Earnings Call: Q3 2017

Aug 29, 2017

Good afternoon, and welcome to the BMO Financial Group's Q3 2017 earnings release and conference call for August 29, 2017. 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 Bill Downe, 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 Darryl White, Chief Operating Officer, Cam Fowler from Canadian P&C, David Casper from U.S. P&C, Pat Cronin from BMO Capital Markets, and Gilles Ouellette from 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. Bill 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 Bill. Thank you, Jill, and welcome to everyone joining us on the call. BMO's performance this quarter was driven by strong growth in our personal and commercial and wealth businesses. Earnings per share were $2.03 in the quarter, with net income of $1.4 billion, up 6%. Year-to-date net income of $4.2 billion reflects strong underlying growth of 10%, 16% if you include the impact of non-strategic assets in the current and prior years. These results demonstrate the continued benefits of our differentiated operating model in an evolving environment. We are generating good and diversified revenue growth as we continue to execute against our strategic priorities, grow our business base, and deepen customer relationships. Credit performance remains strong, reflecting the deep understanding we have of our customers, geographies, and industries. We continue to grow our balance sheet responsibly and maintain a strong capital position with a CET1 ratio of 11.2% after the repurchase of 4 million common shares completed near the end of the quarter. ROE improved from the previous quarter to 13.3%. Turning to slide 5, I'll touch on a few highlights from our operating groups. Canadian P&C continued to achieve good loan and deposit growth across commercial and personal products, generating strong net income growth of 9% for the quarter and returning to positive operating leverage as we focus on managing expenses in line with revenue. Our Canadian banking performance reflects our philosophy and practices with respect to managing risk and risk concentration to deliver consistent performance through the full economic cycle. We're building on our fundamental strength and number 2 market share position in commercial banking by deepening relationships and expanding segments across industries and geographies. Commercial loans and deposits have grown at an annualized rate of 9% and 7%, respectively, over the last 2 years, and we expect to continue to have good growth as Canada's economy remains robust. Our personal business has delivered strong deposit growth averaging 8% over the last 2 years as we've made it easier for both new and existing customers to bank with us. We're proactive in our response to changes in the marketplace and growing demand for digital interactions as we meaningfully transform the business. The percentage of everyday transactions that are banker-assisted now hovers at just 15%, with mobile, a critical sales and service channel, rapidly overtaking online. Our focus is on delivering an experience that seamlessly blends the digital and personal dimensions of our offering with greater personalization across all channels, integrating human and digital advice-based interaction. In US P&C, commercial loans and deposits increased sequentially, reversing moderate declines last quarter, with loan balances reaching 51 billion US dollars, and we saw stable credit performance. The business is absorbing the planned reduction in the indirect auto portfolio, delivering underlying year-to-date net income growth of 3% and positive operating leverage. Across our U.S. footprint, we're recognized as a leading commercial bank and trusted business partner. This is supported by a strong branch presence and retail deposit base that consistently achieves top-tier market share. Our work to optimize process, modernize our physical footprint, and build digital capabilities has resulted in net new customer growth and higher mortgage originations. We remain well-positioned to take advantage of opportunities within the market. Wealth Management continues to deliver strong results with double-digit earnings growth for the quarter and year to date. Good performance in traditional wealth and insurance has been supported by improved equity markets and expense management. We've made investments and innovated in our wealth franchise to take advantage of tremendous growth opportunities, and we're consistently recognized for our commitment to provide clients with leading-edge capabilities, products, and service. In just under 6 years, we've doubled assets under management and administration to $878 billion. In Capital Markets, our year-to-date performance remains strong with net income growth of 15% and positive operating leverage. For the quarter, good performance and investment in corporate banking was offset by the impact of markets and lower client activity in trading products. We're extending our leadership position in Canada and accelerating growth in the U.S. through focused sector coverage, new and maturing client relationships, and a comprehensive product offering. Our strong risk and regulatory position is a source of competitive advantage and will support ongoing growth. Underpinning the advantages in each of our businesses is our approach to developing deep customer relationships and commitment to loyalty. The real benefit is the relentless focus of BMO's over 45,000 employees who define a great experience for our 12 million customers in Canada, the U.S., and around the world. Guiding all of our strategic priorities is the fundamental commitment to sustainability and responsible behavior. Considering social change, financial resilience, community building, and environmental impact is integral to a successful strategy and to long-term performance. We are all proud of our bank's track record, which has been recently confirmed by being awarded the highest ranking for financial services companies worldwide in the 2017 Thomson Reuters/S-Network ESG Best Practices Ratings. This award highlights some of our accomplishments: maintaining carbon neutrality since 2010, achieving