NBF 20th Annual Financial Services Conference 2022

Mar 22, 2022

Dave Casper to the stage. Dave is the CEO of the U.S. business, and he's in charge of overall North American commercial banking for BMO. Dave, I should also mention, you're the point person on Bank of the West integration. Is that right? That is. Well, I'm not the day-to-day, but yeah, I'm the executive sponsor for it, for our IMO. So- It's in the U.S. It makes sense. Yeah. So we'll have a few questions on that. Thanks for coming to Montreal. My favorite city. I will start off with Bank of the West, that acquisition, obviously big news. We've seen some of the U.S. acquisitions Yeah from other banks, the regulatory approval timeline getting pushed back. Are you feeling the same or any different than what you were when you announced the deal? Pretty much the same. The regulatory environment in the United States, where it might have taken, Gabe, 2 years ago, we might have done this in 6 months. When we did the M&I acquisition in 2010, we got it approved, and we closed within 6 months. Just the politics has caused some parts of D.C. to be a little bit more hesitant. But I think to your question, I think, yeah, our plan, we said that we thought we could do it in calendar 2022. We announced it December 20th, and we said we thought we could get done in calendar 2022. So we still think that, yeah. Could be sooner. Don't think it'll be later, but it could be sooner, I guess. Okay. As far as the nuts and bolts of the acquisition, and this is something I hear from investors, is the synergy number was pretty big as a percentage of the $670 million. Yeah. U.S. dollars. US. Yeah. Which is about 35 a little over a third, 35% of their overall costs. Is that a number you feel is ambitious, or is it you've got a very clear line of sight on where you're getting it from and ultra confident in getting it? It is ambitious. I am ultra confident. There were other numbers that were thrown out, and that's not really inconsistent with what other banks have said. It's in the 30%-40%, certainly some at 40, so we're at 35. Here's why I'm confident, though. First of all, we've done this before. We did it, and a lot of people that were there, including myself when we did M&I, we did that. This is different. This is different in a lot of ways. Bank of the West, for those that don't know, 70% of the business is in California. It's been owned by BNP Paribas for probably 40-plus years. So we are taking our platforms, and their platforms are actually fairly similar. FIS provides a lot of the work on both sides, combining that together. That's a big synergy right there. They have shared services that BNP would provide for them. We have shared services. Obviously, the parent provides all the businesses, so that's a really good synergy. We're just taking it and moving it onto our platforms. Unlike when we did M&I, this is easier because we're buying a business that's used to being owned by a foreign bank. When we sit down with them and we say, "Well, the going-in view is we're going to go to BMO platform," there isn't a lot of resistance. They get that. It makes sense. You don't have, and this is what can take time. When you have a merger of equals, you can have a pretty long debate over, "Well, my platform does this, my platform does this." We don't really have that, and it's pretty clear that the Bank of the West platforms are great, but to load it onto our platform, where we've really built over the last 10 years for real scale in the U.S., we're adding another 1.8 million clients to what we have today, 2 million in the U.S. So we've got the scale to do that. So I feel really good about it. There's overhead that obviously part of the control functions, you don't need as many people in finance and accounting as you would when you have risk. But we're going to be pretty smart about it. I feel very good, though, we'll hit that number. That's a long answer, but I'm very confident on that. The number itself, aside from the size, but the pace is expected to be achieved within the first year. Is that really because you're flicking off a switch on their IT side? Well, yeah. I think we've given ourselves a fair amount of time to do that. Right. So we've said that the entire 670 million of cost savings would be achieved in that first year. We absolutely think we will do that. Let's say we close in December, just to pick that as the time. Within six months, we will convert all the systems. Okay. That really creates most of the savings. There's other things that we'll spend. We'll spend some money over a longer period than one year, just as we go through it. But the cost savings really will come in the first year. And I think that we've given ourselves plenty of time to do that. I should- By the way, just say we're working on this every day. As much as we can, we're spending time with them. The tech teams are working together, really very cooperative to figure out how we