see that number in the mid to high 60s in the relatively near term. The growth in active users is actually linked to the point above. If we can continue to see high double-digit growth in usage, that's a 90-day usage number, active user number, then I think all will be well. Underneath your question, I think is, what are you doing to affect that type of activity? For us, digital strategy has been core to distribution in North American Personal & Business Banking for a while. We feel that we're in a very good position given the size and distribution with an urban leaning to our branches. We may have fewer, but they're well-positioned. If we can do very well through digital account opening, card sales through digital, et cetera, we think that we can grow at or ahead of market and we're starting to see some of that come through. Thanks for that. Thank you. The next question is from Gabriel Dechaine with National Bank Financial. Please go ahead. Good afternoon. I just want to follow up on the U.S. margin topic and then have a follow-up for Cam on the Canadian deposit commentary. First on the U.S., the loan growth outpacing deposit growth, you're citing that as the bigger issue. We've seen that for quite a while now. I'm just wondering, is there a strategy in place to accelerate commercial deposit growth or something kind of off the wall that you're exploring to address your funding gap there? Your wholesale funding exposure is growing quite steadily over time. It's Dave. You're right in that we have had really good solid loan growth. We've actually had good deposit growth too, which has not kept up with the loan growth. To just take you back and to remind you, the way our business works, the retail business has been and continues to be a very significant source of our deposit growth, and it continues to be. We have a very strong retail franchise in the U.S. It's grown. We grew deposits 8% this year. It will continue to grow, and as Darryl mentioned in his earlier comments, we have more coming down the road in terms of our digital capabilities in the U.S. on the retail side, which is run by my partner, Ernie, and you'd hear more about that in our Investor Day. To your other question on the deposit side for commercial, we absolutely. We've probably over the past have not grown the commercial deposits as fast as the loans. We will definitely move to do more of that in the future. We have strategies in place in terms of different industries that are more deposit heavy than they are loan heavy. We will do that. We have no concerns to kind of just round this out that we won't be able to very adequately fund ourselves going forward and continue the momentum. I'm just looking at the We're at a CAD 14 billion, I guess, wholesale funding figure here. Is there sort of a max that you want to get to? I'm not sure what you're looking at. Is that in the U.S.? Yeah, actually it is probably a little less than that because I have got the managed mortgages, but it is- Yeah. It is probably about 7 in terms of our, in USD, our deposits are around 70 or so, and our loans are about 77. Yeah, because I think you are looking at the mortgages that we service. Yeah. That is my bad. Yeah. Yeah. Okay. Then just on the commercial, the quarter-over-quarter decline in the commercial deposit balances, that does not sound like you willingly let some of those go, because we are hearing a lot more about competitive pricing in that market, higher betas and all that stuff. Yeah. Well, on the commercial side, it has been more competitive. I think the deposit growth is expected to continue on both sides, but we should have better deposit growth in the commercial side in the next quarter. And we continue to focus on that as well. Okay. And then the Canadian business for Cam, you said the deposit growth is your number one priority. I have heard that from pretty much all the banks. I was just wondering, and I get that. I am just wondering what kind of strategies do you find are working and which ones aren't? Because I get all the offers, do this and get $100 to set up a checking account or whatever, and then various forms of that on an iPad here or there, whatever. Where do you see yourselves playing? Okay, thanks. I guess the first thing I would say is that the number at 1.2 looks not as strong relatively. That has got term decline in it. And as you know, the broker channel is a little thin and a little more competitive. Expect that would come up a little bit over the next little while. But the underlying checking account, which is the one I think you are mainly focused on, is performing, I think, well against market. It is a priority, and I am not at all surprised to hear you say that others are focusing on it as a priority. I would probably go back to the comment I made with respect to the digital channels. And we made a commitment a couple of years ago to make sure that beyond cards, everyday banking and savings accounts could be opened on the mobile phone, in a matter of minutes. And that coupled with, I would say, a 50% increase in marketing spend in that area, has been really helpful to us in achieving the double-digit primary customer growth we have had in the past year. But relative to other markets like the U.S., I would say it is maybe perhaps not as competitive, and there is still room to grow here for the right offer and for the right branch network that is prepared. But I think it is fair to say that competition for these accounts and these deposits will grow through time. And that maybe competitive offering or promotional stuff that you might do is factored into that margin commentary you made earlier? It is. Yes. All right. Thank you. Have a good day. Thank you. Thank you. The next question is from Sumit Malhotra with Scotia Capital. Please go ahead. Thanks. Good afternoon. First, probably a couple of number ones for Tom Flynn. When you took the restructuring charge last quarter, you had indicated that the expectation was about $185 million in expense savings over, I think it was over the coming year on a run rate basis. Especially when I look at your corporate segment this quarter, it seems like you had a pretty quick decline in expenses. It was indicated that maybe all of that wasn't run rate. Just wanted to ask you, of that 185, how much do you think we've seen so far? And specifically, is that the drop we're seeing in corporate? Thanks for the question. We did guide to a number of around 185, which we'll