our goal of 40% representation of women in senior leadership roles, and maintaining a 30-year track record in responsible investment. Our businesses are strong, resilient, well-diversified, and positioned to deliver consistent earnings growth. We are advantaged with respect to opportunities in the current environment and over the long term. With that, I will turn it over to Tom to review our Q3 performance in more detail. Thank you, Bill. I will start on slide 8. Reported EPS for the quarter was $2.05, and net income was $1.4 billion. Adjusted EPS was $2.03, up 4%, and net income was $1.4 billion, 6% higher than last year. Adjusted earnings back out the benefit of a reduction in the collective allowance of $76 million pre-tax, or $54 million after tax. This and other adjusting items are shown on slide 25. Adjusted net revenue of $5.2 billion was up 5% from last year. Quarter-over-quarter growth was 3%, or 5% on a constant currency basis. Net interest income increased 2% year-over-year. Adjusted net non-interest revenue was up 8%, with increases across most areas. Adjusted expenses were up 7% from last year, driven by higher employee costs, including the impact of FX on deferred compensation, as well as higher technology investments and other costs. Relative to the second quarter, expenses were relatively unchanged or up 2% on a constant currency basis. On a net revenue basis, adjusted operating leverage was negative 1.2% in the quarter, and the adjusted efficiency ratio was 61.9%. On a reported basis, efficiency was 63%. Year to date, adjusted operating leverage is good at 3.4%, and 1.7% excluding the positive impact of certain non-strategic asset transactions. The adjusted effective tax rate was 22.5%, up marginally from 22% a year ago, mainly due to lower tax-exempt income from securities, partially offset by a favorable tax item that is reflected in our U.S. segment operations. The adjusted effective tax rate on a TEB basis was 25.1%, down from 26.7% a year ago. Moving to slide 9, the common equity Tier 1 ratio was 11.2%, down 10 basis points from last quarter. As shown on the slide, capital growth was more than offset by higher source currency risk-weighted assets from business growth and the impact of buying back 4 million shares in the quarter. Moving to our operating groups and starting on slide 10, Canadian P&C had good results with adjusted net income up CAD 615 million, up 9% from a year ago. Performance benefited from our strong commercial business, good deposit growth, and our continued prudent approach to the mortgage market. Revenue growth of 5% was driven by higher balances across most products and increased non-interest revenue. Total loans were up 5%. Personal loans were up 4%, including a 4% increase in residential mortgages, and commercial loans were up 8%. Total deposit growth was good at 8%, with personal deposits up 7% and commercial deposits up 9%. NIM increased five basis points from last quarter, primarily due to improved spreads on lending products and changes in mix. Expense growth was 5% and reflects ongoing investment in the business, including in our sales force and digital strategy. Operating leverage was positive 0.1% in the quarter. Provisions for credit losses declined compared to last year due to lower commercial provisions. Moving to U.S. P&C on slide 11, adjusted net income was CAD 289 million in the quarter. The comments that follow speak to the U.S. dollar performance. Adjusted net income of USD 223 million was unchanged from a year ago and up 15% from last quarter. Revenue was up 2% as higher deposit revenue was partially offset by loan spread compression. Average loan balances declined by 1%. Commercial loan growth of 5% was offset by the decline in personal loans, which was largely due to the impact of the sale of a portion of our indirect auto portfolio in Q1 of this year. Excluding auto loans, average loans were up 2.5% from the prior year. Net interest margin increased seven basis points from Q2, benefiting from the higher interest rates in the U.S., net of loan spread compression. Expenses increased 6% year over year, reflecting higher employee expenses, technology investments, and marketing spend. Credit provisions were relatively stable compared to last year and down from last quarter. Turning to slide 12, BMO Capital Markets adjusted net income was CAD 293 million, down 8% from a year ago. Revenue of CAD 1.1 billion was down 1%. Higher revenue in the investment and corporate banking business benefited from good M&A activity and higher corporate banking related revenues. Revenue in our trading product business was down from the strong levels of a year ago, reflecting markets and lower client activity, including lower activity in our equity derivative business, in part due to recent tax law changes. Expense growth of 11% reflects higher employee related costs, including the FX impact on deferred compensation as well as business growth. Provisions for credit losses were down from last year due to net recoveries in the current quarter. Moving to slide 13, Wealth Management adjusted net income was CAD 279 million, up 23% from a year ago. Adjusted earnings in traditional wealth were up 17%, reflecting underlying business growth and improved equity markets. Insurance earnings were up 43% due to a modest benefit from favorable market movements in the current quarter relative to unfavorable market movements a year ago. Adjusted expenses increased 5% from a year ago due to higher revenue-based costs and investments in the business. Assets under management and administration were up CAD 15 billion or 2% from a year ago. Turning now to slide 14 for corporate services. The adjusted net loss was CAD 102 million, largely unchanged from a year ago as higher non-TEB revenue was offset by lower credit recoveries and higher expenses in the current quarter. To conclude, our performance this quarter demonstrates again the resilience of our diversified business model and our ability to continue to grow earnings. With that, I will hand it over to Sergio. Thank you, Tom, and good afternoon, everyone. Starting on slide 16, specific provisions of CAD 