Earnings Call: Q3 2016

Aug 23, 2016

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 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 re-queue. Frank Techar, Chief Operating Officer, Cam Fowler from Canadian P&C, Dave Casper from U.S. P&C, Darryl White from BMO Capital Markets, and Gilles Ouellette from Wealth Management are here with us this afternoon to take questions. 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. 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. Results were strong this quarter with net income of CAD 1.3 billion, up 5% from last year, and earnings per share of CAD 1.94, up 4%. Pre-provision, pre-tax earnings increased 14%. Operating leverage was 3.8% positive in each of our groups, and the efficiency ratio improved to 61.2%. Provisions for loan losses were up this quarter in line with our expectations. This performance reflects continued operating discipline and execution against our commitment to customer experience. We continue to demonstrate sustained momentum in an environment of low interest rates and moderate economic growth. EPS is up 6% on a year-to-date basis, earning through our loan loss provisions that increased from historic lows. Overall credit quality remains good, and Surjit will provide more detail in his remarks. Our CET1 ratio was strong at 10.5%. ROE was 13.5%, both up from prior quarter, reflecting growth in earnings. I'll touch on a few highlights from the operating groups. Combined Personal and Commercial Banking delivered net income of CAD 851 million, up 7% from last year. In Canadian Personal and Commercial Banking, pre-provision, pre-tax earnings growth continues to be good, up 6% this quarter and year to date. Operating leverage was positive for the fourth consecutive quarter, driven by consistent revenue growth and disciplined expense management. The efficiency ratio was below 50% on a year-to-date basis. Canadian P&C is seeing results from ongoing investment in digital capabilities that matter to our customers. In our personal business, customers are now able to open a deposit account in minutes using their smartphone. Notably, this service is the first of its kind from a major Canadian financial institution. In our commercial business, customers continue to expand their use of BMO DepositEdge with roughly 1 million checks processed each month. This innovative and time-saving solution allows customers to securely image and deposit checks directly to their account without having to go to a branch. These are both examples of how we are investing in digital solutions which empower our customers and improve efficiency. In U.S. Personal and Commercial Banking, performance was strong. Net income increased 19% in constant currency, reflecting continued strength in commercial banking, including the benefit of BMO Transportation Finance. Operating leverage was strong in the quarter, reflecting revenue growth and well-controlled expenses. The efficiency ratio was 61% on a year-to-date basis. BMO Capital Markets also had a strong quarter with net income up 18% on good revenue performance across a number of business units and tight expense management. Operating leverage was positive for the fourth consecutive quarter. We are seeing a growing contribution from our U.S. business, which has further expanded M&A capabilities with the addition of Greene Holcomb Fisher, which closed on August 1. BMO Wealth Management had solid underlying performance in both traditional wealth and insurance. Results were impacted by both market pressures and divestitures but remain well positioned in a recovering market as we leverage investments we have made. While closely managing expenses across the bank, we are at the same time continuing to invest to enhance customer experience and efficiency. Across the company, we have gotten closer to our customers, made banking simpler, and expanded our footprint. We remain confident that our strategy and diversification by businesses, customer segments, and geographies will deliver sustained growth. With that, I will turn the call over to Tom. Thanks, Bill. I will start my comments on slide 8. Q3 EPS was $1.94, up 4%. Net income was $1.3 billion, up 5%. As Bill said, results were strong and demonstrate continued operating momentum, the benefits of our diversified business mix, and good contribution from our U.S. operations. Adjusting items are similar in character to past quarters and are shown on slide 25. Net revenue was up 7%, or 6% excluding the impact of the stronger USD. Net interest income was up 11% from last year, benefiting from the addition of BMO Transportation Finance and organic volume growth. Net non-interest revenue was up 4%, primarily from higher trading revenues and other non-interest revenue, partially offset by lower security gains. Expenses continue to be well managed, up 4% from last year and just 2% excluding the impact of the USD. Operating leverage was strong at 3.8% on a net revenue basis. Efficiency of 61.2 improved over 200 basis points from last year. The effective tax rate was 22%, or 26.7% on a TEB basis. Moving now to slide 9. The common equity Tier 1 ratio was 10.5%, up from 10% last quarter. The increase reflects good capital generation, more than offsetting higher risk-weighted assets. As detailed on the slide, risk-weighted assets increased by approximately $3 billion, largely from the impact of FX and business growth, net of changes in book quality and methodology changes. Moving now to our operating