Earnings Call: Q1 2017

Feb 28, 2017

Good afternoon, and welcome to the BMO Financial Group's Q1 2017 earnings release and conference call for February 28, 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 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 short 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 and then queue. We have with us today Darryl White, Chief Operating Officer, Cam Fowler from Canadian P&C, Dave 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 first 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. Today, we announced net income for the first quarter of $1.5 billion and earnings per share of $2.28. Strong earnings growth of 30% was driven by good performance across our businesses and an improved environment compared to this time last year. Although our results benefited from the net impact of the sale of non-strategic assets during the quarter, underlying earnings grew at 19%. Good revenue growth and well-controlled expenses resulted in continued positive operating leverage. Performance was broad-based, demonstrating momentum across operating groups and geographies. Credit quality remains good, and Surjit will provide details in his remarks. Our capital position was strengthened with a CET1 ratio of 11.1%. ROE was 15.3%. Moving to slide 5, I'll review a few highlights from our operating groups. Our North American Personal & Commercial Banking businesses performed well and in line with our outlook. Operating performance in Canadian P&C was driven by well-diversified balance sheet growth across commercial and personal businesses. Loans grew by 5%, and deposits were up 8% as we continue to grow and deepen customer relationships. Expenses continue to be well managed, up 3% year over year. While the gain on sale of Moneris US contributed positively to this quarter's performance, the underlying business generated positive operating leverage and good net income growth. Our U.S. banking results were also driven by balance sheet growth and improved net interest margin. Expenses remain well controlled, up approximately 1%, excluding the extra month of transportation finance in the current quarter. The sale of a portion of our U.S. indirect auto portfolio impacted top-line growth, but underlying operating leverage remains strong. I'm confident in the strides we're making to accelerate the role of technology in delivering a leading customer experience. Building on our long track record of innovation, we continue to advance our transformation agenda in key areas. We're integrating across groups and using partnerships strategically to enhance customer loyalty. We re-engineered our IT architecture, allowing us to introduce products in a faster and more iterative way in all of our businesses. We're digitizing the way we work, creating a culture of innovation and productivity. More sophisticated data and analytic tools, including machine learning, are enabling more personalized customer experiences, and we're enhancing the digital experience for our customers in ways that are intuitive and easy to use. By way of example, this quarter, we introduced secure and convenient payment solutions for our U.S. customers. People Pay provides customers the freedom to send money to another person from their BMO Harris mobile banking app. We also expanded the options available in our digital wallet so that it now includes BMO Harris Debit and Masterpass, Apple Pay, Android Pay, and Samsung Pay. In Canada, BMO customers can now open a bank account online in just minutes, extending the capability we first introduced on our mobile channel last year. The digital adoption rate has increased to 49%, with 16% of sales now originated through digital channels. Mobile transactions are up 54% in each of the last two years, and we expect these trends to continue. Moving to BMO Capital Markets, we're successfully executing on a focused strategy, having built an advantage position across our North American footprint. Net income continues to benefit from a strong contribution in our U.S. segment. We've seen our position in the U.S. market improve consistently as we've refocused our efforts on core sectors in the midcap segment. Importantly, we've been disciplined in our execution, closely managing expenses to improve efficiency and return on equity. Turning to Wealth Management, strong net income growth reflects both favorable market movements that benefited insurance and traditional Wealth Management, together with good business growth and a focus on efficiency. The strength of BMO Asset Management's mutual fund business has been recognized in the 2016 Barron's Lipper review of best fund families. Our U.S. family of funds achieved an overall top 20 ranking, and our taxable and tax-exempt bond funds ranked in the top five. At the same time, we continued to expand our ETF offerings in Canada, Europe, and Asia, providing customers with more choice in structuring their portfolios and navigating markets. Across the bank, we're executing against a clearly defined strategy and demonstrating the agility to adapt and innovate as the environment evolves, and we're helping our customers to do the same. The businesses are highly integrated and benefiting from our re-engineered technology infrastructure, which serves as an effective foundation to make changes faster and at a lower cost. The strategy is yielding tangible, sustainable results, and we're confident we'll continue to build on this momentum. Customer remains at the center of the five strategic priorities guiding the bank. These priorities are anchored in a responsibility to create lasting value for all our