Earnings Call: Q1 2013

Feb 26, 2013

Good afternoon, and welcome to the BMO Financial Group's Q1 2013 earnings release and conference call for February 26, 2013. Your host for today is Ms. Sharon Haward-Laird, Head, Investor Relations. Ms. Haward-Laird, please go ahead. Thank you, operator. 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, I would ask that you please keep it to one or two questions and then re-queue. Also with us this afternoon to take questions are BMO's business unit heads, Tom Milroy from BMO Capital Markets, Gilles Ouellette from the Private Client Group, Frank Techar, Head of P&C Canada, and Mark Furlong, Head of P&C US. 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. Information about material factors that could cause results to differ and the material assumptions underlying these forward-looking statements can be found in our annual MD&A and our first quarter report to shareholders. With that said, I will now hand things over to Bill. Thank you, Sharon, and good afternoon, everyone. BMO had strong first quarter results. Our focus on customers, efficiency, and prudent risk management continues to serve us well. This is reflected in the financial performance underpinned by good operating group performance and also in the progress we've made in advancing our strategic agenda. Reported net income was $1 billion or $1.53 per share. On an adjusted basis, net income was also $1 billion, $1.52 per share, 7% ahead of last year. Revenues increased to $3.9 billion and ROE was 14.8%. Progress was particularly evident in our U.S. businesses. Personal and Commercial Banking U.S. had very good adjusted earnings and loan growth in the quarter. We focused our collective efforts on growing BMO's customer base and capturing opportunities in our redefined home market, and we've been highly visible in the Midwest, increasing our advertising support post-integration. Wealth management and capital markets businesses in the U.S. also had good quarters. We are seeing the benefits of disciplined expense management as we continue to focus on efficiencies to find ways to deliver superior service to our customers and to drive performance across the bank. Excluding costs related to employees eligible to retire booked in Q1, adjusted operating efficiency improved for the bank and all the business groups quarter-over-quarter. Core credit performance was good. Provision for credit losses was down sequentially and relatively stable year-over-year. Our Basel III common equity Tier 1 ratio was 9.4%. We increased our quarterly dividend by 3% to CAD 0.74 a share, reflecting our strong capital position and the success of our business strategies. We delivered adjusted earnings of over CAD 1 billion for the third consecutive quarter. We also gained market share against the backdrop of a cooling housing market in Canada, moderate consumer spending, and continued government restraint. The U.S. economy is gradually improving, led especially by a rebound in housing. Looking ahead, we are optimistic about the opportunities for growth and expect the economy to improve in our markets throughout the year. BMO is very well-positioned in this environment with a proven strength in commercial banking across our large North American platform. Turning to the operating groups, P&C Canada's adjusted net income for Q1 was CAD 461 million, up 4% from a year ago. Loan growth was robust with the total portfolio up 9%. The lift in commercial lending was the strongest we have seen since 2008. In personal banking, we are seeing the payoff from our focus on sales force productivity, which has improved over the past few years with our frontline selling significantly more. We are booking more appointments and having better quality conversations with our customers. We are generating good results in the areas we are focused on while continuing to increase customer loyalty that will support future growth. P&C US adjusted net income was USD 197 million in source currency, up 25% quarter-over-quarter and 13% ahead of last year. As I mentioned earlier, our loan book had very good growth, up USD 800 million or approximately 2% from the fourth quarter. We continue to drive good balance sheet momentum in this business. Core C&I loans were up USD 3.3 billion or 18% from a year ago, and total deposits have increased by USD 1.3 billion. We have strong deposit share in our key Midwest markets that positions us well and provides a source of competitive advantage. Our ongoing campaign to introduce BMO Harris Bank across our expanded U.S. footprint is driving customer recognition and producing good results. Here are some examples of how creative brand support is resonating with customers. In Milwaukee, just a few weeks into our newest advertising campaign, brand awareness of the bank has increased significantly. In Minneapolis, frontline staff are telling us ad recognition has brought customers into branches to open new accounts. We premiered BMO advertising at the Super Bowl with good coverage in our U.S. regional markets and across Canada. BMO Capital Markets delivered Q1 adjusted net income of CAD 310 million, with ROE of 21.3%. Results were highlighted by strong revenue growth driven by M&A activity, debt underwriting, and trading revenues. The 56.9% efficiency ratio reflects improved expense management. Private Client Group produced first quarter adjusted net income of CAD 169 million. Traditional wealth was up 36%, excluding a gain on strategic investment last year, and insurance rebounded to a more normal level. Results benefited from higher revenue driven by growth in client assets and focused cost management. While continuing to post strong financial results, we are making particularly good progress in two areas that are strategically important, institutional asset management and private banking. Consolidated under one platform, BMO Global Asset Management has traction. We continued to add new asset classes, investment capabilities, and distribution in North America, Asia, Europe, and the Middle East, resulting in continued net asset inflows. We have grown to more than 120 billion in AUM, earning a place in the top 100 worldwide rankings. In private banking during the quarter, we completed the acquisition of a Hong Kong and Singapore-based wealth management provider and are now operating as BMO Private Bank Asia, providing services to high-net-worth clients in the Asia Pacific region. With experienced