groups and starting on slide 10. Canadian P&C had net income of CAD 562 million, up 1% from last year, with good pre-provision, pre-tax earnings growth of 6%. Revenue growth was 4%, reflecting higher balances across most products. Total loans were up 6%, and deposit growth was good at 8%. NIM was up 4 basis points from last quarter as a result of above-trend interest recoveries and prepayments. Expense growth was 2%, reflecting disciplined expense management and ongoing investments in the business. Operating leverage was positive 2.1%, and the efficiency ratio for the year to date was below 50% at 49.8%. Provisions for credit losses reflect higher provisions in the commercial portfolio and below-trend consumer provisions last year. Moving now to U.S. P&C on slide 11. Net income was CAD 289 million, up 22% from last year. The comments that follow speak to the US dollar performance. Net income of USD 221 million was up 19%. The acquired BMO Transportation Finance business represented approximately 15% of U.S. P&C's revenue and adjusted expenses in the quarter, similar to Q2 levels. Excluding the acquisition, performance was good with double-digit pre-provision, pre-tax earnings growth. Revenue growth of 23% year-over-year reflects the acquisition and higher loan and deposit volumes. Average loan growth of 17% includes organic commercial loan growth of 15% and lower personal loans, including the planned reduction in the indirect auto portfolio. Net interest margin decreased 14 basis points from Q2, driven by lower loan spreads and interest recoveries, changes in mix, and lower purchase accounting impacts. Expenses were up 14% year-over-year and down 2% excluding the impact of the acquisition. Operating leverage was strong and the efficiency ratio improved to 59.2%. Provisions were up from a below-trend level last year, primarily due to higher commercial provisions. Turning to slide 12. BMO Capital Markets had good net income of CAD 322 million, up 18% from a year ago, with pre-provision, pre-tax earnings up 23%. Revenue was CAD 1.1 billion, up 9%. Trading products growth reflects higher client activity. In investment and corporate banking, higher corporate banking revenue was partially offset by lower advisory fees. Net security gains were down from last year. Expenses were well managed and were essentially unchanged from last year. Operating leverage was positive for the fourth consecutive quarter, and the efficiency ratio improved to 57.2%. Provisions for credit losses were up from last year's levels. Moving now to slide 13. Wealth Management net income was CAD 227 million. Traditional wealth and insurance earnings were essentially flat from last year, as operating growth was offset by market impacts. Expenses declined 4% year-over-year, primarily due to divestitures and disciplined expense management. Assets under management and administration were up 2% year-over-year, including the impact of FX movements. Turning now to slide 14 for corporate services. The net loss was CAD 105 million compared to CAD 68 million a year ago. Adjusted results declined due to lower non-TEB revenue from an above-trend level last year and higher expenses, partially offset by lower provisions for credit losses. To conclude, results in the quarter demonstrate the benefits of our diversified business mix and good operating discipline. With that, I'll hand it over to Surjit. Thank you, Tom, and good afternoon, everyone. Starting on slide 16, our PCLs increased this quarter to $257 million, or 29 basis points, primarily as a result of higher oil and gas provisions and two accounts in other sectors. As Bill said, overall credit quality is good. For the quarter, both the GIL ratio and delinquencies remain stable. In Canadian P&C, consumer losses were flat quarter-over-quarter. In Alberta, marginally higher consumer delinquencies were more than offset by improved performance in the rest of Canada. Commercial losses increased due to higher oil and gas provisions. In U.S. P&C, overall provisions were up, with higher PCLs in commercial partially offset by lower losses in consumer. Commercial had a large provision on one account in the agricultural sector. Capital Markets PCLs fell modestly quarter-over-quarter, with most provisions in oil and gas. Corporate Services PCLs were impacted by lower recoveries in the quarter. On slide 17, impaired loan formations were lower. Oil and gas formations reduced from $286 million last quarter to $88 million this quarter. Gross impaired loans were essentially flat at 63 basis points. Turning to slide 18, our direct oil and gas exposure increased due to new commitments to the pipeline sector and because of the stronger U.S. dollar. We remain comfortable with the oil and gas portfolio and the associated allowances. In summary, Q3 credit performance was in line with expectations, and in the current environment, I expect to see losses over the next four quarters in the mid to high 20 basis points with some quarterly variability. 