Earnings Call: Q4 2011

Dec 6, 2011

Good afternoon, and welcome to BMO Financial Group's fourth quarter 2011 conference call for December 6, 2011. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. 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 question and answer period where we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question and then re-queue. We will wrap up the call at 3:00 P.M. 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 from P&C U.S. At this time, I caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call. They are subject to risks and uncertainties. Actual results could differ materially from forecasts, projections, or conclusions in the forward-looking statements. Information about material factors that could cause results to differ and the material factors and assumptions underlying these forward-looking statements can be found in our 2011 Annual MD&A and our fourth quarter 2011 earnings release. With that said, I will hand things over to Bill. Thank you, Vicki. Good afternoon, everyone. As noted, my comments may include forward-looking statements. BMO generated strong financial results in 2011, with net income increasing in each quarter and finishing the year with reported earnings of just under $900 million. The year was characterized by double-digit revenue growth and continued momentum in our businesses, and it was highlighted by acquisitions that contributed substantially to our growing customer base. Again, in 2011, BMO progressed against its strategic priorities. We generated double-digit earnings growth across all of our businesses. We announced and closed a strategic acquisition positioning our U.S. operations for quality growth. The addition and integration of the operations of M&I is enabling us to achieve the scale we've sought for our U.S. Midwest P&C business, while significantly advancing wealth management by doubling our U.S. private banking presence and substantially increasing the number of financial advisors to support our expanded footprint of nearly 700 retail branches. We further developed our institutional asset management business through organic growth and acquisitions, including Lloyd George Management. Our global asset management business now manages over $100 billion in combined assets, and we strengthened our leadership across the bank and sustained a culture that focuses on customers, high performance, and our people. Talking to you today, five months after the closing of the M&I purchase and the introduction of BMO Harris Bank, our expectations around performance and our confidence in the potential of the business are unwavering. I'm pleased with our progress against all elements of the integration plan to date, and overall, we've exceeded our base case. While we're only in the very early days of realizing on synergies, we're already seeing results. Turning to our financial results, driven by acquisitions, reported revenue in the fourth quarter increased 20% year-over-year to $3.9 billion. Reported net income was up 21% at $897 million, representing an ROE of 14.3%. Reported earnings per share was up 8% to $1.34, and on an adjusted basis, net income was $850 million, and earnings per share increased slightly to $1.27. Consistent with our objective of increasing the retail component of our earnings mix, over 80% of BMO's adjusted operating revenue and net income came from our personal, commercial, and wealth businesses in the fourth quarter. Fourth-quarter specific provisions of $210 million were lower than last year, but higher than the Q3 level. While we continue to expect quarterly variability, we view credit as stable and improving over the longer term. An $80 million general allowance increased total Q4 provisions to $290 million, and Surjit Rajpal will provide more color later in the call. BMO's full year 2011 financial performance was strong on both a reported and adjusted basis. Adjusted revenue increased 10% to $13.5 billion. Adjusted net income was up 15% to $3.3 billion, and ROE increased to 15.3%. Adjusted earnings per share came in at $5.29, 10% above last year, and pre-tax, pre-provision earnings reached a new high of $5.1 billion. As expected, provisions for credit losses declined from 2010 levels. Adjusted productivity was slightly elevated at 62.4%, reflecting expense growth related to business investments that were underway and predated the announcement of the M&I transaction. In the lower growth environment that we're now facing, productivity will play a larger role in our success. In that regard, we're conducting a top-to-bottom review of the relationship between revenue and expenses, and we're confident in achieving productivity improvement. It's still early in the process, and tangible benefits are already surfacing. BMO remains well-capitalized, finishing the year with a pro forma Basel III common equity ratio of 6.9%. BMO's dividend payout ratio for the year was 53%, at the high end of our 45%-55% target range. Tom Flynn will take you through our group results in more detail, but let me touch on some 2011 highlights. P&C Canada's reported net income for the year was CAD 1.7 billion, and on an actual loss basis, up 10%. This success was underpinned by the investments we've been making for our customers, particularly in