private bankers and a well-developed universe of products, our clients will benefit from our investment expertise and an integrated platform that bridges North American and Asian markets. Looking ahead, this corridor creates opportunities for growth. We also continue to make progress with capital markets client coverage efforts in Asia, best demonstrated by recent high-profile advisory mandates and successful transactions completed by our clients. In sum, we had a strong quarter and demonstrated continued momentum in commercial banking on both sides of the border. Commercial banking is an important contributor to the performance of the bank, positioning us well in an environment of business expansion. At the same time, we are maintaining prudent risk management and improving efficiency. We are seeing the payoff from the investments we have made in our U.S. businesses with operating leverage from an expanded platform. As we look forward to the rest of the year, we will continue our focus on delivering industry-leading customer experience, helping businesses expand and customers control their financial lives, allowing them to make better decisions with better information and have confidence in the choices they make. With that, Tom, I will turn it over to you. Thanks, Bill, and good afternoon, everyone. I will start on slide 8. BMO had a strong first quarter with good operating group results. Reported net income was $1 billion, 48 million. On an adjusted basis, net income was $1 billion, 41 million, up 7%, and EPS was $1.52, also up 7%. ROE was 14.8% on a very strong capital position. Each of our businesses showed continued momentum in the quarter. There was strong loan growth in both personal and commercial in Canada and in core C&I in the U.S., and the Private Client Group and capital markets had strong quarters. Our retail businesses contributed over 75% of operating group revenues. As you have seen, beginning this quarter, we changed the way we report our operating group segments to reflect provisions for credit losses on an actual loss basis in each segment. Previously, we had charged the operating groups with credit losses on an expected loss basis. This change will help with comparing our segment results to other banks. Prior period results have been restated for the change. We continue to record all acquisition credit-related items in the corporate segment. Items removed to arrive at adjusted income were similar in character to prior quarters and totaled just $7 million. Slide 30 shows details on the adjusting items. Moving to slide nine, adjusted revenue in Q1 was $3.9 billion, up 3% year-over-year and slightly down from a fourth quarter that was strong. Adjusted net interest income was up 2% quarter-over-quarter, benefiting from growth in all operating groups, particularly BMO Capital Markets. Year-over-year, net interest income declined 4% due to lower NIM in the P&C businesses and higher than usual revenue from our strategic investment in PCG last year. Adjusted NIM, excluding trading of 203 basis points, was up one basis point from last quarter on better capital market results. Adjusted non-interest revenue was up 13% year-over-year on good capital market performance and improved insurance revenues. Quarter-over-quarter was down 5% due to lower trading revenue and insurance results, and corporate was also down due to a variety of items, none of which were individually significant. Turning to slide 10, Q1 adjusted expenses of $2.5 billion include $73 million of compensation for employees eligible to retire, which is expensed in the first quarter of each year. Excluding these costs, adjusted expenses declined 2% quarter-over-quarter. The efficiency ratio improved and operating leverage was positive. Year-over-year, adjusted expenses increased largely due to higher employee-related costs, including performance-based compensation given higher revenue. As shown on slide 11, capital ratios strengthened in the quarter. Effective Q1 2013, regulatory capital ratios are determined on a Basel III basis. With a Basel III common equity ratio of 9.4%, BMO's capital position is strong. OSFI's deferral of the effective date for adoption of the credit valuation adjustment RWA improved the ratio by approximately 35 basis points in the quarter. Moving to slide 12. In Q1, P&C Canada adjusted net income was $461 million, up 4% year-over-year. Results reflect a combination of good volume growth, lower credit provisions, and lower margins. Loan growth was strong in the quarter, with total loans up approximately 9% from last year. There was also good sequential loan growth of over 2% for the third straight quarter. NIM compression moderated this quarter, with a decline of three basis points being primarily due to changes in mix, including loan growth exceeding deposit growth and lower deposit spreads in the low rate environment. Lastly, expenses were relatively flat, reflecting active expense management with selective investment being made in the business. Moving to slide 13, P&C US adjusted net income was US $197 million. Loan loss provisions were down significantly in the quarter to US $33 million. The combination of low credit losses and good non-interest revenue this quarter produced very strong results. Revenue of US $755 million was up 1% quarter-over-quarter due to higher gains on the sale of originated mortgages and strong commercial lending fees. NIM was down nine basis points from Q4, primarily due to lower deposit spreads and changes in mix as loan growth exceeded deposit growth. Adjusted expenses were down primarily due to synergies net of investments being made in the business. The efficiency ratio improved to 57.1% in the quarter. Loans and source currency were up 2% quarter-over-quarter. Loan growth exceeded runoff for the first time post-acquisition. Core C&I loan growth continued to be strong with balances up 7% quarter-over-quarter and 18% year-over-year, and the pipeline remains strong. Turning to slide 14, BMO Capital Markets delivered very strong results, with net income up CAD 310 million and ROE of 21.3%. Earnings were up 38% year-over-year and in line with the good results of the fourth quarter. The performance compared to a year ago reflects good execution, the benefits of diversification, and a better environment. The efficiency ratio improved quarter-over-quarter and year-over-year to 56.9%. Turning to slide 15, Private Client Group adjusted net income