Earnings Call: Q1 2015

Feb 24, 2015

Good afternoon, and welcome to the BMO Financial Group's Q1 2015 earnings release and conference call for February 24, 2015. Your host for today is Ms. Sharon Haward-Laird, Head of Corporate Communications and Investor Relations. Ms. Haward-Laird, 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 short Q&A period during which we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question and then re-queue. Also with us this afternoon are Frank Techar, Chief Operating Officer, Cam Fowler, Head of Canadian P&C, Mark Furlong from U.S. P&C, Darryl White from BMO Capital Markets, and Gilles Ouellette, Head of 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 forecast projections or conclusions in these statements. I would also like to 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 both 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 adjusted 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, I will hand things over to Bill. Thank you, Sharon. Good afternoon. We appreciate everyone joining us on the call today. The economic environment in the first quarter has been unsettled, underscored by movements in oil prices, lower long-term interest rates, and a rapid decline in the Canadian dollar. Against this backdrop, BMO's underlying business results in the first quarter were solid. U.S. personal and commercial banking and traditional wealth posted good results. Our Canadian P&C business continued to grow, although at a slower pace than we saw last year, and results in Capital Markets improved from Q4, but continued to be impacted by the current environment. Our insurance business, which is sensitive to long-term interest rates, faced a significant headwind from declines in long-term rates during the quarter. Tom is going to take you through the financial results in a few minutes, but I wanted to speak first to some of the elements that give us continuing confidence in the bank's ability to respond to evolving market conditions and deliver sustained growth. Net income in the quarter was CAD 1 billion or CAD 1.53 per share. Excluding the impact of the decline in long-term rates and loan accounting, earnings were up 5% year over year. Both loans and deposits were up 9% from a year ago. Credit performance in the quarter continued to be good, as higher provisions were largely driven by lower recoveries compared to last year, and Surjit will provide more detail on that shortly. BMO's common equity Tier 1 ratio remains strong at 10.1%. During the quarter, we repurchased 3 million shares, reflecting our commitment to return capital to shareholders. As I said, I'd summarize the underlying results in the quarter as solid. Turning to the operating groups, our combined P&C banking earnings were $708 million, up 6% year over year, demonstrating the power of having almost 1,600 branches serving our customers across our North American footprint. In Canadian P&C banking, earnings were $503 million, up 4% year over year. This growth was lower than the strong performance we've seen over the previous six quarters. But we remain confident in the foundations we've built and our ability to adapt to the changing market environment. We have a clear strategy for how we'll compete in this business, which we described in some detail last month at our Investor Day. Every part of the strategy is based on a deep understanding that our customers believe that money is personal and their bank should be, too, and how we merge the digital and physical environment only serves to reinforce these concepts. This quarter, we launched our combined BMO banking and InvestorLine iPad app, becoming the first major Canadian bank to have a single app which provides customers access to both personal banking and self-directed investment accounts all in one place. We continue to see very positive results from our second release of mobile banking, with over 4 million downloads in total. We also launched BMO DepositEdge, which provides businesses with the ability to deposit checks remotely. While this was a slower quarter for Canadian P&C, we expect better results in the second half of the year. Our U.S. P&C banking business had another good quarter, continuing to demonstrate the improving trends in revenue and earnings growth that we delivered in the second half of 2014. Net income was $205 million, or $172 million in source currency. Pre-provision, pre-tax earnings growth was strong, up 6% in source currency from last year. Total loan growth was also strong, with balances up 10% year over year. Core commercial lending growth remained robust, with double-digit growth in C&I loans. Our pipelines remain strong. In the context of a still-strengthening U.S. economy, the benefits of our U.S. footprint are becoming increasingly apparent. Wealth management earnings in the quarter were $186 million, including the impact of the significant decline in long-term interest rates during the first quarter. When long-term rates eventually rise, there will be a corresponding benefit in our wealth management business. Our traditional wealth business posted net income growth of 28% year-over-year, reflecting good organic growth in client assets and the addition of the acquired F&C business. Assets under management and administration increased to over $800 million. BMO Funds were recently recognized as one of the top performers in 2014 in the Barron's Lipper Fund Family ranking, coming in second among U.S. fund providers. After introducing 21 new funds over the past two years, BMO Global Asset Management now has 45 U.S. funds with $14 billion in assets under management. Annual earnings in traditional wealth have grown at a compound rate of 24% over the last five years. Capital Markets results improved from last quarter, despite the impact of credit and funding valuation adjustments, but were down from the strong levels we experienced in the first three quarters of 2014. Our Capital Markets business remains well-positioned in the current environment, with good opportunities to gain share in the U.S. mid-cap market. Before I wrap up, I want to take a minute to acknowledge Eric Tripp, who has been a leading force in BMO Capital Markets for 30 years. Eric was President of BMO Capital Markets from 2008 until late last year, when he stepped down in anticipation