frontline staff, infrastructure, and technology. We made tangible progress in improving our customer loyalty as measured by net promoter score, and significantly improved the online customer experience, ranking second among public websites of our Canadian peers in 2011. Share of wallet increased, as did the average number of products per customer for both personal and commercial. We strengthened our branch network, opening or upgrading a record 58, including nine new innovative locations, and we improved our sales force productivity. BMO's financial planners, as an example, improved productivity by over 20% in 2011. P&C US increased its net income 75% to $359 million in source currency. On an adjusted basis, net income was $394 million, of which $142 million was attributable to the contribution from M&I. We're very pleased with our early performance. BMO Harris Bank has high brand equity and leading market positions in the Midwest. In retail deposit market share, we rank number one in Wisconsin and have moved up to number two in the Chicago market, increasing our share by two percentage points to 11.6%, and customer loyalty is strong. 2011 was a good year for the Private Client Group, and net income was up 13% to $518 million, driven by strong performance from traditional wealth businesses, up 31% from a year ago. Global Banking & Finance Review named BMO Harris Private Banking as 2011's best private bank in Canada, and in its recently released annual online brokerage rankings, The Globe and Mail ranked BMO InvestorLine first among banks and third overall. BMO Capital Markets delivered a good year with net income increasing 13% to $920 million and a strong ROE of 20.4%. We've built a team to successfully compete across our North American platform with substantially expanded U.S. equity research, sales, and trading. We were named a primary dealer by the New York Fed, which significantly enhances our U.S. fixed income capability, and Global Finance magazine named us the world's best metals and mining investment bank again. Just last week, BMO was rated best bank for Canadian dollar by FX Week. To conclude, I'll highlight the current outlook from the BMO Economics Group. We expect the growth rate of the North American economy to expand from the current 2% level to closer to 3% by the end of 2012. Recent U.S. data has been encouraging, and assuming the European challenge plays out in a somewhat orderly fashion, we expect sustained economic expansion led by increasing business investment. In our Midwest market, we expect the economy to grow slightly faster than the national average. In Canada, support from low interest rates, firm commodity prices, and a gradual pickup in U.S. demand will help counter tighter fiscal policy and sustain growth. Following the Q&A session, I'll call on our group heads to provide an overview on the 2012 outlook for their respective businesses, and I'll wrap up with some brief comments. With that, I'll pass it over to Tom. Thanks, Bill, and good afternoon. Some of my comments may be forward-looking. Please note the caution regarding forward-looking statements at the beginning of the presentation. Starting on slide 9, reported net income of $897 million was up 21% from last year, and EPS was $1.34, up 8%. Adjusted net income was $850 million, up 14% from last year. Adjusted EPS was $1.27, up 1%, reflecting shares issued for M&I. Net adjustments in Q4 were negative and totaled $47 million or after-tax $0.07 per share. Adjustments all on an after-tax basis include $107 million credit mark related benefit on the acquired loan portfolio, which I will discuss more in a few minutes, integration and restructuring costs of $35 million, and amortization of acquisition intangibles of $25 million. We included the credit mark benefit as an adjusting item to show results more reflective of core operating performance, which will make for more meaningful NIM productivity and growth numbers, and given that the credit mark impacts could be large and have some variability quarter to quarter. Slide 10 highlights our good results for 2011. Total bank reported net income was a record, as was income in each group. On an adjusted basis, revenue was $13.5 billion, up 10%, income $3.3 billion, up 15%, EPS $5.29, up 10%, and ROE was over 15%. Each of our businesses did well with double-digit growth across the board. Moving to slide 11, adjusted revenue in Q4 was $3.6 billion, an increase of 12% year-over-year and 10% sequentially, largely due to the lift from M&I. Adjusted net interest income was $1.9 billion, up 16% from a year ago and 10% quarter-over-quarter. Adjusted non-interest revenue was up 10% from Q3, with the acquired businesses improving results by 9%. As shown in the graph on the right, adjusted total bank NIM, excluding trading, was 214 basis points, down five basis points quarter-over-quarter, with this due mainly to lower spreads in BMO Capital Markets and P&C Canada. Turning to slide 12, adjusted expenses of $2.3 billion were up $326 million or 16% year-over-year. Expenses related to the acquired businesses were $315 million. As shown in the table, excluding M&I, expenses increased less than 1% from a year ago. On the same basis, expenses were up 3.4% quarter-over-quarter due to employee related costs, investments, and