Good morning and welcome to the BMO Financial Group's Q1 2019 Earnings Release and Conference Call for February 26, 2019. Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead.

Thank you. Good morning, 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 Darryl White, BMO's CEO, followed by presentations from Tom Flynn, the Bank's Chief Financial Officer; and Pat Cronin, our Chief Risk Officer. We have with us today Cam Fowler from Canadian P&C and Dave Casper from U.S. P&C. Dan Barclay is here for BMO Capital Markets and Joanna Rotenberg is representing BMO Wealth Management. After their presentations, we will have a question-and-answer period where we will take questions from prequalified analysts. To give everyone an opportunity to participate, please keep it to one or two questions. 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. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall bank. Management assesses performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tom will be referring to adjusted results in their remarks, unless otherwise noted as reported. Additional information on adjusting items, the bank's reported results and factors and assumptions related to forward-looking information can be found in our 2018 annual report and our fourth quarter report to shareholders. With that, I will hand things over to Darryl.

Thank you, Jill. And good morning, everyone. Thank you all for joining us this morning. Today, we announced good first-quarter earnings of CAD 1.54 billion, up 8% from last year, and earnings per share of CAD 2.32, which increased 10%, a very good start for the year. Performance this quarter played out well and as we expected. Our North American P&C businesses performed very well against solid economic fundamentals and a strong and stable credit environment. Our diverse business mix across geographies, products and customers continues to produce sustainable earnings power even as the environment in which we operate evolves. That diversity, together with our strong risk and underwriting practices, also leads to consistently good credit performance. This quarter, earnings growth was driven by particularly strong results across our US platform and in commercial banking broadly, where we continue to have good momentum on both sides of the balance sheet. And in Canadian P&C, balanced growth continued to accelerate. Expenses were very well-managed. Excluding the impact of the stronger US dollar, expenses were up only 2%. We generated positive operating leverage of 1.5%, while continuing to invest in technology and strategically growing our businesses. ROE for the quarter was 13.9% and our capital position remains strong with a CET1 ratio of 11.4%. Today, we announced our intention to renew our NCIB as of June 1. Turning to slide five, we've said consistently that growing our US platform is a key strategic focus and a differentiating strength for BMO. Net income and pre-provision pretax earnings continued to grow at a strong rate with good contribution from each of our US businesses. In US P&C, we're building on good performance in our personal and commercial businesses. This quarter, we achieved revenue of US$1 billion in these businesses for the first time, which…

Thank you, Darryl. My comments will start on slide eight. Q1 reported EPS was CAD 2.28 and net income was CAD 1.5 billion. Adjusted EPS was CAD 2.32, up 10%. And adjusted net income was CAD 1.5 billion, up 8%. As Darryl walked through, results reflect strong performance in our US and commercial businesses and positive operating leverage. Adjusting items are similar in character to past quarters and are shown on slide 24. Net revenue of CAD 5.6 billion was up 6% or 4% excluding the impact of the stronger US dollar. Expenses increased 5% or 2% excluding the impact of the stronger US dollar, largely reflecting higher employee related and technology costs. Net operating leverage was 1.5% in the quarter. As a reminder, in the first quarter of each year, we have higher expenses related to stock-based compensation for employees who are eligible to retire reflected in our results. The effective tax rate was 20.4%, up approximately 1% from last year. The effective tax rate on a TEB basis was 23.1%, down from 24.7% last year. Moving to slide nine, the common equity tier 1 ratio was 11.4%, up approximately 10 basis points from Q4. As shown in the slide, the ratio increase reflects higher retained earnings and also higher AOCI from security gains and other smaller items, net of higher risk weighted assets and the impact of regulatory change. We also bought back 1 million common shares in the quarter. Higher risk-weighted assets were driven by strong business growth, partially offset by positive methodology and asset quality changes. Moving to our operating groups and starting on slide 10, Canadian P&C net income was CAD 648 million, relatively stable compared to the prior year, which benefited from a net gain. Revenue growth was 3%, driven by higher balances across…