of his retirement. Eric has been a mentor to many people in Capital Markets and a champion for diversity in our company. Eric will be leaving BMO in the spring, and I want to thank him on behalf of all of us in the organization for his many great accomplishments in the BMO Financial Group. To conclude, as I said at our last earnings call, the current operating environment poses both challenges and opportunities. In this environment, we are keeping a close check on expense growth. At the same time, with our advantaged business mix, our diversified North American footprint, and our clear and consistent focus on customer experience, we expect revenue growth to pick up over the remainder of the year. With that, Tom, I will turn it over to you. Thanks, Bill, and good afternoon. Turning now to slide eight. Q1 EPS was $1.53, and net income was $1 billion. As Bill said, underlying business results for the quarter were solid, up 5%, excluding the impact of long-term interest rates on insurance and loan accounting, reflecting the benefits of our diversified business model. Two of the larger items in this quarter's results were stock-based compensation for employees eligible to retire, which reduced EPS by $0.09, and the impact of interest rates on the insurance business, which reduced EPS by $0.06. Our Capital Markets business was also impacted by some additional market-driven items, which I will speak to in a few minutes. Revenue was $5.1 billion, up 13% from last year or 10% excluding the impact of the stronger U.S. dollar, driven by growth in Canadian P&C and Wealth Management. As you have seen, beginning this quarter and to align our disclosure with peers, we will report insurance claims, commissions, and changes in policyholder benefit liabilities, or CCPB, as a separate line item on the income statement. Previously, this item was reported as a reduction in insurance revenue. Revenue was up 5% from the prior year, excluding the CCPB adjustment. Net interest income was up 5% year-over-year and 2% from the prior quarter due to volume growth and the impact of the stronger USD, partially offset by lower net interest margin and lower revenue from purchased performing loans. Non-interest revenue was up 20% from last year and 15% from the prior quarter, primarily due to a significant increase in insurance revenue. Excluding insurance, non-interest revenue was up 6% year-over-year, with increases in particular in traditional wealth-related revenues, in part due to the acquisition of F&C, which was partially offset by lower trading revenues, underwriting and advisory fees, card fees, and security gains. Q1 expenses were up 11% from the prior year. Excluding the impact of the stronger USD and the addition of F&C, expenses were up 4%, reflecting higher technology, regulatory, and employee costs. Expenses were up from Q4 due to the stronger USD and $87 million pre-tax or $61 million after tax of stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year. Excluding these two items, expenses were down 1% from the prior quarter. The effective tax rate of 12.2% was down primarily due to higher tax-exempt income, offset in part by a provision for prior periods' income taxes. The rate was 24.7% on a TEB basis, down from the prior year and up from Q4. Moving to slide 9. Our common equity Tier 1 ratio was 10.1%, unchanged from Q4, as higher CET1 capital was offset by higher risk-weighted assets. Risk-weighted assets increased meaningfully in the quarter, with $14 billion of the $16 billion increase due to the stronger USD. The capital ratio has been managed so that it is not significantly impacted by this USD-driven increase. The remaining increase of $2 billion in RWA was due to business growth and higher market risk, partially offset by changes in methodology and improvements in book quality. Our book value per share increased 10% in the quarter to $52.98 per share. Moving now to our operating group performance and starting on slide 10. Canadian P&C results reflect a shifting economic environment, with net income of CAD 503 million, up 4% from last year. Revenue was up 3%, reflecting higher balances and fees. Revenue growth is expected to be higher in the second half of the year and expense growth lower. With this, we expect better operating leverage. Total loans were up 4% and deposits up 7% from last year. Personal loan growth was solid and impacted by our decision to limit growth in longer-term auto loans last year. NIM was down three basis points from last quarter, largely due to lower loan spreads and personal lending. NIM is expected to be flat to slightly up over the remainder of the year. Expenses increased 6% year-over-year and 2% from Q4, reflecting continued investment in the business, including the impact of costs associated with the changing business and regulatory environment. Moving now to U.S. P&C on slide 11. We continue to see an improving trend consistent with the second half of 2014. In CAD terms, net income was CAD 205 million, up 14% from Q1 of last year. In U.S. dollars, net income was up 3%, benefiting from higher revenue and disciplined expense management. Revenue of $720 million U.S. was up 1% from last year, driven by higher volume, partially offset by lower NIM and fee revenue. Loan growth was strong at 10% year-over-year, with continued very good double-digit growth in C&I balances. Revenue was relatively stable quarter-over-quarter, despite a NIM decline of 9 basis points. The NIM change was driven by competitive pressures on loan spreads and a changing mix, including loans growing faster than deposits. Expenses continue to be well managed and were down year-over-year and quarter-over-quarter. As Bill mentioned, our total personal and commercial banking business net income was up 6% from last year. Turning now to slide 12. BMO Capital Markets net income of CAD 221 million was down year-over-year and increased from Q4. Results this quarter were impacted by several market-driven items, including a charge for credit and funding valuation adjustments of CAD 41 million pre-tax or CAD 31 million after tax, and also by FX and deferred compensation hedging items and by slower investment banking activity. Revenue was down 5% year-over-year as good trading revenue was more than offset by credit and funding valuation adjustments and lower