Bank of Montreal
Q2 2021 Earnings Call Transcript

Published: 26 May 2021

[Operator:]

Good morning and welcome to the BMO Financial Group’s Q2 2021 Earnings Release and Conference Call for May 26, 2021. Your host for today is Ms. Christine Viau, Head of Investor Relations. Ms. Viau, please go ahead.

[Christine Viau:]

Thank you and good morning. Welcome to BMO’s second quarter 2021 results presentation. We will begin the call with remarks from Darryl White, BMO’s CEO followed by Tayfun Tuzun, our Chief Financial Officer; and Pat Cronin, our Chief Risk Officer. Also present to take questions today are Ernie Johannson from Canadian P&C; Dave Casper from U.S. P&C; Dan Barclay from BMO Capital Markets; and Joanna Rotenberg from BMO Wealth Management. As noted on Slide 2, forward looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results, management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tayfun will be referring to adjusted results in their remarks unless otherwise noted as reported. And with that, I will turn the call over to Darryl.

[Darryl White:]

Thank you, Christine and good morning everyone. It has been over a year since the onset of the CORONA virus pandemic which has brought challenges unlike any we faced before and they will have impacts for some time to come. But as we transition to recovery there are more hopeful signs every day. We're proud to have supported our customers and communities as they navigate the disruption and uncertainty of the pandemic and with them we have grown stronger, underpinned by our purpose driven strategy and the culture that will help drive sustainably and inclusive recovery. We continue to deliver on our commitments with sustained consistent financial performance. Today we announced another quarter of very strong results with adjusted net income of $2.1 billion and earnings per share of $3.13, up from $3.06 last quarter. Each of our operating groups continues to perform very well, with continued strength in our market sensitive businesses, as well as good growth in our P&C businesses despite record low interest rates. For the first half of the year, adjusted pre-provision pre-tax earnings of $5.5 billion increased 27%. Revenue grew 11% and expenses continued to be well-managed up 1% year-to-date with strong overall operating leverage of 9.8%. Our quality remains very strong with low impaired provisions again this quarter and a modest recovery of performing loan provisions reflecting both the resilience of our customers and our differentiated approach to risk management.

[Tayfun Tuzun:]

Thank you, Darryl. Good morning and thank you for joining us. I will start my comments on Slide 12. Performance this quarter was solid with strong adjusted pre-provision pre-tax earnings, positive operating leverage and continued momentum across each of our businesses. Second quarter reported EPS was $1.91 and net income was $1.3 billion. Adjusted EPS was $3.13 and adjusted net income was $2.1 billion, up from the low level of the prior year and up 3% from a strong first quarter.

[Pat Cronin:]

Thank you, Tayfun and good morning everyone. As Darryl indicated, we were pleased with our risk performance this quarter where we saw continued improvement in most of our key risk metrics from our strong first quarter results. In terms of credit performance, both impaired and performing loan loss provisions, showed a third consecutive quarter of improvement, underscoring our cautious optimism that we are turning the corner on the financial stress from the pandemic. Turning on Slide 25, the total provision for credit losses were $60 million or five basis points, down from $156 million or 14 basis points last quarter. Impaired provisions for the quarter were $155 million or 13 basis points, down from $215 million and 19 basis points in the first quarter, and well below pre-COVID levels. The strong impaired loan loss performance is due to the low rate of new impaired formations, while recoveries were consistent with prior quarters. We are pleased with the results, but do expect impaired provisions to return to more normal levels over time. We recognize the release on performing loans of $95 million this quarter, which was the result of positive credit migration and an improving economic outlook. We now have approximately $2.8 billion of performing loan allowances, and based on our expectation of loan impairment and provisions, we continue to remain comfortable that our allowance provides adequate provisioning against loan losses in the coming year. Turning to the impaired loan credit performance in the operating groups, we saw unusually low loss provisions in several of our business segments. In Canadian P&C consumer loan losses were $100 million, up 2 basis points from low levels in the prior quarter. In U.S. P&C consumer losses were $3 million, down significantly from last quarter. In addition, delinquency rates improved in both Canada and the United States. In our commercial and corporate businesses we have seen similarly encouraging credit performance driven largely by our U.S. segment where we posted a third quarter of low impaired provisions. In U.S. commercial, we reported impaired loan provisions of $3 million. The decline in provisions was driven by very low formations this quarter, very little new reservations and modest recoveries. Canadian commercial also had good credit performance this quarter with $54 million of impaired loan losses, down from $58 million in the prior quarter. Our capital markets business had excellent credit performance this quarter with a net recovery of $6 million, down significantly from the Q1 provision of $45 million. The decline was driven by zero impaired formations this quarter in our capital markets business. On Slide 27, impaired formations at $425 million declined 36% from last quarter, and are at the lowest levels in recent years. We saw significant improvements in some sectors that have been particularly stressed over the past year, such as oil and gas, where we recorded zero formations this quarter, and in our sectors highly impacted by COVID where formations were quite modest. Gross impaired loans declined by $442 million to 65 basis points continuing the trend towards pre-COVID levels that we've seen over the past few quarters. On Slide 29, we provide an overview of those sectors where we have seen COVID related impacts on credit quality. These segments make up less than 5% of our portfolio and notwithstanding the stress, our impaired loan losses across these segments have been quite modest relative to formations to date, reflecting strong origination practices and loan structures. We continue to closely monitor these segments, particularly given the prolonged lockdowns in Canada. And finally, as you see on Slide 30, there were no trading loss days this quarter. In terms of the outlook, we remain cautiously optimistic given the solid credit performance we've seen in the last three quarters, and we expect credit losses through fiscal 2021 to remain manageable. In terms of the performing provision while uncertainty remains in terms of the future path of the pandemic, assuming vaccination progresses in our key markets, and we continue to see a reduction in COVID cases, we would expect further releases from our performing provision in the coming quarters. In terms of impaired loan losses, given the strength of current credit conditions, and the near term economic outlook, we may see the next few quarters continue with low credit losses. Looking into fiscal 2022, our expectation is that impaired loan losses will normalize and average in the range of low 20s in terms of basis points. I will now turn the call back to the operator for the question-and-answer portion of this call.