Thank you, Tom. And good morning, everyone. The main risks of the bank continue to evolve in line with our stated strategy and risk appetite. And we remain comfortable with the risk levels in our various businesses. While the financial markets have been more volatile this quarter, underlying economic conditions were stable and the performance of our credit portfolios remain strong. Starting on slide 16, provision for credit losses on impaired loans was CAD 127 million, a decrease of CAD 50 million from last quarter as we had strong credit performance across our major business lines and particularly in our Canadian and US P&C businesses. In addition, our impaired provisions benefited, as Tom said, from a relatively large US consumer recovery. The provision for credit losses on performing loans was CAD 10 million, resulting in a total provision of CAD 137 million for the quarter. Turning to each of the businesses, in Canadian P&C, total PCL was broadly unchanged as lower commercial losses were mostly offset by marginally higher consumer losses. PCL on impaired loans for US P&C decreased $46 million, largely due to lower commercial losses and a CAD 36 million recovery on legacy consumer loans related to an insurance settlement. Capital Markets PCL had a net loss of CAD 1 million versus a net recovery of CAD 3 million in the prior quarter and Wealth Management losses were flat quarter-over-quarter at CAD 2 million. The CAD 10 million provision on performing loans in the quarter was the net effect of increases caused by more uncertain financial market conditions, a reduced benign scenario wait, and portfolio growth, which was largely offset by a decrease due to improved credit quality in the portfolio. While there was little quarter-over-quarter change in the GDP or unemployment, the quarter did have higher allowances…

Thank you. [Operator Instructions]. Our first question is from Robert Sedran with CIBC Capital Markets. Please go ahead.

Hi. Good morning. I wanted to ask about deposit and margin trends in the United States. I'll focus on deposit gathering, but double-digit deposit growth was also sequential. A pretty big increase in the commercial side on a quarter-over-quarter basis. And I'm wondering if there's something unusual in those numbers, if maybe some of it is a temporary spike in deposits or if there's something more substantial going on? And then, the interplay on that was the margin guidance which is better than what I thought Tom had suggested last quarter. And I'm curious, A, if I'm remembering that correctly and then, B, if you can update that view on the outlook for the US margin?

Robert, this is Dave. I'll take the second part first. You actually aren't remembering correctly. You're remembering correctly on the guidance. But I'd like to blame it on Tom, but I gave you the guidance on the NIM.

Okay.

So, let's go back to your first part. The deposits on both the personal and the commercial side have grown really, really well. And we've said, over the last couple of years, that our deposit growth had actually – until about two years ago had not grown as fast as our loan growth. And, over time, we've always been pretty balanced between personal and commercial. So, we have absolutely gone after commercial deposits, largely from our existing customers, where we do all their operating business, but sometimes we had not gotten all their liquid balances and we've made a push to do that. And also, with new customers as well. So, I don't think it's temporary. There's always some fluctuation between the quarters, but you should expect that – and we've said that our deposit growth will at least equal our loan growth over the long term, and we expect that to happen. Going back your NIM question, the guidance was a little bit lower. We really were happy with what happened in the quarter. Our loans spreads actually came in a little bit better. We also saw our deposit costs come in a little bit lower and we had some interest recoveries again in this quarter, which helped a little bit. I'll stop there and just see if that helps you if you need anything else.

It goes. But, I guess, just the 12% sequential growth in deposits, clearly, not something you would expect to continue at that pace. It sounds like better than what it has been.

Yeah. It absolutely has. And as I said, over the long term, we expect the deposit growth to be at least as good as loan growth. In the quarter, there were a couple of big deposits, but nothing really unusual. Remember in that, there was a year-end in there. Sometimes that takes deposits for a little bit that then go off. I wouldn't expect it would be 12% every quarter. But I would expect, and we should expect, in our commercial business and in our retail business to continue to grow good long-term deposits for the long term from our customers.

Okay, thank you.

Thank you. Our next question is from Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning. I was operating if you can talk to, when I look at year-over-year operating leverage, it feels like the majority of that was driven by the US segment this quarter. When we think through the rest of the year, Darryl or Tom, how should we think about sort of the biggest drivers of operating leverage across the four segments? Like, where do you expect operating leverage to pick up as the year progresses versus flattening out from here?

Yeah. It's Tom. Thanks for the question. I would say, in the quarter, we felt good about the operating leverage coming in at 1.5 in a quarter that did have some softness, for at least part of it in Wealth and Capital Markets. The expense growth was, we think, very good in the quarter. In constant currency, expenses were up about 2% year-over-year, and that continues to be a focus. And in this quarter, we did have particularly strong performance in our US segment. And that was true of the income growth across businesses and was also true of the operating leverage. And I'd say, as we go through the year, we expect continued good performance in the US, but contributions from all other groups as well. So, now, the numbers will vary quarter to quarter and by group. But I would expect positive operating leverage through the year to come from all other groups.

And just tied to that, Tom, following up, when we look at expense growth in every segment, is there any pickup or moderation that we should expect tied to investment cycles, be it on technology, et cetera.

For the year, we will be focusing on our expense growth. And I would expect the growth rate that we reported this year to be not that far off overall. So, for the year, actual expense growth was 4.5%, rounded to 5. We do continue to invest in technology. Technology growth this quarter was again double-digit and other expense growth was basically flat in the quarter. And we've talked about that trend of investing in technology and managing other expenses tightly, and we've done that over the last couple of years and that's the plan for this year as well.