investment in corporate banking revenues, in part due to lower security gains. Revenue was up 14% from the fourth quarter due to higher trading revenue. Excluding the impact of the stronger U.S. dollar, expenses were down 2% from the prior year due to lower employee-related expenses, partially offset by higher costs driven by a changing business and regulatory environment. Expenses were up 9% from the prior quarter due to higher employee-related expenses, including CAD 23 million for stock-based compensation for employees eligible to retire, increased support costs, and the impact of the stronger U.S. dollar. Moving on to slide 13. Wealth management had good underlying business growth in the quarter. Traditional wealth earnings were up 28%, driven by revenue growth of 26% due to the benefit of the acquired F&C business and higher fee-based revenue from good growth in client assets. Insurance net income was down from the prior year, primarily due to a CAD 41 million after-tax charge from movements in interest rates in the current quarter compared to a CAD 7 million charge a year ago. Traditional wealth management income was up 16% from the prior quarter, driven by business growth. Net income and insurance decreased quarter-over-quarter as Q4 was above trend and in Q1 we had the impact of lower interest rates. Putting these two units together, total wealth management net income was CAD 186 million, up 2% from the prior year and down from Q4. Expenses were up year-over-year due to the acquisition of F&C, higher revenue-based costs, and the impact of the stronger U.S. dollar. Expenses were elevated consistent with Q4 due to CAD 27 million in stock-based compensation for employees eligible to retire in the current quarter and the settlement of a legal matter in the prior quarter. Assets under management and administration were up 43% and 18% excluding F&C, driven by the stronger U.S. dollar, market appreciation, and growth in new client assets. Turning now to slide 14. The corporate services segment had a net loss of CAD 74 million compared to a net loss of CAD 41 million in Q1 of last year and the prior quarter. Excluding the impact of the group tax adjustment on revenue and taxes, year-over-year results were lower, primarily due to lower credit recoveries, higher regulatory expenses, higher taxes, and the impact of a stronger U.S. dollar, partially offset by higher revenue, largely due to treasury-related items. To conclude, despite a number of moving parts that impacted our results in the quarter, the underlying business performance was solid and continues to demonstrate the benefits of our diversified business mix. With that, I will hand it over to Surjit. Thank you, Tom, and good afternoon, everyone. We had another quarter of strong credit performance. Starting on slide 16, specific PCLs were $163 million, $7 million lower than in the prior quarter. In Canada, total losses in the personal and commercial business were stable, while in the U.S., losses were lower. Moving to the next slide. Formations this quarter were $424 million, a decrease of $110 million compared to the prior quarter. Gross impaired loans increased quarter-over-quarter solely due to the impact of FX. Our GIL ratio was relatively flat at 69 basis points. Turning to the topic of interest. On slide 18, our oil and gas exposure remains low at 2% and with 60% of it to investment-grade borrowers. The portfolio grew by $1.1 billion this quarter, with a third due to FX and the majority of the balance coming from a couple of large investment-grade customers. We are diligently monitoring our commercial and consumer portfolios in Alberta as well as in other oil-producing provinces, and we remain prudent in our underwriting practices. As Bill discussed at the RBC Investor Conference, we stress-tested our loan portfolio at $35 a barrel for 2015 and $50 a barrel for 2016. Under this test scenario, the incremental losses from the oil and gas portfolio and the knock-on effects from the commercial and consumer portfolios are very manageable. Of note, a low oil price scenario is expected to benefit our U.S. loan book and our exposure in the non-oil-producing provinces. I will now turn it over to the operator for the question and answer portion of today's presentation. Thank you. Please press *1 at this time if you have a question. 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 at this time 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 going to be for Cam Fowler, and specifically in regards to the commentary in Canadian P&C revenue. The statement that first off, you feel confident that you will be able to hold NIMs flat to slightly up for the balance of the year and couple that with your view that revenue trends get better as the year goes on. What are you seeing in either the macro backdrop or specific to BMO that gives you the confidence that those two items are achievable? Thanks, Sumeet. It is Cam speaking. On the NIM side, we are down 3 points on the quarter. That is a little bit of pressure on the personal lending spreads, specifically indirect auto and mortgage needs. I expect that we will get much of that, if not most of that back in the second quarter. I think through the balance of the year, the reason I think we will be stable to up modestly is that we will have the combined benefit of improved spreads on the variable loans. I think we will have better balances and performance in the payments business. I think we will continue to do very well on the deposit side, both personal and commercial checking on the personal side and free deposits on the commercial side, and those have helped us. So that is what I think about NIM. With respect to the revenue-linked point, I just think there is more earnings power for us in the back half of the year in a few areas where we have not done quite as well in the first quarter. Payments is one area. I think we have more opportunity in commercial lending. As you know, because I have discussed on previous calls, we dialed things down a little bit in the longer-term component of the indirect auto business, 72 months and beyond. For that reason, and one or two others, we are quite slow in that bit of the market right now. I would expect based on the activity that we have in the market and the business development successes that we are having, that we will enjoy better growth in that in the back half of the year. For those reasons, I think revenue will be stronger. One more here and then I will re-queue. We might have to tag Tom in. In making the statements about net interest margin, are you contemplating any further action by the Bank of Canada in terms of the overnight rate in your view that you can hold NIM stable to current levels or even improve it? Secondly, card fees were down decently on a percentage basis anyway this quarter. Just hoping for an update here. I believe the finance minister in the announcement made in November had given the parties until April to implement the agreed-upon changes to the interchange fee structure. Can you talk about whether that implementation has taken place at BMO? If not, how that affects your revenue outlook, particularly for the back half of the year, and I will leave it there. Okay. I will start with your follow-up question on NIM. It is difficult to say what will happen with the Bank of Canada or with competitive response. My own view is that we should be able to hold on to stable NIM in this business through the year. With respect to the card business and fees specifically, we are down a little bit on fees this quarter linked to interchange and specifically customer buying behavior on the retail side, which is contributing about half of the miss on the fee side. The other half is a combined impact on the corporate side, which is combined interchange and some slightly higher rewards costs. With respect to the interchange adjustments and their effective date for April 1st, we are positioned to move in line with the expectation of the changes that have been put upon the network for that time. And so those dates stand. Okay. The decline this quarter had nothing to do with the decreases having been implemented, there were other factors at play, and you are expecting that to come into place to begin April? That is right. Thanks for your time. Thank you. The next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead. Thanks very much. First, maybe just to follow up. Cam, you mentioned doing better in commercial in half two. I noticed coming into the quarter it looked like industry loan growth on the commercial side was accelerating through your fiscal Q1. I noticed your loan growth was down a little. Maybe to start, just a quick update in terms of, are you giving up a little bit of market share? Are you seeing competition spike at all? Would appreciate your perspective there. Commercial loan growth at 7% is a decent number for us right now, I think. I take your point about the acceleration that is available or taking place. Ours is a tale of two halves. On the upper end of the mid-market, we are moving along quite well. In the core business, we are at a slightly lower number. We get to a blended 7%. The core business has just come through a major platform change through the course of 2014, where we have replaced our lending platform, which is going to be a great positive for the business going forward. We have just been digesting that from a capacity perspective over the last couple of quarters. One of the reasons I think that we have good opportunity in the back half of the year is that we will have moved through that change and the traditionally very strong core commercial business will be moving better. It is quite healthy in terms of what is happening by industry and by geography and by segment there. That is the reason for that. You would expect that overall industry momentum to persist through this year despite puts and takes across the economic backdrop? Yeah. Difficult for me to say. It feels very healthy and reasonably competitive right now. Okay. If I could, just a quick question for Tom. I noticed unrealized gains were up quite a bit in the quarter to the highest level we've seen in some time, looking at page 17 of the supplemental. Just a couple of questions on the back of that. Is that just on the back of lower rates? Might this imply that we'll see a rise in securities gains in future quarters if rates stay low? I also noted a footnote suggesting some of these gains may be offsetting certain hedges. A little context there would be helpful, Tom. Thanks. Sure. The unrealized gain number is up significantly, as you said, to $850 million from $450 million. The lion's share of that is simply driven by lower rates positively impacting fixed income portfolios, and the majority of the portfolio would be hedged with derivatives. I wouldn't read anything into this increase as it relates to an expectation for higher security gains going forward, given that most of the portfolio is hedged on an all-in basis. Thanks for that. Thank you. The next question is from John Aiken from Barclays. Please go ahead. Good afternoon, Surjit. The point that you made was that there really was no real impact on credit quality, and I do not think anyone was terribly surprised by that. But when we look at the loans past due, not impaired, we did see a significant uptick, particularly in the bucket over the last month. I know this is early days, but does a lot of that, particularly on the consumer side, is that largely concentrated in Alberta, or are there other factors at play here that I may not have drilled down to well enough? Okay. Thank you. Let me start out by saying that whenever a quarter ends on a weekend, it is not unusual to see the early-stage delinquencies to go up, and they generally get resolved right after the weekend. That has been the case with most of the delinquencies that we saw going up in this quarter for us. Having said that, we have not seen yet any delinquency increases in the regions where unemployment is expected to decrease as a result of oil prices or where unemployment is high right now. But needless to say, we are watching very carefully given the economic environment and the economic factors that are taking place, but nothing observable at this time for us to be able to report on it. Great. Thanks, Surjit. Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead. Good afternoon. Just on the expense commentary that was made earlier and how that's underpinning part of your strong second half outlook for the Canadian P&C business, can you give me a sense of what your core expense growth can be in that business? And maybe at the consolidated level, what kind of expense growth the bank can sustain considering initiative spending and regulatory costs? How much of that has become a permanent cost structure? Gabriel, it's Cam Fowler speaking. Thanks for the question. I'll start, and then I'll pass it to Tom. If you look at the expense growth in the Canadian business, it's relatively evenly split between our priorities around customer growth, the digitization of our bank, and some of the regulatory capabilities that we've been pursuing recently. We also have the employee cost in the first quarter, which you're well familiar with. So those are all built-in. When I think about the question with respect to sustainable cost for the Canadian business, I always have in mind the relative revenue opportunity that's in the market right now. In a slightly lower growth environment, my number's probably a little bit lower. So numbers between 3.5, 4 and change seem to me to be the types of numbers we should be aspiring to. I would expect that as the year goes by, we travel towards those types of numbers in the Canadian business. Okay. Tom, maybe you would answer the enterprise question. Yeah. For the enterprise, I would say a few things. As we look forward, we will be managing expenses tightly across the bank. We are expecting moderate expense growth from current levels over the balance of the year. in Q1, as you know, we had the eligible to retire, which increases the expenses in the quarter. Yep. Without those next quarter, we would expect the expense level to be down, and expense growth for the year to be adjusting for the currency, which is significant in the lower single digits. Okay. And maybe for Tom or Bill, I do not know, maybe there is a sense of impatience out there to see the banks pull back on cost because what we see in the press really, about the slowing Canadian economy and the actions by the Bank of Canada tied to weaker GDP growth prospects and the disconnect between all that and the expense inflation we are seeing at the bank. I guess my question would be, how much lower do they have to get from what we are seeing today before BMO or the industry really hunkers down on cost? I am just curious about that. Maybe I will take a shot at that question, Gabriel, because it is one that we do give considerable thought to. The investment spend that the industry is making, and specifically that we are making in technology to track the change in consumer behavior as mobility more online ramps up, and it is ramping up relatively quickly, it is not a tap that you turn off and turn on intermittently. I think that those expenditures, you really have to look at a 12-month or 12 to 18-month time horizon to think about ramping them up or down. And in the end, I would expect that the economies that come from many of those changes will start to track in relatively soon. I think we are going to see the benefits of some of that elevated investment, both in consumer satisfaction, the ability to originate more business online, and just a streamlining of operations. On the broader question of the management of information in response to the appetite that global regulators have for granular data, I think that we are probably, as an industry, 75% or 80% of the way through that process. So, I think looking out late 2015 into 2016, you will also see some benefits. I think your underlying question is if economic growth were to slow to real growth, were to slow to zero- Right would we continue with the level of investment and expenditures that we have? And I think, candidly, we do not think that is a high probability scenario, but if that were to occur, I think the response would be to simply slow down the rate of investment, extend the investment period out over two or three years instead of the time horizons that we now have. So I do think that there is the ability to adjust should economic growth slow more than we have in our plan. But I think Tom's comments with respect to expense growth really relate to an overall belt-tightening in the current environment and extracting some economies from the investments that we are making. Great. Thank you for that. Appreciate it. You're welcome. Thank you. The following question is from Robert Sedran from CIBC. Please go ahead. Hi there. Just as a quick follow-up, and I hate to keep flogging the same issue, but I think there's a bit of a dislocation in that the market is kind of expecting the second half of the year to be harder than the first half of the year. Is the message from BMO basically $40 to $50 oil, interest rates do what they do, you're comfortable that your second half is going to look better than your first half, there's no real storm coming? Is that the message we're supposed to take away from this? It's Tom. I don't think we're expecting a big storm. We're not expecting a big storm. Clearly parts of the country are adjusting to the lower price of oil. There will be some credit losses there, but we're not seeing signs of those yet, and we don't expect them to be problematic. In P&C Canada, as Cam has talked about, we see things in the business that lead us to believe that we've got upside in the second half relative to the current quarter. As well in Capital Markets, at the end of last quarter, we talked about how we expected Q1 to be up from a relatively weak Q4, but not fully back to normal. I think that's what you saw this quarter. The earnings were better than the fourth quarter, which we expected them to be, but not fully back to the average level of last year, in part because of some valuation items, and in part because investment in corporate banking is a little softer. As we look at the business, we certainly think that we've got upside from the Capital Markets number that we recorded in this quarter. Okay. That actually just takes me to the next question I had. Thanks for the color, Tom. The CVA, FVA impact in the quarter, how much of that was FVA? I was under the impression that last quarter was the vast majority of the impact, and going forward, it would almost not even be worth talking about. Was I wrong on that? The majority of the combined impact was CVA. There was some FVA, but it was in the clear minority of the total. The combined was above average, as you know, in part because this quarter, credit spreads widened. Given the move in the FX rate, some of our exposures increased. Those two things drove a larger than normal increase, and most of that was driven by the CVA, which really wouldn't be atypical because CVA is sensitive to counterparty credit spreads, which were out in the quarter and exposure size. Following those credit spreads is the best way to try to figure this out and not worry too much about the FVA. Is that fair? That's fair. Okay. Thank you. Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead. Hi, good afternoon. Questions about the U.S. business. Talk about margin pressure coming from competition in business. I am just wondering if you could give us a little more detail in terms of the mix there. What was driving the decline in the margins? The second question is just on the expenses down 2% year-over-year in the U.S. I am wondering what is driving that. Is that something that you see as a positive for looking forward over a number of quarters? Okay. First let me do margin. We had really strong loan growth again, particularly on the commercial side, and it is diverse. It is across markets and segments. As we continue to grow that portfolio, the new loans that we had come on it spreads a little bit less than the spreads that are in the portfolio today, and there is a little repricing that takes place as well. But that is just kind of the normal competitive pressures in the U.S. I do not think there is anything unusual to that. In fact, we looked at our peer group, and our loan growth was substantially stronger than our peers in the U.S., and we had just a couple basis points more margin pressure than they had. So that is what was going on with margin. From an expense standpoint, we are very focused on managing our expenses very well, and we will continue to pay a lot of attention to that throughout the year. As you saw, the operating leverage popped, and that is going to move around a little bit during the year. We will be attentive to that as well. We are not in a downward trend on expenses. There is always a little bit of timing from quarter to quarter. But we are going to be conscious of what the growth and expenses looks like on a year-to-year basis but manage it tightly. If you look across our quarters that are in the supplementary package, you get a pretty good sense of what the run rate of expenses are. While it moves around a couple million dollars, we think we have found a pretty good place, and we think we can manage it relatively tightly, though it will move a little bit in between the quarters. So there's nothing in terms of notable initiatives that are part of this quarter? Well, no. I think we always have initiatives underway to try and manage the expenses, but there isn't any initiative other than trying to be better at what we do and more efficient at what we do. And inside different business lines, there are various initiatives, but not one of those things that you'd read about in the newspapers, but just the things that it takes to be better and better at your business every year. Okay. Thank you. Sure. Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Good afternoon. I have a couple of questions. I think most of these can go through fairly quickly. Mortgage delinquencies in Canada did seem higher, but I suspect this is mostly seasonality. Is that fair? No, I wouldn't say it's seasonality. You've got to look at it in the context of where they've been in the past. Actually, when you look at it on a year-over-year basis, I think they've come down three points. Right. Talking Q over Q. When you look at the trend, it's very much in the range that one would expect right now. So I wouldn't consider that seasonality, nor would I consider this blip anything indicative of where the losses are because we're not seeing any losses increase either at this point. Okay. But you acknowledge that quarter-over-quarter, the delinquency was up a little bit in Canada. That is correct. Okay. But I wouldn't think it is. 3 basis point change is not that significant. Moving on to oil and gas. I see that the drawn is up, the undrawn is also up, and it's the undrawn that surprised me a little bit. So maybe the question is, did the drawn increase essentially from taking down the undrawn? Is that what we're looking at? No. It is a combination. There are two or three things that happened. One, we have the FX rate as well. That takes care of, I think roughly about a third of the change would be because of FX, because FX did change the drawn and the undrawn amounts almost in a similar fashion. That said, we did have some new drawings. In our existing borrowing from our existing borrowers, and then there were new loans. I think all in all, it is a combination of those three factors where new commitments and FX cause a little bit of a higher undrawn balance. Okay. Liquidity seemed a lot higher this quarter. Things like repos available for sale, securities, cash. Is this just normal business activity or is there something special going on? It is Tom, Mario. It was normal business. The two largest drivers were number one, the change in the U.S. dollar, and a decent portion of the liquidity is in U.S. dollars. Then secondly, Q4 is a bit of a seasonal low point from a liquid asset perspective, and so there was a bit of a bounce back given that. And then just finally on the ROE, maybe this is a little more of a detail question. The company's outlook for the ROE or guidance or whatever is materially higher than the ROE we've seen this quarter and in prior quarters. That 15% ROE, is that even a realistic outlook in the near term or even in the medium term? It's Tom. So a few things. The ROE in the quarter, in part reflects the significant increase in book value that we saw. That increase relates in part to the higher carrying value for our foreign investments in OCI. With that, the book value per share is up 10% in the quarter, which is nice. The higher book value insulates the capital ratio from the higher Canadian dollar value of the U.S. risk-weighted assets. With the higher book value, the ROE has a bit of a negative impact. Some of that will flow through to next quarter because the period end book value is higher than the average for the quarter as a whole, given when the currency moved. With the higher book value, I'd say the target range