[Operator:]

Thank you. Our first question is from Ebrahim Poonawala from the Bank of America. Please go ahead.

[Ebrahim Poonawala:]

Good morning. I guess just the first question around commercial loan growth, I heard you I think, both Darryl and Tayfun talk about expectations for a pick up. You did actually have commercial loan growth up quarter-over-quarter both in Canada and the U.S. Just talk to us in terms of what we're hearing from the U.S. banks is a lot of liquidity impact also being on borrower demand. So give us a sense of timing of in both regions when you see commercial loan growth picking up and do you expect Canada to be stronger than the U.S. as we see a pickup in loan demand?

[Dave Casper:]

So, Ebrahim, it's Dave Casper.

[Ebrahim Poonawala:]

Hey Dave.

[Dave Casper:]

Let me try to give you a sense. So, when we talk to our clients and this would be pretty similar on both sides of the border, demand for their products is really quite strong and we're seeing that really across all of our industries, regions. Our pipelines are up across the board. They're back to pre-pandemic levels. We continue on both sides of the border to add a lot of new clients, but to part of your point, many of those clients while we give them authorizations for credit, they're really not borrowing today. So, they come over, we get their operating business, but they're not borrowing today. So, the M&A activity continues to be high and I should say enthusiasm on both sides of the border for growth continues to be high. The headwinds which Daryl and Tayfun have both covered are real and those are -- so the inventory pipelines are basically climbed across the borders now. Labor issues are real, they really are real and there are very few of our clients that are having issues there. And there's product delays and there is price increases. So, all of that is kind of the backdrop to here's the answer I think to your questions. Loan growth as you pointed out was actually sequentially up both in Canada and the U.S. this quarter, and I expect it will continue to grow during the quarters, but at a -- you know the modest pace. I think by the fourth quarter we will start to be back to loan growth as starting to see what we've seen in the past with modest increase year-over-year. I think where my enthusiasm -- last year we were pretty optimistic that we will have loan growth by the end of this year and I continue to believe that. I'm more optimistic now than I ever was in terms of over the next two years including the next few quarters, so it's going to get better. The economy is coming back. I don't think Canada is going to be necessarily any faster than the U.S., but they're both growing and I'm just reflecting the optimism of our clients, and I've already outlined some of the headwinds, but those will go away. So, let me stop there and see if I've answered your questions appropriately.

[Ebrahim Poonawala:]

That was helpful Dave. And just one thing to add on to that, like pre-pandemic we did see BMO in the U.S. You've talked a lot about whitespace and market share opportunities. Should we expect you to all perform if and when commercial loan growth for the industry rebounds given the market share opportunities you've had maybe over the last five years to seven years?

[Dave Casper:]

I think we will continue in the U.S. to take advantage of the white space we have, the industries we cover, the geographies that we cover, that we continue to grow and I would expect that just as we have in the past we will be peer leading in our loan growth over the next couple of years and echoing really more important than loan growth, client acquisition growth.