Got it. Thank you for taking my question.

Thank you. Our next question is from John Aiken with Barclays. Please go ahead.

Good morning. In line with the strong commercial loan growth that we saw on both sides of the border, can you talk to the competitive response that you're seeing? Are we seeing any price aggression or any change in terms of the terms that are being offered that may impair your growth rate or the profitability on a go-forward basis?

So, this is Dave. I would say, nothing really out of the ordinary or unexpected. We're nine years into a recovery. And with that, there is always some efforts to be a little more aggressive. I think we are – I feel really good we're holding the line on the commercial side on both sides of the border and continuing to grow, but doing it wisely. We're really not impacted by what any one competitor would do. We pretty much stick to what we've done over the long period of time. That's what I've got at this point unless you have any other questions.

No, it's good. I'll requeue. Thanks, Dave.

John, it's Cam. I'll just add for the Canadian market. Very similar answer to what Dave has said. I think given the geographic and industry and product diversity we have, we're not feeling compression or disproportionate competitive pressure anywhere. In pockets, certainly, we do, but it hasn't caused us to yield at all in terms of price or term. And if anything, we're, I think, building strength by vertical and by quarter.

Okay. Thanks, Cam.

Thank you. Our next question is from Gabriel Dechane with National Bank. Please go ahead.

Good morning. And just I want to follow-up on the operating leverage comments, Tom, you're making. And you indicated you expect expense growth to stay flat at around the 5% level. So, that would imply revenue acceleration – growth acceleration from what we saw this quarter. And granted, markets were tough and all that. But is that really what you're signaling? By extension, does that mean that we might not see a material outperformance versus that 2% target this year?

I guess I would say that, broadly, at a high level, the shape of the growth in the current quarter isn't that far off what we would expect for the year. And the economic backdrop, we think, is constructive to our businesses. Revenue growth this quarter was 6%. And we think that's a reasonable number, give or take, for the year. And as you pointed out, that did reflect softness in market-related businesses. And on the expense side, the number that we posted this quarter is likely to be in the zone of the number for the year. But the year-over-year growth numbers in any quarter can move around a little bit. But, broadly, we think this quarter is in line with what we would expect for the year.

2% is still your goal for the year?

Yes. 2% is the goal, has been the goal. We're focused on that. And then, as well as we talked about at our investor day, we are focused on making progress on the efficiency ratio and the goal there is to have a ratio of 58% in 2021.

Switching gears to M&A, hard to ignore the activity that's been taking place in the US the last year and weeks? In the past, particularly with M&I, that was more of an – maybe an opportunistic credit cycle acquisition where you've got a lot of recovery on conservative marks. In your own expense base, let's say – do you view yourself as subscale whereby a deal becomes increasingly important to drive your efficiency lower? Because that's what we're hearing from – as a motivation for other deals.

Gabriel, it's Darryl. Maybe I can help you with that. Thanks for the question.

Please.

So, you've done a nice job sort of tracing back some of the work we've done, M&I and otherwise. And I think that's an important place to think about the question because when we look at the strategy and a question of scale and, in particular, in the United States and we talked about it on this call, haven't it, we've got strong growth from our US segment. If you look at the compound annual growth rate of our US businesses since 2015, it's been 17%. And most of that is, in fact, not –because that was – I picked a date intentionally well past M&I. Most of that growth is not through M&A. There have been some smaller tuck-in acquisition. But most of that growth is organic. And as of today, 30% of the bank's earnings based on the last 12 month rolling are coming from the United States. Why do I say that? Because when we look at the question of scale, I would say we have sufficient scale in the United States to succeed. And we benefit from our global scale. When we talk about the resources that we bring to bear in the United States, it's the resources of the bank and efficiencies that we get from our ability to spend, whether it's technology, regulatory, marketing and the evidence of that is in several places where, as I said earlier, we're the seventh largest lender in the United States in commercial lending and our loan growth has outperformed the market in the last four years. We've got a really strong Midwest footprint, as you know, but one of the comments that I've made from time to time that I think has surprised some of our shareholders is that two-thirds of our new originations are coming from…

So, if I interpret your comments, I shouldn't look at US P&C and say, oh, there's subscale versus the super-regional and hence they're motivated or ultra-motivated to do something. The global consolidated picture is what's important. Then, therefore, I shouldn't read too much into that.

Well, I can tell you, and you can ask them, that some of the US super-regionals would say to us, gee, it must be luxurious to have the benefit of the balance sheet and the size and skill that you have globally as we seek to compete with you in the US.