that we have out there will take a little longer to achieve and clearly will be pretty tough in the current year given where we are. But we remain committed for working towards that number in the midterm, and those numbers are midterm target numbers that we've put forward. So that's how we think about it. Okay. Thank you. Thank you. The next question is from Brian Klock from Keefe, Bruyette & Woods. Please go ahead. Good afternoon, and my question is for Surjit. Surjit, again, I guess sort of a follow-up here on the oil and gas side. In Canada, I guess forgetting about the FX impact, it did look like you had about CAD 500 million, CAD 600 million of oil and gas increase there on the drawn. I guess how much of that was E&P and upstream versus the oilfield services? Do you have that breakout available? I don't have an exact breakdown of the two, but a lot of it was E&P, and a lot of it was investment grade. Okay. Then a follow-up question for Mark Furlong, and I'm sorry if I missed this, but I guess what are your expectations for loan growth and the NIM for the next two or three quarters this year? Well, on loan growth, I think we feel pretty good about what we've done, particularly on the business side and on the commercial side. I'm not sure that we're good enough to predict percentages, but we continue to feel that we'll get some good growth through the rest of the year and consistent with some of the trends we've seen in the last few quarters. I'd say we feel pretty positive about that. On the consumer side, I think as the consumer picks up in the U.S. we'll see a little bit of expansion there, but right now it's just down slightly on the quarter, and the near term that probably doesn't change. Maybe by the back half of the year we'll see some growth there. From a NIM perspective, as I mentioned in the first conversation, we expect that we'll continue to have some modest downward pressure on NIM, though not to the extent that we saw this quarter. However, the other side is that there are some upside benefits that we'll see when the Fed begins to raise rates at some point down the road. Okay. Appreciate it. Thanks for your time. Thanks. Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead. Hi, I guess a question for Darryl. I thought trading revenue looked pretty good this quarter, particularly in equities. I mean, underwriting revenue actually didn't seem that bad given what was going on in the quarter. Maybe each, what's your outlook for each in 2015? Well, thank you for the question. I think the trading revenues, in fact, were quite good in the quarter. We were pleased with the revenue in the business. I'd point to a couple things. The rates, if you're in the supp pack, you'll see that the rates revenues were decent, and the numbers that you see in there are after the impact of the valuation adjustments that Tom summarized before. It was quite a good quarter in rates. It was also good in equities. In equities, as you know as we've said before, in some quarters we have client activity which is lumpy in nature, and some quarters we don't. In this quarter we happen to have a bit of that, and if you look back over history you see that that jumps around. I think when you put the two of those things together, it was quite a good quarter for us across the trading businesses. You asked a question on outlook. That's obviously a much harder question to answer. It'll depend on market conditions. Assuming stable market conditions, we're confident in the outlook for the rest of the year. Just turning to underwriting, what industry segments did your revenues come from in this quarter? We don't break that down specifically, but I guess what I would be comfortable telling you is that it was fairly well diversified, and frankly, a better balance than we've seen in the past, which you might expect with a pullback of some of the resources revenues. We saw a fairly diversified set of underwriting revenues across different asset classes as well as across geographies. Okay. I don't want to corner you into guidance, but assuming we get a Obviously, the oil and gas sector isn't going to be great this year, but other sectors might do better because costs go down, energy costs. Assuming that sort of scenario plays out, and we have pretty decent growth in the U.S., you're pretty confident in your ability to deliver underwriting revenues in and around where we've been this quarter? Well, yeah. When I step back and look at the underlying performance of the quarter, and if you look at our revenues overall, you see the underwriting revenues, you see the trading revenues at $921 million of total revenues. That includes the impact of the valuation adjustments. If you excluded that impact, you'd see that our total revenues are, in fact, better than the average of what we had last year. When I look at the operating potential of the business going forward, yeah, it's pretty difficult to call quarter to quarter as you'd imagine, but we had said at the end of last quarter that we expected a better performance in this particular quarter, and I guess I would say over time, I would continue to be confident in that statement. All right, thank you. Just Tom, what was the methodology change for RWA? The methodology change related to continue to move a portion of our U.S. portfolio towards full AIRB treatment away from standardized. Similar in character to what we saw last quarter. How long does that go on for? It can vary. I think our advice would be look at the number we had this quarter. We're happy to have it this quarter, and I wouldn't necessarily bake anything into the future. That said, we're not fully phased in on the AIRB at this point. In the United States. Correct. All right. Thank you. Thank you. The following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead. Thanks. Tom, you talked about the ROE target being probably more of a medium-term target now. You also have some EPS growth targets out there and operating leverage numbers out there. How do you feel about the shorter-term achievability of those types of targets out there? Well, I guess the first thing I'd say is we explicitly don't give short-term guidance, and they're mid-term guidance figures. We've described the way we feel about the year on this call and on the last quarter. We're always working hard to achieve positive operating leverage. Some quarters are easier than others. But I'd say for the year, we're absolutely focused on that across the bank and across our operating groups. On the earnings target side, I'd rather not be any more specific than pointing to the mid-term nature of the target that's out there. Okay. If I was just going to ask the question slightly differently, which one of these three medium-term targets would you say are the most difficult to achieve? Which one would it be, do you think? I think that takes your question back to the first question. Okay. Thank you. Thank you. The following question is from Darko Mihelic from RBC Capital Markets. Please go ahead. Hi. Thank you. Excuse me. Just a question on the card revenues. You pointed to two things that caused them to be a little bit under range, I suppose. One is customer behavior, I guess less purchases, and then I guess on the corporate side, there were higher rewards costs. If I were a conspiracy theorist, I might think people are using their points to buy groceries, and they're also using their card less because they're nervous about the future. Do you have good data capture? Is any of this actually happening in certain geographic regions, or is the data capture just not good enough to dispel that conspiracy theory? I would say it's early days, Darko, on that one. It's not totally clear what has gone on over the last 90 days or so. I referenced one thing that we're clear on, which is slightly different spending behaviors in terms of both what's being bought and where it's being bought compared to what we might have anticipated. We don't have a longer data set on that just yet, and so we'll see. I think regardless, the fundamentals for our business are as I described, which is the ability for us to activate on the premium side the new accounts we brought on last year and to do a really good job on the core of our business in the next 12 months is what's best for our business, and behavior will be what behavior will be. We'll see. I still do see there to be meaningful upside for us in the payments business towards the back half of the year. What about actual pickup of new accounts? Has that slowed as well? It's down just a little bit. It's not a big number. On the premium side, we wouldn't have expected the growth in new accounts over the last few months to be quite as large as it was over the 12 before, just because we're not in the market quite as loudly. But it is going quite well. More recently, growth in originations in the branch and online are picking up. I would say it's a balanced and sort of normal year with a slightly slow start. Okay. Thank you. I don't know if I picked up, Surjit, did you mention the watch list, if there's any increases in the number there? No, there is no increase there. Okay, great. Thanks very much. Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead. Actually, one of my questions was asked, but I figured I'd ask about the buyback. You were pretty active during the quarter. Do you expect to remain as active in 2015? It's Tom. I won't answer the specifics of the question, but we were active in the first quarter as you saw. The capital ratio continues to be very strong, so I would say based on our actions in the past and the strength of the ratio, it wouldn't be unreasonable to assume that there would be some level of activity under the buyback over the next couple of quarters. Okay. Just another one on the cards, different type of question, though. A few of the banks have reemphasized. Well, last year was the year of the higher-end card initiatives, and it seems like there's more of a shift towards the lower end of the market, and cashback cards as well. Do you have any initiatives there that you're undertaking? We have several product activities underway that you will see come to market through the course of the year. We like cashback. Okay, thanks. Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead. Good afternoon. A question for Tom Flynn. Page 11 of your report to shareholders, you refer to potential application of Basel III floor for RWA. What would be helpful to understand there is, are we talking about mortgages, like a RWA floor for mortgages, or what products are we talking about? And does this really matter? Because it is impossible for us to think about how big this is, how important this is to the bank. Yeah. So we added that comment to the disclosure, and really, rather than referring to any particular product, we are acknowledging a discussion that is going on among regulators globally related to the extent to which risk-weighted assets are model-based versus standardized factor-based, and the extent to which you use floors when using models. Really, we are not saying that we think this will be a really big issue. We are just acknowledging that there is a debate going on, and it is something that we are watching, and it could be of interest to people. Really nothing more than that. On the mortgages specifically, I guess the only thing I would add is, as you know, the majority of the Canadian portfolio is government-insured, and I would say we have no reason to think that the risk ratings related to government-insured product will change. We are totally comfortable with that. Am I right in saying that it was just a couple of summers ago that OSFI's position on floors for mortgages was clarified, insofar as saying there was no intention of doing so? Is that a fair statement? I forget the exact timing, but there was a clarifying statement to that effect that was made, slash, I think that is the message that people took from comments that were made. They have expressed that point of view on the topic. Okay. Then finally, IBG loans up 11% quarter-over-quarter. I think a lot of that is currency. Anything else? You got about half of it right there, Mario. It's about half currency and just half fundamental growth in the business. Thank you. Thank you. This concludes today's question and answer session. I'd like to bring you back over to Ms. Sharon Haward-Laird. Please go ahead. Great. Thank you, everyone. We're happy to take any follow-up calls in investor relations. With that, we'll end the call. Thanks, everyone. Thank you. The conference call has now ended. 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