[Ebrahim Poonawala:]

Got it. And what was the PPP balance if you have that at the end of the quarter.

[Dave Casper:]

In the U.S.? Around $4 billion I think.

[Tayfun Tuzun:]

Average loans are $4 billion.

[Dave Casper:]

Yes, average were about $4 billion.

[Ebrahim Poonawala:]

And the remaining fees tied to that that you expect to accrue as they get forgiven?

[Dave Casper:]

I think we basically accrued about half of the fees that we've received, we've accrued about half and the rest will come in through the next couple of quarters and into next year. I think it's around in U.S. dollars around a $100 million. Tayfun can correct me if that's not close.

[Tayfun Tuzun:]

Yes, yes.

[Ebrahim Poonawala:]

Got it. Thanks for taking my questions.

[Operator:]

Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.

[Paul Holden:]

Thank you. Good morning. So first I just want to ask a quick question or clarification. Tayfun, you mentioned the expected NII to be roughly flat year-over-year, just wanted to clarify if that's for the full year 2021 or for the back half of the year?

[Tayfun Tuzun:]

Full year '21 compared to full year '20.

[Paul Holden:]

Thank you, thank you for that clarification. Okay, so my next question is just regarding the NIM sensitivity table you provided in the slide back there which is very helpful and really highlights the upside you have in the U.S. business. Just wondering, to your knowledge, is there anything different about BMO's Canadian business that would perhaps make it any more or less rate sensitive than peers domestically?

[Tayfun Tuzun:]

I don't think so. I think it's a really I mean the contracts that you see between the U.S. and the Canadian side is more related to the deposit sensitivities. In the U.S. you know the picture is a bit different, but I don't think that necessarily to my knowledge that there are significant differences in Canada between us and the peers. And some of the, obviously we continue to also invest and roll both our deposits and equity on a periodic basis. And you may see some quarter-over-quarter changes in that number, it more relates to how we invest those balances.

[Paul Holden:]

Got it, okay. Thank you.

[Operator:]

Thank you. Our following question is from Meny Grauman from Scotia Bank. Please go ahead.

[Meny Grauman:]

Hi, good morning. Also on the subject of rate sensitivity Tayfun, you talked about how the rate sensitivity can go higher if you're able to retain the excess deposits that you've built over the pandemic, I'm just wondering how much upside is there? What's your expectation there as you look at it now?

[Tayfun Tuzun:]

So, Meny, if we assume that we retain all of the balances, you know it's a modeling exercise basically, then the sensitivity could be 70% to 80% higher than what we are showing up here, but we don't want to do that as we expect those balances to eventually leave the banking system. So, that's sort of is the range that I can give you. It is a number that is quite sensitive to the assumptions around retention of those deposits.

[Meny Grauman:]

That's helpful. And then maybe as a follow up just on the business side, if you could kind of try and highlight what are you doing on the business side to try and retain those deposits? Is that particularly just in Canada versus the U.S.? Just trying to get a sense of how you can make those deposits stickier, how realistic that is to expect that some of those deposits will stay?

[Dave Casper:]

It's Dave. I'll talk a little bit about the commercial side. I think the reality is, we are viewed as a pretty safe place to put excess deposits, combined with a very good place to actually have your operating accounts. So, during this pandemic we benefited on both sides. We will retain more than probably what the model suggests at least compared to what we've done in the past. We always seem to retain more. As clients need to use them for borrowing, obviously they'll come down, but we have a lot of clients that just don't borrow, and we'll keep a fair amount of money in short term and we will retain those. We will continue -- what we're really doing is we're always competitive, but today we don't have to be that competitive to keep these rates and keep these balances. And it's basically the same on both sides of the border. The would be the -- in essence, the commercial strategy. Ernie may, Ernie has done great job on the retail side as well.

[Ernie Johannson:]

Great, thanks Dave. I'll take over Meny on the retail side. I'll start with the U.S. first and then do Canada. On the U.S. side as you know, we've been acquiring deposits across 50 states in the U.S. and are committed to continuing to maintain good relationships in those growth engines for deposit. We've shifted our focus away, this is a North American state and away from the broker, terms, CD, market and we're really focusing on our customer base and on checking and savings growth. On both sides of the border we have been accelerating our initiative to digitize that process, acquire more new customers for those key relationships that start with a checking and a savings account. You'll see that that growth happening in Canada in our regional deposit share movement and as well as our continued investment in marketing campaigns for growth. So, we're really pleased with those relationships and find that those deposits as you can imagine are sticky. And as we see the economy open, there may be a little bit of softening as consumers start spending on both sides of the border we'll see a decrease in those deposits, but as I've said, as we acquired more new customers and we anticipate that that -- the surge deposit that we've acquired will be slower running off than one had imagined a few months ago. That's initially what we're seeing as the economies are slower to ramp up the consumer spending. So, really a good news story on both sides of the border on the retail side.