was CAD 169 million, up 54% year-over-year and in line with the fourth quarter. These results are consistent with our view of the underlying earnings potential of the business. Revenue was up 12% from a year ago, driven by a bounce back in insurance results, largely due to a lower impact from long-term rates. Wealth results in PCG were up 8% year-over-year and up 36% excluding a gain on a strategic investment a year ago. Assets under management and administration of CAD 479 billion were up nicely, 10% or CAD 44 billion year-over-year and 3% or CAD 14 billion quarter-over-quarter. Turning now to slide 16, corporate reported a net loss of CAD 65 million and CAD 95 million on an adjusted basis. Adjusted revenues were down year-over-year and sequentially. Contributing factors included lower security gains, a higher TEB gross-up offset in the current quarter, and a variety of items, including treasury-related items, none of which were individually significant. Adjusted recoveries of credit losses were down, reflecting lower recoveries on purchase credit impaired loans. As a reminder, we record all acquired loan credit accounting items in the corporate segment. Adjusted expenses were higher primarily due to increased benefits costs, including pension costs, timing of technology investment spending, and higher severance. To conclude, we had a strong start to the year and feel good about our operating group performance and momentum. With that, I will turn it over to Surjit. Thanks, Tom, and good afternoon. It has been another good quarter from a risk perspective. Referring to slide 19, specific provisions excluding the purchase portfolio were CAD 155 million, down from CAD 245 million in the prior quarter. This improvement is the result of higher recoveries and reversals and a decline in new reservations. As a reminder, last quarter provisions were elevated based on regulatory guidance relating to certain performing U.S. consumer loans. The improvement we had this quarter was evident across major businesses in both Canada and in the U.S. Provisions for the purchase performing portfolio at CAD 82 million were up CAD 17 million quarter-over-quarter after adjusting for last quarter's regulatory guidance. As I said in earlier quarters, there will be timing differences between when losses occur and when we recognize income from this portfolio. We continue our proactive management of the purchase credit impaired portfolio, resulting in a recovery this quarter of CAD 59 million. This portfolio is now down to roughly 40% of its original size. Our strong workout skills and loan sales capability will ensure a satisfactory resolution to this portfolio. I have mentioned on previous calls we have been managing down this portfolio, and as the portfolio shrinks along with the associated mark, future recoveries will moderate from last year's levels. Total impaired formations at CAD 630 million are slightly lower this quarter after excluding last quarter's CAD 142 million from previously mentioned regulatory guidance. Looking at the trend on slide 20, it would appear that formation peaked in the second quarter of 2012. Excluding purchase portfolios, total gross impaired loans declined this quarter, as did the ratio of impaired loans to gross loans and acceptances. The ratio now stands at 0.8% versus 1.02% in the first quarter of last year. In closing, we are encouraged by the reduction in provisions and increase in recoveries. We are comfortable with our risk profile in both Canada and the U.S., and we believe are well-positioned in the marketplace. I'll now turn over to the operator for the question and answer portion of today's presentation. Thank you. We'll now take questions from the telephone lines. If you're using a speakerphone, please lift the handset before making your selection. If you have a question, please press star one on your telephone keypad. At any time, you may cancel the question with the pound sign. Please press star one at this time if you have a question. There will be a pause while participants register for questions. Thank you for your patience. The first question is from Gabriel Dechaine from Credit Suisse. Please go ahead. Hey, good morning. Just wanted to first ask you about, or sorry, good afternoon, the Canadian retail margin. So three basis points of decline sequentially. That's about half of, or less than half of what we've seen over the past three quarters. I'm wondering if you think there's a sustainability to that number. What's changed? I think commercial deposit growth was pretty good, and you cited that as a factor to stabilize the margin, if that helped at all. Then also as the balance sheet makes changes, particularly in mortgages, what's the cross-selling success kind of been? Actually, I'll throw in my last one here. The assets to capital multiple jumped up a little bit, and you cite Basel III transitional modifications. Is that a BMO specific issue? Can you kind of delve into that a little bit? Hey, Gabriel, it's Frank. I'll start, and since you took the liberty of asking three questions, I'm going to take the liberty of maybe answering more than what you asked. Go for it. We had a solid quarter in P&C Canada. Our net income, as you saw, was up 4% this quarter, and we continue to have the confidence in our strategy. There's no doubt it's a challenging environment, but we are continuing to build a better business in P&C Canada, and I think you'll have noticed that the balance sheet growth this quarter is very strong. Our consumer loan growth was up 9.5%. Our large commercial business is strengthening. Deposit growth was up 6.3%, the strongest we've seen in a year, and loan growth was 9.4%, which is the strongest, as Bill mentioned, that we've seen since 2008. On top of that, mutual fund growth was 12.8%, and as you point out, our margin declines are moderating. Consistent with what I've said in previous quarters, we expect to see continuing moderate declines in NIM over the next few quarters given the environment that we're operating in. The reason we are seeing moderation is the mix is changing in the balance sheet. We are seeing more growth in loans with higher spreads, and we would expect that to continue in future quarters. Relative to cross-sell, I think I've mentioned this in previous quarters, our five-year fixed, 25-year am mortgage product was very successful last year in bringing new customers into the company. In fact, for every one that