a strong U.S. dollar, which accounted for a third of the increase. As Bill mentioned, in what looks like it will be a lower growth environment, productivity will be an important part of success. Recognizing this, we are stepping up our focus in this area across the bank in a deliberate way. Slide 13 provides an update on the M&I acquisition. We're pleased with the contribution in the quarter, with the acquisition adding adjusted earnings of $148 million in total and $124 million to operating groups. Based on our current outlook, we now expect that the M&I acquisition will be accretive to adjusted EPS for fiscal 2012, better than our assumptions when we announced the transaction. As a reminder, for reporting purposes, operating group financials reflect business results, credit provisions on an expected loss basis, net interest income based on contractual rates for loans and deposits, and amortization of acquisition intangibles. Corporate includes a number of items as shown on the bottom left of the slide, including restructuring costs, differences between expected and actual credit provisions, and the residual of the rate mark amortization and other corporate treasury items, which was not significant in the current quarter. The largest item impacting corporate this quarter relates to accounting for the credit mark on the acquired loan portfolio, and this resulted in CAD 107 million in net income. Turning now to slide 14, we show the components of the credit mark related to accounting. First, a portion of the credit mark is amortized into net interest income over the life of the purchased performing loan portfolio as higher effective yield. This accounting is similar in concept to the higher yield that would result if a bond was acquired at a discount to par. In Q4, the amortization or accretion of credit mark drove CAD 161 million of net interest income. Over time, if the credit mark is correct, this NII will be offset by credit provisions. The second item that increases revenues relates to the impact of loan repayments. When acquired performing loans are repaid, the amount of credit mark held on the loan is no longer required, so it is released and recognized as interest income. In Q4, loan repayments increased net interest income by CAD 110 million. This represents a true gain for the bank. In effect, we bought loans at a discount to par and got fully paid out. The third component of the accounting relates to PCLs. Specific provisions will be recognized on the portfolio over time as required. In Q4, specific provisions were CAD 118 million. In addition, general allowance will be taken as appropriate. In Q4, the general allowance was CAD 80 million. The net credit mark related income of CAD 107 million in Q4 was high, mainly due to the loan paydowns that occurred and a relatively low level of specific provisions. As shown on slide 15, capital ratios continue to be in good shape, with the common equity ratio at 9.6% and Tier 1 ratio at 12%. Our Basel II common equity ratio will be lower by approximately 50 basis points in Q1 2012 after accounting for the changes coming related to the implementation of Basel 2.5, changes to deductions for insurance subsidiaries, and the beginning of the transition to IFRS for capital purposes. Our pro forma Basel III common equity ratio at year-end was in good shape at 6.9%. This ratio reflects full implementation of IFRS and Basel III and so is not impacted by the items that I mentioned will impact Basel II in Q1. Moving to slide 18, P&C Canada delivered annual net income growth of 10% on an actual loss basis and 4% reported. Revenues were up 4%, reflecting volume growth and some NIM pressure. P&C Canada maintained its productivity ratio in the low 50% range while investing in its strategic agenda. Net interest margin declined four basis points quarter-over-quarter, mainly due to lower deposit spreads and lower mortgage refinancing fees. Moving to slide 19, P&C US fiscal 2011 adjusted income was USD 394 million, up 77%. Q4 revenue and net income more than doubled from a year ago, reflecting good contribution from the acquired business. The adjusted productivity ratio of 57.3% improved notably. Fourth quarter adjusted net income was CAD 171 million, with CAD 111 million of that coming from the former M&I operations. NIM increased from a year ago, mainly due to higher deposit balances and improved loan spreads. Turning to slide 20, Private Client Group fiscal 2011 net income of CAD 518 million was up 13%. Excluding insurance, business net income was up a strong 31%. Net income in the quarter was CAD 144 million, up 13% from a year ago. Earnings excluding insurance were up 20%. Insurance earnings were down slightly from last year but up from Q3. Turning to slide 21, Capital Markets delivered good fiscal 2011 earnings of CAD 920 million, up 13%. ROE was strong at 20%. Fourth quarter net income was CAD 149 million. Lower revenues in the quarter reflect a weaker and more volatile trading environment and subdued investment in corporate banking activity. Expenses were up 5.4% from a year ago, driven primarily by strategic investments in people. On slide 22, for corporate on an adjusted basis, there was a net loss of CAD 44 million in the fourth quarter. The improvement from last year was