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 line. If you have a question and you're 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 the participants register. Thank you for your patience. The first question is from Meny Grauman with Cormark Securities. Please go ahead. Hi, good afternoon. Just a question on cost savings. How much in run rate savings do you still have left after two rounds of restructuring charges? If you could also remind us just in terms of how you foresee the timing of those coming into the results. It's Tom. Thanks for the question. The restructuring that we took in the last quarter was close to CAD 200 million, and we talked about savings from that being realized over about a year, and in total being around CAD 200 million. In the current quarter, we've got benefits equal to around 25% of that amount, and I'd expect to build to the full amount pretty much smoothly over the next three quarters. The charge that we took a year ago is wholly reflected in the operating earnings that you see in the quarter. Thanks for that. If I could just change gears just to talk about a topic we've been talking about for a long time now, but definitely is back in focus. Just on housing, Bill, a number of your peers have been more outspoken about the need for further government action in the housing market, especially in Toronto and Vancouver, and I'm wondering if you could share with us your view about that specifically. In a related point, just your view on what kind of role government policy is playing in terms of the supply of land and whether that is a bigger issue or is a big issue in your mind in terms of what's going on specifically in Toronto and Vancouver. Well, thanks, Meny. I don't have a great deal to add to what has already been said. I think public policy is working to try to dampen any evidence of speculative pressure in local markets, specifically identified as Vancouver and also a concern about Toronto and I suppose some parts of Montreal. But I think you just have to let the adjustments that have been made run through and see what the impact is. Real estate is cyclical, and it always has been, and I think there's been so much discourse on this topic. I don't have a great deal to add. Thank you. Thank you. The next question is from Robert Sedran with CIBC. Please go ahead. Hi, good afternoon. Tom, there's some information on the slide, but I'm hoping you can provide a little more color on the moving parts on the capital ratio. A 50 basis point jump is larger than what I might have expected, and it looks like AOCI in particular was up almost CAD 1 billion this quarter. I'm curious how much of that is just sort of normal quarter volatility, how much might have been FX, what else is going on and how you'd see the progression of that ratio in coming quarters? Sure. I would say we feel good about the change in the ratio in the quarter. With the ratio landing at 10.5, we've really rebuilt the ratio after the closing of the Transportation Finance acquisition, which is good. The AOCI movement that you see is largely related to the impact of the U.S. dollar, and it basically is offset by higher U.S. dollar risk-weighted assets and U.S. dollar deductions from capital. U.S. goodwill coming through at a higher level. So big change in the balance, but not a significant contributor net to the change in the ratio. The change in the ratio this quarter did benefit from a good level of capital generation. We had strong earnings, and that certainly helped. As well, typically after doing an acquisition, we manage the balance sheet in a tighter fashion to help get the ratio back up. We did that in this quarter, and you're seeing the benefits of it in the ratio that we reported. Would you say sort of takes you back to a neutral position, or is this a level at which you feel comfortable restarting the buyback? I would say we are back into a normal range. As you know, the number moves around in any quarter. Having come back into a normal range, I would expect that you would see from us over time what I think of as our normal pattern. So, job one from a capital deployment perspective is to generate good organic growth, and we are seeing that in our business. We have got good growth in our commercial portfolios in particular, really across the board, Canadian P&C, U.S. P&C, and Capital Markets. We expect that to continue, and to feel good about it. As time goes on, we will look at inorganic opportunities to deploy the capital. I would say we are back into a normal pattern of looking for opportunities to grow in a variety of ways, and if the ratio gets above what we think is a needed level, we would activate the buyback as we have in the past, but that is not likely to be in the near term. Thank you. Thank you. The next question is from Gabriel Dechaine with Canaccord Genuity. Please go ahead. Hi, good afternoon. I have a quick numbers one and then a follow-up on the capital. The quick numbers one, 8% revenue growth in Capital Markets, very strong. But expense growth was negative. I am wondering, is there some sort of true-up we could anticipate by the end of the year? Because normally they move in the same direction, expenses and revenues. That is my first question. Gabriel, it is Darryl. I do not think you can expect a true-up per se. I think that underlying what you have pointed out is that you have got some good core client-driven revenue growth in both of our businesses, in the I&CB business and the trading products business. In the expense category, I think you should think about a couple of things. We have gone through, as Tom alluded to earlier, two rounds of restructuring. We have taken our share of that in the Capital Markets business, and we have held the line very tightly in terms of controlling those costs going forward. While at the same time investing in the places that we need to invest. The other thing you might notice is that in the Q3 of last year, if you are comparing