SpeechesRemarks by William A. Downe, President and Chief Executive Officer, BMO Financial Group at the Scotia Capital Financials Summit
Toronto, ON, September 7, 2011
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Thanks, Kevin – and good morning, everyone.
It’s always a pleasure to be here at the Scotia Capital conference. Kevin does a terrific job. In some ways it signals the end of summer -- time to get back to business, and always nice to see such a great turnout.
I’d like to cover three main topics this morning:
First, a brief review of BMO’s year-to-date results.
Second, an overview of the increasingly diverse markets where we do business in Canada and the US as well as our perspective on the economic outlook for North America.
Third, I’ll address a question we are hearing frequently these days: How do you achieve quality growth in the current economic environment? You do it with a prudent approach to risk – and by maintaining discipline in the execution of your strategy.
For us, the key phrase here is quality growth.
Slide 1 – Forward-Looking Statements and Non-GAAP
Before I continue, please note the caution regarding forward-looking statements. You’ll find additional details in the public filings of BMO Financial Group.
Slide 2 – Year-to-Date Results
As you know, BMO reported very good third-quarter results. They reflect the momentum that’s evident across all of our businesses.
Through nine months ending July 31st, adjusted revenue was up 10% from last year to $9.8 billion. Net income, on the same basis, exceeded $2.4 billion – that’s 16% above last year.
Adjusted EPS increased 13% to $4.02 per share. This translates into a year-to-date ROE of 16.1% – up from 14.9% a year ago.
We achieved these results while continuing to invest in future growth – most notably through our acquisition of the US regional bank Marshall & Ilsley. M&I’s network and strength in the Midwest complements our footprint in and around Chicago and effectively doubles our competitive presence across a six-state area. The M&I transaction closed smoothly and on time in Q3.
And each of BMO’s operating businesses is performing well.
In Canadian Personal & Commercial Banking, year-to-date net income was up 13% on an actual-loss basis, driven by revenue growth for most products.
In our US Personal & Commercial business, net income in source currency increased 27% to $204 million, reflecting improved NIM and higher deposit balances. Our newly renamed P&C business – BMO Harris Bank – now has competitive scale in the US and provides a strong platform for further expansion within attractive markets.
Nine-month net income for our Private Client Group increased 13% to $374 million. Earnings from our traditional wealth businesses were strong, up $73 million – or 35% – based on growth across the board.
Assets under management and administration improved to $429 billion, with acquisitions adding $153 billion of assets under administration. Excluding the impact of acquisitions and the weaker US dollar, assets increased 12% from a year ago.
Turning to BMO Capital Markets: year-to-date net income rose 28% to $771 million, yielding an ROE of 22.9%. Revenues were up 8%, driven by increases in investment banking fees, securities commissions and interest rate trading.
BMO’s overall capital position remains strong. Our Basel II Common Equity Ratio at the end of the third quarter was 9.1%. This figure includes the impact of our US acquisition in Q3, which increased risk-weighted assets by approximately $45 billion.
We remain confident that we will comfortably meet the 2019 Basel III requirements for Q1 2013. Our pro-forma Basel III Common Equity Ratio at July 31, 2011, was reported at 6.6%. The decrease from 7.8% estimated at the end of 2010 is due to the impact of the M&I acquisition, higher RWA and refined Basel III estimates.
Slide 3 – BMO’s North American Markets
With our latest results as context, I’ll shift to my second topic this morning: BMO’s North American footprint.
The four major markets where we operate form a T centred in the heart of the continent. In Canada, both the West and the Atlantic region are driven economically by natural resources industries. In central Canada the emphasis is on manufacturing – as it is in our fourth key market, the US Midwest, which has a similar orientation to the Great Lakes shipping corridor.
Taken together, the three Canadian regions have a total GDP of $1.5 trillion – a figure we expect will grow steadily as manufacturing continues to recover in Ontario and Quebec.
Canada has a well-diversified economy. Employers can draw talent from
a highly educated population. And the country benefits from strong demand
for natural resources from emerging markets. As a consequence of all
these factors, Canada’s unemployment rate is currently 7.2%, which
compares favourably worldwide.
The area has a wide range of industries and is home to 78 Fortune 500 companies and thousands of small and medium-sized enterprises.