stakeholders. In that spirit, it's a source of pride for everyone at BMO to have been named the 2017 Catalyst Award winner for accelerating diversity, inclusion, and gender equality in the workplace. If there's one thing we've learned over time, it's the importance of keeping this subject alive by making it a permanent part of the business agenda. In our annual report to shareholders, which you can review online, we speak about linking sustainability principles to the achievement of our strategic priorities. For 200 years, the Bank of Montreal has incorporated a deep sense of responsibility in the way we do business. As we mark BMO's bicentennial, we're focused on our proven ability to adapt and transform as we refine our strategy to meet challenges of tomorrow. We've reshaped the bank while reinforcing our core strengths, and our results confirm it. Our business model works, and thanks to a unique set of advantages, the bank is ideally positioned for future growth. With that, I'll turn it over to Tom to present the Q1 results in more detail. Thanks, Bill. I'll start my comments on slide 8. Reported EPS for the quarter was $2.22, and net income was $1.5 billion. As Bill mentioned, we had good underlying performance across the bank in the quarter. Results in the quarter also benefited from the combination of the sale of Moneris US and the sale of a portion of our U.S. indirect auto loan portfolio, which resulted in a net gain of $133 million after tax, or $0.20 per share. Consistent with past practice for similar gains and losses, this amount is included in adjusted earnings. Adjusted EPS was $2.28, and net income was $1.5 billion, both up 30% year-over-year or 19% excluding the net gain. Adjusting items are similar in character to past quarters and are shown on slide 25. Adjusted net revenue of $5.4 billion was up 13% from last year, with the net gain contributing 3% of that. Net interest income was up 2%. Adjusted net non-interest revenue was up 24%, primarily due to the gain on sale, as well as higher trading revenue, insurance revenue, and underwriting and advisory fees. Adjusted expenses were up 4% from last year. The increase was primarily due to higher employee-related costs in line with performance. On a net revenue basis, the adjusted operating leverage was 9.1%, with 3% of that coming from the net gain. The adjusted efficiency ratio improved 530 basis points to 61.5%, with 150 basis points of the improvement due to the net gain. On a reported basis, efficiency was 62.6%. The adjusted effective tax rate was 19.8%, up from 16.2% a year ago, and was 24.4% on a TEB basis, down from 24.8%. Moving now to slide 9. The common equity Tier 1 ratio was 11.1%, up from 10.1% last quarter. As shown on the slide, the increase reflects lower risk-weighted assets, strong earnings, favorable pension and post-retirement benefit impacts, and share issuance. Risk-weighted assets were down from the prior quarter due to the benefit of our focus on managing certain risk positions and executing on risk mitigation opportunities, as well as from foreign exchange and methodology changes. Moving now to the operating groups and starting on slide 10. Canadian Personal & Commercial adjusted net income was CAD 744 million and includes the CAD 168 million gain on the sale of Moneris US. Net income growth was good with and without the benefit of the gain. Revenue growth of 15% was driven by higher non-interest revenue and higher balances, partially offset by lower net interest margin. The gain included in non-interest revenue contributed 11% to the 15% revenue growth. Total loans were up 5%, and deposit growth was good at 8%. NIM was down 2 basis points from last quarter, largely due to the low rate environment. Expense growth was 3% as we balanced investing in the business with good expense management. Operating leverage was positive with and without the benefit of the net gain. On provisions, both consumer and commercial losses were down compared to the prior year. Moving now to US P&C on slide 11. The adjusted net income was $272 million, up 3% from last year. The comments that follow speak to the US dollar performance. Adjusted net income of $205 million was up 7% from last year. Income includes a $27 million loss on the sale of indirect auto loans, which reduced income growth by 14%. Revenue was up 3%, driven by an additional month of BMO Transportation Finance being included in the results this year, higher deposit revenue and increased loan volumes, partially offset by loan spread compression and the impact from the loan sale, which reduced revenue growth by 5%. Average loan growth was 6%. Net interest margin increased 12 basis points from last quarter, largely from benefits from reducing the lower yielding auto loan portfolio and from the Fed interest rate increase. Expenses were up 5% year-over-year, primarily due to an additional month of the acquired BMO Transportation Finance business being included in results in the current quarter. On an adjusted basis, operating leverage was negative 1.6% and it was solidly positive if you remove the 5% impact from the loan sale. Credit provisions were down slightly from last year. Turning now to slide 12. BMO Capital Markets had strong net income of CAD 376 million. Results reflect good execution of our strategy, strong U.S. performance, and constructive markets. Revenue was CAD 1.2 billion, up 21%, driven by strong performance in trading products and growth in investment in corporate banking. Expense growth of 9% largely reflects higher employee costs in line with performance. Operating leverage was double digit and the efficiency ratio was 