Right. Thank you.

Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead.

Thank you. Good morning. First question is going to be for Dan in the wholesale results. Dan, your revenue trends were better than we've seen from most of the group so far. I would say, overall top line loan growth looked very good. One of the issues we discussed last quarter was the outlook for improved operating leverage. Particularly when we look in the US, we're still seeing expense growth at a very healthy clip. So, I guess, my question more directly would be, even with the revenue trend as solid as it was this quarter, we didn't really see that op leverage fall through. What are some of the pieces that have to align for the overall revenue expense dynamic to improve, especially in your US business?

Yeah, thanks for the question. I think as you saw from results, we actually had a great outcome in the US this quarter where we did deliver positive operating leverage in the US. So, very, very strong. The drivers of that in the US, as you know, on the expense growth was KGS on a year-over-year opportunity. They also created, obviously, some benefit as we went through it. As we look forward to the year, with a softer quarter overall, and yes, we had good revenue outcomes, but we looked at it as having relatively soft capital market outputs for the investments that we made. We do expect us to continue to drive increased revenue as we look out for the rest of the year and that should drive our operating leverage overall to positive for the year.

And thanks for information on KGS. I think that's probably the biggest factor and I'm looking only at your US piece here on the loan increase we see. So, average loans were up about CAD 3 billion. So, both for that franchise and then also adjusting your core business in the US, how are you measuring your success in cross-selling some of the corporate credit you've been able to extend to customers? Is it products per customer? Is there a fee target you have in terms of extending credits? Just wondering a little bit how you think about that mix going forward?

Sure. So, let's make sure we're clear on the loan growth. It's not coming out of KGS. KGS is in our trading business overall. We had very strong loan growth across all of our industry groups. That loan growth was both acquiring new clients, doing new business with the firm, as well as existing clients expanding their relationships with us. As you know, we do drive a universal bank model relationship with those clients. And so, we look to add product capability across the spectrum, whether that's investment banking, whether it's trading products, whether it's other nature of the relationship where we can be helpful. When you look at our revenue production over the first quarter in the US, it was actually quite broad-based. Some was from corporate banking and the expanded loan base.. And also, diversified across the business mix. We had a decent result in FICC. Rates were down. KGS was up, but we also had good performance then in our commodities and FX business. We also had good performance in our underwriting businesses. They were relatively flat in what was a challenging market environment. So, quite encouraged on our side.

Jill, can I ask one more?

Yes.

Okay, thank you. Let me – I'll keep it tight hopefully for Cam. There was a question asked earlier in the US about margins and deposit mix. I want to bring that one to you. I feel like when the rate hike cycle started in Canada, your segment had relatively quick pick up when it came to net interest margin. That's flattened out over the last little while. Even though your commercial loan growth has been good and your deposit gathering has been strong, factors – I would've thought – would've helped them. So, more to the point, going forward, how are you thinking about the net interest margin outlook for your business? And do those two factors, commercial growth and deposit, not suggest that margin should get better from here?

Thanks. It's Cam. It's 3 to 5 bps for the year. That's what we're anticipating in terms of improvement on NIM. And I do agree with your point that the quality of the growth in those two areas are additive from a mix perspective. And in this particular quarter, pressure on prime BA was a little bit greater, and that's why we're down. But it's relatively stable. But, yes, I would say 3 basis points to 5 basis points for the year. The combined effect of the balance momentum in the air, as you point out, and the stabilization of the prime BA will support that.

Do you need any more rate hikes for that to happen?

No.

Thanks for your time.

Thank you. Our next question is from Meny Grauman with Cormark Securities. Please go ahead.

Hi. Good morning. Pat, you gave some good color on the PCL on performing loans. But just a follow-up question there, and that's do you have the ability to be more conservative when it comes to that line specifically?

Well, I would say we have a very well defined process for determining performing loan provisions. And we would've followed that exact same process this quarter. I think when you look at the number of CAD 10 million, that may seem like a modest provision if I understand where you're coming from. But if you unpack the CAD 10 million, there was a fairly large amount of movement underneath that number. And specifically, we did make changes – I think I alluded to this in my opening comments – to reflect a more uncertain forecast going forward. And so, in particular, some of the market-related variables, as I mentioned, loan spreads did drive a fairly large underlying increase in the provision. And that, along with loan growth, would have seen the provision increase – I would put it – in a relatively meaningful amount. But as I said, we did have an offset in the portfolio as we just had positive credit performance. And you would get that from migration between stages or rating improvements of our credits. And some of that can be lumpy, particularly in the wholesale book. And so, we did definitely take steps to try and reflect a more uncertain environment. But in the spot market, the credit performance was very good, and that offset some of that.