In June, unemployment in the Midwest was 8.4% – 70 basis points below the national average of 9.1%. In fact, the region’s unemployment rate has been below the overall US figure since March 2010. Year-over-year income gains in five of the six states exceed national indicators, with Illinois up 4.8% and Wisconsin up 5.1% compared to a US average of 3.8%.
This week the US Congress comes back to work. In his speech to both houses tomorrow evening, President Obama will map out the basic elements of an economic blueprint for the country.
It’s clear that manufacturing activity will be the catalyst for job creation in the US. We’re encouraged by the improvement from a year ago in the Midwest’s output, as measured by the Chicago Fed index. The latest numbers reinforce our belief in a business-led recovery.
In this context, BMO has an enviable North American footprint and market presence – aligned geographically with industry sectors where we have deep knowledge and proven capabilities.
Slide 4 – Economic Outlook
In the global economy, there are still major challenges to work through. Clearly both the political and fiscal climate in Europe is cause for concern. However, we’re encouraged by the underlying resiliency of the Canadian and US economies.
In the year ahead, a gradual resumption in growth will be driven by three factors:
A weaker currency, somewhat lower oil prices and the improving financial health of consumers will also provide a boost to the US economy. And in Canada, commodity prices will continue to provide an economic benefit.
Even with these positive factors in play, fiscal consolidation is restraining activity in both countries. Although we revised our outlook downward for the North American economy early in the summer, we feel there is a reasonable basis for recovery and growth resuming in the next two to three quarters.
We expect consumer borrowing to remain subdued, while commercial loan growth will depend on the pace of the recovery. At BMO, our focus on building quality assets has always been a key source of corporate strength. We will continue to pursue growth with this as a differentiator.
Which brings me to my third and final topic this morning: why we have confidence in the future performance of our businesses and the results we’ll generate – even during a period of slow economic growth.
Slide 5 – Growing in a Slow-Growth Market
I. Commercial Banking
At BMO, we’ve chosen to invest in areas that we believe have the most value for current and prospective customers – to firmly position us for growth in any environment.
And as I said at the outset, we’re aiming for quality growth.
I’d like to highlight some of the strengths that differentiate BMO and underpin our confidence in a sustained growth trajectory.
First: Commercial Banking.
Commercial lending has always been a differentiator for BMO – in Canada, where our 20% market share makes us a leader, and south of the border as well.
We intend to build on that strength to become the premier banker for business within our North American footprint. We want to be recognized as true partners to business, providing clear, proactive guidance, expert advice and complete solutions.
Let me give you some specific examples:
Our online Banking for Business channel provides one entry point with an array of web-based tools for custom-tailoring BMO products and services. Customers have the instant access they need to run their businesses effectively and capitalize on new opportunities. And we have a platform that can be built once and then leveraged cost-effectively for multiple applications.
The Banking for Business channel includes a foreign exchange feature that lets you effectively “pick a price” instead of having to canvas the street looking for the best rate. This has been welcomed by customers – which translates into greater share of wallet for BMO, along with higher customer retention and more cross-sell opportunities.
In other distribution channels, we’re ramping up our specialized sales force. For example, by the end of the fiscal year we’ll have 150 new small business bankers focusing entirely on these customers at the branch level.
We’re looking for more opportunities to grow fee-based income. For instance, BMO’s Global Transaction Banking includes treasury management services – a business area that delivers a steady, annuity-type earnings to the bank with limited risk. What’s more, promoting this kind of day-to-day interaction helps to deepen relationships and attract more commercial deposits.
The breadth and depth of our business services reinforce BMO’s profile as a trusted advisor offering best-in-class information, liquidity, working capital management and risk mitigation.
In our US commercial banking business, our goal is clear: to be the undisputed leader in the Midwest. We’ve specifically targeted customers in the mid-market, where network competitors struggle to actively focus, and where smaller banks lack the capital and product breadth to compete. Harris and M&I were individually strong in this part of the market. Together, they’re a powerhouse.
We have a two-part strategy:
One: As in Canada, to increase fee income by boosting penetration of treasury management services.
And two: To offer customers an ideal combination of local access and specific industry expertise – and providing a reliable source of capital with which to grow.
When we talk to senior business leaders, we can provide deeper expertise in specific verticals – from food and consumer products to agriculture and healthcare – while sharing firsthand knowledge of the overall marketplace.
Slide 6 – Growing in a Slow-Growth Market
II. Lift from US Expansion
Another differentiating strength I want to focus on this morning is the lift we achieve from combining the US businesses of BMO Financial Group with M&I.