can do this, because it's all about getting it right from the client side. Anybody that's ever been through a conversion, it's painful if you don't do it right, and if you don't think through it. So that's what we're spending the time on now, and we've got actually a longer period of time than normal to do that and get ready. I should have started with this question, but what are you doing now as far as integration? You can't integrate anything, but as far as preparing for that. Yeah. We can't integrate, but our tech teams can. Everything has to get done through. Legal has to look at it. Obviously, we can't share any confidential data. But we can share, and the regulators actually want you to share the types of things, how do the systems work? How's your cyber going to work? How are all the things going to work on day one? The regulators expect that and want you to do that. So we're doing that now. Our tech teams are working very closely together so that when legal day one comes, we won't be kind of like, "Oh, what are we going to do now?" So that we've thought through this. It's about how we handle the customers, how do you get the data over, how do you move from Bank of the West or from BNP to BMO. They're doing a great job, and the teams really are focused together on that. Last one on the synergy stuff, but if I plug in quick merge of the models. Mm-hmm. Yeah. income statements. Yeah Then plug in the synergy number, I get to about a 50% pro forma efficiency ratio, which is below where both entities are running. Is that you expect it to be? Well, the good news is your math is very similar to ours. We put that in our deck. I think we said 51%. Right. When we fully synergize. The pro forma, if we just took last year's numbers, I think at the end of 2021, pro forma would be about 50. Our overall U.S. productivity is around 54. Our P&C U.S. Okay which this is mostly in the P&C business, this acquisition, is now below 50. I think the numbers that you're looking at are good. They're instructional. I think they're helpful. I would also say, just to go back to what we did with M&I. When we bought M&I, and actually, since even 2018 in the U.S. and our P&C business, we've taken the productivity down, I think 800 points just since 2018. We've really made some real good improvements. That's all scale. It's being more efficient. It's investing. It's taking as much as we can, making it digital. We've made some good efforts there. We've also moved our ROE up, Gabe, from I think 12 to 18 or something like that, just in our P&C businesses. Lastly, the U.S. business, there was a time when BMO was investing in the U.S., you were getting growth in the U.S., but you weren't getting the returns. That was the issue. You're growing in a more competitive market. Today, our U.S. business, and that's P&C, Wealth, Capital Markets, Retail all together, is equal in terms of productivity and ROE to what we do for all of BMO. So it's no longer dilutive. It's a good growth market, and if not accretive, it's certainly equal. I think with this acquisition, that'll even get better. I'm not predicting the U.S. will be better. Right. I'm just saying that it's going to be a good story. We're on to the more fun stuff. Yeah. This is the fun stuff. Well, now is the growth part. You've got an acquisition, an organic growth. The question that investors and I have is: How does this improve your future organic growth potential? Yeah. An obvious thing to look at is how Bank of the West has not really grown much. BMO is going to plug in their systems and accelerate its growth somehow. Yeah. How does that work out? Is there a playbook Sure. Yeah. for better sales culture or what now? Well, we've talked about the infrastructure side and where we think we're going to get the costs out. Your question is really more on the revenue synergies. What are we going to do? How is Bank of the West, which is a good bank, and it's done well. It's a conservative bank with good culture. I do think there's a lot of opportunities to keep that growth going. I think you're referencing they had some lower loan growth the last while. There's a couple things in there. They got out of the indirect auto business, so they've substantially reduced that. That took about CAD 1 billion out. They had PPP, which John was talking about earlier. That's obviously affected them as it has other banks. Their mortgage business came down a little bit. There's no question in my mind that bringing our playbook to what I think is a good culture there. I don't think I mentioned this, but part of the reason people wondered about our synergies, we're not closing any branches. So there's no synergies there. The branches are staying, and it's contiguous, so there's very little overlap. On the wealth side, on the commercial side, there's no loss of people there. In fact, we'll add more people to that. I think we can get in the West Coast, just in California, it's twice the GDP of