58.8%. Provisions for credit losses were down from last year due to net recoveries in the current quarter. Moving now to slide 13. Wealth Management adjusted net income was CAD 281 million, up significantly from last year. Adjusted earnings in traditional wealth were up 16%, reflecting improved market conditions, business growth, and efficiency benefits. Insurance earnings were up significantly, mainly due to favorable market movements relative to a year ago and business growth. Adjusted expenses declined 1% year-over-year due to favorable FX impacts and good expense management, partially offset by higher revenue-based costs. Turning now to slide 14 for corporate services. The net loss was $143 million compared to $48 million a year ago. Results declined due to lower non-TEB revenue from above-trend levels a year ago, lower credit recoveries, and higher expenses. To conclude, the strong results in the quarter demonstrate the growth benefits of our business mix and continued good operating discipline across the bank. With that, I'll hand it over to Surjit. Thank you, Tom, and good afternoon, everyone. Starting on slide 16, our PCLs were $173 million or 19 basis points, flat compared to the prior quarter. PCLs in the Canadian P&C business were down as a result of continuing below-trend consumer losses. In U.S. P&C, PCL was also slightly down, with low new reserves in the commercial business more than offsetting consumer losses that increased after two low quarters. Capital Markets had a PCL of negative $4 million, once again benefiting from recoveries in the oil and gas sector. On slide 17, formations and gross impaired loans were both down, with gross impaired loans decreasing 2 basis points to 60 basis points. Turning to slide 18, the risk characteristics of our Canadian residential portfolio remain strong. 57% of this portfolio is insured, and our loan-to-value ratio on uninsured mortgages remains low at 54%. Looking at GVA and GTA, which have been the focus of much attention, we are well-positioned with loan-to-value, delinquency, and bureau scores all better than the national average. Our approach to consumer adjudication is based primarily on the financial strength of the borrower, and we remain prudent in our underwriting practices with lower LTVs for higher risk segments. In summary, good results in U.S. commercial and Capital Markets, which reflect normal variability in these businesses, contributed to another good quarter from a credit risk perspective. I'll now turn it over to the operator for the question and answer portion of today's presentation. Thank you. If you have a question, please press *1. If you're using a speakerphone, please pick up the handset before pressing *1. You may cancel your question by pressing the # sign. Please press *1 if you have a question. There will be a brief pause allowing you to register. Our first question is from Sumit Malhotra from Scotia Capital. Please go ahead. Thanks. Good afternoon. First question is for Tom Flynn, and it goes to your capital ratio. There is obviously a reversal of the Basel I RWA floor inclusion that we saw for the first time last quarter, but I think it had impacted your numbers over the last year after the restatement. That $15 billion swing, could you maybe help me understand what triggers that going away this quarter? And from your perspective, what is the likelihood that we see this line item reemerge again going forward in terms of your capital sustainability? Sure. It is Tom. Thank you for the question. The Basel I floor risk-weighted assets did go just a little below, in effect, zero in the quarter. Reflected, I would say, two categories of things. Firstly, accounting for almost half of the reduction, we took a series of actions focused on reducing assets that are heavy from a Basel I perspective, and did that through the course of the quarter, and referred to that in the press release and on the slide. In addition, there were a number of other things that helped reduce the number, and they would include higher source currency, Basel III risk-weighted assets, pension impacts, FX, and risk weight changes. And those things contributed the balance of the half of the change. In terms of the go-forward expectation two things. Firstly, notwithstanding the strong improvement in the ratio in the quarter, our ordinary course moved through time expectation would be that the ratio would go up by in the zone of 10 to 15 basis points a quarter. And it is possible in some quarters that the Basel I floor will pop up. It is just slightly underwater this quarter. But as we look at it, that is just part of what drives the ratio. And overall, we would expect what I would call a traditional normal build through time. When we look at that line, that Basel I capital floor, over the past five quarters previous to this one, it had had a steady increase before dropping off. When you say it is just slightly below water, I think that is what you said, if it was to reemerge, it would be at a smaller level than the larger ones we saw in the back half of 2016. Am I thinking about that the right way? That's correct. It should be at a smaller level, and I'd say we're managing it in a tighter way in order to get that result. Let me wrap it up here. It's for you and maybe for Bill. I feel like your capital deployment and management strategy has been pretty consistent for a number of years now. After you undertake an acquisition, you spend some time building the capital back up, usually more quickly than I've expected, and you put the buyback in place and are somewhat active on it until you find something else from an