driven largely by lower credit provisions, partially offset by lower revenues. Quarter-over-quarter adjusted results were better by CAD 43 million, reflecting higher revenues and lower credit provisions, partially offset by higher expenses driven by the acquired business. Reported results were impacted by the adjusting items I spoke to earlier. Before wrapping up, I note that we've provided two slides which summarize our MD&A disclosure on the transition to IFRS as well in the package. With that, I'll turn it over to Surjit. Thanks, Tom, and good afternoon. Before I begin, I'd like to draw your attention to the caution regarding forward-looking statements at the beginning of the presentation. We begin on slide 31, where we provide details of our CAD 208 billion loan portfolio, which includes the recently acquired businesses. There has been no significant change in the makeup of the portfolios quarter-over-quarter, with two-thirds of the loans based in Canada. Given concerns about the Canadian housing market and household debt, I want to take a moment to address this in the context of our portfolios. Our total direct residential mortgage exposure is approximately CAD 42 billion, which represents about 7.5% of the total value of Canadian chartered bank residential mortgages, estimated to be CAD 563 billion. In addition, we have insured 70% of our managed portfolio and 62% of our own portfolio. The uninsured portfolio reflects solid homeowner equity with an average loan-to-value of 54% based on July house price data. The level of uninsured balances in our total retail portfolios and our conservative loan-to-value ratios on our real estate secured book have positioned us well. Nonetheless, we continue to maintain prudent lending practices and regularly assess and amend our underwriting guidelines to adapt to changes in the risk environment and our risk appetite. The U.S. portfolio represents 29% of total loans and approximately 37% of this is in consumer products. Together, our retail portfolios in the U.S. and Canada represent approximately 54% of the total bank loans with more than 87% secured. Slide 32 presents details of the total U.S. loan portfolio in U.S. dollars. I would first like to note that we are seeing some signs of improvement in the U.S. economy. Business balance sheets have improved, along with an increase in manufacturing output and a year-over-year easing of the unemployment rate, which in November dropped to 8.6%. The U.S. portfolio of $61 billion consists of $23 billion in consumer, $28 billion in C&I, and $10 billion in commercial real estate. The consumer portfolio consists of 36% first mortgages, 36% real estate secured lines, with the remainder in auto and other consumer loans. The C&I portfolio is well-diversified across industries, with the largest sectors being owner-occupied commercial mortgages at 18%, manufacturing at 16%, and financial institutions at 15%. Exposure to the commercial real estate sector is USD 10 billion, with approximately USD 8 billion of this from the acquisitions. 72% of the total is investor-owned commercial mortgages. Commercial real estate portfolio represents about 16% of the total U.S. loan portfolio. As I mentioned last quarter, we continue to actively manage this portfolio with a focus on reducing distressed assets. Turning to slide 33. The situation in Europe has resulted in significant turmoil in global markets, requiring added awareness and of course, disclosure. On this slide, we provide an overview of our relatively moderate European exposure. Total direct exposure to Greece, Ireland, Italy, Portugal, and Spain is modest at $203 million. The direct exposure to the remaining countries in the Eurozone is $5 billion, with approximately $3.5 billion to sovereign counterparties or backed by sovereigns. These sovereign exposures are largely cash products. I would note that we remain alert to the evolving European situation and are proactively managing our exposures. We provide additional disclosure on our European exposures in the annual management discussion and analysis. Turning now to slide 34 where we provide an overview of the gross impaired loans and formations. Formations of $543 million for the quarter. $185 million of this is related to the acquired portfolios, $81 million of which is backed by an 80/20 FDIC loss share. The increased formation of the core portfolios is primarily due to a few large accounts, mainly in the financial sector, as well as in Canadian manufacturing and agricultural sectors, where continued economic weakness and a high Canadian dollar are impacting exporters. On slide 35, we provide details of the provision for credit losses. The consolidated specific provision was $210 million. In addition, there was an $80 million increase in the general allowance, which is related to the acquired portfolio. The table to the right provides the business segment details of the provisions. P&C Canada provisions are relatively flat over the quarter, with the consumer portfolio contributing the majority at $130 million. P&C U.S. provisions were up this quarter to $69 million. The U.S. commercial portfolio provisions increased to $30 million this quarter, primarily from the commercial real estate sector. The consumer portfolios represent the largest share at $39 million, although it is lower quarter-over-quarter. Capital Markets provisions continue to be modest at $10 million. Turning to slide 36, we provide a segmentation of the specific provision by geography and sector. The Canadian provision was $102 million, up from $94 million last quarter and $98 million a year ago. The consumer loan and credit card segments contributed to the largest share at 39% and 25% respectively. The U.S. provision was $108 million, an increase from $80 million in the third quarter. The personal lending segment contributed the largest at 29%, followed by the commercial real estate investor-owned sector at 26%. The acquired portfolios contributed about $30 million to the provisions this quarter. On slide 37, we note that the trading and underwriting market value exposures dropped quarter-over-quarter from $16.7 million in quarter three to $12.3 million in the fourth quarter, mainly due to reduced interest rate exposures in both our debt products business and our liquidity pools, partially offset by higher equity risk. Interest rate VAR exposures on our AFS portfolio was also almost unchanged over the quarter and continues to be concentrated in portfolios holding significant asset swap positions in Canada mortgage bonds, government of Canada bonds, and U.S. Treasuries. In closing, I am pleased with our performance this year. We have made a substantial acquisition, our core book continues to perform well, and our risk culture is growing stronger. As we look forward, we must maintain our awareness of the risk environment and the challenges therein, in particular, the European situation, the elevated consumer debt levels, and potential Canadian housing price correction. As I mentioned earlier, we regularly assess our lending practices to ensure they remain prudent in light of changing market conditions and within our risk appetite. We can now move to the Q&A. We will now take questions from the telephone lines. If you are using a speakerphone, please lift your handset before making your selection. To ask a question, press star one on your telephone keypad. Should you wish to cancel your question, press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from André-Philippe Hardy of RBC Capital Markets. Please go ahead. Thank you. Just a clarification, please, and then a question for Bill Downe. The clarification is on the derivatives exposure to Europe. It looks like you are giving us a number that is the mark-to-market net of collateral. What would that number be if you looked at it based on future exposures like some of the banks have disclosed it? My question for Bill Downe is around the EPS guidance over the medium term. It has been reduced. Is that because the starting point on credit will make for tougher comparisons, or it is a more conservative view on your potential revenue growth? Thanks, Andre. I will take your question and then the question on the European exposure I will pass back to Surjit. There are a couple of contributing factors. This time last year, we expected that the rate of economic growth in 2011 would be a little bit more robust than it turned out to be in the latter part of the year. I do think that there is some moderation in the expectation around the rate of credit recovery. I think it will continue, but to your point, the U.S. housing market continues to struggle. I think it will just take a little bit longer for us to see a recovery in that segment. So that is a contributing factor. That said, I am still quite optimistic that we will have acceptable economic growth, and that will support the growth of all of the businesses. Surjit, I will turn it over to you to talk about the European exposure. Sure. Andre, we have shown you the mark-to-market list of collateral on the table that you see. I suspect when you talk about expected exposure, you are talking about future potential exposures. That is right. If you look at it on that basis, our total European exposure, I do not have the number in front of me, but it would be somewhere in the region of CAD 4 billion-CAD 5 billion. That's helpful. Thank you. Thank you. The next question is from Robert Sedran of CIBC. Please go ahead. Hi there. Good afternoon. Tom Milroy, just a couple of questions on the trading. That slide 37, those two big spikes in particular at the end of October were presumably all CVA or mainly CVA. Can you give us any color as to what that was and how much of an impact the CVA might have been quarter-on-quarter? On a related note, I noticed, and Surjit mentioned, I believe, that the VAR is down quarter-on-quarter. Should I assume a lower level of revenue as well then going forward, or should I not make that link? Before I go to the revenue question, let me deal with the question on CVA that you have and the two days that are high. Those two days really represent both our normal trading activity as well as our CVA. During the quarter, we did make some enhancements to our methodology. I'll give you some examples. We incorporated a risk-neutral model to calculate the expected exposure profile. We also introduced a default correlation, and that helps when you look at, there is always a connection between defaults between counterparties that are particularly financial. Then we also refined our calculation with