Bank of Montreal Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Doug Young - Desjardin Capital Markets - Analyst : Hi, good morning. On the PCL, the guidance was for impaired to be in line with Q2. It was up 9 basis points, and I get the things changed. Just curious, what surprised you when you mentioned impaired PCLs likely remain elevated for a few quarters. What gives you confidence that it's going to -- you refer to the long-term average in fiscal '25. And is this more midway through fiscal '25, early '25? Just some color.

Question: Doug Young - Desjardin Capital Markets - Analyst : And just to clarify, so you're more expecting the revolution to the long-term average closer to the end of fiscal '25, not through the entire year. And then the 50 basis points when you -- last quarter, you said remain elevated and flat sequentially. So in the 40 basis point range for here. We're at 50 now. That 50 is of like the proper starting point to think about the remaining elevated over the next few quarters. Is that correct? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 27, 2024 / 11:15AM, BMO.TO - Q3 2024 Bank of Montreal Earnings Call

Question: Meny Grauman - Scotiabank - Analyst : Can you hear me now?

Question: Meny Grauman - Scotiabank - Analyst : Thanks. Good morning. Darryl, I wanted to ask about capital. 13% CET1, a little bit below expectations, but still very strong relative to the range of 12% to 12.5%, which seems to be where most banks are comfortable operating now. So I'm just wondering why no buyback given that capital level are credit concerns keeping you cautious? And Piyush, you talked about migration during the quarter. So I'm wondering if that's part of the story here?

Question: Meny Grauman - Scotiabank - Analyst : Just as a follow-up, where you see sort of your comfortable operating range in terms of CET1? And is it more elevated now just given the environment?

Question: Ebrahim Poonawala - Bank of America - Analyst : Hey, good morning. I guess a question for Piyush and maybe for Darryl on credit. So a couple of things like -- it seems that you have very limited visibility on credit for now. And two questions come up. One, is there an issue in terms of the bank having too many outsized credit for its size, because for a bank of BMO size, one loan, two loans moving credit meaningfully quarter after quarter is a little bit surprising. So one, just talk through in terms of how you're approaching whole size? Are these all shared national credits in the US and you're having to take these charges as you go through the review with examiners? And second, just talk through the process like given what's happened in the last two quarters, help us gain some confidence that you've done some deep dive reviews what the outcomes have been and why you have a better handle today than six months ago?

Question: Ebrahim Poonawala - Bank of America - Analyst : That's helpful. And I'll follow up on the shared national credit exposure later. But I had a question for you, Darryl, from an investor standpoint, 10.6% ROE, is there any short this bank again becomes a 14% ROE? And what will it take to get there?

Question: Ebrahim Poonawala - Bank of America - Analyst : Got it. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 27, 2024 / 11:15AM, BMO.TO - Q3 2024 Bank of Montreal Earnings Call

Question: Mario Mendonca - TD Securities - Analyst : Good morning. So BMO's PCLs, as you've disclosed, have gone from 21 basis points impaired last year to 50% this year, and your peers are something like 24% to 38%. So clearly, something's gone wrong. And I appreciate your comments around the pandemic, but the pandemic was not unique to BMO. So as you look back, do you see can you identify the failures, like the underwriting failures, the mistakes that the bank made? And the reason I'm asking the question this way is because it has been my experience that when a bank goes through something like this. And I think the bank is clearly going through something relative to your peers, that changes need to be made and often those changes lead to subpar growth until the bank figures out what went wrong. So the question is two parts, what went wrong relative to your peers? And secondly, does this necessarily lead to a period of below average growth as the bank retools? Nadim Hirji - Bank of Montreal - Group Head, BMO Commercial Bank, North America and Co-Head, Personal and Commercial Banking In terms of did we do something different, our credit underwriting policies, procedures are robust and we did not make any significant changes to our credit risk appetite over the past several years. I thought about this and we've taken share in the US in the last few years. It was purposeful. It was more so in specialty segments like ABL, sponsor fund lending and dealer finance. And these are not the areas where we are seeing an increase in impairment. And as you heard from Darryl and Piyush, we're not seeing systemic issues in the portfolio or losses concentrated in any segment geography. It is broad based. We had a growth strategy but we didn't lose discipline. And we're going to, of course, look at our underwriting and portfolio management practices in a changing environment, but it's going to be to support continued growth and support our clients through these times.

