Bank of Montreal Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Overall Performance: Pre-provision pre-tax earnings grew 5% to $13.4 billion. Achieved positive operating leverage in the last three quarters and full year, with efficiency ratio improving to 58.6%. Deposits grew by $61 billion or 9%. CET1 ratio increased to 13.6%.
• Business Line Highlights: Canadian P&C had strong loan and deposit growth; U.S. P&C shifted branch model to advice-centric; BMO Wealth Management saw strong net flows; BMO Capital Markets had growth in securitization and M&A activity acceleration.
• Strategic Progress: Advanced digital-first strategy powered by AI, data, and technology modernization. BMO Insurance launched AI-powered digital assistant and received five Global Retail Banking Innovation Awards.

Segment Performance

• Canadian P&C: PPPT was up 11%, with record revenue of $2.9 billion, up 5%, driven by good loan and deposit growth (loans up 6%, deposits up 10%). Net income down due to higher PCLs but offset by strong PPPT growth at 6% and positive operating leverage of 1.1%.
• U.S. P&C: PPPT grew 4%, with lower expenses offsetting impact of lower margins on revenue growth, resulting in positive operating leverage of 2.2%. Loans up 3% (excluding RV loan portfolio sale), deposits up 6%.
• BMO Wealth Management: PPPT was up 10% with good growth in client assets. Ranked first in J.D. Power 2024 Canada Wealth Management Digital Experience Study.
• BMO Capital Markets: PPPT grew 7% in a mixed environment with strong trading performance, reflecting growth in securitization business, and seeing signs of M&A activity acceleration.

Guidance

• Credit provisions expected to moderate through 2025. Aim to rebuild return on equity to 15% over medium term. Expect stronger growth in net interest income in 2025. Effective tax rate in 2025 expected to be in the range of 24% to 25%.
• Focus on improving U.S. segment performance, including lower PCLs by leveraging scale and optimizing business mix. Expect positive all-bank operating leverage and disciplined balance sheet optimization.

Risks

• Still restrictive interest rates, ongoing geopolitical tensions, and potential trade protectionist measures pose risks. Credit performance deterioration more than anticipated in 2024 impacted results.

Question and Answer

Q: Give a sense of the U.S. credit demand side and loan growth evolution.

A: Darryl White said net bullish on U.S. with more constructive loan growth in 2025 expected, and BMO expects to fully participate in the market.

Q: How does the impaired loss ratio trend over 2025 and will there be releasing of performing provisions?

A: Piyush Agrawal said Q4 was a high point, expects impaired losses to moderate from Q4 levels in 2025, and doesn't expect releasing of performing provisions soon as there are no leading indicators of change in migration.

Q: Talk about the CET1 ratio target and capital optimization.

A: Tayfun Tuzun said CET1 management target is 12.5%, and capital optimization includes buybacks and optimization of capital allocation to businesses, with no sizable divestitures currently planned.

Q: What are the factors in U.S. segment improvement for ROE rebuild?

A: Ernie Johannson mentioned acceleration in California and Western markets with digital engagement and sales, and Nadim Hirji talked about capital and funding optimization to redeploy capital to higher-returning segments.

Q: Expectations for commercial loan growth in 2025?

A: Darryl White said BMO would look to participate with the market, expecting positive loan growth in 2025 and to not give up market share.

Q: Details on Capital Markets PPPT and commercial loan pipeline?

A: Alan Tannenbaum said there's a pickup in M&A activity and sponsor processes, and Nadim Hirji mentioned growing pipelines in Canada and positive customer sentiment in U.S. post-election supporting loan growth.

Q: Thoughts on credit formations, peak formations, and losses?

A: Piyush Agrawal said formations variability will continue, write-offs are good hygiene, and there's strong collateral in formations that didn't warrant immediate provision.

Q: Lessons from credit episode and impact on growth outlook?

A: Piyush Agrawal mentioned learnings from client selection, due diligence, and risk underwriting criteria, and Darryl White said changes in underwriting practice now occur to produce different outcomes from past vintages.

Q: Size of 2021 vintage portfolio and comfort level going forward?

A: Piyush Agrawal said a large part of 47 basis points impaired loss was from 2021 vintage with larger holds, and confidence comes from work done parsing the portfolio and expected loss moderation.

Q: Changes in management or practice post-2021 vintage?

A: Darryl White said changes in underwriting practice now occur, with different outcomes expected from current and past vintages due to revised underwriting criteria.