took that product last year, about 40% of them were new customers to BMO. For those new customers coming into BMO, we sold in excess of two other products to them. We know that is one thing that's contributing to the growth that we're seeing overall in the balance sheet. As we continue to bring those customers in, I have a huge amount of confidence in our sales capabilities in our branches at this point. Okay, it's Tom. I'll answer the assets to capital multiple question. The multiple that we're showing on our slide 11 is the Basel III multiple. We're transitioning in under the rules, which means that we're including all of our capital with the non-common capital being subject to the phase-out rules that are applicable under Basel III. The ratio moved up a bit in the quarter, and that's a function of having asset growth in the quarter and also one redemption of a capital security. I'd say nothing unusual in terms of the movement and nothing unusual in terms of how we will look at this ratio versus others. Okay. Thank you. Thank you. The next question is from Sumit Malhotra from Macquarie Capital Markets. Please go ahead. Good afternoon. My questions are for Surjit, and if we start with the repurchase credit impaired portfolio. Last quarter you answered one of my questions on the call by saying you would think CAD 200 million to CAD 250 million would be an estimate for what we could expect in recoveries from that portfolio, but there was no real basis behind that estimate. Three months later, I am sure you have had a chance to think about that estimate and was hoping you could give us an update on what you are seeing there, taking into account those statements that the book is down to 40% of the original level. Yeah. Let me start out by saying, the reason I said there was not much of a basis is because the strategy that we are adopting is one of value maximization. I did not want to give you a number and then put myself under pressure to deliver a number because we would like to get the best we can for this portfolio. My guidance has not changed. I still believe that the number I gave you before would hold. That is about it really, Sumit. Well, let us stay with credit for a second because I think we can agree that there has been differing treatment on how people look at the earnings results, whether the purchase credit impaired should be core or not. Maybe let us not go into that. If I look at the adjusted provisions, as you call them, X of the PCI recovery, there is still a pretty substantial decline on both the quarter-over-quarter, year-over-year basis. I think it is CAD 90 million sequentially. When I hear your comments on the core part of the portfolio with provisions down in each of your segments, formations relatively stable, am I right to say it does not seem like you are of the view that there is going to be a material change in the non-PCI portion of your credit portfolio in terms of losses? Yeah. Let us examine the numbers a little carefully because you are right in focusing on the non-PCI or purchase portfolios. When you look at our current quarter, most of our provisions relate to the consumer book because we have had very good recoveries and repayments, as well as lower provisions in our commercial and corporate books, particularly in the U.S. If you look at the chart, you will see negative numbers over there. While the economic environment continues to improve, you do know that when you are talking about commercial or corporate, given the nature of that business, it always introduces an element of variability. The sense I can give you is that we certainly are having a much better year than last year when it comes to PCLs for our core book, if I can call it that. We will definitely do better than last year, but there will be quarter-to-quarter variability. At 24 basis points, I think we had a good quarter last quarter, and I would expect that if the market doesn't deteriorate, we will have good quarters going forward. Thanks for your time. Thank you. The next question is from John Aiken from Barclays. Please go ahead. Good afternoon. With your outlook for both the interest rates from the Fed and the Bank of Canada remaining stable through the remainder of the year, is there anything that we can actually do to stem the margin compression, or are we going to continue to see this tick down on both sides of the border? John, it's Frank. I'll just reiterate what I said a minute ago. In Canada, at least the P&C business, no change from what we've seen in the past. We expect continuing moderate declines in NIM over the next few quarters. Without a change in rates, I think we're in that environment for the foreseeable future. Thanks, Frank. It's Mark Furlong. On the U.S. side as we talked last quarter, we said we expected about a five basis point decline due to the low interest rates on deposits, and we're still sticking with that. Two basis points was really related to conversion, just the machinations you go through in kind of resetting some of the stuff we were doing. That won't repeat. The other two basis points was extremely strong C&I loan growth. When you look at the portfolio, the new business we're generating has spreads that are under our current margin, so necessarily that would have a little bit of drag on the margin. But we see that as a positive because that's growing relationships and growing the business. So there's kind of give and take to that. If that's the driver the rest of the year, that's probably a pretty good driver of growth for the business. Mark, on the C&I growth, the margin or at least sort of the margins you are pulling in, is that competitive pressures, just the environment? On the competitive side, are you seeing competitors actually do anything on the covenant light side that is giving you pause? Our spreads in commercial were stable this quarter. It is just that they are not at the 400 basis point level of the current margin right now. So that just kind of gives you a sense of what is going on competitively, at least where we have chosen to compete. From a competition standpoint, I think if you are in the large leverage loan deals, I think there is some pretty ferocious competition to take big holds and from a pricing and structure standpoint, but that is not really where we compete. We have been kind of in that true middle market space, and there may be more competition that moves its way down there at some point in time. It