achieve in the middle of next year. In the current quarter, on an annualized basis, the number would be more like $85 million to $90 million. And it will build from that number up to the 185 sort of Q2, Q3 of next year. In terms of corporate, the corporate results were better than average by around $30 million. A number of things contributed to that, none of them individually that significant on the expense side. We had some benefit from restructuring, but we also had a real estate gain in the number that helped on the expense side. And on the revenue side, treasury was a little better than usual, and we also had a higher level of security gains. So that combination produced the better overall corporate results. But the expense drop is some of the benefit of the restructuring there. It is, and also the real estate. Okay. This one's probably for you too, because it's kind of esoteric, and that's usually the CFO's job. Page 11 of your supplement, the trading revenue by product. The column you call the mysterious other column is up $40 million sequentially. Then you talk about runoff of structured credit and hedging exposures. I don't think there's any structured credit runoff these days. What exactly is this, and why was it such a decent-sized move in the quarter? There isn't any structured credit. That is a legacy comment. We did have some larger mark-to-market items related to our treasury operation that I think are in that line. That is what's contributing to the stronger performance there. Some of that is offset because it's a hedge. The bump you're seeing there doesn't flow to the bottom line for the most part because there's an offset. But it's treasury that's really driving that in the quarter. That's some of the corporate segment revenue then. That's correct. Okay. I guess you can update note 3 to take out this structured credit comment. We will take a look at that. It could be that in the farther back comparable periods it's still relevant, but we will check it. Okay, last one for me, and this is probably for Darryl White. It wasn't that long ago that, at least for a few years, I was wondering whether that 15% ROE objective for BMO was going to have to be adjusted lower because it'd been a while since we'd seen it. You got there this quarter, and the obvious question comes to sustainability. But so far on this call, we've heard your management team talk about higher NIM in Canada, higher NIM in the U.S., credit in check, expenses in check, U.S. Capital Markets earnings going higher. So really, I think the question that's more in my mind is what do you see as the impediments to that 15% ROE objective that you hit this quarter not being achieved in the near term? Is there something in the way of investment spend? Or maybe just leave it to you. Is getting there this quarter the start of what you expect will be 15%+ for BMO as a run rate level going forward? Sumit, thanks for the question. We did set that 15% target some time ago. I'm not sure how to react to your confidence level in us achieving it at one point in time, but I'll skip past that and go straight to the forward part of your question. This is what we set out to do. The businesses are operating well. They're operating against the agenda that we set with the 2.9% operating leverage that I talked about earlier and all four of our business groups contributing to that operating leverage with all of the details behind it that you're hearing from the management team in this call. The short answer to your question as we look forward to the future is if the markets remain constructive, I don't really see anything that will stand in the way of us delivering on that 15%. Of course, markets do change. If credit environments change dramatically, we'll have a different conversation. But assuming the market that we're in right now, the execution that we're prosecuting right now against the pipelines that we have, I don't see anything in particular because if you consider the spend. You've asked a good question on spend. If you consider the spend that is included in the 15%, I mentioned it in my remarks, but in case it was missed, we've got a double-digit spend on the technology agenda growth year-over-year, about approximately 2% in constant currency of our all other expenses. So you would expect something like that, give or take, to continue into the future, and assuming the markets are as constructive as they are right now, I don't see why we would falter on our 15% over time. There might be a quarterly variation around that, but as I look over the next little while, I would see that to be a number that we're going to shoot for. Thanks for your time. Thanks, Sumit. Thank you. The next question is from Scott Chan with Canaccord Genuity. Please go ahead. Good afternoon. I just want to go back to the Canadian margin or NIM. If I look at the past four quarters, it's been pretty flat-ish, and I don't know if I kind of caught it, but is the outlook stable or is it increasing on the margin side in Canada? It's stable to increasing. It's Cam speaking. I think it'll be up a couple of points in Q4 and would continue in a similar trajectory through 2019. Okay, great. And perhaps for Darryl, just with the excess capital, there's a lot of talk about U.S. P&C, but what about Wealth? Is that an area of interest, considering your competitors have been pretty aggressive in that space recently? Yeah, those are both areas of interest, Scott. We're looking at growing the bank, and you all do a good job of asking us this question from time to time. I might bore you with the response, but we don't comment on any specific situation. As you know, we're looking to grow the bank. Those are two areas in particular where we're looking to grow the bank. With that, I'll just remind you that we take a pretty disciplined approach to everything that we look at, and we'll deploy capital as the opportunities meet the criteria. Okay. Good luck. Thank you. Thank you. The next question is from Nigel D'Souza with Veritas. Please go ahead. Thank you. Good afternoon. I had two questions for you. First, if I could refer you to page 23 of your supplement and a question on the commercial loan balances. Sequentially, your commercial loan book is up about CAD 6.5 billion relative to Q2. When I look at the industry breakdown, it appears that the financial segment, particularly non-bank financial services, is driving a fair bit of the increase, nearly half with non-bank financial loan balances up about CAD 4 billion sequentially. Is there something particular that you're seeing, and I assume this is out of the U.S., but is there something particular you're seeing in that sector that's driving that growth? How sustainable do you think that is going forward? Yeah. This is Surjit Rajpal. I'll answer your question. That financial segment sector that you see there has a number of sub-sectors, and one of the sectors that we had higher drawings in this last quarter, but by the way, those drawings were in the investment grade and of a short-term nature. This is not unusual. That's happened in the past, but generally, there's been an offsetting reduction somewhere else because there's so many sectors and so many moving parts. This time it didn't go that way, so you've seen a large increase. But there's nothing there that points to anything that would indicate that there's a particular sector that's gone up or a change in strategy. Okay, so we should expect more of, I guess, a runway that's in line with your historical basis and not take this recent sequential increase as more of a trend going forward for that specific sector? That is correct. From time to time, there will be drawings though that will cause the number to change. But as I said, it just happens that this time those There was not much to offset the increase in one particular sub-sector. Okay, great. Thank you. My second question had to do with a comment made earlier, and I wanted to make sure I heard it correctly. There was a comment on amortizing HELOCs, and is it accurate to state that the comment was including amortizing HELOCs in your growth rate, the RESL mortgage book would be up 4% versus the current growth rate of roughly 1%? Is that right? It's Cam speaking. Yes, it would be about 4%, but that would be compared to the 3% if you do not include the HELOCs. The 1% is where we are on a quarter basis if you take branch-originated mortgages plus the amortizing HELOC. So it's one quarter-on-quarter and four year-on-year with the two together. If you are just looking at the branch originated, no HELOC, it's 3.7 quarter-on-quarter. Okay. Got it. Just a quick follow-up to that. Are you seeing any acceleration in the conversions for amortizing HELOCs or to amortizing HELOCs among your retail customers or is that run rate roughly the same as it's been the last few quarters? It's stronger this quarter than last quarter, but that's what we expect in Q3. If you look at it over four or eight quarters, it's in line. Okay, great. Thank you. Thank you. The next question is from Mario Mendonca with TD Securities. Please go ahead. Good afternoon. Tom, could we go back to the restructuring charge taken last quarter, the $260 million? Could you provide a schedule outlining how that has been used so far, or how much has been used in the first quarter since the charge? I can update you on that. The charge was about $260 million, or was $260 million. About 85% of that related to severance. And we have left accrued of the $260 about $190. You have gone through, I guess $70 would be fair statement then. Yeah, correct. Yep. That is right. When do you expect to be through it all? We will be through it all by Q2 of next year. Okay. We are basically at full run rate as we exit Q2. The accrual should be gone by that point. That makes sense. Another similar question probably for you, Tom. I try not to look at this quarter to quarter because I know it can bounce around. I am referring to the fairly substantial growth in liquid assets. I am referring to repos, cash resources, securities, ex trading. The increase there over the last three quarters, Q1, two, and three, has been material, and I am trying to understand what is driving this because it is having an effect on the all-bank margin that is coming in. I get it. I understand why that would be the case, why that margin would be coming in, and we all calculate NIM on an all-bank basis differently. I do not suspect anyone on this call does it precisely the same way. But maybe, Tom, you could talk about why we are seeing this. It has been for three straight quarters now. Yeah. No, it is a fair question. We have had higher growth in liquid assets over the last three quarters than in the overall balance sheet, and the growth is good in the overall balance sheet. That really has been the factor that has moved the total bank NIM down quarter-over-quarter, and that is because the spreads are lower. I would say three factors contributing to the growth. One is just client activity in our Capital Markets business. Providing liquidity to clients is a core service. We have seen good client flows, and that drives a part of the increase. We have increased the amount of supplemental liquidity we are holding as a bank. That is done through our treasury group and has been a contributor. Then last point is we will have closing in the fourth quarter the U.S. Capital Markets acquisition that we disclosed a little while ago. That is a broker-dealer focused on particularly mortgage-backed and asset-backed securities in the U.S. The name is KGS-Alpha. To glide into that acquisition, we did increase some of our participation in the market in advance of that. So you will not see as much of a pop with the acquisition, but we front-end loaded some of the balance sheet associated with it. So Tom, what were you referring to in the second point? You said supplemental liquidity you had increased. That's liquidity we hold for a rainy day. So it's just excess liquidity we keep from a risk management perspective. Are you done doing so? I wouldn't expect that to grow at a higher rate than the overall balance sheet going forward. Thank you. Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Darryl White. Thank you, operator, and thank you all for your questions. I will close with a quick comment to reinforce the confidence that we've got in the momentum in all of our businesses. The bank is strong, diversified, and growing. As you heard today, we're executing against the strategies that position us to grow in our target markets, which is leading to accelerated growth and improving efficiency. We're on track to achieve the financial targets we set out at the beginning of the year and sustainable growth over the longer term. Thank you everyone for your time on the call today. We look forward to speaking to you again at our Investor Day in October. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.