respect to our BMO CDS curve to more align it to the market because you don't have very much of a market in CDSs with respect to banks. So we use that to refine our methodology. The numbers you see there are a reflection of both our normal activity as well as CVA. Having said that, quarter-over-quarter, the CVA did not move very much. It almost remained flat. That number is very tiny. Your question with respect to whether that's a reduction in our It's whether the reduction in VAR implies a reduction in outlook for revenue as well. The reduction in the VAR really is a function of where we were in terms of risk-taking. It was largely, as I explained, had to do with some of our, the risk in our liquidity pool as well as in our debt products business. I'll ask Tom to elaborate if he thinks there's anything beyond that. No, I don't. Okay. Thanks. Thank you. The next question is from Steve Theriault of Merrill Lynch. Please go ahead. Thanks. Good afternoon, everyone. For Frank Techar, please. Frank, revenue growth has been on the decline now for a few quarters, I think for the last four consecutive quarters, and approaching flat in Q4. Can you refresh us on your outlook for revenue growth for next year? On the expense side, the efficiency ratio at 53 this quarter. In the past, you broached the idea of an efficiency ratio below 50% next year. Is that still realistic given your updated plans for investment spend and the grind from lower rates? Just, sorry, lastly, if you could address, I noticed the market share in commercial was down, I think 60 or 70 basis points this quarter. Pretty big swing. Can you talk to that a little bit as well? Sure, Steve. Thanks. I am certain now that you were paying attention to Viki's comment about one question. I think that was three. It might have been four actually, but I will give it a whirl. Just a couple of comments about the year since I have the floor. We started the year with a little more optimism about the Canadian prospects for economic growth, as Bill mentioned, and about the level of business activity investment and even interest rates relative to our outlook. We started the year with more optimism than we ended with. Given the trends that we saw, we had a solid year with stronger balance sheet growth than in 2010 in P&C Canada. We did it with really solid performance from a margin compression perspective as well, just down 2 basis points for a full year. We did continue to invest in the business, as you mentioned. While pointing out that our revenue growth over the last few quarters has been in decline, our expense growth has been in decline as well over those 4 quarters. We did moderate that growth as we saw our top line start to decline as well. It allowed us to maintain our productivity ratio in the low 50s, which was my commitment when we started the year. We ended up full year at 51.9. We are paying attention to the prospects on the top line as we continue to invest in the business. We did have solid earnings growth of 10% using actual losses. I just might point out it is our 13th consecutive quarter with year-over-year net income growth. Overall a solid quarter, but we did have to react to some things that we did not anticipate when we started the year. As I look out into 2012, my expectation is the trends that we are seeing currently are going to continue. The top line is going to be growing slower than we saw back in 2010. As a result, we are going to have to react from an expense perspective. I do not think it is realistic for us to be looking at a productivity number below 50 as we go into 2012. We are going to be working really hard this year to deliver a positive operating leverage for the business. That is what we are starting the year on, and we will see how the top line plays out. Relative to commercial growth and commercial market share, we did see a little softer growth this quarter than our competitors in our commercial loan growth. We have been taking what I would characterize as a cautious approach to underwriting risk in our commercial real estate segment. For us, that represents about 20% of our Canadian commercial portfolio. This management action has resulted in slower growth as we have gone through 2011. It has also had an impact on our June market share levels. In fact, the contribution from our commercial real estate segment basically made up a portion of the decline in our share from March to June. The other big factor was one of our competitors restated their multi-residential mortgages from consumer to commercial in that period, and that made up about three-quarters of the decline for us from the March to June period. Two factors, one restatement on the share side. The other one is we are just taking a cautious approach to underwriting risk in our real estate portfolio. I will say that our spreads in our loan book overall and the spreads in our commercial loan book have held up really well. We see no decline in our loan spreads from 2010 to 2011, and our commercial loan spreads have actually increased year over year. We are feeling good about the quality of the portfolio and the earnings power of that portfolio notwithstanding the softness in the growth in the balance sheet. Thanks for that, Frank. Thank you. The next question is from John Reucassel of