is certainly competitive today, but the weakness in structure and kind of going to the floor on pricing has not gotten there yet. Great. Thanks, Mark. It is Tom Flynn, John. I just add one thing to the NIM discussion, and we do think it is notable that this quarter, the adjusted NIM for the bank consolidated, excluding trading, was actually up a bit quarter-over-quarter. That reflected the retail performance that we have talked about, but also BMO Capital Markets being up nicely in the quarter, which was partly driven by corporate lending activity in the U.S. and partly by the AFS security portfolio. Thank you. The next question is from Robert Sedran from CIBC. Please go ahead. Hi, good afternoon. Surjit, I would like to come back to Sumit's question on the loan loss line. In answering this question, you noted that commercial recoveries were a significant factor, but if I look at slide 19, the personal side was also down in pretty much every bucket that you list there as well. It sounds like what you are saying is perhaps this quarter was a little on the low side from a provisioning level, but last year was perhaps a little on the high side from what we can expect going forward. Is it fair to assume something in the low 30s from a provisioning ratio is about what we should be expecting this year with some variability obviously around that? Yeah, I would say so. As I said, I think if you look at the average for last year, we had 42 basis points, and I think to make that assumption if the economy holds, I think is not an unreasonable assumption. You can count me among those that is happy to see the backside of expected loss methodology. If we were on that methodology, what kind of expectations might that have kicked out for the Q1 numbers? Would they be similar to what we ultimately saw, or would they have been higher than what we ultimately saw? It's Tom. I guess a couple things in reaction to that. The expected loss numbers historically through time didn't change much quarter-over-quarter. The biggest change was in Q1 of each year when we looked at things in greater detail. It's really impossible to answer your question precisely because we have moved on. I would take a look at the fourth quarter of last year as the best indication of what we think makes sense from an EL perspective. Thank you. Thank you. The next question is from Mario Mendonca from Canaccord Genuity. Please go ahead. Good afternoon. First on loans. Commercial loans in the U.S. obviously improving the growth we see this quarter particularly, but also last quarter. It seems like it coincides with perhaps slower growth in IBG or in wholesale lending. Is there any change in classification that would cause those two to go hand in hand at slower growth in IBG, offset by better growth in commercial, particularly in the U.S.? Well, okay. This is Mark Furlong. Let me start out. I'll do the P&C side. We're not competing in the same space. The growth in the P&C business, just like last quarter, it's across every geography and it's across all of our specialty segments. It is really truly broad-based, particularly the last two quarters. I think it's absolutely unrelated to anything going on in any other segment. I'd say a little pickup, of course, you'd see at year-end related to changes in tax rules and changes in dividend rules and things like that. But it was so broad-based, and it was not weighted toward acquisition or leverage that really this is the kind of the long-term efforts of sustained calling and service and a little bit of expansion by existing customers and kind of all those pieces to build up to that loan growth. So maybe just to follow up then on the wholesale side, assuming it's entirely like there's no connection there. Why do you figure what appeared to be some very healthy growth in IBG may have tapered off in the last couple of quarters? Well, first of all, I think we think it continues to be pretty prospective, but we've seen a lot of refinancings that have gone into the market. But we continue to do business, and you see we've managed to it's basically flat quarter over quarter. We would expect if our view of what's happening in the economy is correct, Mario, I think we'd expect to see more financing and more growth in that loans as we go forward through 2013. Okay. Then maybe just for perfect clarity then, for Tom Flynn, the bank hasn't changed the definition of where you would book the loan then? Nothing's changed then in the last couple of quarters? Yeah, no, I was wondering if that was where you were going. That's what I was doing, yeah. Whether to jump in, and the answer to the question is no. Okay. There's no reclass between Capital Markets and P&C US. That's very helpful. Just finally, back to the PCLs for a moment. Surjit, in the U.S., 25 basis points of PCLs. Am I thinking about it correctly to say that part of the reason why the PCLs are light or look really low, the ratio looks low now is because the deal was only a year, a year and a half ago since you fair valued those assets, and that over time we'd expect that PCLs ratio to migrate back up to, in the U.S. specifically, 40, 50 basis points. Is that a reasonable expectation? It really depends. You're talking about the acquired portfolio now? No, I'm talking about excluding anything to the, actually, you're right. I'm talking about the entire U.S. business, but I don't want to take into account anything to do with recoveries. I'm just saying the pure PCLs that are emerging from your US P&C business. Yeah. Okay. I wanted to be clear whether you were talking about the combined business. I am. I do not look at it so much on a combined basis because I think even if you look at it on a combined basis, over time, the businesses are getting fully harmonized from a risk perspective. I would think that the long-term trend would be lower than the one you indicated. I think it will be more like 40, 45 basis points. It is not going to be that high. It is not going to be in the 50s. Yeah, that. The environment is improving, and if it improves faster, I think we would see better results there. Yeah. You sort of answered the question when you say you are harmonizing the sort of the credit culture. We would not see something that we might have seen in the U.S. for other companies. I think you kind of nailed the question there. Thank you. Thank you. The next question is from Brad Smith from StoneCap Securities. Please go ahead. Great. Thanks very much. Just on that last comment about the U.S. economy, I noticed that the impaired loan levels in the consumer portfolios, both the residential mortgage and the installment and other consumer loans, were up quite substantially sequentially. I was wondering if you might be able to share with us the geographical location of those changes, and then square that with the reduction that we see continuously in your allowance levels. I do not have a geographic breakdown that I can share with you. But I can tell you that the ACL numbers that you are looking at, perhaps you are looking at, do not include the credit mark on the purchase for performing portfolio. Sorry, Surjit. I am looking at impaired loans. Okay. I am not looking at a PCL. You are looking at impaired loans. The consumer impaired loans, $937 million in the quarter at the end on page 38 in the sup pack, up from $856 million. What I would really like to know is a geographical breakdown of that. I think most of your peer banks provide that. I do not have the geographic mix with me. Okay. But I can give you a flavor for what's happening in the U.S. In the U.S. last quarter, we did have a large number of performing loans that we put into impaired as a consequence of regulatory guidance. If I recall right, that number was $142 million. So you're seeing that $142 million of performing loans embedded in that number. That's why it seems elevated. But I don't have the breakdown for you. Right. The same thing happened the quarter before, I take it, because it went to 856 from 712. Yeah. You recall, I think if you go back in time, some of the impairments that you had in the U.S. were really, I think I described them as label changes because as we was reviewing our smaller accounts, which already had a mark against them, we had moved them to impaired once we took a look at them through our processes. So really it didn't have an impact on any factor from a loss perspective because the mark was more than adequately covered it. Could I ask you to venture where that number will be next quarter when we sit here? Will it be higher or lower? No, I think the trend is positive. Absolutely positive. I think given where we are, I would suggest that the number is coming down, which is why when I spoke, I said the formation seems to have peaked a few quarters back. They're coming down nicely. Okay. I mean, to be clear, the trend is not positive. It's 50% higher in that portfolio, in the consumer portfolio than it was a year ago. I don't understand how that becomes a positive trend. It's a bigger portfolio now from a dollars perspective. Okay. Thank you. Thank you. The next question is from Andre Hardy from RBC Capital Markets. Please go ahead. Thank you. You note and show in your US P&C business expenses declining sequentially and year-over-year. Can you update us on how much of your synergies have been achieved related to the M&I transaction? How much is left to go from the current run rate? It's Tom. We had a similar question in Q4, and we said that around two-thirds or a little over two-thirds of the synergies were baked into the Q4 run rate. The answer this quarter would be that the number would be approaching the 75% level. By the end of the year, we would expect to be above the 90% level. We're continuing to make progress on the integration. We completed the large systems conversion in the fourth quarter, and have supported that with the brand change that we've talked about advertising to make people aware of the new name. The synergies are coming in pretty much on expectation. Integration costs will continue to cause noise going forward, or is that all behind? It's not all behind. You saw the number in the current quarter. There is still work going on, so the number will trail down through time, but it's not done as of the end of this quarter. Am I right to say that the number is now in excess of what you originally targeted on integration costs? It's not in excess of the update on the target that we gave in the last quarter. I think it is above the estimate that we had when we announced the transaction. But the synergies, as you know, are now CAD 400 million versus CAD 250 million that we talked about when we announced. So the ratio between synergies and one-time costs we think is still good. But we said in Q4 that the one-time cost would be around in mix CAD 650 million. We're now a little above CAD 600 million, and we're likely to go a little above the CAD 650 million number through time. Okay. Thank you very much. Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead. Thank you. I am sort of following up on a couple of other questions. How long should we expect that the net interest revenue releases related to the purchase credit portfolio will continue at an elevated level? And how long will the integration costs continue at an elevated level also where they seem to largely offset each other this quarter? And I have a couple of other questions. It is Tom. The amortization of a portion of the credit mark will continue probably for about the next two years. It will decline through time. It bump-stopped in certain quarters because of repayments of loans, and we had some of that this quarter. It is hard to predict exactly when it will be unusually high because it is a function of the repayment activity. But I would expect the number to sort of trend down through time over the course of the next year and a half. By the end of 2014, pretty much done? Yes. Okay. On the integration expenses, similar story, shorter tail. We think the expenses will continue over the next few quarters, but they should be pretty small by the end of the year. Okay. Now turning to your personal demand and notice deposits, they were up more than $6 billion in the quarter or 8% from year-end. Where did this increase come from? Oh, sorry. Well, this is Mark Furlong. We have a billion-dollar-plus gain in just the commercial business alone in the U.S., and- No, I said personal Oh, on the personal side. Yeah, we had a couple hundred million CAD on the personal side in the U.S. Frank and Tom probably made up the rest of it. Can you elaborate? I mean, 6 billion CAD is a big increase. You ended the year at about 78 billion CAD. Just a sec. Let me check here. Yeah. You ended the year at about 79 billion CAD of personal demand and notice, and you were at over 85 billion CAD at the end of the first quarter. So where did that come from? Michael, we'll take that offline and get back to you on it, all right? Okay. My last question, you had a high level of cures, sales, and repayments this quarter. Was this one or two big loans that got fixed and came out? Or was it sort of across the board? Was there any unusual interest recapture? This was spread over a large number of loans. In capital markets, it is a little lumpy. While there were a large number of loans, there are obviously larger recoveries as well. I would suggest this is where I am telling you the trend is a lot better because we are seeing recoveries in a large number of small loans on the commercial side. That is what I take my comfort from in terms of the outlook as well. Okay. Any meaningful interest recapture? Don't know offhand, but yeah, there always is an element of that. Okay. Can you let me know? Sure, we can get back to you on that. Okay. Thank you. Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead. First, just a quick question for Surjit and related to Brad's question. Retail formations are up. I don't have a question about the U.S. In Canada, are there any signs of deteriorating credit quality, retail credit quality in your view? Not at the moment. Yeah. There's a lot of concern that you keep reading about, but as of now, a lot of personal depends on the employment rate, and the employment rate is pretty good at 7%. It's come down. I haven't seen anything yet that would cause me concern. Okay. Bill, you're sitting at 9.4% on the CET1 ratio. Got the NCIB approved. Quick question, maybe it's not a quick answer, but what's the probability that an acquisition opportunity might interrupt your planned share buybacks? I'd say in the short run it's pretty low. Pretty low. Just the dynamics of the market. Sellers are feeling better about the future, and even if they would intend to do a transaction at some point down the road, I think the tendency will be to delay, and that certainly would be in Personal and Commercial Banking. Smaller probability in the wealth area is about the same as it always has been. Okay. Thank you. You're welcome. Thank you. The next question is from Darko Mihelic from Cormark. Please go ahead. Hi, thank you. Two questions. First one's for Frank. Frank, I've seen some rival banks raise fees for deposit accounts and a whole bunch of little transactions. I'm wondering if you could comment on whether or not any of that is in the future for BMO, if it would be material. My second question is also on the buyback, but I'll take a slightly different approach to it. There's a sentence in there with respect to your, it's on page 17 of your shareholder report. It says, "The bank will only initiate any purchases under the bid after consulting with OSFI." I find that a peculiar sentence, and maybe it's just me, and I could be reading into this too much, but I thought in the past, if you had it approved, you can just sort of set up a formulaic buyback and you sort of go on. What's the need for a consultation with OSFI, and what is it that they'd have to say on the matter after they've already approved your NCIB? Hey, Darko, it's Frank. Just on the first one quickly, where I was looking at our fee schedules relative to the competition, I'd say the opportunities that exist are pretty small at this point in time. We'll be opportunistic, but it's not going to play a big role in our revenue growth going forward over the course of 2013. Okay, it's Tom on the buyback question. We've got the approval for the program in its totality. But in the current environment, in the new environment, I'd say it's customary to keep an active dialogue with your principal regulator on capital related matters. That would include checking in through the course of a year on intentions with respect to a buyback. We don't think there's anything unusual about that. We think it's a reflection of the heightened focus on capital and the new way of doing things. Okay. Tom, it doesn't mean that if you decide to buy back every day, you're phoning up OSFI for permission or No. Okay. No, it's meant to acknowledge that it's not a once and done, but it's certainly not an everyday kind of a discussion or anything close to that either. Thank you. Thank you. The next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead. Thanks very much. Good afternoon. A couple questions for Mark Furlong. Mark, I heard that there was some pulling forward of demand on C&I lending towards the end of the year, potentially due to some tax fears coming into year-end. Was that the case? If so, how much pull forward was there? If not, has the pipeline just grown to the level where this level of growth is sustainable going forward? Okay. There was some pull forward, I don't think there's any doubt about that some of the transactions that occurred near year-end pulled a little bit forward. But the pipelines are still full and as I mentioned earlier, I can't recall whose question I was answering, but the growth was really broad-based across the portfolio. It wasn't really all acquisition related. It was new customers and just expansion things going on with existing customers. It was kind of a variety of areas. But one piece was some financing for some acquisitions. That would be the normal part. Then sustainability going forward, the pipelines are still pretty strong and they're kind of strong broadly across the portfolio. It's hard to pin it into any one quarter, but if you said look out into the rest of 2013, how do you feel about loan growth? The answer is I feel really good about loan growth and kind of broadly across the commercial portfolio and broadly across geographies. I'd say it's kind of that result of we've had about two years together, kind of the pre-integration, then integration, post closing timeframe. And the teams really work together well, and they're very seasoned, and they've been through several cycles. So, we expect them to be successful, and I think we're seeing some of the results of that. It's hard to pick any one quarter, but overall feel very good about where we're at and very good about what the future holds. Yeah, that's helpful. The other question I wanted to ask was on expenses. If I go back, Mark, to the investor day last year, in the slides you target mid to low 50s for US P&C efficiency ratio. You've got the majority of the synergies now in the run rate. You've cracked the 60% level for efficiency. The question is, are you targeting something in the 53% to 55% range over