Canada. There's a real growth opportunity for us. We've been out there as a bank. BMO's been out there, but not with branches, not with enough people. I think when we're out there, we get the wealth humming, the wealth commercial teams humming. The commercial teams, which are very similar in terms of what we do and what they do. We have some things that they don't have. They have some things that we don't have. Together, whether it's ag or their beverage business, we grow together. They have a technology business just because of where they're located, which I think we've built up. I think that's a real opportunity for us. What they did, what Bank of the West didn't have, they had a parent, a good parent, but it was probably 5% of BNP's business. When we put these two together, the U.S. will be 46%-47% of the net income of BMO. We're going to invest a lot more. Yeah. We're going to grow it. It's not that they were starved, but I think they're going to see a lot more momentum, a lot more encouragement to grow together. I think we've got the playbook to do that. So that's where the real upside is. As you know, we didn't really talk about the revenue synergies in our deck, but we'll bring more of that out over the next couple of months, I'm sure. Last question on Bank of the West. Shortly after your deal, another one was announced, the TD's, and there was some disclosure on employee retention. Yeah. Do you have any structures like that in place in this, and how is it? Absolutely. Maybe not exactly the same way, but we have a big plan for retention that is ongoing. It's critical that we keep the people that are most valuable to run the business. There will be no question for those people that we want them, we need them. We think, actually I know, that the vast majority of them will see this as a positive. They'll see that we're not cutting jobs. We're growing jobs in the markets. They'll see that if they were a good bank at Bank of the West, they will be a better bank, we will be a better bank by putting them together. They see that, and they compete against the big guys out there, B of A, Wells, JP Morgan. U.S. Bank is buying a bank there, so they'll be bigger. They see us together, I think, as a very good alternative to some of the very large banks that are out there. For our mid-market, mid-cap business, which is basically what we have for commercial, we are a pretty good alternative, as we have proven in other parts of the U.S. Okay. Another big topic that has come up in BMO's results, especially in 2021, was the securities gains. Yeah that were boosted by private equity-related co-investments or whatever term you would use is the one we will use. How big is that portfolio in the P&C Bank? In the P&C Bank, the portfolio in Canada is around a half a billion CAD, in that neighborhood. We have been doing that for probably 15 years. John gave you a good explanation. Ours would be a little bit different, but we would invest. By the way, capital markets would do this as well. Right. But I think you were specifically talking about P&C Canada. So we would invest in various funds, similar to what John had said. We do that only really. First of all, there would be some people that always say, "Well, let's invest in the fund. We'll get more business." Yeah, maybe. But the first thing we're going to do is make sure it actually makes sense, that they're smart, they know how to get a good return. And as everybody knows in this group, the alternative business, the private equity investments have been very strong. So it's got to make sense. But then we'll invest a pretty small amount. And those have grown. So as we started maybe 10, 12 years ago with fund one, now some guys are on fund four or five. It's, over time, returned very well. And then we also, I think you'd asked before, that's probably half of the business. The other half is- Actually, if I can pause. The CAD 500 million you referenced, that's the, when you're in- That's all of our investments. That's- Some would be the private equity. Okay. Some would be private equity investments, and it's probably 5, 10, maybe 15 million in a fund. Okay. We might have 15 if we have it in three different funds. It goes down over time as they, obviously, they return capital. But the other part of our business, we invest in private companies, not the private equity companies, where they'll come to us, and it might be a generational issue, and they say, "You know what? We need X dollars for an expansion or to buy somebody out." Well, maybe there's a certain amount of that that we actually would say that works within our traditional senior loan structure. But we might put $5 or $10 million into a sub-debt piece, which we would see as, we know this company, we're going to get a higher return on it. We'll put a little bit in there. We don't do that very often, but we absolutely do that, and we've been doing that for 10 or 15 years. As those return, we get that