Bank of Montreal BMO
Q1 2013 Earnings Call Transcript
Transcript Call Date 02/26/2013

Operator: Good afternoon and welcome to the BMO Financial Group's Q1 2013 Earnings Release and Conference Call for February 26, 2013.Your host for today is Ms. Sharon Haward-Laird, Head of Investor Relations. Ms. Sharon Haward-Laird, please go ahead.

Sharon Haward-Laird - Head, IR: Thank you, Operator. Good afternoon, everyone, and thank you 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 prequalified analysts. To give everyone an opportunity to participate, I would ask that you please keep it to one or two questions and then re-queue.

Also with us this afternoon to take questions are BMO's business unit heads; Tom Milroy from BMO Capital Markets; Gill Ouellette from the Private Client Group; Frank Techar, Head of P&C Canada; and Mark Furlong Head of P&C U.S.

On behalf of those speaking today, I note that 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 these statements. Information about material factors that could cause results to differ and the material assumptions underlying these forward-looking statements can be found in our Annual MD&A and in our first quarter report to shareholders.

With that said, I will hand things over to Bill.

William Downe - President and CEO, BMO Financial Group: Thank you, Sharon and good afternoon everyone. BMO had strong first quarter results. Our focus on customers, efficiency and prudently risk management continues to service well. This is reflected in the financial performance underpinned by good operating group performance and also in the progress we've made in advancing our strategic agenda.

Reported net income was C$1 billion, or a dollar C$1.53 per share. On an adjusted basis net income was also C$1 billion, a C$1.52 per share, 7% ahead of last year. Revenues increased to C$3.9 billion and ROE was 14.8%.

Progress was particularly evident in our U.S. businesses, Personal and Commercial Banking U.S. had very good adjusted earnings and loan growth in the quarter. We focused our collective efforts on growing BMO's customer base and capturing opportunities in our redefined home market. We've been highly visible in the Midwest increasing our advertising support post integration.

Wealth Management and Capital Markets businesses in U.S. also had good quarters. We're seeing the benefits of disciplined expense management as we continue to focus on efficiencies to find ways to deliver superior service to our customers and to drive performance across the Bank. Excluding cost related to employees eligible to retire booked in Q1, adjusted operating efficiency improved for the Bank and all the business groups quarter-over-quarter.

Core credit performance was good, provision for credit losses was down sequentially and relatively stable year-over-year. Our Basel III common equity Tier 1 ratio was 9.4%. We increased our quarterly dividend by 3% to $0.74 a share, reflecting our strong capital position and the success of our business strategies.

We delivered adjusted earnings of over $1 billion for the third consecutive quarter. We also gained market share against the backdrop of a cooling housing market in Canada, moderate consumer spending and continued government restraint. The U.S. economy is gradually improving led especially by a rebound in housing.

Looking ahead, we're optimistic about the opportunities for growth and expect the economy to improve in our markets throughout the year. BMO is very well-positioned in this environment with a proven strength in Commercial Banking on across our large North American platform.

Turning to the operating groups, P&C Canada's adjusted net income for Q1 was $461 million, up 4% from a year ago. Loan growth was robust with a total portfolio up 9%.

The lift in commercial lending was the strongest we've seen since 2008.

In personal banking we are seeing the payoff from our focus on sales force productivity, which has improved over the past few years with our frontline selling significantly more, we are booking more appointments and having better quality conversations with our customers.

We are generating good results in the areas we’re focused on, while continuing to increase customer loyalty that will support future growth.

P&C U.S. adjusted net income was $197 million in source currency, up 25% quarter-over-quarter and 13% ahead of last year. As I mentioned earlier, our loan book had very good growth, up $800 million, or approximately 2% from the fourth quarter. We continue to drive good balance sheet momentum in this business. Core C&I loans were up $3.3 billion or 18% from a year ago and total deposits have increased by $1.3 billion.

We had strong deposit share in our key Midwest markets that positions us well and provides a source of competitive advantage. Our ongoing campaign to introduce BMO Harris Bank across our expanded U.S. footprint is driving customer recognition and producing good results.

Here are some examples of how creative brand support is resonating with customers. In Milwaukee, just a few weeks into our newest advertising campaign, brand awareness of the Bank has increased significantly. In Minneapolis, frontline staffs are telling us ad recognition has brought customers into branches to open new accounts. We premiered BMO advertising at the Super Bowl with good coverage in our U.S. regional markets and across Canada.

BMO Capital Markets delivered Q1 adjusted net income of $310 million with ROE of 21.3%. Results were highlighted by strong revenue growth driven by M&A activity, debt underwriting and trading revenues. 56.9% efficiency ratio reflects improved expense management.

Private Client Group produced first quarter adjusted net income of C$169 million. Traditional wealth was up 36%, excluding a gain on strategic investment last year and insurance rebounded to a more normal levels. Results benefited from higher revenue driven by growth in client assets and focused cost management.

We're continuing to post strong financial results; we're making particularly good progress in two areas that are strategically important, institutional asset management and private banking. Consolidated under one platform, BMO Global Asset Management has traction. We continue to add new asset classes, investment capabilities and distribution in North American, Asia, Europe and the Middle East, resulting in continued net asset inflows. We've grown to more than C$120 billion in AUM earning a place in the top 100 worldwide rankings.

Private banking during the quarter, we completed the acquisition of Hong Kong and Singapore based wealth management provider and are now operating as BMO private bank Asia providing services to high net worth clients in the Asia Pacific region.

With experienced private bankers and well-developed universal products, our clients will benefit from our investment expertise into an integrated platform that bridges North America and Asian markets and looking ahead, this corridor creates opportunities for growth.

We also continue to make progress with capital markets' client coverage efforts in Asia, best demonstrated by recent high-profile advisory mandate and successful transactions completed by our clients.

In sum, we had a strong quarter and demonstrated continued momentum in commercial banking on both sides of the border. Commercial banking is an important contributor to the performance of the bank, positioning us well in an environment of business expansion. At the same time, we are maintaining prudent risk management and improving efficiency and we're seeing the pay-off from the investments we've made in our U.S. businesses with operating leverage rather from an expanded platform.

As we look forward to the rest of the year, we continue our focus on delivering industry-leading customer experience, helping businesses expand and customers control their financial lives, allowing them to make better decisions with better information and have confidence in the choices they make.

With that, Tom, I'll turn it over to you.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: Thanks, Bill, and good afternoon, everyone. I'll start on Slide 8. BMO had a strong first quarter, with good operating group results. Reported net income was C$1.48 billion. On an adjusted basis, net income was C$1.41 billion, up 7%, and EPS was $1.52, also up 7%.

ROE was 14.8% on a very strong capital position. Each of our businesses showed continued momentum in the quarter. There was strong loan growth in both personal and commercial in Canada and in core C&I in the U.S., and the Private Client Group and Capital Markets had strong quarters.

Our retail businesses contributed over 75% of operating group revenues. As you have seen, beginning this quarter, we changed the way we report our operating group segment to reflect provisions for credit losses on an actual loss basis in each segment. Previously, we had charged the operating group's credit losses on an expected loss basis. This change will help us comparing our segment results to other banks. Prior period results have been restated for the change.

We continue to record all acquisition credit-related items in the Corporate segment. Items removed to arrive at adjusted income were similar in character to prior quarters and totaled just C$7 million, Slide 30 show details on the adjusting items.

Moving to Slide 9, adjusted revenue in Q1 was C$3.9 billion, up 3% year-over-year and slightly down from a fourth quarter that was wrong. Adjusted net interest income was up 2% quarter-over-quarter, benefiting from growth in all operating groups particularly BMO capital markets.

Year-over-year net interest income declined 4% due to lower NIM in the P&C businesses and higher than usual revenue from our strategic investment in PCG last year. Adjusted NIM excluding trading of 203 basis points was up one basis point from last quarter on better capital market results.

Adjusted non-interest revenue was up 13% year-over-year on good capital market performance and improved insurance revenues, quarter-over-quarter was down 5% due to lower trading revenue and insurance results and Corporate results were down due to a variety of items none of which were individually significant.

Turning to Slide 10, Q1 adjusted expenses of C$2.5 billion includes C$73 million of compensation for employees eligible to retire, which is expensed in the first quarter of each year. Excluding these costs adjusted expenses declined 2% quarter-over-quarter, the efficiency ratio improved and operating leverage was positive.

Year-over-year adjusted expenses increased largely due to a higher employee related cost including performance-based compensation given higher revenue.

As shown on Slide 11, capital ratio strengthened in the quarter, effective Q1 2013 regulatory capital ratios are determined on a Basel III basis. With the Basel III common equity ratio of 9.4% BMO’s capital position is strong; OSFI’s deferral of the effective date for adoption of the credit valuation adjustment RWA improved the ratio by approximately 35 basis points in the quarter.

Moving to Slide 12. In Q1, P&C Canada adjusted net income was C$461 million, up 4% year-over-year. Results reflect the combination of good volume growth, lower credit provisions and lower margins. Loan growth was strong in the quarter with total loans up approximately 9% from last year. There was also good sequential loan growth of over 2% for the third straight quarter.

NIM compression moderated this quarter with a decline of 3 basis points being primarily due to changes in mix, including loan growth exceeding deposit growth and lower deposit spreads in the low rate environment. Lastly, expenses were relatively flat, reflecting active expense management with selective investments being made in the business.

Moving to Slide 13, P&C U.S. adjusted net income was $197 million. Loan loss provisions were down significantly in the quarter to $33 million. The combination of low credit losses and good noninterest revenue this quarter produced very strong results. Revenue of $755 million was up 1% quarter-over-quarter due to higher gains on the sale of originated mortgages and strong commercial lending fees.

NIM was down 9 basis points from Q4, primarily due to lower deposit spreads and changes in mix as loan growth exceeded deposit growth. Adjusted expenses were down primarily due to synergies, net of investments being made in the business. The efficiency ratio improved to 57.1% in the quarter. Loans in source currency were up 2% quarter-over-quarter. Loan growth exceeded runoff for the first time post acquisition. Core C&I loan growth continued to be strong, with balances up 7% quarter-over-quarter and 18% year-over-year and the pipeline remained strong.

Turning to Slide 14, BMO Capital Markets delivered very strong results, with net income of up C$310 million and ROE of 21.3%. Earnings were up 38% year-over-year and in line with the good results of the fourth quarter. The performance compared to a year ago reflects good execution, benefits of diversification and a better environment. The efficiency ratio improved quarter-over-quarter and year-over-year to 56.9%.

Turning to Slide 15, Private Client Group adjusted net income was $169 million, up 54% year-over-year and in line with the fourth quarter. These results are consistent with our view of the underlying earnings potential of the business. Revenue was up 12% from a year ago, driven by a bounce back in insurance results largely due to a lower impact from long-term rates. Wealth results in PCG were up 8% year-over-year and up 36% excluding a gain on our strategic investment a year ago. Assets under management and administration of $479 billion were up nicely, 10% or $44 billion year-over-year and 3% or $14 billion quarter-over-quarter.

Turning now to Slide 16, Corporate recorded a net loss of $65 million and $95 million on an adjusted basis. Adjusted revenues were down year-over-year and sequentially. Contributing factors included lower security gains, a higher teb group offset in the current quarter and a variety of items, including treasury related items, none of which were individually significant.

Adjusted recoveries of credit losses were down, reflecting lower recoveries on purchased credit impaired loans. As a reminder, we record all acquired loan credit accounting items in the Corporate segment.

Adjusted expenses were higher, primarily due to increased benefits cost, including pension cost, timing of technology investment spending and higher severance. To conclude, we had a strong start to the year and feel good about our operating group performance and momentum.

With that, I will turn it over to Surjit.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Thanks, Tom, and good afternoon. It has been another good quarter from a risk perspective. Referring to Slide 19 specific provisions excluding the purchase portfolio were C$155 million, down from C$245 million in the prior quarter.

This improvement is a result of higher recoveries and reversals and a decline in new reservations. As a reminder, last quarter provisions were elevated based on regulatory guidance relating to certain performing U.S. consumer loans.

The improvement we had this quarter was evident across major businesses in both Canada and in the U.S. Provisions for the purchase performing portfolio at C$82 million were up C$17 million quarter-over-quarter after adjusting for last quarter’s regulatory guidance.

As I said in earlier quarters, there will be timing differences between when losses occur and when we recognize income from this portfolio. We continue our proactive management of the purchase credit impaired portfolio, resulting in a recovery this quarter of $59 million.

This portfolio is now down to roughly 40% of its original size. Our strong workout skills and loan sales capability will ensure a satisfactory resolution to this portfolio.

I have mentioned on previous calls, we have been managing down this portfolio and as the portfolio shrinks along with the associated marks, future recoveries will moderate from last year’s level.

Total impaired formations at C$630 million a slightly lower this quarter, after excluding last quarter C$142 million from previously mentioned regulatory guidance. Looking at the trend on Slide 20, it would appear that formations peaked on the second quarter of 2012.

Excluding purchase portfolios, total gross impaired loans declined this quarter as did the ratio of impaired loans to gross loans and acceptances. The ratio now stands at 0.8% versus 1.02% in the first quarter of last year.

In closing, we are encouraged by the reduction in provisions and increase in recoveries. We are comfortable with our risk profile in both Canada and the U.S. and we believe are well-positioned in the marketplace.

I will now turn over to the operator for the question-and-answer portion of today’s presentation.

Transcript Call Date 02/26/2013

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: Just wanted to first ask you about the Canadian retail margins. So three basis points of decline sequentially that’s about half of or less than half of what we’ve seen over the past three quarter. I am wondering if you think there is a sustainable ability to that number, what’s changed? I think the commercial deposit growth was pretty good and you cited that as a factor to stabilize the margin, if that helped at all? Then also as the balance sheet mix changes, particularly in your mortgages, what’s the cross-selling success kind of been? I should now throw in my last one here. The assets to capital multiple jumped up a little bit and you cite Basel III transitional modifications, is that a BMO specific issue? Can you kind of delve into that a little bit?

Frank Techar - President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: Gabriel, it’s Frank. I’ll start and since you took the liberty of asking three questions, I am going to take the liberty of maybe answering more than what you ask.

Gabriel Dechaine - Credit Suisse: Go for it.

Frank Techar - President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: We had a solid quarter in P&C Canada. Our net income, as you saw, was up 4% this quarter and we continue to have the confidence in our strategy. There is no doubt it’s a challenging environment, but we are continuing to build a better business in P&C Canada. I think you’ll have noticed that the balance sheet growth this quarter is very strong. Our consumer loan growth was up 9.5%, our large commercial business is strengthening. Deposit growth was up 6.3%, the strongest we’ve seen in a year. Loan growth was 9.4%, which is the strongest as Bill mentioned that we’ve seen since 2008. On top of that, mutual fund growth was 12.8%. As you point out, our margin declines are moderating. So consistent with what I’ve said in previous quarters, we expect to see continuing moderate declines in NIM over the next few quarters, given the environment that we are operating in. The reason we are seeing moderation is the mix is changing in the balance sheet. We are seeing more growth in loans with higher spreads and we would expect that to continue in future quarters. Relative to cross-sell, I think I’ve mentioned this in previous quarters, our five-year fixed, 25-year am mortgage product was very successful last year in bringing new customers into the company. In fact, for everyone that took that product last year, about 40% of them were new customers to BMO and for those new customers coming into BMO, we sold an excess of two other products to them. So we know that is one thing that's contributing to the growth that we're seeing overall in the balance sheet. As we continue to bring those customers in, I have a huge amount of confidence in our sales capabilities in our branches at this point.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom. I'll answer the asset to capital (multiple) question. The multiple that we're showing on our Slide 11 is the Basel III multiple. We're transitioning in under the rules, which means that we're including all of our capital with the non-common capital being subject to the (phase out) rules that are applicable under Basel III. The ratio moved up a bit in the quarter, and that's a function of having asset growth in the quarter and also one redemption of a capital security. So, I'd say nothing unusual in terms of the movement and nothing unusual in terms of how we will look at this ratio versus others.

Operator: Sumit Malhotra, Macquarie Capital Markets.

Sumit Malhotra - Macquarie Capital Markets: My questions are for Surjit, and if we start with the – we purchased credit impaired portfolio. Last quarter, you answered one of my questions on the call by saying you think C$200 million to C$250 million would be an estimate for what we could expect in recoveries from that portfolio, but there was no real basis behind that estimate. Three months later, I'm sure you've had a chance to think about that estimate and was hoping you'd give us an update on what you're seeing there taking into account those statements of the book is down to 40% of the original level?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Let me start off by saying, the reason I said there was not much of a basis is because the strategy that we are adopting is one of value maximization and we – I didn't want to give your number and then put myself under pressure to deliver a number, because we'd like to get the best we can for this portfolio. My guidance has not changed. I still believe that the number I gave you before would hold and that's modest (really Sumit).

Sumit Malhotra - Macquarie Capital Markets: Let's stay with credit for a second, because I think we can agree that there has been differing treatment on how people look at the earnings results whether the purchase credit impaired should be core. Maybe let's not go into that, so if I look at the provisions the adjusted provisions that you call them X of the PCI recovery, still a pretty substantial decline on both the quarter-over-quarter, year-over-year basis. I think it's C$90 million sequentially. So when I hear your comments on the core part of the portfolio with provisions down in each of your segments, formations relatively stable, am I right to say it doesn't seem like you are of the view that there is going to be a material change in the non-PCI portion of your credit portfolio in terms of losses.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Let's examine the numbers a little carefully because you do, you're right on focusing on the non-PCI of purchase portfolios. When you look at our current quarter, most of our provisions relate to the consumer book, because we've had very good recoveries and repayments as well as lower provisions in our commercial and corporate books, particularly in the U.S. If you look at the chart, you'll see negative numbers over there. Now while the economic environment continues to improve, you do know that when you're talking about commercial or corporate, given the nature of that business, it already introduces an element of variability. So my – the sense I can give is that we're certainly having a much better year than last year when it comes to PCLs for our core book, if I can call it that. We will definitely do better than last year, but there will be quarter-to-quarter or quarter variability. At 24 basis points, I think we had a good quarter last quarter, and I would expect that if the market doesn't deteriorate, we'll have good quarters going forward.

Operator: John Aiken, Barclays Capital.

John Aiken - Barclays Capital: With your outlook for both the interest rates from the Fed and Bank, Canada remained stable through the remainder of the year, is there anything that we can actually do to stem the margin compression, are we going to continue to see this tick down on both sides of the border?

Frank Techar - President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: John, it's Frank. I'll just reiterate what I said a minute ago. In Canada, at least the P&C business, no change from what we've seen in the past. We expect continuing moderate declines in NIM over the next few quarters. Without a change in rates, I think we're in that environment for the foreseeable future.

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: It's Mark Furlong, in the U.S. side as we talked last quarter, we said we expected about a 5 basis point decline due to the low interest rates on deposits, and we're still sticking with that. 2 basis points was really related to conversion just mechanizations you go through and kind of resetting some of the stuff we're doing. That won't repeat. Then the other 2 basis points was extremely strong C&I loan growth. When you look at the portfolio, the new business we're generating have spreads that are under our current margins, so necessarily that would have a little bit of drag on the margin, but we see that as a positive because that growing relationships and growing the business. So there's kind of give and take to that and if that's the driver for the rest of the year, that's probably a pretty good driver of growth for the business.

John Aiken - Barclays Capital: Mark, on the C&I growth, the margin or at least sort of the margins you're pulling in, is that competitive pressures, just the environment? On the competitive side are you seeing competitors actually do anything on the covenant life side that's giving you pause?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Our spreads in commercial were stable this quarter. It's just that they are not at the 400 basis point level of the current margin right now. So that just kind of give you sense of what's going on competitively, at least where we are if chosen to compete. From a competition standpoint, I think if you're in like the large leverage loan deals, I think there's some pretty ferocious competition to take big goals and to take a – and from a pricing and structure standpoint, but that's not really where we compete. We've been kind of in that true middle market space, and where there may be more competition that moves its way down there at some point in time, it's certainly competitive today, but the weakness in structure and kind of going to the floor and pricing hasn't gotten there yet.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom Flynn, John. I just had one thing to the NIM discussion and we do think it's notable that this quarter the adjusted NIM for the Bank consolidated excluding trading was actually up a bit quarter-over-quarter and that reflected the retail performance that we've talked about, but also Capital Markets being up nicely in the quarter, which was partly driven by corporate lending activity in the U.S. and partly by the AFS security portfolio.

Operator: Robert Sedran, CIBC.

Robert Sedran - CIBC World Markets: Surjit, I'd like to come back to Sumit's issue on or question on the loan loss line and answering this question you noted that commercial recoveries were significant factor, but if I look at Slide 19, the personal side was also down in pretty much every bucket that you list there as well. So it sounds like what you're saying is perhaps this quarter was a little on the low side from a provisioning level, but last year was perhaps a little on the high side from what we can expect going forward? Is it fair to assume something in the low 30s from a provisioning ratio is about what we should be expecting this year with some variability obviously around that?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Yeah, I would say so. As I said, I think if we look at the average for last year, we had 42 basis points and I think to make that assumption as the economy holds, I think is not a not an unreasonable assumption.

Robert Sedran - CIBC World Markets: You can count me among those, it's happy to see the back side of expected loss methodology, but if we (indiscernible) methodology, what kind of expectations might that have kicked out for the Q1 numbers? Would they be similar to what we ultimately saw, or would they have been higher than what we ultimately saw?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom, I guess there couple of things and reaction to that. The expected loss numbers historically through time didn't change much quarter-over-quarter and the biggest change was in Q1 of each year, when we looked at things in greater detail. So it's really impossible to answer your question precisely, because we have moved on, but I would take a look at the fourth quarter of last year as the best indication of what we think makes sense from an (EL) perspective.

Operator: Mario Mendonca, Canaccord Genuity.

Mario Mendonca - Canaccord Genuity: First on loans. Commercial loans in the U.S. obviously improving the growth, we see it this quarter particularly but also last quarter. It seems like it coincides with a tough slower growth in the IBG or in wholesale lending. Was there any – is there any change in classification that would cause those two to go hand-in-hand with a slower growth in IBG offset by better growth in commercial, particularly in the U.S.?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Well, this is Mark Furlong. Let me start out. I’ll do the P&C side. We are not competing in the space. So the growth in the P&C business, it’s really just like last quarter, it is across every geography and it is across all of our specialty segments. It is really truly broad-based, particularly the last two quarter. I don't think we’re at all – I think it is absolutely unrelated to anything going on in any other segment. I’d say, little pickup of course you see year end related to changes in tax rules and changes in dividend rules and things like that. But it was so broad-based and it was not weighted toward acquisition or leverage that really this is the kind of the long-term efforts of sustained calling and service and a little bit of expansion by existing customers and kind of all those pieces to build up to that loan growth.

Mario Mendonca - Canaccord Genuity: So maybe just a follow-up then on the wholesale side, assuming it is entirely linked, there is no connection there, why do you figure what appeared to be some very healthy growth in IBG may have tapered off in the last couple of quarters?

Unidentified Company Speaker: First of all, I think we think it continues to be pretty perspective, but we’ve seen a lot of refinancings that have gone into the market. But we continue to do business and you’ll see we’ve managed to – it’s basically flat quarter-over-quarter. So, we would expect, if our view of what’s happening in the economy is correct Mario, I think we’d expect to see more financing and more growth in that loans as we go forward to 2013.

Mario Mendonca - Canaccord Genuity: Then maybe just for perfect clarity then, for Tom Flynn. The Bank hasn’t changed the definition of where you would book the loan and that nothing has changed in the last couple of quarters?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: I was wondering if that was where you are going in (multiple speakers) whether to jump in and the answer to the question is, no. There is no reclass between Capital Markets and P&C U.S.

Mario Mendonca - Canaccord Genuity: Then just finally, back to the PCLs for a moment, in the U.S. 25 basis points of PCLs. Am I thinking about it correctly to say that part of the reason why the PCLs are light or look really low, the ratio looks low now is because the deal was only a year or a year and a half ago since you fair valued those assets and that over time we’d expect that PCLs ratio to migrate back up to, in the U.S. specifically, 40, 50 basis points. Is that a reasonable expectation?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: It really depends. You are talking about the acquired portfolio now?

Mario Mendonca - Canaccord Genuity: No, I am talking about excluding anything – actually, you are right, I'm talking about the entire U.S. business, but I don’t want to take into account anything to do with recoveries. I'm just saying that pure PCLs that are emerging from your U.S. P&C business?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: I wanted to be clear whether you we’re talking about the combined business.

Mario Mendonca - Canaccord Genuity: I’m.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: So I don’t look at it so much on a combined basis because I think even if you look at it on a combined basis, over time the businesses are getting fully harmonized from a risk perspective. So I would think that the long-term trend would be lower than the one you indicated. I think it will be more like 40, 45 basis points. It's not going to be that high. It's not going to be in the 50s. The environment is improving, and if it improves faster, I think we'd see better results there.

Mario Mendonca - Canaccord Genuity: You sort of answered the question when you say you're harmonizing the sort of the credit cultures, so we wouldn't see something that we might have seen in the U.S. for other companies. I think you've kind of nailed the question.

Operator: Brad Smith, Stonecap Securities.

Brad Smith - Stonecap Securities: Just on that last comment about the U.S. economy, I noticed that the impaired loan levels in the consumer portfolios post the residential mortgage and the installment and other consumer loans were up quite substantially sequentially. I was wondering if you might be able to share with us the geographical location of those changes, and then square that with the reduction that we see continuously in your allowance levels.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: I don't have a geographic breakdown that I can share with you, but I can tell you that the ACL number that you're looking at – perhaps you're looking at – do not include the credit mark on the purchase performing portfolio.

Brad Smith - Stonecap Securities: Sorry, Surjit, I'm looking at impaired loans. I'm not looking at a PCL.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: You're looking at impaired loans.

Brad Smith - Stonecap Securities: The consumer impaired loans, $937 million in the quarter at the end on Page 38 in the sub-pack, up from $856 million and what I would really like to know is a geographical breakdown of that. I think most of your peer banks provide that.

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: So I do not have the geographic mix with me, but I can give you a flavor for what's happening in the U.S. In the U.S., last quarter, we did have a large number of performing loans that we put into impaired as a consequence of regulatory guidance and if I recall right that number was $142 million. So you’re seeing that $142 million of performing loans embedded in that number. That’s why it seems elevated, but I don't have the breakdown for you.

Brad Smith - Stonecap Securities: Right. The same thing happened the quarter before I think, because it went to $856 million from $712 million?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: You recall – I think if you go back in time some of the impairments that you had in the U.S. were really I think I described them as label changes, because as we were reviewing our smaller accounts which already had provisions against – a mark against them we had moved them to impaired once we took a look at them through our processes and so really it didn't have an impact on any factor from a loss perspective, because the mark was more than adequately covered.

Brad Smith - Stonecap Securities: Can I ask to venture where that number will be next quarter when we sit here? Will it be higher or lower?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: No I think the trend is positive, absolutely positive, I think given where we are I would suggest that the number is coming down, which is why when I spoke I said the formation seems to peaked a few quarters back. They are coming down nicely.

Brad Smith - Stonecap Securities: But I mean to be clear the trend is not positive, it's 50% higher in that portfolio, in the consumer portfolio than it was a year ago. So I don't understand how that becomes a positive trend?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: It's a bigger portfolio now from a dollars perspective.

Operator: Andre-Philippe Hardy, RBC Capital Markets.

Andre-Philippe Hardy - RBC Capital Markets: You know I'm sure in your U.S. P&C business expenses declining sequentially year-over-year. Can you update us on how much of your synergies have been achieved related to the M&I transaction and then how much is left to go from the current run rate?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom, so – we had a similar question in Q4 and we said that around two-thirds or little over two-thirds of the synergies were baked into the Q4 run rate. The answer this quarter would be that the number would be approaching the 75% level, and by the end of the year, we would expect to be above the 90% level. So we're continuing to make progress on the integration. We completed the large systems conversion in the fourth quarter and have supported that with the brand change that we've talked about, advertising to make people aware of the new name, but the synergies are coming in pretty much on expectation.

Andre-Philippe Hardy - RBC Capital Markets: And integration costs will continue to cause noise going forward or is that all behind?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's not all behind. You saw the number in the current quarter, there is still work going on, so the number of trail down through time, but it's not as of the end of this quarter.

Andre-Philippe Hardy - RBC Capital Markets: Am I right to say that the number is now in excess of what you originally targeted on integration costs?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's not in excess of the update on the target that we gave in the last quarter. I think it is above the estimate that we had when we announced the transaction, but the synergies, as you know, are now $400 million versus $250 million that we talked about when we announced. So the ratio between synergies and one-time costs, we think is still good. But we said in Q4 that the one-time costs would be around in mix $650 million. We're now a little above $600 million, and we're likely to go a little above the $650 million number through time.

Operator: Michael Goldberg, Desjardins Securities.

Michael Goldberg - Desjardins Securities: I'm sort of following up on a couple of other questions, so how long should we expect that the net interest revenue releases related to the purchase credit portfolio will continue at an elevated level and how long will the integration cost continue at an elevated level also where they seem to largely offset each other this quarter. I have a couple of other questions.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom. The amortization of a portion of the credit mark will continue. Probably for about the next two years it will decline through time. It bumps up in certain quarters because of repayments of loans and we had some of that this quarter, but it's hard to predict exactly when it will be unusually high because it's a function of the repayment activity, but I'd expect the number to sort of trend down through time over the course of the next year, year and a half.

Michael Goldberg - Desjardins Securities: But by the end of 2014, pretty much done?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: Yes. Then on the integration expenses, similar story shorter tail. We think the expenses will continue over the next few quarters, but they should be pretty small by the end of the year.

Michael Goldberg - Desjardins Securities: Turning to your personal demand and notice deposits, they were up more than $6 billion in the quarter or 8% from year end. Where does this increase come from?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Well this is Mark Furlong. We have a $1 billion plus gain in just the commercial business alone in the U.S. and...

Michael Goldberg - Desjardins Securities: No, I’d say personal.

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: On personal side, yeah we had a couple of $100 million on the personal side in the U.S., Frank and Tom probably made up the rest of it.

Michael Goldberg - Desjardins Securities: Can you elaborate I mean $6 billion is a big increase, you ended the year at about C$78 billion just on check here, yeah, you ended the year at about C$79 billion of personal demand and notice and you were over C$85 billion at the end of the first quarter. So where did that come from?

William Downe - President and CEO, BMO Financial Group: Michael we’ll take that offline and get back to you on it, all right?

Michael Goldberg - Desjardins Securities: And my last question you had a high level of (Q) sales and repayments this quarter. With this one or two big loans that got fixed and came out, or was it sort of across the board, and was there any unusual interest for capture?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: This was spread over a large number of loans, but not and Capital Markets it's a little lumpy versus, while there were large number of loans, there were – there obviously larger recoveries as well, but I would suggest this is where I’m telling you the trend is a lot better because we are seeing recoveries in a large number of small loans on the commercial side. So that’s what I'd take my comfort from in terms of the outlook as well.

Michael Goldberg - Desjardins Securities: And any meaningful interest recapture?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Don't know often, but yeah there always is an element of that.

Michael Goldberg - Desjardins Securities: Can you let me know?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Sir, we can get back to you on that.

Operator: Peter Routledge, National Bank Financial.

Peter Routledge - National Bank Financial: First, a quick question for Surjit, and related to Brad’s question. Retail formations are up, I don’t have a question about the U.S., in Canada, are there any signs of deteriorating credit quality – retail credit quality?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: Not at the moment. There is a lot of concern that you keep reading about, but as of now a lot of personal and depends on the employment rate, and the employment rate is pretty good at 7%. It has come down. So we haven’t seen anything yet that would cause me concern.

Peter Routledge - National Bank Financial: Bill you are sitting at 9.4% on the CET1 ratio, got the NCIB approved, a question, maybe it is not a quick answer, but what's the probability that an acquisition opportunity might interrupt your planned share buybacks?

William Downe - President and CEO, BMO Financial Group: I’d say in the short run it’s pretty low.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: Just the dynamics of the market. Sellers are feeling better about the future. Even if they would intend to do a transaction at some point down the road, I think the tendency will be to delay and that certainly would be in personal and commercial banking. Small probability in the wealth area; it is about the same as it always has been.

Operator: Darko Mihelic, Cormark Securities.

Darko Mihelic - Cormark Securities: Two questions. First one is for Frank. Frank I have seen some rival banks raise fees for deposit accounts and a whole bunch of little transactions. Wondering if you could comment on whether or not any of that is in the future for (BMO) that will be material? Then my second question is also on the buyback, but I will take a slightly different approach to it. There is a sentence in there with respect to your – it's on Page 17 of your shareholder report. That the Bank will only initiate any purchases into bid after consulting with OSFI. I find that a peculiar sentence and maybe it's just me and I could be reading into this too much. But I thought in the past if you had it approved, you can just sort of set up a formulate buyback and sort of go on. What's the need for a consultation with OSFI and what is it that they are going to have to say on the matter after they already approved your NCIB?

Frank Techar - President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: Darko, it's Frank. Just on the first one quickly. Where I was looking at, our fee schedules relative to the competition, I'd say the opportunities that exist are pretty small at this point in time. We'll be opportunistic, but it's not going to play a big role in our revenue growth going forward over the course of 2013.

Thomas E. Flynn - EVP and CFO, BMO Financial Group: It's Tom. On the buyback question, we've got the approval for the program in its totality. But in the current environment and the new environment, I'd say it's customary to keep an active dialogue with your principal regulator on capital related matters and that would include checking in through the course of the year on intentions with respect to a buyback. So we don't think there is anything unusual about that. We think it's a reflection of a heightened focus on capital and the new way of doing things.

Darko Mihelic - Cormark Securities: So Tom, it doesn't mean that, if you decide to buyback, every day you are following up OSFI for permission?

Thomas E. Flynn - EVP and CFO, BMO Financial Group: No. I'd say, it's meant to acknowledge that, it's not a once and done, but certainly not an everyday kind of a discussion or anything close to that either.

Operator: Steve Theriault, Bank of America Merrill Lynch.

Steve Theriault - Bank of America Merrill Lynch: A couple of questions for Mark Furlong. Mark, I heard that there were some pulling forward of demand on C&I lending towards the end of the year, potentially due to some tax fears coming into your end. So was that the case and if so, how much pull forward was there and if not, has the pipeline just grown to the level where this level of growth is sustainable going forward?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: So with some pull forward, I don't think there is any doubt about that, that some of the transactions that occurred (indiscernible) pull a little bit forward, but the pipelines are still full and as I mentioned earlier, I can't recall whose question I was answering, but the growth was really broad-based across the portfolio. So it wasn't really all acquisition-related. It was new customers and just expansion of things going on with existing customers. So it was kind of a variety of areas, but one piece was some financing for some acquisition. So that would be the normal part and then sustainability going forward, the pipelines are still pretty strong, and they're kind of strong broadly across the portfolio. So it's hard to (attune) into any one quarter, but you said look out into the rest of 2013, how do you feel about loan growth? The answer is I feel really good about loan growth, and kind of broadly across the commercial portfolio and broadly across geographies. I'd say it's kind of that result of we've had about two years together, kind of the pre-integration and integration -- post-closing timeframe and the team is really worked together well, and they're very seasoned and they've been through several cycles. We expect them to be successful, and I think we're seeing some of the results of it. It's hard to pick any one quarter, but overall, I feel very good about where we're at and very good about what the future holds.

Steve Theriault - Bank of America Merrill Lynch: The other question I wanted to ask was on expenses. If I go back Mark to the Investor Day last year in the slides you target mid to low 50s for U.S. P&C efficiency ratio. You got the majority of the synergies now in the run rate, you've cracked at 60% level for efficiency. So the question is, are you targeting something in the 53 to 55 range over the next two or three years or is this a longer data target or am I missing anything here?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: We targeted kind of the low to mid 50s, but part of that has to be, it's not just driving expenses, part of that is the revenue growth. So there is kind of two sides of the equation, but we do feel like we can get far more efficient and we do feel like a big piece of that is on the revenue side and we're beginning to see a little bit of that right now, but yes, we’re not going to change those numbers, that's where we have to be, to be competitive from a profitability standpoint long-term.

Operator: Sumit Malhotra, Macquarie Capital Markets.

Sumit Malhotra - Macquarie Capital Markets: Couple of questions on the buyback. So let me just ask this one directly. With the NCIB now approved and with the capital ratios strengthening again over 9% even after the eventual deduction of the CVA. Do you plan to start the repurchase activity eminently or is it still something that you're putting on hold until later in the year?

Surjit Rajpal - EVP and Chief Risk Officer, BMO Financial Group: No, we intend to have in effect from this point forward.

Sumit Malhotra - Macquarie Capital Markets: So, theoretically now that results are out, you can be in the market buying back stock tomorrow if you wanted?

William Downe - President and CEO, BMO Financial Group: We could. I could link Outlook and you could take a look at my diary and pick a point, but without being facetious, it is approved and we're going to move ahead with it.

Sumit Malhotra - Macquarie Capital Markets: Yes, not to put it – obviously, it's not the biggest thing in the world, but I think your commentary last quarter was – seemed to indicate it might wait a little bit, but that was probably caution on your part until it was approved. So we're there now.

Operator: Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse: Just one on the U.S. expenses and another on the U.S. margins. U.S. expenses, they were down 7% quarter – year-over-year, sorry. What would that decline have been if you hadn't reinvested in various growth initiatives, and what are those growth initiatives?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Let me think, if we hadn't reinvested, I mean our growth initiatives are continuing to build out Commercial Banking, continue to build out our mortgage platform and build out our mortgage capability. I mean those are probably the two single biggest on their own. Then the third piece is not so expense related, it's the premier banking program, which we talked about, which is the partnership between my business and Gilles' business, and that's more fee income-related. But there's a few people related, there will be no material P&L related. So while we added a few personnel, that's not going to have a material impact in the averages for the quarter. So I – and we'll have a few personnel adds or things like that through the rest of the year, but particularly focused in the mortgage side of the business and on the Commercial Banking side where the growth opportunity sits today.

Gabriel Dechaine - Credit Suisse: Is this hiring people or…

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Yes, hiring people…

Gabriel Dechaine - Credit Suisse: Branding or…?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Well, we will have that too, but we had – we if you looked at – so kind of give you a perspective. The last 12 months we mailed 7 million pieces of paper to customers and 7 million mailings and about 80% of that was into the former M&I franchise. The advertising and branding campaign has been launched kind of mid-November and has created all this brand awareness, as we’ll continue in various phases throughout the rest of the year. But that’s kind of been planned into our run rate and our thinking about efficiency ratio and expenses and all that. So, of course, that will continue just because that’s part of running the business. But I don’t think there isn’t any unusual expenses you should expect or think is going to happen other than kind of the trends you are looking at.

Gabriel Dechaine - Credit Suisse: I am trying to get a sense for how much of the synergies are being reinvested percentage wise.

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: Well, percentage wise.

Gabriel Dechaine - Credit Suisse: Or dollar wise whatever. Dollar wise value either.

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: I don’t know that I have a really good answer for you. I am sure, we’ll add over the course of the year, 150 to 200 people predominantly in sales or sales support roles in P&C U.S., if you went from very beginning to very end. So I suppose that average 100 or so something like that. We don’t really look at it like that. It was more so how do we build out the business correctly in every one of the markets we’re in relative to the size we’re in those markets. So, I know that does quite get to your answer, but – so some small amount of the synergies are reinvested.

Gabriel Dechaine - Credit Suisse: Then just on the margins, something you talked about the C&I growth and loan growth outpacing deposits. Where you bit caught off guard by the loan growth or hadn’t pressed on the gas as much on the deposit gathering and is that something you can rectify going forward to kind of smooth out your funding gap?

Mark F. Furlong - President and CEO, BMO Harris Bank, N.A.: I think that’s possible, I guess the way we look at the deposit side is, if you looked at core checking year-over-year, Consumer is up about C$1.2 billion. We looked at the Commercial side it's up over C$3 billion. So Commercial has grown 18% in DDA and interestingly enough the commercial portfolio has grown 18% year-over-year. So, we really think those two are matching each other very well. On the Personal side, we have brought down some of the higher costing money market and CD product over the course year, and that's just kind of an excess funds gradually bringing down pricing, kind of the normal stuff that you'd see in a portfolio. But we still have significant excess funding and think we have a pretty good sense of elasticity of deposit pricing on that customer base. So we think we can move that back if in fact that's what we want to do. So we feel pretty good about both of them, I mean I wouldn't be surprise if we have another quarter or so where we actually bring down deposits based on pricing, if that's the right thing to do based on what our views are on the kind of long – on the near-term pricing is going on in the market. So I think we probably have a little more flexibility there than maybe some would give us credit.

Operator: Thank you. This concludes today's question-and-answer session. I would now like to turn the meeting back over to Ms. Haward-Laird.

Sharon Haward-Laird - Head, IR: Thank you, operator. Thank you everyone for joining us today. If you have any further questions. I will be pleased to take them in the Investor Relations department. Thanks, and have a good afternoon.