BMO Capital Markets. Please go ahead. Thanks. Just a question for Tom Flynn, just to clarify that on slide 13, I think you talked about contribution from M&I of $112 million on adjusted basis. Is that the base number we should assume coming out of M&I, Tom? Is that the number to build upon? Well, looking on slide 13, we showed the numbers adjusted at the top, reported at the bottom. The total adjusted income in the quarter was $148 million, and you see how that broke down by group. The way I'd think of it is, the contribution going to the groups was $124 million, and that's normal business contribution, including the impact of allocating expected losses to the businesses. We allocated about $40 million of expected loss to P&C US in that $112 income number. Corporate was $24 million. So our expectation is that going forward, we'll be in that kind of a range. In the next quarter, we're going to have to absorb in P&C US the introduction of interchange, and for the total segment, that's going to have an impact of $10 million-$12 million in the quarter. We've talked about that number before. That's a little bit of a headwind coming into the quarter next year. As you know, at the beginning of every year, we adjust our expected loss methodology, and the expected loss numbers will tick up a little bit in the first quarter just given recent performance. Long answer to the question, but I think in the range of what went to the operating groups this quarter at 124 to the 148, that was the fully adjusted number. Okay. If someone from the outside looking in, BMO spent roughly $4 billion to buy M&I. The 124 million net some of the expected loss and the interchange, that's a reasonable number to look at as a base as to the return potential to grow from for the M&I acquisition. Is that correct? Correct. Okay. Thank you. Thank you. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead. He can talk about the trading question. Yeah. I will talk about both trading and the underwriting and advisory. Maybe I will start with underwriting advisory. That business was down. We think like the rest of the industry, we really feel pretty confident we did not lose any market share, but it was a period when a lot of clients backed away. The bright note there is that our pipelines continue to be very healthy, so we are looking for a market opening, and we will be seeing higher activity levels. In terms of the trading performance in Q4, it was really a result of both the general market conditions and then how we are positioned. In terms of the market, like others, we suffered from higher market volatility and weaker client activity. In terms of our positioning, our positioning was such that we actually That is where we got caught. We had losses both realized and on mark-to-market. As we think about our positioning, we continue to think about it over a longer period of time than a quarter. We are very comfortable with how we are positioned. We think it is reflected in our performance when you look at it for the whole year, where we performed well and frankly, better than all our competitors. We were down but not down as much. So we are pretty pleased with that. With that, I will pass it over to Tom Flynn to speak to the compensation. Hey, thanks, Tom. Just a couple of things on the expense and comp related question. The first would be a statement of principle that it is important to us, and we know it is important to everyone that we have an appropriate relationship between compensation expenses generally and revenue. What I would point to specifically would be the numbers for the year, and these are disclosed in our sup pack. But for the year, our performance-based compensation was up a total of 7%, excluding the impact of M&I, it was up 4%. That is a lower percentage growth than we had in income, which was up 16%, and EPS, which was up 10%. Overall, we did have an increase in total performance-based comp, but it was at a lower rate than growth in the bottom line, and we think that we maintained an appropriate relationship between the expense base and revenue. Thank you. Thank you. The next question is from Gabriel Dechaine of Credit Suisse. Please go ahead. Hey, good afternoon. Just to go back to one of Frank's comments on expectations of more of the same in 2012, challenging environment. I would like to tie that back to your NIM outlook, considering the big challenges in the form of mortgage repricing. That is an ongoing process and what sounds like a significant funding gap, at least a noteworthy one you mentioned in your annual report. Then on the commercial lending, the lost market share, you talk about backing down from some segments of the marketplace. Can you talk a bit more specifically about the condo market, if that is included in that commentary, and what you are seeing there and where I would see that on your balance sheet, possibly, or in your disclosures in Canada? Yeah, sure, Gabriel. It's Frank. Back to the NIM question. We did see a four-basis point decline in our margin on a sequential basis in Q4. The primary reason for that is we're experiencing lower deposit spreads in this low interest rate environment. As I said earlier, our loan spreads are holding up well, and in some cases, they're even higher this year than they were last