acquisition perspective that works. By filing for the NCIB today, is it reasonable to think you're in a position now that we will see you active on the buyback in the near term if and when it's approved in short order? In other words, the step up in capital today gives you enough comfort that you can activate the NCIB? Well, Sumit, it's Bill. I think the first two-thirds of what you just said was almost a perfect recall of what we say on almost every call. Having the Normal Course Issuer Bid back in place gives us the flexibility to repurchase stock. Obviously the higher ratio gives us the ability to transact if opportunities were to present themselves. I think really what Tom has laid out is the completion of a set of actions we took in 2016 after announcing a significant acquisition. That's the pattern that we've really held to, is rebuild capital in order to restore flexibility and then have the option of deploying that either through stock purchase or when the opportunity presents itself, businesses that are complementary to our existing suite of capabilities. I wouldn't say it signals anything different than what we've always said, that we want to have maximum flexibility. Thanks for your time. You are welcome. Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead. Thank you very much. First, probably for Tom. Tom, the U.S. margin up nicely this quarter. I saw a mention of the loan sale and higher rates, but can you split out the impact from the loan sale and higher rates and anything else that is driving that? All else equal, is there more upside looking out to Q2 and beyond from the December rate hike or the divestiture, or how should we think about that? Sure. We were happy with the margin in the quarter. It was up 12 basis points from Q4, which is a nice increase. A little over half of that came from the sale of the indirect auto loans, and they are a lower yielding part of the loan portfolio. As a reminder, when we announced the acquisition of transportation finance, we said we would reduce that portfolio by about half. The sale that we had in the current quarter really accomplishes that objective and does improve the margin. Then around half of the increase came from the higher Fed increase that we had in the quarter. There is some upside to that that we will see in the next quarter. We would expect the NIM to be up a bit next quarter based mainly on the remainder of the Fed increase rolling through and a little bit of benefit also from the indirect auto. Is it fair to say that is about half the benefit from the December rate hike that we saw in Q1, sorry. In the zone of half, yes. Okay. Then maybe also for you, Tom. The adjusted loss in the corporate services has been higher now for a couple of consecutive quarters. Would you still guide us to somewhere closer to CAD 100 per quarter, or has anything changed in there the loss will be higher? I ask in part because I'm seeing these higher expenses in the report to shareholder, so wondering if maybe there's more unallocated expenses. How should we think about that line item after a couple of quarters of lumpiness there? So, a couple of things, I guess. Over time, we've had some residual expenses in corporate and some residual negative revenue. Then we've also had the benefit of loan loss recoveries. There was a point in time a few years ago where those were significant. But they have been helpful over the last couple of years, although in a smaller way. At this point, those have pretty much gone away. With those going away, the net negative in corporate is likely to be, on average, a little higher this year than it's been over the last couple of years. The level we're running at this quarter, negative CAD 140, is actually pretty much in line with the average level that we've had over the last year. The numbers do move around quarter to quarter. Some of that is timing of spend, some of that is residual items from a treasury perspective. As a reminder, in Q1 of every year, we do have our eligible to retire expense, and that was included in the expense number for the corporate segment in the current quarter, and that was about CAD 30 million. So, bit of a long answer. PCLs are part of the story. But with the benefit we've had from that over time going away, I'd expect a slightly higher net negative in corporate going forward like you saw this quarter. Obviously, Tom, it bumps around, but in the range of what we saw this quarter? I'd say that's as good a number as any. Okay. Thanks a lot. Thanks for the time. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Hi. I'd like to ask about your outlook for U.S. bank valuations. One of your peers talked about the fact that they thought that an ability to generate synergies and return on capital remains challenging at best, so their words. I'm wondering if you agree, and if not, what's your outlook in terms of U.S. bank valuations right now as you think about the M&A opportunities? It's Tom. I'll take that. I don't think I'll comment directly on bank valuations, but I will say that we feel good about the ability to grow our U.S. business organically. Over time, we've made meaningful investments in our U.S. platform. We do think we've got the ability to drive positive operating leverage off of it, and that's particularly true in a better revenue environment, which we certainly had in the first quarter, and we're hopeful that we'll have over the balance of the year. We're happy to have the U.S. exposure, expect it to grow, but the focus of the management team is really on generating good organic growth. Thanks, man. Thank you. The next question is from Robert Sedran