back. We don't get an equity slice there, but we get very good returns there. Then on occasion, we will invest some equity in some companies, sometimes through private equity, but it would be in the $5 million piece. All that adds up to about 500 in total. But in terms of the gains, every quarter we have some gains. We hardly ever have loss. I mean, we might have a loss in one deal, but every quarter. Last year, we had about $100 million, a little over $100 million in gains in that portfolio. Some realized, some unrealized. Mostly unrealized. Okay. But that represents, in terms of our P&C Canada, our NIR, that is about 5%. And that total 100 for P&C Canada would represent maybe 20% of all of BMO's securities gains for that year. So it is important, but it is not. We run our business really around the clients, and if there is an opportunity for us to make a smart investment because we have got proprietary knowledge, we will do it. But our main business, by far, is lending money and taking deposits and giving that advice. Does that help? Yeah. It is very helpful. The lending aspect of it. Yeah. I know the capital markets business does leverage lending. Yeah. That is the originate to distribute model. Yeah. But at the commercial bank, both in Canada and the U.S., you lend to leverage loans Yeah to buy out these Yeah investment companies, right No, we buy middle-market companies. Right. That- We finance middle-market companies that private equity firms are buying. Correct. That's what I meant. Yeah. How big are those portfolio And those are balance sheet- Yeah loans, right? It's a little different. It's different in Canada than the U.S. In Canada, it's a smaller portion. It might be CAD 2.5 billion, if that, in Canada. In the U.S., it's about $5 billion. But they're very different in terms of how we run the business. In the U.S., we probably have 200 portfolio companies, and in 90% of those, we are the lead. We never would hold more than $25 million in any one deal, and we have a cadre of investors that invest with us for the senior loan, and they've done that because we've been doing this over 10 years. So they invest with us because they know, unlike if they put their money with any other money manager that's investing in this, we've got $25 million in every deal. This has been a very good business for us in the United States, and it is more of a distribution. The loans that we're doing there are less than, almost always less than $50 million of EBITDA, so the companies might be worth $300 million-$400 million at the max. When they get much above that would be a capital markets where they don't hold as much, and they do distribute. But we're holding in every one of those deals. Canada would be similar, except they don't have the market in Canada to distribute the way we do in the U.S. As a result, those loans to Canadian private equity firms, which are more conservative than the U.S. firms, those we would hold a little more. We would be, just as John said, we would be agent in at least two-thirds of those, I think, and with good relationships with the firms. We hold those. But they're less leveraged too. Okay. Just the loss rate though in the U.S., where I'd say it's probably a little bit riskier, has been exceptional. Very strong returns, exceptional loss rate over a 10-year period. The difference is we've hired asset managers really to run that business in the U.S. because we like relationship managers, but when you're running against private equity firms, you really need more of an asset manager mentality to do it right, and I think we've got the right recipe there. We keep referencing John. Yeah. Hey, I told him I would just, anytime you stumped me, I'd say, "Just refer to John. What did John say? But I asked him, and I'll ask you the whole what are your clients Yeah saying, doing. They're facing a whole bunch of. This is a Canada, U.S. answer. Yeah I'm sure is different. Inflationary pressures, geopolitical backdrop Yeah concerning China, experiencing or contributing to supply chain constraints. I could go on. Despite some of the growth numbers we're seeing, is this restricting growth at all? Yeah. So far it really hasn't. Obviously, the supply chain is, in a way, it's acting as some pretty good equilibrium, which I think stretches out the recovery even over a longer period of time because there just is not enough labor or raw materials. But it has not caused, really in any of our sectors, anything that's significant. Most of our clients are able to pass it on. It might take a little while. Like our food business, it takes a little bit of time. Our asset-based lending business is a big business for us. It's grown, and that's where we've seen a lot of growth there. I haven't seen yet any real slowdown as a result of the war or even what's taken place. We have seen the supply chain continues to stretch out, whether it's our auto dealers or our truck dealers or some of the other businesses