year. It really is just the low interest rate environment. We're feeling really good about our ability to compete, and we're doing a good job, I think, of holding the line in that competitive environment relative to our pricing. When you look back over the last couple of years, we've moved from a spot where our margin in P&C Canada used to be one of the lowest, and on an absolute basis, we're now the highest of the Big Five banks. Overall, we feel pretty good. When we look into 2012, we're going to see those trends continue. Rates we don't expect to be increasing anytime soon, and the pressures on margin will continue to be there. We would expect that our margin decline will moderate as we go through fiscal 2012. We're not expecting to see as much decline as we saw this year. But why not? Well, we're continuing to change the mix in the business, and that's been a big factor in why we've improved so much relative to the other players, and that's going to continue in 2012 as well. Stronger deposit growth would be one of those areas for opportunity for us in the coming year. Relative to your other question about commercial and market share and our real estate segment. The business that we would do for builders involved in the condo markets across Canada would be included in the commercial real estate segment in our portfolio. We've been cautious over the last year or so, and I would expect we're going to continue to be cautious in underwriting that risk going forward. Great. Thank you very much. Thank you. We'll take the final question from Brian Klock of Keefe, Bruyette & Woods. Please go ahead. Good afternoon. Thanks for taking my question. Maybe just a quick follow-up, I guess. Frank, on that, can you size the portfolio at all for us to the exposure to developers in Canada, and if any way, how much of that is to condo developers in Canada? Yeah. I don't believe we've disclosed that in the past. I'm not prepared to do that now. Just suffice it to say that our entire commercial real estate book is 20% of our P&C Canada commercial book, and that would include many different sectors. Okay. Obviously, builder-developers and investor-owned and commercial mortgages and all of those sectors. That is as far as we are prepared to go at this point. Maybe just a follow-up on overall loan growth expectations for 2012 in Canada. I guess maybe can you talk about commercial growth expectations versus the consumer growth expectations for 2012? Yeah, I think my view would be the same as we started 2011 with, that we would expect to see stronger growth on the commercial side than on the consumer side. We experienced that through the first two quarters. We took a little different position relative to our appetite, I think, in a couple of sectors, and that affected our growth through the back half of the year. But overall, I think there is going to be more opportunity for stronger growth in the commercial side than on the consumer side of the business in 2012. Okay, great. Thank you. Thank you. I would now like to turn the meeting back to Mr. Downe. 2012, as I've already mentioned. Continue to believe that our strategy's working well, and we are going to continue to invest in our frontline capabilities, but, as I mentioned, at a slower pace than we saw in 2011. Margins are going to continue to be under pressure, but as I said, the decline will moderate for us, and we are going to continue to take a cautious approach to underwriting risk in both our consumer and commercial real estate segments. Our balance sheet is stronger today than it's ever been, and our margin, as I said, has gone from one of the lowest a few years ago to the highest of the Big Five banks. We're confident in our strategy. Customer loyalty in both the consumer and commercial segments are at record levels, and we're starting to get some external recognition for our work. As I mentioned, our balance sheet grew faster in 2011 than in previous years, and our sales force is larger and more productive than it's ever been. Overall, we're confident in the strategy, we're confident in the path that we're on and our ability to compete, and I would expect 2012 to be another good year for P&C Canada. Over to you, Bill. Great. Thanks, Frank. Looking forward, the MD&A captures our medium-term financial performance objectives. They remain consistent with our expectations of strong competitive performance and increased productivity. For adjusted EPS, we're looking at an average annual growth rate of 8%-10%, generating adjusted annual operating leverage of 2% or more, earning average annual adjusted ROE of between 15% and 18%, and maintaining strong capital ratios that exceed regulatory requirements. We're confident in our ability to perform strongly against our peers through a number of differentiated growth levers. First, continued successful integration in the U.S. Second, strength in commercial banking. Third, expected return on investments we've made across our businesses in people, technology and distribution, including our U.S. Capital Markets business. Fourth, continued success in our flagship P&C Canada business. Thanks very much for joining us today. We look forward to reporting to you after the first quarter, and good afternoon. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.