year-over-year, we had the GKST business. In this Q3 we do not. We have sold that business. That had a little bit of a contribution to the good expense year-over-year performance that you have seen in the U.S. But going forward, I do not think you should see a true-up. We may have some small increases as we go forward, but we will manage it pretty tightly. Okay, thanks, Darryl. That's very helpful. Then on the capital, I guess you touched upon it, Tom, and Bill if you want to contribute as well. Inorganic opportunities. In the past you've been opportunistic. You bought into the U.S. at a very low point of the cycle in 2010. FMC, I'm not sure how well it's doing right now, but you didn't pay a big multiple for it, for sure. There are certainly some areas in the U.S. that are out of favor, Texas, and you've always said that's a contiguous state you'd like to be bigger in. Are you actively on the hunt for acquisitions right now, or is it more of a passive stance that you've got? What's the size of acquisition that BMO could stomach at this stage? Well, thanks for the question, Gabriel. I think you answered it when you asked it, which is that we've been pretty consistent over time in our approach, and I wouldn't signal any change. We maintain an active dialogue across a wide range of opportunities at all times when our capital is building and when it's in the area where we have the most flexibility in. It's so often simply driven by where opportunity arises, and some of that is just a question of what's on the minds of potential partners. We're going to maintain the discipline we have around price. If we have the opportunity to expand within footprint or adjacent to footprint in things that are complementary to our business, of course, as we always have, we'll pursue it. But I wouldn't imply that there's something imminent. Okay. I guess to follow on for Tom, just to hear his voice. The internal. You didn't like my answers? No, I did. You crave for a better one? No. I like hearing all of you. 40 basis points of internal capital generation, if I exclude the book quality improvement and the other model refinement items. That's quite a bit more than what your old guidance would've been, I believe, which was in the 15 to 20 basis points a quarter range. Looking ahead, could you quantify what you think your normal run rate for internal capital generation is, considering the environment and considering the regulatory changes on the horizon, of which there are several that you list in your disclosures that we're all aware of, but can't really quantify? Yeah. I'll answer the question, but I'll give just a caution that, as you know, the number can move around in any quarter. And this quarter was a good quarter for the reasons that we've talked about. But we've been saying for the last few quarters that in a typical quarter, we would expect the ratio to build by in the zone of 10 to 15 basis points. And there's variation around that. But that's what I would expect in a typical quarter over quarter. Okay, thanks. Thank you. The next question is from Sumit Malhotra with Scotia Capital. Please go ahead. Thank you. Good afternoon. Tom, sorry if I missed it, but I was just hoping you could give some details on what exactly were the methodology changes or the improvement in book quality. When you say book quality, not that the credit quality numbers are deteriorating materially or anything, but it seemed like it was a stable to slightly up quarter in terms of impairments provision. Just hoping you could give a little bit more detail on what those two factors were that drove the increase. Sure. We had improvements in both areas. They weren't significant, but they were helpful. On the methodology side, it was about CAD 1 billion of RWA, and included in that, we had one U.S. portfolio that moved from a standardized risk weight treatment to AIRB. That was an item that contributed to the methodology change. On the book quality, I referred to how we've been managing the balance sheet in a tight fashion post the acquisition. Included in that, we did have a transaction to lay off some of the risk and a risk transfer transaction that shows up in book quality in the quarter, sort of a CDS-like transaction. We also have the benefit of the recognition of collateral values in our LGD calculations that are helping. The book quality change is more reflective of those things than fundamental migration in the portfolio, which overall is pretty stable. The first part of that, the U.S. portfolio that got transferred to or migrated to the advanced approach, that was the one I was looking for. You mentioned one specific portfolio. I know you may not want to go into full details, but is there more of that that we can expect from the bank, that there are further components of the U.S. portfolio that as they, I use that term again, migrate to the AIRB approach that you should get some RWA relief? There's likely to be a little bit over time, but the strong majority of that transition has taken place, and most of it took place last year. I would say yes, but not in a way that's significant. Thanks for that. The second part of the question, or my final part question is likely for Bill and to go back to expenses. As you mentioned, it's been four or five quarters now that BMO has had positive operating leverage on an all-bank basis. It certainly looks like, at least the way I'm looking at the numbers, that it's accelerated in the past two quarters. Is this as simple