Bank of Montreal Earnings Call Insights: Purchased Credit Impaired Portfolio and P&C Canada

Bank of Montreal (NYSE:BMO) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Purchased Credit Impaired Portfolio

Robert Sedran – CIBC World Markets: Surjit, can you just give us an update on the evolution of these purchased credit impaireds numbers, please? Appreciating that there is a lot of caveats, but your guess is certainly better than mine. I think last quarter you suggested that H2 could look like H1, but after Q3, I think H2 already looks like H1?

Surjit Rajpal – EVP and Chief Risk Officer, BMO Financial Group: I have always little reluctant to be very definitive about what happens in the purchased credit impaired portfolio, given that it’s a combination of the workout process that we go through and loan sales. And in quarters in which we have some loan sales, you do see better numbers. So, I would suggest that for – if you want to look forward, you got to bear in mind that the portfolio is only down to 29% of this side, so it’s a much smaller factor. Having said that, I would expect the next quarter to be good, because we are trying to take advantage of the improving market, and through resolutions and loan sales I would see the results to be good, but not at the level that you’ve seen for the last two quarters.

Robert Sedran – CIBC World Markets: Just as a follow-up on the similar theme in Canada, we keep hearing about the Canadian consumer being a problem, and then, you’ve taken provisioning levels down and your peers are doing the same or at least have been doing the same. How much of this is good performance today and how much of this is you feeling optimistic about the next 12 months to 18 months when it comes to consumer? I mean, considering that the loan book is more heavily secured than it was in past cycles, should the trough be lower than past cycles; have we got this wrong in the market?

Surjit Rajpal – EVP and Chief Risk Officer, BMO Financial Group: On the consumer side, I think you’ve got to differentiate between the two markets. In Canada, we did actually – the allowance that we had increased in our consumer area because of the Alberta floods. I think the consumer area in Canada is performing quite well for now. And I would expect that to continue. I don’t know how to answer your question on the trough. If the market were to change – obviously, when the market does change and it’s been driven by high consumer debt levels, things could be very different. So I am cautious, but all I can tell you is that in terms of our provisioning from a collective allowance standpoint, we feel comfortable that the numbers that we have there more than adequately protect us and are appropriate for the level of risk that we see going forward.

P&C Canada

Peter Routledge – National Bank Financial: Frank, very strong quarter. I noticed expenses and I’m sure you want to talk about revenue too. But I noticed the expenses were kind of in line. They’ve been pretty good really the last couple of years now. How much expense control is left related to restructuring? Is there more – do you get more of a lift from restructuring in the quarters ahead, or we pretty much see all that now? And then what’s your outlook on your efficiency ratio for 2014?

Frank Techar – President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: Sorry, Peter, you were talking about the Canadian business?

Peter Routledge – National Bank Financial: Yeah, P&C Canada, I’m sorry…

Frank Techar – President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: Okay. Well, first of all, since you’ve given me the opportunity, I am going to barge in and just make a couple of comments about the quarter because I may not have an opportunity to do it. This was a really good strong clean quarter for P&C Canada and the best thing about it was the fact that the improvement was broad-based across a number of different elements. I won’t repeat – Tom and Bill mentioned a very strong loan growth that we’ve seen, very strong mutual fund growth that we’ve seen. These are really big numbers for us, especially in this competitive environment and we think we can continue the growth just the way we’ve seen over the last couple of quarters. In addition to that, the margin compression has moderated a bit and that’s on the back of stronger deposit growth which you all know, we’ve been working on very hard and the numbers came through nicely this quarter. So, my expectation about margin going forward is similar to what I said a few quarters ago, which is moderating moving forward, 1 to 2 basis points as we go into fiscal 2014. We also saw non-interest revenue very broadly strong across many product categories; our deposit products, our card products, mutual fund products. So, the lift we’ve seen in the results for this quarter are broad-based across many elements of the business, which gives me confidence that moving forward, the strength in many areas, there’s no reason why we can’t continue. So with strong growth, moderating margin declines, better non-interest revenue growth, I’m expecting our revenue growth to continue to improve over the coming quarters. Relative to expenses, we are building a stronger bank and we’re building one that’s going to win and last, and we are continuing to invest modestly in the business, particularly on two fronts; one is improving our channel, both our branches and our online and mobile capabilities, but also improving some of our core processes. And right now, in slate, we’ve got work going on, on our commercial lending platform and our credit card platform. And so, we do have a little, as you characterized it, restructuring going on in the business, and specifically, our expenses were up C$27 million sequentially, and that increase occurred in a couple of areas, days as you might imagine, we had some volume-driven cost and this investment in the business. So, going forward, I’d expect to see a little bit of seasonal growth in Q4, but I’m really not expecting year-over-year expense growth to be higher than we saw this quarter. I am expecting it to be lower as we go into 2014. I think our investment in the business can be offset with some of the productivity initiatives we’ve got ongoing, and I wouldn’t expect it to be this high as we move forward.

Peter Routledge – National Bank Financial: Just a follow-up for Bill. It’d be unfair of me to ask dividend question without first seeing you bought back 4 million shares. I guess the question isn’t so much why the Board elected not to raise the dividend. Was it more of a trade-off decision; you like the price of your shares throughout the quarter, so you elect to buy back maybe a bit more shares and you hold out on dividend for a later date, or is there other considerations?

William Downe – President and CEO, BMO Financial Group: Well, thanks for not asking an unfair question, Peter. I don’t think there’s a change in direction. I would be consistent with my previous comments that we believe that returning capital to shareholder is a good thing to do, particularly when you have very strong capital ratios. And that increase in the dividend over time consistent with earnings increases is a pattern that we want to stick with and that’s dividend increase of one or two times a year. I think your point about the way in which capital is returned to the shareholders, it does – it is the case that we bought back 4 million shares, and if you just look at the value of the repurchase plus the dividend, about 60% return to the shareholders and about 40% retained as retained earnings to support the growth of the businesses. And I think you’re right, we do believe that the share price is attractive and that a good mix between share-backs and dividend increases will be well received by all shareholders.

A Closer Look: Bank of Montreal Earnings Cheat Sheet>>

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