The combination has significantly enhanced our three operating groups in the US: Personal & Commercial Banking, Wealth Management and Capital Markets.
In terms of senior management, all top and level-two leadership positions were confirmed on close. We opened on July 6 with our new organization fully in place. Performance objectives for the combined business have been set. And while we’re operating the former parts of M&I within the revised organization, I want to comment specifically on how this acquisition is impacting our US growth strategy.
First, it is a milestone in the transformation of our US retail operations. We’ve gained 2 million customers, primarily for our US P&C business. Our third quarter included 26 days of results from the acquired business, which added $117 million in revenue and $32 million to adjusted net income.
We expect the successful integration of Harris and M&I to generate in excess of $300 million in cost-related synergies. We intend to capture that on a run-rate basis by the end of 2013. On a reported basis, we should realize approximately one-third in 2012 and the rest in 2013.
We estimate one-time integration expenses of approximately $600 million pre-tax, of which $78 million has been booked year-to-date.
Our new US retail brand – BMO Harris Bank – has been well-received by customers. We’re currently replacing signage and other branded elements in branches across the network. The positive response in the marketplace – backed by our strong balance sheet and capital strength – is reinforcing our trademark BMO commitment to placing the customer at the centre of everything we do.
That same commitment is evident in our US Wealth Management business, where we now have an established family of mutual funds, a large team of financial advisors working with customers in our branches, a full suite of private banking services and strong capabilities in institutional asset management.
We’re confident that all of our US initiatives will further differentiate BMO’s offer and propel future growth.
Slide 7 – Growing in a Slow-Growth Market
III. Capital Markets U.S.
Our BMO Capital Markets business in the US represents another key source of growth. We’ve invested in moving to a North American wholesale model, taking a unified approach to client coverage that will enable us to build stronger relationships.
We stress three main differentiators:
Since the beginning of 2010, we’ve refocused our investment and corporate banking business to concentrate on debt and equity financing, and mergers and acquisitions. We’ve transferred a number of smaller, lending-oriented clients to our commercial banking group. As the rest of the bank has grown, our Capital Markets business now accounts for a quarter of total revenues.
BMO Capital Markets has also made tremendous progress in building out and expanding coverage of US institutions with a renewed equity platform. We’ve upgraded the team to complement our research coverage and corporate access.
BMO has long been a leader in Canadian equity research, and we’re pursuing the same goal in the US. In 2010, Greenwich Associates ranked us 20th overall in US equity research. This year we moved up to 16th place. In the Wall Street Journal’s annual “Best on the Street” research survey, BMO Capital Markets placed fifth overall.
Yesterday, we announced the return of a veteran BMO banking analyst, Ian de Verteuil, to head up our unified North American research platform.
Lastly, we’re developing a US fixed-income platform focused on North American government markets and targeted corporate sectors. We’ve strengthened our public finance and infrastructure offering while continuing to build our sales and trading capabilities.
From a very strong North American foundation, BMO Capital Markets is now well-positioned to take advantage of opportunities as they emerge. We’re on track strategically to maintain a strong return on equity without introducing unwanted volatility.
Slide 8 – Growing in a Slow-Growth Market
IV. P&C Canada
In wrapping up, I want to underscore the importance of our flagship Canadian Personal & Commercial business, whose continued strong performance provides the foundation for quality growth.
Over the last two years, P&C Canada has delivered top-tier performance by balancing product mix and pricing with a commitment to providing the best possible customer experience.
We’ve extended the meaning of making money make sense – helping customers control spending, grow savings, borrow smartly and invest wisely. Our loyalty scores continue to rise, and we’ve seen gains in the number of products used by both personal and commercial customers.
We remain confident in our ability to sustain this customer-centric strategy. We’ll keep up the momentum by capitalizing on new opportunities while maintaining that crucial balance between efficiently managing the business and placing customers’ interests first.
The energy driving our P&C Canada business is evident right across all of BMO’s businesses. Our entire team is highly motivated and determined to deliver on our strategic priorities.
As I said at the outset, we’re getting there by managing our business responsibly, with strong governance, a prudent approach to risk and disciplined expense management – and by pursuing the quality growth that will enable us to continue fulfilling our promise to our customers.
Thank you for letting me share the BMO perspective. I’ll now be happy to answer questions.