Just to follow-up in terms of the scenario analysis, is it correct to use three scenarios? And then, the question would be, could you expand that and would you consider expanding that sort of an annual basis or how often would you look at that?

Yeah. So, we would look at the weightings of our scenarios every quarter. And as I mentioned, we did make some very modest adjustments again to reflect a more uncertain environment in the quarter. And as you know, we use three scenarios right now, benign base and adverse. We're very comfortable with the construction of those scenarios, as well as the number. And so, I wouldn't anticipate us adding any further scenarios in the coming quarters.

Thank you.

Thank you. Our next question is from Steve Theriault with Eight Capital. Please go ahead.

Thanks very much. Back to expenses for a moment, operating leverage 1.5%. As you mentioned, pretty good given the softness. But, Cam, can we talk about your division for a sec? 0.2 operating leverage, can you talk about the likelihood of getting to that 2% target for the full year? And maybe if you could layer in – we normally see seasonality in Q2. So, Q2 efficiency ratio higher than Q1. That would translate into pretty nominal operating leverage for Q2. So, is it really a back-end loaded story in terms of expenses for you this year? Some color would be great.

Thank you. I would say that this is a good start to the year for us. And our business performance will grow through the year. And to the question, I answered previously, prime BA stabilization coupled with the strength we're seeing on the balance sheet in personal and commercial and, in particular, the quarterly results give us confidence that there's revenue improvement through the year. So, that's one point. Expect the balances to continue. And mix, I expect to be similar to down. We did, through Q4 and Q1, invest in the areas of focus I highlighted at our investor day, which is an increase in sales force capacity. 100 new relationship managers on our commercial business and 50 odd financial planners as well, strategically located by geography. And we put those in more of a frontloaded – to your question, more of a frontloaded manner, such that we can get productivity through those resources through the course of the year. But, in general, I would say the performance improves quarter-on-quarter and revenue will be up a little bit and mix should be flat to down. NIM up 3 basis points to 5 basis points.

And does that translate, if all goes well, into close to 2% for the year in terms of operating leverage?

In the range. Like, I would expect us to build in Q2 and build again in Q3 and Q4. We'll see where the averages come out, but I'd certainly expect to be between 1 and 2 in the back half of the year and we'll see where we go from there.

Okay, thanks. And then, a quick one if I could. Over to Dan, I look at the league tables, it looks like the underwriting volumes are down, looks like advisory numbers are down for everyone, inclusive of BMO. But the underwriting number looks quite strong. I think up year-on-year. So, anything in terms of timing of revenue recognition, any color there would be great? Certainly, a positive outlier versus what we've seen elsewhere this quarter?

Sure. I think the predominance of the outperformance of that category is around the M&A business and our advisory. We had a very strong outing both in Canada and the US on a year-over-year basis. Obviously, that business, there can be some larger fees in that business. So, lumpy when you quarter-over-quarter, year-over-year, but it's paying off on the lessons that we've made over the last while. On the underwriting side, you're correct. The equity business, in particular, has had very challenging underwriting conditions. Challenging last year. Very challenging in this quarter. We think that outlook is getting much better. We'll see it come back. What we hope to is normal run rates through the balance of the year. And then, on the debt side, we've actually had some good performance. And so, on that side, I think of it as flattish. But in the marketplace that we were in, I think that's an exceptional outcome.

Thanks for that.

Thank you. Our next question is Scott Chan with Canaccord. Please go ahead.

Thanks. Good morning. Maybe going back to Dave, just on US side, appreciate the margin guidance in Canada, and I was wondering, Dave, if you can provide a margin guidance in the US for fiscal 2019.

Sure. As I said, we had better performance than expected in the second quarter. What I said after the last quarter – sorry, first quarter, margins of the second quarter – but as I said at the end of last year, I thought we'd dipped down a little bit and basically stayed flat for 2019. And I still think that's the case. We have some things to move around, interest recoveries, et cetera. But the range we have, I would say, we'll stay in that range for the year. A little bit up and down over the year. But I think pretty stable. Does that help?

That helps. And does that guidance kind of include any Fed rate hikes or is that kind of assuming no rate hikes?

That assumes no rate hikes.

Okay, perfect. Thank you very much.

I will now turn the call over to Darryl White to conclude today's call.

All right. Thank you, operator. In summary, we are pleased with the good start to the year and a positive outlook as you've heard through the call, consistent with the strategies that we outlined for you back at our investor day in the fall. So, with that, I'll thank all of you for joining and we'll see you at our AGM. Thank you, operator.

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.