from CIBC. Please go ahead. Hi, good afternoon. I wanted to come back to the portfolio sale in the U.S. I guess it's for Tom, but I'm just curious what gave rise to the loss, whether it was rates or credit quality or something else. Whether there's any contemplation of, now that you've kind of gotten to where you said you'd get to, A, how you chose the ones that you sold, and B, whether you might be inclined to do a little bit more. Okay. It's Tom. I'll take that. The loss was actually driven by writing off a deferred, in effect, sales commission that we have on the portfolio. We call the portfolio the indirect auto portfolio because it's originated through auto dealers, and we pay a fee for that, and we amortize that fee over the life of the loans. With the sale of the loan, we wrote off the balance of that deferred commission, and the financial asset itself for the loan was basically sold at a price pretty close to par. In terms of future direction for the portfolio, it has been a lower yielding portfolio. We wanted to reduce it for that reason. We do think being in the business in our footprint makes sense. We'd expect the portfolio to continue to be in the zone that it's in now. Maybe a little bit of growth, but not significant. We're not looking at completing another sale. This is very much not a business in runoff. It's just a business now that you're going to replace as things roll off and kind of grow with the market. Is that the idea here? That's correct. In a sense, we accelerated the reduction in the portfolio that we talked about at the time of the transportation finance acquisition. We're very much in the business with our customers in our footprint, and that's what the remaining business represents. Okay. Thank you. Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Good afternoon. My first question, it is on this RWA reduction. When I see these things happen, it is positive at the outset because you get a nice little capital boost, but then I have to ask myself if there is any negative impact on earnings. If I look at your return on risk-weighted assets, it is around 2%. I suspect the risk-weighted assets that went away this time are not that lucrative, but is there any material or noticeable earnings impact from this RWA reduction? It is Tom, Gabriel. There is some impact, but it is modest. We were focused on B1 assets, and Basel I, as you know, is less risk sensitive. We were able to reduce assets in a pretty efficient way. I would think of the run rate impact as being a little under $5 million in net income per quarter. Okay for the actions that we took. Okay. Just a follow-up to the comment you made about the U.S. margin. 12 basis point increase sequentially, half of that is tied to the Fed rate hike, plus a little bit more. If I take a 6 basis point, let's just use what happened this quarter, we're accepted about $100 million of net interest income. If there are more this year, we could see, is it linear? Are we going to see that much of an impact on your revenue line in the U.S. this year if these rate hikes happen? Well, that, I'm not sure- $100 million is a quarter, sorry. Yeah, that seems high off one increase. But I guess I'd say two things. Number one, we absolutely have a positive sensitivity to higher U.S. short rates, and we're hopeful the Fed moves again this year, we'll see. Then secondly, there is a diminishing benefit as rates move up more through time. The pass through. Yeah. And that's because customers become more sensitive as money has a higher value. And so it's not a linear curve. It does decline through time. Of course. Okay, sorry. Then just a quick final one. I appreciated your annual report disclosure on sensitivity to U.S. tax rate changes. And it clearly outlined the benefits of a reduction of the statutory rate. Did you take into consideration any offsets, interest deductibility, anything of that nature that you would call out, that's something we should be aware of? Yeah. That could water that down? From our perspective, it's too early to comment on that. There's lots of public discussion about the direction that U.S. tax policy might take. We'll wait for the process to work through, rather than commenting on different things that might or might not happen. Given the commitment that the administration has had to lowering the corporate tax rate, we gave the sensitivity. Which was that for a 5% reduction in the corporate tax rate in the U.S., it would increase our annual earnings by about $75 million. Going forward, as the proposals get firmed up we'll give additional color. Okay. I appreciate the responses. Thanks. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Hi. Two quick questions. First, operating leverage in the BMO Capital Markets business, not something I look at very often. But I was a little surprised at how big the operating leverage has been over the last three quarters. It is just not something I would expect. Is that really a function of the mix, or is that a change in philosophy toward expenses in BMO Capital Markets? Oh, hi, it is Pat Cronin. It is actually a combination of both of those things. Certainly, if you look at the revenue increases that we have seen in the U.S. market, there we are getting very strong operating leverage consistent with what we have said for a while. The installed base there of capital and FTE, we have said for a long time, has significant upside potential on revenue. So we expect to get very high degrees of operating leverage there. At the same time, we have been very focused on cost, generally speaking, both in the U.S. and also in Canada, with a much higher level