on both sides of the border. It's taken longer. I've been hearing for 18 months, it's five or six months away, and they've been saying that for 18 months. Yeah. They're saying it today. Well, it's five or six months away. At some point, they're going to be right. At some point, the auto manufacturers will load up the dealers again with cars. But we haven't seen that yet. We're down at least 70% in terms of our utilization in our truck and our auto floor plan business. So that's going to come back. Sorry, what? At this point in the season, we would probably be at 75% pre-COVID. Okay. 75% of the lines being used for our auto dealers and our truck dealers, which combined is probably 10% of our business. Today it's probably 20%. At some point that's going to come back. Other parts of our utilization are still down, but they're slowly coming back. Has inflation been a net positive? I know we hear about it as risk, but if you're lending to trucking company, you got to buy a new truck. Right. They cost more. New truck's $10,000 or $15,000 more. Yeah, I suppose it is, although the dealer's not financing the trucks anymore. They just go out as soon as they get it. Or they want to expand their plant, then building costs go up. Yeah. No, inflation absolutely is impacting in some ways, but it is also obviously a drag in terms of because of the inflation. Inflation is there because the supply cannot meet the demand. So the price is going up, so you are getting less demand. I think as we move more into equilibrium, loans will continue to grow, and our loans have grown. Have they? Our loans, despite all this, our loans in Canada were up 10%. Yep. Our loans in the U.S. were up, I think, 14% ex PPP. We've still had some pretty good growth. It's a lot of new business. You haven't asked me about real estate, but- All right, but- You're going to Let's- You want me to answer it before you ask it? Let's put that I have a really quick one. It's similar to what I asked previously, because as the previous speaker said commercial and office space Yeah everything seems to be okay, unclear on office space for commercial clients. The U.S. is like a little bit unique, and I'm wondering what it looks like down there because people have moved their homes virtual, et cetera. Yeah. Do you have a comment on that? I have a couple of other questions. The other one is, you said earlier you moved asset managers versus wealth advisors to have a better model. No, no. No. Let me just correct you on that. In our sponsor finance business, where we lend money to financial sponsors to buy companies, we have their relationship managers, but they think more like asset managers because they do better with private equity. I do not want to go into it too much. I can talk to you afterwards, but that is what I meant. It has nothing to do with wealth. Okay. Very good. The real estate- The last question, if you can answer, is stock splits, if it does become- Oh where it's coming, if it's coming. If what's where what? Stock splits. Stock splits. Is there a possibility that BMO announces a stock split? Oh. You probably couldn't. That's above my. How about a comment on stock splits. Oh, okay. You can't tell me. Oh, okay. Clearly. If they're remote, but- Let me talk about real estate. The real estate business for us is, first of all, for BMO, we have about the same amount of overall real estate in BMO as we do in the other banks, about 9% of our total loans. But for our commercial loans, so commercial real estate, we're about 17% of our commercial and government book, and the other banks are probably close to 30%. So we're much lower. We're underweight in commercial real estate, both in Canada and the U.S. vis-à-vis our peers. That's not necessarily good or bad. We love the real estate business. It's just other C&I businesses grow at a pretty good pace, too. You just have that as part of your thinking, good or bad. As real estate has grown, and it has for a big last couple of years, we participated, but when we have 15% less of our commercial book in real estate, we're not going to see that growth. I feel pretty good about where we are. Office, I feel pretty good, but it's a small part of our business, and most of our business is fully developed. We have about 15% that's development that we're working with, and some of that, maybe 25%, it would be office, where we're building the offices. But we're in pretty good shape there, and we're keeping up with what has been huge demand. In the U.S., we don't have much office exposure. Our biggest two office exposure loans in the U.S. are in Milwaukee and Chicago, and we're the main tenant in both. I feel pretty good about those. We're class A. Okay. Okay. I feel like we didn't even have any time. I don't- Can I get another 25 minutes? What is it? Time flies when you're having fun. Yeah. Are we done? Any more questions? Yeah. I think we have to. Okay. We have another speaker. Thank you very much. Thanks.