as you've now had the benefit of two restructuring charges that are making their way through the expense line that we're seeing? Or is there something on your end? Have you slowed the pace of investment spend or some of the regulatory projects that were underway? Is that one of the factors that's really driving the even stronger expense metrics that we're seeing from BMO of late? Yeah. Sumit, I'd say that the cumulative effect that you've identified 2 years in a row of progressive changes on the same agenda, basically working the same agenda, is paying off. I think Tom talked about the fact that really not a large portion of the most recent one has flowed through yet. It's really as we've spoken about it's been focused on 2 things. The evolution or the movement of client transaction volume into the mobile space, which drives higher customer satisfaction and a more efficient fulfillment process. You can imagine account opening on a mobile device in 7 to 8 minutes is pleasing to the customer. It's also a much more efficient way. Lower error rates, higher levels of confidence, all of those things. I think these things are building on each other. Also, the work that we've done on process simplification builds on itself. The capabilities necessary to start to change the processes cost more money around just the basic architecture upfront, and then as you move across different applications in the organization, it becomes more efficient. I think that's really where you're seeing the benefit. Contrary to any suggestion that investment in the future has moderated, I would say that the regulatory and supervisory agenda, which has been big for all banks, it's been complementary to the things I just spoke about because the digitization of information and process makes compliance more reliable and brings down the cost. I would say that there is Some repurposing, if you like, of investment dollars that were really focused on getting to a high level of capability now being more available to apply to both customer experience and then contributing to the flow-through and efficiency. I think it's a good story. It's a progressive story, and it's pretty consistent with what we've been talking about, I would say, going back to the first charge that we took. Thanks for the details, Bill. My pleasure. Thank you. The next question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead. Thank you. Two quick, hopefully, questions. One for Darryl. Darryl, the trading revenue in particular was yet another good quarter. This north of CAD 400 million type trading revenue, is this now what you look to be a sustainable set of numbers? If yes, maybe talk a little bit about if there's any new businesses you've entered, or what is it that's helping that top-line growth in trading? Sohrab, I would say if you look through the contributors to the trading business, I agree with you, it's another good quarter. It's off a smidge from Q2, which was very strong. I think it's 95% or 96% of the Q2 number. When I look through it, you see rates consistent, you see a small drop in FX and in equities, and you see a pickup in commodities. All told, I think it's a good mix and a good quarter. What's driving it? I think what you're seeing is the benefit on the revenue side because there are revenue benefits as well from the restructuring that we undertook last year when we reorganized around trading asset classes and our customer focus enhanced, and we got a lot better at getting closer to the customer. I think you're seeing really good client execution. I think we're also seeing, when you ask about new products, we're seeing good product development, and we're seeing ourselves close gaps in areas where perhaps our competitors were and we weren't. I guess you asked for an example. An example might be our SSA business. Our SSA business, if you looked at it a year ago, you'd see that globally we were somewhere around 20th in the global league tables, and today we're around 13th. I think we've done 22 transactions this year on a lead basis relative to three last year. I could give you other examples, but we set out about a year and a half ago to close some of those white spaces relative to market opportunities, and I think we're executing on some of those. Okay, thank you. Going forward, the short answer, that was the long answer to your question. The short answer to your question is yes, I would expect if markets remain constructive, we would be able to continue to perform at or about these levels on the trading side. Okay, thank you. Maybe a question for Dave out of the U.S. P&C segment. The commercial loan growth in particular, organic up 15%. Dave, can you just confirm that you haven't adjusted, or the bank hasn't adjusted its risk appetite? That you're not getting this loan growth by going down market as it were, as far as credit quality is concerned? Yes, I can confirm that. The growth, and it has been good at 15%, really has come over a long period of time, largely really starting with the time we purchased M&I. We felt that there were some businesses that with the size we had become, that we were not at of scale. Mostly businesses where they are secured by assets, like our asset-based lending business, our auto dealer finance business, also our equipment finance business. We have grown probably larger and faster in those businesses really as we have tried to grow to scale and fill the pipeline up with our clients where we did not have those businesses before. There is no change in our risk appetite. The commercial business is a really good business for us. We have been in it for almost 200 years now, and we like it, and we like going through the cycles. Are there other pockets where you think you still have the opportunity to improve to, let us say, to punch at your weight that you maybe were punching below your weight? Or will these just become now the type of run rate loan growth expense? I guess what I am trying to get at, we are going to get into a more difficult comp period. You are not going to be able to grow at 15% forever, but are there some one-off pockets still that can help maintain that kind of a growth trajectory? Well, we are always looking for new areas where we can be helpful to the clients and bring the whole bank. I do think that the growth we have had at the 15% level is probably not I would not expect that it would stay at that level, but we still expect good growth, good commercial growth as we gain market share and add businesses. Okay. Thank you very much. Thank you. The next question is from Mario Mendonca with TD Securities. Please go ahead. Good afternoon. If we could look at the other side of that question in the U.S. loan growth, specifically the U.S. consumer. That hasn't played out as well. Bill, I think you've guided in the past to an improvement in the second half of 2016. What's your outlook on why that hasn't played out and what your outlook is going forward? This is Dave. I think, first of all, the personal business is actually doing pretty well as we look at it over the last couple of quarters. We've invested in it. We've built it on both sides, on both the retail deposit gathering business, which is the core part of our business and critical for our loan growth that we just talked about. But also on the consumer lending side, where we've made progress. We've had a couple of our regions where we've actually had good sequential growth. We're not where we want to be at this point, but we're making really good progress, and it's an important part of our business, but the larger and more important part of our personal business is really on the deposit side, and there we've had very good growth, 6% year-over-year, and that continues to grow. Help me think through that answer. You were suggesting that the consumer had been growing. You've been generating consumer loan growth? No. In a couple of our regions, we have seen the consumer growth actually grow sequentially from month-to-month. We haven't seen that throughout our whole footprint at this point. I see. Is it your expectation that eventually everything will start to grow or the total will grow? No, I think one thing you'd want to back out because as you may recall, we intentionally reduced our indirect auto lending last year, in essence, to help fund the acquisition of BMO Transportation Finance. X that, we absolutely would expect the personal lending to grow over time. We're seeing signs that it's moving in that direction now. Okay. Bill, just going back to your guidance in the past, is it no longer appropriate to rely on that guidance that the consumer will grow in the second half? Well, I think if we are talking about one quarter of movement, Mario, that would be the only adjustment. I think I expected we would see absolute growth in the second calendar half. I would say I would adjust that by a quarter, and I think next quarter, and the quarter after, we are going to see the plateau and the balances on the loan side. But as Dave said, and I think this is an important part of the answer that he gave you. Deposit growth has continued to be very strong. We are adding customers. The uptake of borrowing, as you know, in the market. Most of the mortgage activity across the marketplace has been refinancing. New home construction is still lagging natural demand. I think plus or minus 180 days or 90 days, we still have expectation that loans will grow, and we are pleased with the deposit growth. Okay. Let us move on another issue, and I am not sure whether I care about this or not. Maybe you could help me think through it. The 1-29-day delinquency bucket did move substantially year-over-year, not so much quarter-over-quarter. It seems elevated, and I am just not sure whether that short perspective really matters. Maybe Surjit can take me through that. Yeah. You are talking about the U.S. still, aren't you? Yes. Yeah. In the U.S., I think some of it has got to do with the early-stage delinquencies, and I think I've explained this before. When you have a quarter end that's on a holiday and this time it was a Saturday, then 2 days of receipts sometimes get delayed. So that's one reason when you compare year-over-year, that becomes an issue. I think there is one part of the portfolio that is going through the system which we watch very carefully, which is referred to as the end of draw, where we are actually talking to our HELOC clients where they had these 10-year interest only and then have to be converted back to a repayment schedule. Some of it could be attributed to that, but I'm not sure at this point in time. But there's nothing with the quality. From a quality perspective, in fact, when I look at the rates that we've had from a loss perspective this quarter, our PCL rates have gone down. I don't see the 30-day early stage delinquency as anything other than an indicator of perhaps the first point I made, which is the weekend. That's helpful. The quarter end. Let me just drive on to the final question then. The tax rate. Normally don't get into this in too much detail, but is there anything happening with the total return swaps that may be causing the tax rate to move higher this quarter? Not in the current quarter, no. Tax rate was to me, and it's Tom Flynn speaking, a pretty normal tax rate. Okay. Thank you. Thank you. The next question is from Peter Routledge with National Bank Financial. Please go ahead. Just a quick follow-up for Dave. You mentioned indirect auto you pulled back for the acquisition of BMO Transportation Finance. I thought you'd pulled back because you didn't like the risk-return dynamics in that market. Did I misunderstand that, or? Well, no, I think they're both right. We wouldn't have pulled back had we not seen a better opportunity, and this was a portfolio that really it's a very, very high-grade portfolio. But with that comes pretty low spreads. So it was a good opportunity to reposition the balance sheet a little bit. Yeah. We still are in that business, just not to the extent that we were before. Okay. Related questions for Surjit Rajpal. The pullback from indirect auto is consistent with what I've seen from BMO in terms of being a bit more conservative in terms of credit risk management. I wonder if I look at uninsured mortgages in B.C. and Ontario, and they were up about CAD 3 billion quarter over quarter in an environment of elevated home prices. I guess the question is, why not more restraint in those portfolios? Okay. I will decouple your question into two. Yeah. The first point you make with respect to our indirect auto being a reflection of our risk appetite is not necessarily correct. I think you have got to look at risk in the context of return as well. When we look at these businesses, we never look at them just from a risk perspective. From a risk-return perspective, when it is not attractive, then we tend to slow down. Going back to your second point on mortgages per se, we are very selective in how we underwrite our mortgages in all the geographies. We recognize that there are markets that are more frothy than others, but we adjust our parameters given where we see every market. We have the ability to change our loan to LTVs. If you look at our charts, you will notice in our mortgages that we give you by province as well, in one of our slides. Yeah I think it is slide 20, you will notice that our growth in mortgages is quite secular. It is in all the areas, and our loan to values on the uninsured portfolio is still at 56%. We are mindful of markets, the condition they are in, and we make our adjustments. What should give you some satisfaction is that the loan to value that you are seeing and the fact that these are more fixed term, the fact that the delinquencies are not bad at this point in time, the fact that our condos are, again, not growing at the same level as the rest of the portfolio, all give us comfort. We do adjust our parameters all the time to make sure that as a portfolio mix, we remain comfortable. Yeah, I recognize the very good point you make on the 56 average LTV, but there's got to be some portion of mortgages within that number that are north of 65% LTV at origination. I wonder with Vancouver up 25% year-over-year, if those LTVs are really accurate. If we look back on it a year or 2 from today, will they be as accurate? Will those credit risk decisions seem as prudent? Yeah. You're absolutely right. We tend to watch our originations in those markets and make sure that the originations at those levels are contained. We do run our stress as well. We look at our numbers, and we stress our portfolios given the distribution across the LTV curve. We are satisfied that our portfolio is very robust in that sense. Even if the- If you see detached homes going up too much in a particular area, you might pull back from that area and maybe put more into condos or houses in different areas. That, and we would also lend less for the higher value homes. Right. Which we already started doing, by the way. Right. Okay. Thank you. Thank you. The next question is from Doug Young with Desjardins Capital. Please go ahead. Hi, good afternoon. My first question is for Surjit Rajpal, and hopefully this is a relatively straightforward one, but I just wanted to get a little more color on the oil and gas PCLs that did go up quite substantially sequentially, but your gross impaired loan formations in the segment went down substantially. So my question is, was there a catch-up here, or is this just a function of a loss on the loan or loans that went bad? Just hoping to get a little extra color. Yeah, it's a good question, Doug. I wouldn't use the word catch-up. I think these things are You can never predict the timing of when you make a determination as to a client's ability to pay back. There was one particular largest loan in Capital Markets, and there was some in the oil and gas services sector, which we saw reflected in our commercial business in Canada that was spread out. So they are higher than the last quarter, and this is something that we had seen would perhaps happen if oil prices remain low. It didn't come as a surprise at all. On the other hand, the formations have come down quite significantly, as you noticed, and that's what gives me a lot more comfort. We've gone through our portfolio. Now we are well past the stress test days where we actually know every part of our portfolio and see how it performs in a low oil price environment. With the slowdown in our