of discipline over the course of the last two years. The combination of both of those things is driving that operating leverage. The other thing you are seeing as well, though, is you are looking at, especially year-over-year, you are seeing revenue comparisons, particularly to Q1 last year, where we had a fairly weak Q1. So you are seeing larger revenue growth numbers than you might otherwise see. As we roll forward the comparison of strong revenue quarters will start to temper that operating leverage that you are seeing. So what was the nature of the revenue in the U.S. that would have been supportive of the big operating leverage? It was really broad-based. Market conditions were very conducive in the quarter. There were some Catalyst events that are well-known, like the Fed rate hike and the OPEC decision and the presidential election that released a fair bit of pent-up demand. Client volumes, and you can see that in almost all of the market volume related metrics, you saw very significant increases, certainly year-over-year, but even quarter-over-quarter. Market volumes were higher, generally speaking, across the board. You're saying that those revenue streams didn't give rise to similar levels of expense growth? Yeah, absolutely. Like we've said for a while, we think we have a platform there that can support a significant increase in revenue without a commensurate increase in cost. Okay. Now a quick question for Tom. I'm going back to the notes I have from last quarter, where I think you offered that U.S. margins, we could see 2-3 basis points of margin pressure going forward each quarter. Now, it sounds like things have changed, but the rate increase, I thought that was sort of well-known around that time. Am I missing something? What else may have changed? I think that guidance was absent a Fed increase. Oh, I see. That's the difference. Good. Thank you. Yep. Thank you. The next question is from Nick Stogdill from Credit Suisse. Please go ahead. Hi, good afternoon. Just to follow up on the Basel I floor reduction. Were capital relief trades a material driver of that reduction in the Basel I floor? Is that a tool you could continue to use going forward to mitigate the return of the floor? Well, we looked at a number of ways to reduce the RWA intensity of some of the Basel I assets. We did have some credit default transactions that were part of what we did. Looking forward, I'd say we have some ability to manage the numbers. It's not complete. Like we talked about earlier, the B.I floor is sort of just below being operative, so some chance it will be part of the ratio as we go through the year. Overall, looking at risk-weighted assets and our growth in capital, we'd expect some growth in the ratio through time like we've seen looking back. Okay, thank you. Just a quick question for Surjit. Another strong quarter on credit with PCLs at 19 basis points. Is mid-20s for 2017 still a realistic number? If so, what business lines do you see kind of ticking up from here? Well, I still think mid-20s is a good number to work with because there is variability in the commercial and corporate businesses. While the economic environment we are operating in is very good at this point in time, and the credit is again, from a loss perspective in a very benign environment. I don't want to become complacent, but I would say mid-20s is a good number to work with. Okay. Thank you. Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Well, thanks for getting me back on. A couple of more number questions to clarify. First off, in U.S. banking, commercial loan growth has been one area where this bank has had very strong performance for a long time. At least on a sequential basis, if I'm looking at this correctly, it looked like the growth was much flatter than we've seen in a long time. Can you give me some detail on what you're seeing in the commercial portfolio and why that portfolio growth slowed so abruptly? Sure. This is Dave. You're right. We have had really very strong, probably above-market growth for 2 or 3 years now. The last quarter, a couple things, and I think you've probably seen in the press a fair amount of press around this in just what's happened to loans and commercial loans late, and we were probably no exception. We saw one thing that was unique for us, that was utilization in our revolving loans was down close to a percent, and that's $700 million or $800 million. And that's a reasonable amount. And I think we still expect our loan growth to be very good this year. We expect it to be above market, whatever the market will be, and our pipelines continue to be good. We continue to add new clients, and I feel confident about the continued good growth. But as we've guided in the past, not at the levels we've had in the past. This business, even obviously the last year, you've had your year-over-year comparisons benefiting from the transportation finance acquisition. But even ex of that, it looks like this has been a double-digit business for quite some time. And it's been carrying a lot of weight given that the consumer portfolio's been declining. When you say very good, do you still think that commercial for BMO is a double-digit growth business in the U.S.? So, back when you called it transportation finance, but I think you meant transportation finance. Yeah. I am sorry, transportation finance. Right. The transportation finance, even without that, the growth has been double digit. It is hard to tell over time where it will be. I feel more confident saying we will be at or above the market than to be able to predict specifically where it would be for the year. I