the next two or three years, or is this a longer-dated target, or am I missing anything here? Well, we targeted kind of the low to mid 50s. But part of that has to be, it's not just driving expenses up, part of that is the revenue growth. So there's kind of two sides to the equation. But we do feel like we can get far more efficient, and we do feel like a big piece of that is on the revenue side, and we're beginning to see a little bit of that right now. But yeah, we're not going to change those numbers. That's where we have to be to be competitive from a profitability standpoint long term. Thanks for that. Thank you. The next question is from Mario Mendonca from Canaccord Genuity. Please go ahead. The question was asked and answered. Thank you. Thank you. The next question is from Sumit Malhotra from Macquarie Capital Markets. Please go ahead. Thanks for letting me in again. A couple questions on the buyback, so let me just ask this one directly. With the NCIB now approved and with the capital ratio strengthening again over 9%, even after the eventual deduction of the CVA, do you plan to start the repurchase activity imminently, or is it still something that you're putting on hold until later in the year? No, we intend to have it in effect from this point forward. Theoretically, now the results are out, you can be in the market buying back stock tomorrow if you wanted. We could. Okay, thanks. I could link Outlook, and you could take a look at my diary and pick the point, but without being facetious. No It is approved, and we're going to move ahead with it. Yeah. Obviously, it is not the biggest thing in the world, but I think your commentary last quarter seemed to indicate it might wait a little bit, but that was probably caution on your part until it was approved. So we are there now. Great. Thanks for your time. Thanks for the question. Thank you. The next question is from Gabriel Dechaine from Credit Suisse. Please go ahead. Right. Just one on the U.S. expenses and another on the U.S. margins. U.S. expenses, they were down 7% year-over-year. What would that decline have been if you hadn't reinvested in various growth initiatives, and what are those growth initiatives? Let me think. If we hadn't reinvested. Yeah. I mean, the growth initiatives are continuing to build out commercial banking, continuing to build out our mortgage platform, and build out our mortgage capability. Those are probably the two single biggest on their own. Then the third piece is not so expense related, it's the premier banking program which we talked about, which is the partnership between my business and Jill's business. That's more fee income related. But there's a few people related. There'd be no material P&L related to that. So while we added a few personnel, that's not going to have a material impact in the averages for the quarter. We'll have a few personnel adds for things like that through the rest of the year, but particularly focused in the mortgage side of the business and in the commercial banking side where the growth opportunity sits today. Is this hiring people or Yeah, hiring people. branding or which? Well, we will have that too. To kind of give you perspective, the last 12 months we've mailed 7 million pieces of paper to customers, and 7 million mailings. And about 80% of that was into the former M&I franchise. The advertising and branding campaign that launched mid-November and has created all this brand awareness will continue in various phases throughout the rest of the year. But that's kind of been planned into our run rate and our thinking about efficiency ratio and expenses and all that. So of course that will continue just because that's part of running the business. But I don't think there is any unusual expenses you should expect or think is going to happen other than kind of the trends you're looking at. I'm trying to get a sense for how much of the synergies are being reinvested percentage-wise. Well, yeah, percentage-wise. Or dollar-wise, whatever. Dollar-wise is probably easier. I do not know that I have a really good answer for you. I am sure we will add over the course of the year, 150 to 200 people predominantly in sales or sales support roles in P&C US if you went from very beginning to very end. I suppose that averages 100-ish or something like that. We did not really look at it like that. It was more so how do we build out the business correctly in every one of the markets we are in relative to the size we are in those markets. I know that does not quite get to your answer, some small amount of the synergies are reinvested. Okay. Then just on the margin, you talk about the C&I growth and loan growth outpacing deposits. Were you a bit caught off guard by the loan growth, so had not pressed on the gas as much on the deposit gathering? Is that something you can rectify going forward to kind of smooth out your funding gap? I think that's possible. I guess the way we look at the deposit side is if you looked at core checking year-over-year, consumers up about CAD 1.2 billion. If you looked at the commercial side, it's up over CAD 3 billion. Commercial has grown 18% in DDA, and interestingly enough, the commercial portfolio has grown 18% year-over-year. We really think those two are matching each other very well. On the personal side, we've brought down some of the higher costing money market and CD product over the course of the year, and that's just kind of excess funds, gradually bringing down pricing, kind of the normal stuff that you'd see in a portfolio. But we still have significant excess funding and think we have a pretty good sense of elasticity of deposit pricing on that customer base. We think we can move that back if in fact that's what we want to do. We feel pretty good about both of them. I wouldn't be surprised if we have another quarter or so where we actually bring down deposits based on pricing if that's the right thing to do based on what our views are on the near-term pricing that's going on in the market. I think we probably have a little more flexibility there than maybe some would give us credit. Thank you. Thank you. This concludes today's question and answer session. I would now like to turn the meeting back over to Ms. Haward-Laird. Thank you, operator. Thank you everyone for joining us today. If you have any further questions, we would be pleased to take them in the Investor Relations department. Thanks and have a good afternoon.