210 million or 22 basis points, down from 28 basis points in the prior quarter. The decrease in specific provisions was primarily as a result of lower losses in Capital Markets and US P&C. In addition, we had a CAD 76 million reduction of the collective allowance, resulting in a total PCL of CAD 134 million. The collective allowance reduction was largely due to positive migration in our wholesale and retail portfolios. Total allowances at about CAD 2 billion, equivalent to 53 basis points, are well above recent loss experience. Looking at Canadian P&C, provisions for consumer and commercial were flat in both portfolios. Provisions in US P&C decreased CAD 11 million quarter-over-quarter due to lower consumer losses. Capital Markets had low new provisions and recorded a net PCL recovery of CAD 2 million versus a provision of CAD 46 million in the prior quarter, which was the result of two accounts. On slide 17, formations were CAD 405 million, down significantly from CAD 752 million in Q2, with quarter-over-quarter reductions in most industries. Gross impaired loans decreased by CAD 290 million to CAD 2.1 billion, with all the reduction in the U.S., of which half was due to FX. The GIL rate was 56 basis points, a decrease of seven basis points compared to Q2. Turning to slide 18, our Canadian residential portfolio continues to perform well. Delinquencies decreased slightly and losses remain very low. Our GTA and GVA mortgage portfolios continued to demonstrate better loan to value, delinquency, and bureau scores than our national average. In summary, we had a good credit quarter with positive migration and lower losses, formations, and gross impaired loans. I will now turn it over to the operator for the question and answer portion of today's presentation. Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before 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 participants register. Thank you for your patience. The first question is from Ebrahim Poonawala from Bank of America Merrill Lynch. Please go ahead. Good afternoon. I am sorry if I missed this in your prepared remarks, but just wanted to get some clarity in terms of when we look at your slide nine on capital and the impact from the higher risk-weighted assets. I was wondering if you can talk to in terms of, one- How much of this was given, because this was excluding the FX impact, how much was this driven by asset mix shift versus refinement of internal models? And what is your outlook as we look forward in terms of capital build from here? Okay, thank you for the question. It is Tom Flynn. Firstly, on the currency, the numbers that we are showing, as you point out, are excluding the impact of FX. We show the numbers that way because the FX impact on the ratio is largely hedged, and so it is not a driver of the ratio, and so it is easier to look at the changes excluding that item. The growth in the risk-weighted assets in the quarter in source currency principally reflects business growth that we had across our operations. And so that was the main driver of the growth. And on a go-forward basis, subject to share buybacks, which did reduce the ratio by the 13 basis points in this quarter, we would stick with our guidance of expecting to post modest growth in the ratio on a quarter-over-quarter basis. In the past, we've talked about that in a typical quarter, the numbers move around in any quarter as being in the zone of 10-15 basis points per quarter. Understood. So the 24 basis points change, was it just what you would classify as typically driven by business mix change and growth? Business mix, but really more than that, just business growth. The business is growing, so with that, the risk-weighted assets grew in the quarter. So it's a combination of mix and the growth. Got it. Secondly, Tom, if you could just remind us in terms of as we think about operating leverage relative to your 200 basis points year-over-year guidance, both in Canada and U.S., we saw a pretty decent jump in expenses. How should we think about in terms of the efficiency ratio from this point on, looking out over the next 12-18 months? Okay. I guess a few things on that topic. For the year to date, our operating leverage is above 3%. That does include the benefit of some asset sales. If you take out those kinds of transactions, so one-off asset transactions, the operating leverage is positive 1.7 for the current year to date. Last year, we were a little above our 2% target. For this year in total, we would expect to be at the current operating leverage for the year to date of 1.7 or more likely a little bit better. We're shooting for the 2%, not quite clear yet at this point if we'll hit it, but we're certainly in the zone this year, and we were better than it last year. Looking forward to next year, I'd say we continue to be focused on the relationship between revenue growth and expense growth, and we will be aiming for the 2% target that we've set for ourselves. Just quickly, if we can touch upon the expense growth in the U.S., was there anything one-off in the growth that we saw sequentially or year over year? Should we expect that to tick lower going into fourth quarter or just the right run rate going forward? This is Dave. I would say to answer your question, we would expect the expense numbers in the fourth quarter to be lower than they were. There were a couple of one-time items there. A number of things we talked about, including the compensation and the FX trading technology, higher technology costs, higher marketing costs. But I expect in the fourth quarter we get back to a normal range. Approximately, should it be back to Q2 levels or somewhere in between Q2 and Q3? I'd look at the average for the year, and I think we'd be in that range, but certainly lower than the third quarter. Got it. Thank you. Thank you. The next question is from John Aiken from Barclays. Please go ahead. Good afternoon. Tom, when the bank was considering the reversal on the collective, were there any discussions centering around the upcoming changes to IFRS 9? My understanding is, of course, that IFRS 9 really impacts the specific versus the collective, but