think it will be good. I would say it will probably be a little bit lumpy, but I would expect it to be in around 10%. That is what I would expect based on what I see today. That is good. Last one I will say is probably for Tom. Your insurance business. Earnings that you show us from insurance are up about $25 million quarter-over-quarter. I think we have all gotten used to some volatility in this business based on what happens with long yields, good or bad. When we look at this $104 million number, is there what you would term somewhat of a one-off in here as a result of the large upward move in yields, or is $100 million or so more of a run rate number now based on where yields end of the quarter? Sumit, it is Gilles Ouellette. How are you? No, I mean, the way it works is that when rates do go up, we get a one-time bump. As you know, for the last six or seven years, rates have been going down, and we've had this headwind. For the last two quarters, the rates have been going up, and that's been helpful. The fourth quarter, but much more so this quarter. The underlying business is probably yielding about somewhere around $65 million a quarter. But this quarter, we get the benefit of something like $40 million worth of combination of interest rates and equity moves. The numbers roughly assumed are for 100 basis point increase in long rates, that's probably worth about $65 million after tax. For a 10% move in the equity market, that's worth about $30 million after tax. If we're expecting, going forward, rates to be going up, and markets to be going up, this should be a tailwind for us. All right. So that's some really good detail. Thank you for that. So run rate, you're saying, has been around 65. Last two quarters have helped. Based on these factors continuing to work, that's where the bump to run rate earnings comes into play. Yeah. If you are looking at a flat rate environment, you should probably start around 65. That is very helpful. Thank you for your time. Thank you. The last question for today is from Doug Young from Desjardins Capital Markets. Please go ahead. I will be quick. Gilles, sorry, I did not catch that. Did you say 100-basis point increase in equity markets equals 65 million? Did I get that number right? No, that's 100 basis point increase in long rates is $65 million. Okay. A 10% increase in the equity market is worth around $30 million after tax. Thirty million after. That's on an annual basis, or that can go through in a quarter, I guess so. It goes through the quarter. Yeah. If that's the experience in a quarter, that's what we're going to get. We'll get some fraction of that. Okay. My other question for Gilles, too, is traditional Wealth Management earnings were extremely strong. They were up 16% year over year. AUM, I think, was up under 2%. AUA, I think, was down. Just trying to triangulate. I understand expenses. It sounds like expense management was a big contributor. Can you maybe break it out a little bit in terms of the delta between what we're seeing in the traditional earnings growth and what we're seeing in what I would consider to be the main metrics that would drive earnings? Yeah. The single biggest factor for us, Doug, is foreign exchange. As you know, in the asset management business, half of the book is in the U.K. So obviously the pound coming off in the last two quarters has had a real impact on AUM. Now, that's going to rectify itself in another couple of quarters, right? So when you're looking year over year, starting in the third quarter, we're not going to have that. But the reason that you don't see much of an increase in rates or increase in assets converted back to Canadian is because of FX. In constant currency, the numbers are quite different than that. The assets are growing in the U.K., et cetera. But when we convert it back, compare that to last year, we're not getting the impact. But to your point, though, there's been a real drive for efficiency, as you know, around here for the last few years, and we've had some real dividend this quarter. I think you look at our top line grew by something in the order of about 13%, and our expenses actually came off in spite of the fact that there's revenue-based costs in this. So we've had some real benefits of the work we've done in the last couple of years, and we expect to get more of this going forward because, as you know, around BMO, it's been a big emphasis in the last couple of years. Just to kind of follow up. I understand the U.K. pound being down impacts the AUM. Does that not impact your revenue and your earnings as well? Or have you hedged out any of your currency exposure that you're benefiting from? I'm dealing with the issue of why the AUM hasn't moved up, but the revenues have, okay? It's the book that's been impacted by the pound, but we're having the same impact on revenues. The cost of currency, the revenues are higher by something in the order of about 3% more than what you see there, and as are the costs also, right? How would I explain it? It's the book that's being impacted more than the revenues. We're getting the revenues. We're getting the benefit from revenues and the cost reductions. Okay. Tom, you're not hedging out any currency exposures here, are you? We're not. Okay. We don't hedge either the USD or the pound. Okay. Thank you. Thank you. This concludes the question and answer session. I'll now turn the meeting back over to Ms. Jill Homenuk. Please go ahead. Thank you, and thanks everyone for joining us on the call today. We look forward to talking to you again in May. Have a good day. Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation.