SpeechesRemarks by William Downe, President and CEO, BMO Financial Group, at Scotia Capital Financials Summit 2008
Toronto, Ontario, September 9, 2008
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Thank you, Kevin I’m pleased to be here today to talk to you about BMO Financial Group.
Before I start, I will direct you to the caution regarding forward looking statements.
Today, I’d like to focus on three things:
First, our view of the current economic and credit market conditions affecting both the broader market and more specifically BMO;
Second, the capital strength of BMO Financial Group and some of the opportunities we see in this environment; and
Third, our performance. How we are continuing to drive a customer-oriented focus to our frontline and through the entire organization. I’ll concentrate on our Canadian retail business to give you insights into what we are doing differently and how that is starting to make a difference in our results.
Recently, attention on the market liquidity issues faced by our industry has been joined by credit cycle concerns.
Market liquidity issues during the last 14 months have been unprecedented – Alan Greenspan calls it a once in a lifetime event - and everyone in the industry has challenges as a consequence.
In the last 12 months we’ve seen a reduction in aggregate exposures as market participants have taken write-downs and recapitalized.
Our record in this regard speaks for itself. Bloomberg statistics, show Canadian banks have fared better than many of our global competitors.
And, in the Canadian arena where BMO was the leading asset securitization bank, the write-downs and reserves have not stood out relative to other banks our size in terms of balance sheet and capital base.
BMO moved early with restructuring plans for our off balance sheet vehicles. We have a timeline for the orderly wind-down of these exposures and it has progressed well.
In aggregate, our two SIVs have been reduced in size from approximately $28 billion to less than $10 billion since July 31, 2007. They continue to reduce in line with our expectations.
The Apex/Sitka Trust re-structuring closed in the third quarter. We remain comfortable with the credit exposure, given the quality of the underlying companies and the first-loss protection that’s in place.
Placing Freddie Mac and Fannie Mae in a conservatorship under the FH FA clears away a large obstacle that was in the path of the home mortgage markets return to health.
While the liquidity issues are unprecedented, history shows that economic cycles have a pattern, whether it be the Asian Market revaluation in the ’90’s, media and telecom in the early 2000’s or the current recessionary conditions sparked by the US housing market. Excess liquidity flooded into the market and bid up prices. This resulted in lowered risk-return premiums and a substantial increase in leverage. We are now moving into the phase where lending standards are tightening and companies are recapitalizing.
BMO has been through economic cycles many times before. We understand them, and we know how to manage through the downturns.
We believe that discipline in credit risk management is a source of competitive strength. We have underwriting criteria that have worked well in good times and tough times and we are consistent in how we work with our customers, throughout the cycle.
This past quarter, our provisions for credit losses were elevated, reflecting the continued deterioration in U.S. real estate and with a concentration in two large credits.
Let me put BMO’s loan loss experience into context.
Year to date, our specific provisions for credit losses represent 46 basis points of average loans and acceptances. While this is higher than our 16-year average of 33 basis points, it is still better than the 16-year average of our peers, at 54 basis points.
Further, when you compare the 46 basis points to the historic peaks, there is a consistent pattern. Historically we have increased our provisions early in the cycle but we expect consistent underwriting, supervision and collection to result in out-performance in subsequent quarters.
The US is in a shallow recession, and it is unclear how severe it will be or how long it will last.
I think we all held on to the idea that Canadian economic growth could be largely insulated. However, the duration of the US slowdown is affecting global markets and is showing up in the Canadian economy, most notably in Ontario and Quebec.
From what we’re seeing, there is no guarantee that the difficult times are over … but I would note:
Turning to capital, BMO’s Tier 1 ratio of 9.9% reflects our financial strength. It translates into $3.5 billion of capital in excess of our targeted minimum of 8%.
Under a more stringent test – tangible common equity as a per cent of risk-weighted assets – our ratio remains very strong at 7.4%.
Strong capitalization ensures flexibility and the capacity to ensure future growth, both organic and through acquisition.
We will continue to pursue growth opportunities. Where are the best ones? One obvious opportunity is the US.
With Harris growing as an established brand, we clearly have an opportunity as a consolidator.
As you know, we’ve been actively expanding our branch network through acquisitions. It has grown to 276 branches – up 45% over 3 years ago – and last weekend we completed the systems conversion of the recently acquired Wisconsin banks which added 41 full service branches to our network.
Our acquisition criteria have served us well, and remain unchanged. That said, while we continue to look at well-run banks whose distribution networks would complement ours, we don’t need to be in a rush. We need to have greater visibility into how future loan losses look in potential acquisitions. In addition, any acquisitions we would make in the current environment would be in the context of prudent maintenance of our strong capital ratios.
In terms of organic growth, we will continue to deploy capital to strategically advantaged businesses and we would expect our retail businesses, including commercial and wealth to be the primary beneficiaries.
Another element to our capital management framework is our dividend. We target a payout range of 45 to 55% of earnings. This target is reflective of our confidence in our ability to grow earnings and our strong capital position.
Dividends are generally increased in line with long term trends in earnings per share growth, while retaining sufficient earnings to support expected business growth and fund strategic investments.
Turning now to BMO’s year to date results, you can see Retail was the biggest contributor to both revenue and the bottom line.
Total bank year-to-date revenue was $7.4 billion, and personal, commercial and wealth accounted for $6.0 billion, or 81% of that amount.
Year-to-date total bank net income was $1.4 billion, with the operating groups contributing $1.8 billion, as provisions in excess of expected loss are booked in Corporate. Retail accounted for $1.4 billion or 77% of operating group net income.
We are in a period of strategic spending with deliberate plans to capitalize on opportunities in our Retail businesses. We’re investing to improve our competitive position, but I want to make it as clear as I can -- in the current environment -- we’re highly mindful of making every dollar count.
And, we’re working hard to improve consumer perception – both inside and outside of the bank. I don’t think we’ve been crystal clear about our brand position in the Canadian retail market and we are going to be very specific in defining what constitutes a great customer experience.
This is a clear space BMO can occupy.
Customers are experiencing newer branches, improved service, innovative retail offerings – and this fall we are increasing advertising in major urban centres in both Canada and the US.
Inside the company every one of our 36,000 employees is armed with a clearer focus on how we compete.
This is translating into higher customer loyalty scores and in top line growth.
We know we have to be visibly different from the competition.
The change we want to see is underway, and it is showing up in our performance.
We are confident that we can continue to build on the success we are having as we invest in people, processes, distribution, and products… all the factors that drive success.
I’ll give you just a few examples that relate to our P&C Canada business specifically, though I can assure but change is underway across our entire company.
Let’s start with new branches, which we continue to open with a well defined plan.
Our new branch construction and redevelopment program in Canada encompasses a combined 125 locations out to 2010.
We’ve opened 11 branches year to date. By way of example I’ll speak about the new branch we opened last week in fast-growing Red Deer… Alberta’s third largest city.
It is an expression of how we are modernizing the retail face of the bank. It pops visually from the landscape with the strong use of our distinctive BMO blue.
It has a full complement of retail and commercial bankers and wealth professionals – so we can help our clients manage more of their financial affairs conveniently in ONE location.
And, customers, investors, and employees expect companies to show leadership when it comes to achieving environmental sustainability. At BMO, we are committed to minimize the impact of our operations on the environment.
Today, I am pleased to announce our intention to reduce net emissions related to energy consumption and transportation to zero within two years.
We seek to achieve carbon neutrality by 2010 across our enterprise – worldwide. To help reach this goal, we are committed to cut our greenhouse gas emissions by 5 per cent over this period.
And to achieve this goal we have committed purchasing an additional 3,300 megawatt hours of renewable power allowing us to power 100 of our branches with this clean alternative. At Harris, We have our first two LEED certified buildings coming on line at the end of October.
But the changes in our branch network run deeper than just the physical plant…
We are focusing on improving revenue growth by pushing individual performance scorecards down to every frontline employee, with specific key performance metrics that drive their compensation.
Routinely, I sit-in on staff de-briefing sessions to listen to the success stories shared from branch to branch. Frank Techar and Ellen Costello are doing the same thing. These sessions ensure we capitalize on what we’re doing right on the front lines, across the network.
Simply put, we are working hard to make it easier for our customers to do business with us, making sure we are providing customers “Not just choices, but help in choosing.”
And, let me give you a few examples of the customer-focused offers that make it easier to do business with us… and that have increased balances, market share and customer loyalty:
Homeowner ReadiLine – our home equity product. It’s effectively a combined mortgage and secured line of credit and it’s the only loan many customers will ever need.
And more importantly, it’s a prime example of what we can do when we focus on what our customers want, provide our employees with the tools and technology to make it easier to sell the product, and incent them appropriately.
This product delivers substantial balances at very attractive spreads and it’s done within conventional credit risk parameters.
Homeowner ReadiLine is one big reason our personal loans are up 19 per cent year-over-year… and personal loan market share is up 87 basis points.
In personal banking, the number of active customers, product categories per household and percentage of households retained are all up dramatically.
We have also been increasing the visibility of our card business through the branches as a way to deliver customer benefits.
We emphasized the importance of the BMO Mosaik card by incorporating its sales into the branch scorecard.
In turn, the increased sales from the branch channels – generated by effective performance management -- have resulted in higher quality accounts and continuous growth in the personal card portfolio.
Year to date we have seen strong growth in:
Year to date, cards revenue is up 8%.
And if you are a customer of BMO, you’ve already seen signs of our growing focus on the customer in the service provided through our call centres and online.
The focus on the customer can also be seen on the commercial side – where we have been terrific commercial bankers for a long time with the number two position in market share at 19.9%.
Eighteen months ago, we appointed a new Senior Vice President, Commercial Banking, to create and drive our strategic agenda.
Over that period, we’ve significantly re-energized our Commercial focus, and generated solid results.
Here are just four examples:
And the results? Commercial customer loyalty is up strongly this year. Loans are up 9% year over year. And market share is up 69.
So where do we go from here?
We have multiple initiatives underway to capture commercial deposit growth and the personal wealth business of our commercial clients.
BMO has a wealth management offering that is second to none.
Wrapping up, here is how we see the world.
This is a burden that will weigh on global markets into 2009. The better news is that the credit cycle is something we know and have experienced before.
We are managing through it effectively, and the profitability of many of our businesses is improving as loan pricing improves.
BMO Financial Group is strong and we have lots of opportunities in the current business climate.
Our approach to the customer experience is working and remains the most effective strategy to gain market share today and position ourselves to do better than our competitors under more normal conditions.
Thank you for your time. I will now be pleased to respond to your questions.