were there any discussions around this, and should we take this as a positive indication for Bank of Montreal? John, this is Surjit. Let me answer that question. The IFRS is really a different accounting standard, which is yet to be put in place. It comes into effect next year. So the current methodology that we use is under an accounting standard, which is different, which is IAS 39. So the computation we did of our collective this quarter is using the methodology that we've used in the past, and we've stuck to the methodology and we've been true to the methodology. It hasn't been governed by what may or may not happen under IFRS 9. So these are two independent things. Thank you, Surjit. Appreciate that. I guess a quick question for Cam on the domestic commercial borrowing. Can you give us some elaboration in terms of which industries you're seeing the growth coming through and whether or not there's been an aggressive competitive response to the growth that's been happening system-wide? Thanks, John. As the second largest player in the market, we will always feel competition as it comes, especially as it increases. So to your point, diversification is pretty important for us. We are number one or number two in most of the markets in commercial real estate and ag, and both of those businesses are performing quite well. Three or four other businesses for us are supporting lending growth. I would point to retail, trade, transportation, tech, and probably healthcare as the ones that are coming up the fastest behind the CRE and the ag that I pointed to. I'd say, though, from a vertical perspective and a geography perspective and a pipeline perspective, the momentum's there, and we feel good about it. This has been a pretty consistent business for us beyond being a big one. The combined effect of modest PCLs and seven or eight quarters between 8% and 11% feels good, and we expect it should continue. Cam, what about the staunch competitors against the growth that you've been showing in terms of pricing or- John, I would say that you do feel the competition. We haven't felt pricing pressure on the lending side. On the deposit side, there is some in some cases, and where it makes sense in important relationships, we're there. Where it doesn't, we focus on more important operating accounts. But we're still at 9%, so I think we're holding our own. Great. Thanks. I'll requeue. Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Thanks. First, I would just like to go back to capital for a second, Tom. Just to follow up, I hear you talking about business growth. From what I can tell, I was thinking it was the Basel I floor. Looks like it cost about 20 basis points of CET1. Is that not the right way to look at it? It is hard to tell, I guess, maybe with the currency flipping around a little. I guess a couple things. First would be the currency really does not have a big impact on the ratio given the hedge. Second would be the Basel I floor was up in the quarter. It was up mainly because Basel III risk-weighted assets were down due to positive migration and model changes, and those things are not reflected in the Basel I risk-weighted assets, and because of growth. So fundamentally, to me, the RWA are growing because the business is growing, and that is the biggest overall factor, even though a portion of that growth comes through the Basel I RWA as opposed to the Basel III. Okay. And for Cam, if I could, margin up quite nicely, I am sure better than you would have expected. So maybe you can touch on your shorter-term outlook with respect to margins. Is there anything in the numbers, the big lift this quarter you would expect to revert? And if you can speak to your outlook given pipeline, your expectations for mix the next little bit and with the Bank of Canada rate hike. Sure. Okay. We are stable year-on-year. The 5 points on the quarter is two things, mainly. Mix is the biggest, and within mix, we are growing deposits faster than we are growing loans, and within the deposit growth, you are seeing, as was pointed to earlier, quite strong retail deposit growth, including checking accounts and in double digits, and commercial growth at a good, strong 9%. I think that is the big thing. On the spread side, there is some benefit from pricing and some smaller one-time items, but mix is where I would point. With respect to outlook, I think stable, possibly slightly down, but quite stable for the next little while based on my view of the pipeline and the mix within the pipeline. There is nothing particularly in these numbers from the Bank of Canada that will come through over the coming quarters in a modest way. What was the source of the pricing impact? What was the source of the pricing impact? I think just Yes good discipline on the lending side. Okay. Lastly for me, going to Capital Markets for Pat, just wanted to ask if the total return swap runoff is all in the numbers now in Q3, or does that continue to eke its way in in Q4? Well, thanks for the question. I would say the impact of the Canadian budget change was very much in line with our expectations this quarter, very much in line as well with the guidance that we've previously provided. We have been executing on our mitigation strategy. All of that would suggest that it mostly is in the run rate that you're now seeing. You should expect a similar impact in Q4, and then obviously a full-year impact in F18. But for the most part, the impact is in the run rate that you're seeing right now. Perfect. Thanks very much. Thank you. The next question is from Gabriel Dechaine, National Bank Financial. Please go ahead. Good afternoon. Just a quick numbers one and another on the U.S. commercial lending trends. On the tax rates, your tax rate spiked this quarter a little bit. You talked about some reduction in tax-exempt income, but also a benefit from the recovery in the U.S., I guess. What was the size of that U.S. recovery, and what should we expect for your tax rate going forward given the new TRS trade going away? It's Tom. In terms of the tax rate going forward, we expect to have an effective tax rate in the 22%-24% zone. A little more likely to be in the upper half of that range than the lower half of the range. And the favorable tax item, which was sprinkled through our different U.S. businesses was about 1.5 points on the tax rate. And as it happens, it was largely offset by the impact of FX on our deferred comp. So those two items in the overall P&L were pretty close to a wash. Okay, thanks for that. My follow-up is on the U.S. business, and we've seen the trend in the industry, the commercial lending slowdown that's continuing. And I believe in your comments you said margins were up because of the Fed rate hike, but that something that ate into that expansion was what? Spread compression? I assume that meant competitive intensity. My question is, as commercial loan growth is weakening or weak in the U.S., and banks are flush with capital and hungry for growth, do you think there's additional pressure that the pricing becomes such that it eats into future Fed hikes? And we're seeing it, I guess, in the Fed loan officer surveys there's some slackening of terms. This is Dave. A couple of points to just level set. We had had pretty flat for two quarters commercial loan growth. This quarter, we had pretty good and strong commercial growth, 2% for the quarter, so 8% annualized. And going into the fourth quarter, we really have, I think, pretty good momentum and good pipelines. That said, to your point, I've been in the business a long time, there has always been competition. There continues to be. We have a couple points that I think position us well. We have a very diverse commercial loan offering, and we have very strong market shares in a number of our businesses. We compete hard, but we don't always compete on price. In fact, that's usually the last thing we do. Given the fact that we've been in this business as long as we have, we've seen these clients through the cycle, that positions us well. I don't see big diminution in loan spreads. I just think we're going to continue to grow and build the business. Does that answer your question or anything else? Yeah, it does. Excellent. Is there any greater participation in syndicated deals? No. No greater than what we would do in the past. We lead a number of syndications, we continue to try and lead as many as possible. That's a good business for us. Thank you. Thank you. The next question is from Robert Sedran from CIBC. Please go ahead. Thanks, and good afternoon. I actually want to follow up on Dave's line of questioning, but maybe flip to the other side of the balance sheet. I want to understand a little bit more the interplay between interest rates, the margin, and the deposit performance. Have you been holding pricing to protect the margin on deposits, or is there something else going on on that front? Well, we're basically following the rest of the U.S. banks as we look at our deposit. There's probably more competition than we expect that on the commercial side. A great percentage of the deposits on the commercial side are there to support services that we provide for them. On the retail side, we continue to do very well. We have good growth in our non-interest bearing checking, and we have decent growth in our interest bearing, and we continue to grow the deposits on the commercial side and the retail side, with the exception of there is some institutional deposits on the commercial side which we've lost over the last couple of quarters, which we expected to, just as rates move up and institutions. We don't pay the rate that they can get, and these are large institutions, so they leave. All in all, I'd say we've done a very good job of protecting as much as we can on the deposit side, the interest rate increases, as have most of the U.S. banks. Is that institutional business largely done now, Dave? Just as a follow-up to the comment on pricing, are deposit betas basically performing as you would have expected, or are they rising a little sooner than you might have expected? I would say they are performing about as we expected. As I said, we expected that there would be a little bit more give in the commercial side, and there has. Overall, I would say they have performed as we expected. As far as institutional, there are still some deposits that we would view as institutional that have stayed in the bank. But over time, I would expect as rates go, we will lose some of those. We are replacing those, though, with core deposits as we continue to add new clients where there are more core deposits, not excess deposits. Okay. Thank you. Tom, I would just add one thing to that. We did have on the personal side a planned decline in a small brokered CD deposit book that we have. It is a small part of our deposit base, only about $1.5 billion, but it was down quarter-over-quarter. That in part might be what you are looking at. Away from that, our checking deposits were up and our money market deposits were up 5% year-over-year. As Dave said, I think there is a general expectation that as rates in the U.S. move up, some portion of the more institutionally oriented commercial deposits will flow into money market instruments and out of the banking system. Those are very low spread deposits for us and in a sense, excess deposits. So we are not troubled by that. It's in line with our expectations and what other banks with similar balance sheets are seeing. Tom, that brokered deposit business is running to zero? It won't run to zero. We use it as a bit of a toggle, and we dialed it up a little bit around the time of the Transportation Finance acquisition. That was a $10 billion acquisition, so we took on a few more deposits. We'll maintain it, but when we don't need to grow it's our highest cost of retail deposits, so we let it drift down. But it will continue to be around, but it is a small part of the overall deposit funding. Okay, thank you. Thank you. The next question is from Nick Stogdill from Credit Suisse. Please go ahead. Hi, good afternoon. My first question is for Tom. You called out the impact of foreign currency translation on the deferred comp this quarter. How much of a drag was that at the consolidated level? Is this a regular expense that was only called out because of FX this quarter? It is a regular expense, but it is normally very small. We have not talked about it before. It has not been a consequential item before. We did have the Canadian dollar strengthen by 12 cents against the U.S. dollar and the pound in the quarter. So big move in the currency. With that, the Canadian dollar share based deferred comp liability of our U.S. entities inflated, and it was close to CAD 30 million on a pre-tax basis for us. So meaningful enough that we thought we would mention it. Going forward, I would not expect to talk about it. Again, we are doing it really this quarter, just given the size of the move in the currency quarter-over-quarter. Okay. So an extra kind of CAD 30 million this quarter. Got it. Thank you. My second question for Cam, just on the operating leverage in Canada. It improved this quarter from the second quarter. That was mostly driven by better revenue growth. What should we expect maybe for Q4 and into next year? Should we still expect some improvement from here? Thanks. As I said last quarter and have said in quarters prior, we've got a multi-year transformation going on in this business. The philosophy of the work is that we take cost out before we put cost in. In most quarters, 6 of the last 7, we've been able to keep the relationship correct between revenue and expense. This number at 4.7 is a productive and thoughtful 4.7, I would say, in that almost two-thirds of that is advice-based sales folks in our distribution system for digital spend, which is focused on self-service or digital sales. I would expect in Q4 the number to moderate slightly. I am expecting operating leverage in the fourth quarter, and I expect we travel into 2018 with the same focus. Thank you. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Hi, good afternoon. I just wanted to go back to U.S. commercial loan growth. Big picture, definitely people have talked about what's driving the slowdown, and policy uncertainty seems to be the consensus view. I'm wondering from your perspective, do you agree with that? Are there other things going on here that maybe are more long-lasting? If you could just talk about a little bit more granularity in terms of what you're seeing on the commercial loan side, in terms of sectors, what's working, what's not? Okay. This is Dave. The first part of the question, it is hard to tell in the U.S., throughout the U.S., what is driving it, I would say. Again, we probably did better this quarter than the industry in terms of kicking back up on the commercial side. The uncertainty is definitely having an impact on taxes, somewhat offset by what has already been some lessening of regulation, which has, in some cases, encouraged some of our manufacturing clients. As you go sector by sector, we have had pretty good growth across all the sectors, whether it is automotive, whether it is diversified in Wisconsin or even Illinois, whether it is our businesses that relate to some of our services industries. So I wouldn't say that there is any specific area where it has been negative. I actually think, when I spend time with clients, most of them would say the economy in the U.S. is pretty good. They expect it to continue, and they expect some of the uncertainty to wane as we move forward. Does that help? Yeah, that's helpful. Thank you. Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead. Hi, good afternoon. Just sticking with the U.S. side, there's been a lot of questions on commercial, but trying to put it all together in terms of expectations for earnings. If I look at your U.S. mid-cap commercial comps over the next 18 months, they've got double-digit earnings expectations, is that a reasonable kind of target for BMO medium term? What would be the main factors to watch for to drive it? Well, I don't want to commit to any specific numbers based on what you're saying. I would say, I think we have pretty good prospects throughout our commercial and improving prospects in our personal business. Certainly, I would expect that to translate into improved earnings going forward. We'll have more modest expense growth than we certainly did in the third quarter, and increased revenue growth. Our PCL should do pretty well vis-a-vis this quarter and even next. So I think all the components are pretty good. If you look at our pre-provision, pre-tax in each of the quarters in the U.S., it's been up $20 million to $25 million each quarter sequentially. I think that bodes well for our future, and I think with potentially some rate hikes, which we expect there should be some over that 18-month period, that would be an added plus for us. Okay. That's helpful. Just quickly on Capital Markets, Pat, I noticed that full-time employees were up 100 or 4% sequentially, which seems contrary to just the peers. What's that related to, and is that going to impact future operating leverage? Well, thanks for the question. It was driven by a couple of things. One, you're seeing to some extent the addition of Greene Holcomb & Fisher, the acquisition that we did in Q4 of last year. So year over year, that wouldn't have been there, so that added some. We have been increasing for a while now our front office staff that are focused on regulatory and control-related areas, and so that was a good part of it as well. The rest of it is really just normal business growth in both trading products and investment in corporate banking as we continue to roll out new initiatives and growth objectives in both Canada and the United States. It's nothing unusual in the FTE growth rate. I think it's commensurate with the revenue growth that you're seeing certainly in the year-to-date versus year-to-date, and commensurate with our objectives for 2018. Okay. Thank you. Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Thanks. Good afternoon. First question is for Surjit Rajpal on credit quality. I think earlier this year you were very specific in reminding us that there could be some fluctuation in the loan loss level. We saw that in Q2 and certainly migrated lower this quarter. Maybe leaving the exact number aside, when I look at your underlying credit metrics, your new formations are down pretty sharply, lowest level we've seen in a few years. Overall, gross impaired loan balance is down pretty sharply as well. Is there any reason that we couldn't see loan losses remain in the lower 20 range, or are there parts of the portfolio that you feel are running at levels that you see as unsustainably good right now? No, I think the portfolio overall, as you mentioned, is of high quality and is doing well. There are always portfolios that we look at a bit more closely than others, and there's a bit that we have as well, but they are always small. Just to give you a sense of what I'm looking at specifically, the agricultural sector in the U.S. is a little strained relative to the other sectors. Our Transportation Finance business has finished going through a cyclical lull and is going to come back up. You always focus on those sectors a little bit. I think to have overall in a benign environment, and that's how I would define the environment, to have it in the low to mid-20s, to have a PCL in that range is pretty reasonable. The thing I always caution on these calls is that there can be variability quarter over quarter, and I'm always surprised at the reaction I get when there is a blip in one particular quarter. I do believe that I have the confidence that the economic conditions are extremely good and serving us well in both the geographies, and there's no particular portfolio of concern. We had the oil and gas story, which is behind us. Yeah, and I think that's pretty consistent with what we've seen from the group this quarter. It almost seems like we've seen a step down or further improvement in credit, and that's consistent with what you're messaging to us. The second question I have is for Cam, and it's on residential mortgages domestically. I never really think of this as BMO's issue. You've talked about the fact that you've got lower exposure here. Q3 is usually a seasonally good quarter, and it doesn't look like BMO participated as much in the faster growth we've seen in Q3. First off, this is some of the numbers we see on the outside. Is that your view as well, that you've ceded some market share in resi mortgages, and if so, is that a conscious decision on your part to let some of the growth go? There has been some moderation, so from a number between 5 and 6 to a number between 4 and 5, and that's pretty much in line with what we'd expect. We've been making choices quarter by quarter as we move along over the last couple of years, and that's true of where we sit here right now, and I'd expect we'd make them as we go forward. We're pretty happy where we are right now. We are seeing a little bit of moderation in the market. But, you know We continue to strengthen our business and invest resources where we think there are opportunities, and we're doing that now. Then I go back to the old refrain, which is, we are undersized nationally, and we are undersized in Toronto, so there are still opportunities for us, and we are by no means pulling out of this market. That's really the rub. As we go into the fall months, maybe some of the impact of the changes we heard about back in the spring starts to have a bigger impact on balances. Are you expecting another leg down from that, as you put it, 4-5 now? Or do you think because you're undersized, there are pockets of growth for you to remain in that kind of growth range? I think it's probably a little bit more of the latter. There could be moderation. But as a smaller player in the market in absolute, and with this as a relatively smaller part of my total loan book and the bank's total loan book, it's therefore a smaller part of revenue. So I'm not anticipating feeling a meaningful impact on this in 2018. But I think your point about us looking for opportunities elsewhere to balance out in a range that's similar to where we are now is about the right way to think about it. Thanks for your time. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Good afternoon. Before I go to Surjit, Tom, could you just help me think through the operating leverage guidance you offered? I think it was on a total bank basis, and the way you described it was year-to-date, 1.7%, excluding the Moneris gain in Q1, and you would expect the full year to also be 1.7%, excluding the Moneris gain. Directionally, that is what I said. So we are 1.7% year-to-date, excluding the net gain. Based on what we see in the fourth quarter, we are expecting expense growth in the fourth quarter to be very low and for us to have good positive operating leverage at or potentially slightly better than the year-to-date number. Okay, I get it. That is what you were suggesting for the Q4. That makes sense, and I think I get it. Let me move on to Transportation Finance then. Surjit, can you just talk about the size of that portfolio? Just help me think through how big this is. I remember that there is US$8.7 billion or so that was purchased. But the overall size of this portfolio now, where the loss levels are at, and what you would expect them to be going forward. The size is a little smaller than it was, and I'll give you the exact number in a little bit. It is about $7.1 billion right now. U.S., right? Yes. Yep. 7.1 U.S. As I mentioned in my earlier comments in response to Sumit, this is a cyclical business, and it has gone through the bottom of the cycle. We are seeing phenomenal improvements. The economic conditions are really good. Spot prices have edged up and are now quite stable and are at the levels at which the spot prices are. The truckers are making good money. At the heart of the issue this time was capacity. It wasn't the economic condition. The last downturn that this sector experienced was because of economic conditions. This time it was because of excess capacity. That capacity is slowly getting reduced. In fact, we'll get a little tighter because some of the new changes that are being made with respect to what's called the ELD mandate that is coming into existence at the end of the current year. Basically, what every driver is required to do now is to not manually, but actually electronically enter the hours they drive because people have been driving longer hours than they are expected to drive, and that's something that's technically against the law. I think that's going to move some of the spot prices in the right direction from my perspective. What we've seen in our own portfolio is an improvement in the delinquencies. The delinquency rate, both early stage and late stage, have improved. The loss rate, all the delinquencies have to go through, the late-stage delinquencies have to go through a process, but we've seen those getting arrested as well. I'm very positive in terms of, I think that we've seen the worst of it, and the economic environment is going to take care of the rest. It's a good environment to be in this business right now. Having said that, we are seeing other evidences as well, and that is the prices at which we are selling some of the trucks that we repossess, for instance. We are seeing that those are improving as well. Everything is pointing in the right direction, and that's why I say this is out of the low end of the cycle into an area where I will see improvement. I hope that gives you some flavor for that portfolio. Have you seen- The portfolio we knew all along would be a cyclical portfolio, and we bought it at a time in the cycle when losses were sub 20 basis points or so. We knew that was not sustainable. This is not unexpected at all. The question is, how soon will this turn around? We feel that that time has come, and we will see it turn around. Delinquency is better, loan loss is lower, utilization moving higher. How about, just to be clear, residual values, the sale, the amounts you're actually realizing on sale, are you saying that's turned the corner as well? Yeah. We are seeing better residual values in these trucks. Okay. That covers it. Thank you. Thank you. The next question, the last question, is from Doug Young from Desjardins Capital Markets. Please go ahead. Hi, good afternoon. Just on the positive migration was mentioned a few times, obviously related to the collective release and then the risk-weighted assets. Just want to delve, or can you delve into a little bit about what's going on around positive migration. Where would I see this in the supplement? Is this just the shift in your internal ratings, and why did it occur this quarter? Just trying to get a little bit more detail around that. The positive migration on the commercial side was broad-based, as I mentioned. Some of it also had to do with oil and gas. There was a fair bit of migration even on the oil and gas side. So that you will not notice in any one sector, but you can notice it in terms of what you're seeing as emerging as formations. So the fact that the formations are down is an indication that obviously the portfolio is getting better, that there are fewer formations coming our way. So when you triangulate, you should conclude that it's easy to understand why we say that our migration is positive. Now, I have obviously a lot more granular data portfolio by portfolio, and that's how we calculate our collective allowance. Our collective allowance process requires you to look at each portfolio with a fair amount of granularity and then look at what the expected loss is going to be, and then there's another bit of judgment as well that's used. That's the current IAS 39 methodology that we use. So when we did it on that basis, the number that we came back with was an improvement of $76 million. I did give you some flavor of where that was. A little over 60% of it was in commercial, and then there was an element of it in consumer as well. In consumer, we also back test some of our assumptions that we make with respect to the judgment factors that we use. Okay, so that provides a little color. I may follow up on a few other things on that slide. Then just lastly, traditional Wealth Management, I'm just struggling a little bit. I know the earnings were up 17% on an adjusted basis, but AUM and AUA was up 1 or 3%. So I can't imagine it's related to FX. Maybe the average balances were a lot higher through the quarter. Or is there some additional items that kind of went through that positively impacted the results? Well, in the revenue line, there's two lines, right? There's a NII line and an NIR. You'd expect that the assets under management would impact the NIR line and not the NII line. In this quarter, the NII line grew quite a bit faster than the NIR line. That's one reason. The second reason is FX. I think we show a 2% asset growth, but actually after FX, it's more like 5%. So the difference between the NIR growth and the asset growth is only about 1%, and that can be accounted for by commissions and also direct investments that we have that's unimpacted by the market. So it's largely the growth in NII, which is faster than NIR, and FX. Okay. Thank you. Thank you. There are no further questions registered. I will turn the meeting back over to Mr. Bill Downe. Thank you very much, operator. Doug, thank you for that question. This is my last call, and it's so seldom Jill gets asked a question. I'm glad you were able to finish that way. I want to take a moment to express my personal appreciation for the support of the many stakeholders of the bank over the last decade. I'll start by thanking the analysts and portfolio managers who regularly participate in these calls for both your engagement and the candid feedback that you provide us. To the bank's employees who put our brand and values into action every day, our bank's ability to adapt, renew, and grow in relevance everywhere we do business is a direct reflection of your commitment to our customers. I'd also like to recognize the strength of our executive team, and in particular Darryl White, who have proven their ability to deliver results. It's been a great honor and privilege to lead this organization. I have every confidence that under Darryl's leadership, the bank will build on our track record of success in service to our customers. Thanks very much, and goodbye. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. This conference is no longer being recorded. Please note that this conference call has ended. Please disconnect your line at this time. Thank you.