Question: Mario Mendonca - TD Securities - Analyst : Yes. Darryl, you don't believe there's any reason to take growth down in your Corporate and Commercial business?

Question: Mario Mendonca - TD Securities - Analyst : Thank you.

Question: Matthew Lee - Canaccord Genuity - Analyst : Good morning, guys. You mentioned the watch list and I noticed it's going from to 5% of the book, up from 3% at the end of '23. Can you maybe just talk about what level of credit deterioration the company has to show before they end up on that list? And just maybe you can detail some of the indications looking forward when you put a company on that list?

Question: Matthew Lee - Canaccord Genuity - Analyst : Yeah, just some details on the indicators that you look for when you put a company on that watch list?

Question: Matthew Lee - Canaccord Genuity - Analyst : Okay. That's great. And then maybe on the US expense front. Efficiency ratio dropping a couple of hundred basis points quarter-over-quarter good progress. Can you maybe put some dimensions around where you expect that ratio to end up over the medium term? Like should we be expecting to see a return to the low 50s, high 40s in the next couple of years or are there like mitigating factors that might offset cost reductions there?

Question: Matthew Lee - Canaccord Genuity - Analyst : All right. Thanks, guys. I'll pass the line.

Question: Gabriel Dechaine - National Bank Financial - Analyst : Good morning. I just want to follow-up on the line of questioning that Mario was going with earlier. In terms of maybe stuff that went wrong over the past couple of years. I know you're saying it's normal and consistent with the industry on the consumer side. But on the commercial side, I'm just wondering if, while you were integrating Bank of the West, maybe that watch list wasn't as closely watched as it should have been?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Okay. And just so I understand your credit outlook in a clear fashion, you're saying the next one to three quarters are going to be in and around the credit experience we've seen this quarter, some variability, I guess, for whatever you're calling it, idiosyncratic situations. But in and around this quarter's level for the next one to three then after that moving towards the normalized level, which would be what?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Okay. And again, this language is important here. You're saying higher than the 36 or higher than what we saw this quarter?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Got it. All right. Well, thanks.

Question: John Aiken - Jefferies - Analyst : Good morning. Darryl, I wanted to circle back in terms of your commentary about the timing of revenue synergies from the Bank of the West deal. Now understandably that's being pushed out. But do you still think that you're able to achieve what you originally thought? And can you give us some framework in terms of what you're thinking about timing moving forward now?

Question: John Aiken - Jefferies - Analyst : Thanks for the color guys. I'll re-queue.

Question: Lemar Persaud - Cormark - Analyst : Yeah, thanks for taking my question. So just on credit. I'm just wondering like what is really preventing you guys from providing more specific guidance on PCLs given that you guys have done this deep dive in commercial wholesale exposures? Like is it because of uncertainty around the rate environment, unemployment like what are really the few factors preventing you from going there? Because as you know, most of your peers are able to provide more specific guidance on credit losses at least on the impaired side?

Question: Lemar Persaud - Cormark - Analyst : That's helpful. Yeah, it just sounds like it's, I guess, more because of a mix issue. The other your peers are probably able to better mask it given they're heavier in retail.

Question: Lemar Persaud - Cormark - Analyst : Okay. And then just another you guys have mentioned that some of these losses in the commercial and wholesale businesses are syndicated position. So I'm assuming you'd see what peers are involved in these loans. When you look across some of your peers that are involved in these loans that went bad, does it feel like elevated PCLs are more just BMO being conservative on credit or are they simply just more meaningful to BMO?

Question: Lemar Persaud - Cormark - Analyst : Appreciate the time.