formations to the level it is, that should point you to the fact that we, I think a lot of the issues that the $35, $40 oil would have indicated are behind us, but also depends on how long prices remain depressed. But we are very comfortable with our portfolio and the way we manage it. In fact, I did mention in my remarks that we will grow the portfolio selectively if the opportunity arises. So when I think about just how to think about it going forward, are we at kind of steady state at this portfolio, or is there a little bit more potentially erosion that could happen if oil price stays, say, flat from these levels? There could be if potentially oil prices stay flat. Depending on the duration of them staying where they are, there could be a little bit more that comes our way. Because cumulatively, when I look at the losses to this point in time over the last six quarters, our loss rate is about 1.8%. This is not annualized, this is just a cumulative loss rate. I can see that going up. We do have, and I think I mentioned again in my comments that the allowances that we've kept for the remainder of the 12 months is more than adequate. But I can see it going up under certain circumstances. Okay. Thank you. My next question would be just for Cam on NIMs in Canada. I think the NIM last quarter was 2.51%. I think you'd guided to, in the back half, another 1 to 2 basis point decline in NIMs, yet we had a nice bump up. Is that delta really just the prepayments or higher interest recoveries? Was that about a 5 to 6 basis point positive impact in NIMs? Just trying to think of the sustainability of that as we look forward to the latter half of this year and into next year. Thanks. Cam. The guidance I gave last quarter, I would say, stands. Yes, the majority of the bump this quarter is on the above-trend interest recoveries and prepayments. I would expect that in Q4 we're back in the Q2 range as guided. There are good components to the performance in there on the NIM to be sure, including good deposit growth, but you're right, I would stick with the guidance I gave last quarter, which is where I expect Q4 to be closer to Q2. Okay, great. Thank you very much. Thank you. The last question is from Darko Mihelic with RBC Capital Markets. Please go ahead. Hi. Thank you. I just want to get a little more specific with Tom on some of the answers that he gave earlier. First, Tom, the question is, when you answered the question on the restructuring, you said you were 100% through the first charge and 25% through the second. Is that the same as you've drawn down on the provision by those amounts? Is that correct? From an income statement perspective, I'm not sure that that's how I'd put it, but I'm not sure what you mean. I'll explain how I was thinking about it. We took a charge in Q2 of last year. We said savings would be in the zone of CAD 100 million, and those savings are now in our run rate. We've achieved those benefits. We had a charge in the second quarter of this year around CAD 200 million. We said we'd realize savings of around CAD 200 million over the next year. Of that amount, a little over 25% is in the results for the current quarter. That's hitting the P&L, and the balance we'll get over the next three quarters. Okay. Just with respect to the actual provision, how much have you drawn down on it? If by the provision you mean the amount of the charge, how much of that have we consumed? It would be under half of it. Okay. Under half, but you have about half of all the savings that you have talked about so far in the run rate. No, there I am just referring to the most recent charge, the Q2 charge. Okay. All of the charge from last year would be gone. Okay, that's helpful. I've done a little back of the envelope math to the first decimal point. If I take the run rate savings of CAD 150 million so far, that's annualized, that's in your number. I can effectively say to some extent, keeping the revenue number as is, that about 1.3% of your 3.8% operating leverage is coming from the restructuring initiatives, and the rest of it's coming from normal course disciplined. Have you looked at it that way, and do you think that that's a correct way of thinking of it? Directionally, I would say yes. I mean, the savings are coming through. They're absolutely contributing to and a key part of the operating leverage. Your math sounds like it's in the right zone. Okay. That's very helpful. Thanks for the color, Tom. Thank you. I would now like to turn the meeting back over to Mr. Bill Downe. Thanks very much, operator. Before we wrap up, I would like to recognize Russ Robertson, Executive Vice President, who has announced his intention to retire from banking at the end of this month. As many of you will remember, Russ joined the bank in 2008 as Chief Financial Officer from Deloitte Canada, where he was Vice Chair. He went on to oversee the integration of Harris and M&I, the largest and most complex acquisition the bank had ever undertaken. Russ has earned the deep respect of colleagues across our organization and the industry. He has been a tremendous partner and will leave a lasting legacy. Russ accomplished all of this while championing integrity, empathy, diversity, and responsibility, the best of our values. For that, I would like to personally thank him, and on behalf of everyone at BMO, wish him the very best. With that, thanks everyone for joining today, and have a good afternoon. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.