[Meny Grauman:]

Thank you.

[Operator:]

Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

[Doug Young:]

Hi. Good morning. I guess this question is for Pat. I'm just trying to think of credit here, and I mean, if I go pretty -- well your average coverage ratio for performing loans was I think around 32 basis points in fiscal '18 and fiscal '19, and what I'm trying to get at is there any reason why you can't revert back to this level call it over the next few years, is there some structural changes or are you just going to be more conservative or what would be a reasonable timeframe? If you're confident in your book what would be a reasonable timeframe for getting back to that level?

[Pat Cronin:]

Well great. Thanks for the question, Doug. I would say first of all in terms of the timing or for getting down or timing of releases, it's really going to depend on primarily how we see lockdowns easing, particularly in Canada and then a commensurate reduction in stress for those borrowers that are uniquely impacted by the lockdowns. And then we'd like to see an easing of some of the health issues that are percolating in certainly in countries like India that may have a larger impact on the global economy. And then some stability in Canadian housing prices would probably be another trigger for us to start to release. In terms of where we get back down to, it really depends a lot on the mix of the book and some things we might provision higher for versus others. So, it depends a lot on how some of the sectors grow as well as the product mix within the consumer business. And then I would expect us to remain slightly elevated versus our historic levels because now we obviously have a new stress event to consider when we think about what the tail of loan losses could be as we move forward. So, it will take some time to go back down. My gut is probably over the course of the next twelve 12 months to 18 months we'll see a reduction to something that's more stable and it will probably settle slightly above where it's been pre-COVID.

[Doug Young:]

Okay, that's helpful. And then just on card fees, I mean it was mentioned there was a non-recurring item. What I'm trying to get an idea of just the trending of card fees and so I don't know if you can quantify what the non-recurring item was that we can kind of look at card fees excluding that. And can you talk a bit about what you're seeing in the card business in general? Thank you.

[TayfunTuzun:]

Yes. So let me ask the, let me answer the fee question and I'll turn it over to Ernie about what she is seeing. Doug, as I said, there were three notable items during the quarter, altogether they didn't have any impact on net income, and one of them was in card fees. In terms of sort of the trend expectations, what I would suggest is that in a quarter or two, as consumer spend activity picks up and card swipes continue to go up, we would expect to grow into this number, away from the onetime impact this quarter. So that's how I would look into sort of modeling that line item. And in terms of what Ernie is seeing, Ernie, I will turn it over to you on that topic.

[Ernie Johannson:]

Right. Thanks, Tayfun and thanks for the questions Doug. If I look at sort of card related revenue, obviously elevated this quarter as you've mentioned, that line typically has a couple of items in there that move around, timing of reward cost is one, the actual consumer spending that occurred, that occurs through that. So as I look at the past month or so, what we're seeing is a return back to I would say, pre-pandemic levels of spending, and it's just in a recent in the past month or so that we're returning back to 2019 numbers and that's good to see overall. We're seeing it in a couple of categories. As you can imagine, historically, in the pandemic, you saw, grocery, home rental, gardening kind of categories at their peak and above normal levels and now we're starting to see is a return to travel. And we're seeing that across hotels, travel industry and so that's really a good indication of what we're going to be facing in the next little while, which is, as consumers are more confident about the about the pandemic situation get vaccinated, we're seeing that spend grow. So I would anticipate that we are going to be seeing stronger and strengthening consumer payments spend. I'm seeing that even now on card, credit card acquisition. We're really pleased with our launch of our of our new Visa eclipse products, they're performing extremely well in terms of acquisition growth. It would appear that the payments businesses is getting back up to where it was pre-pandemic. So we're really pleased with that performance.

[Doug Young:]

Great, thank you.

[Operator:]

Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

[Gabriel Dechaine:]

Good morning. I have a quick one on the prepayment income and then a follow-up. In Canada, do you have, can you tell if you have maybe a more strategy to encourage prepayment activity and relatedly, like what is the size of these revenues been over the past couple of quarters?

[Ernie Johannson:]

It’s Ernie. I’ll, I think you're referring to prepayment on mortgage.

[Gabriel Dechaine:]

Yes.

[Ernie Johannson:]

Okay. Thanks for the clarification. It's an interesting question. We're obviously consumers are taking advantage of a lower interest rate environment to refinance. We're also seeing consolidation of lending. So it is really looking at how do they consolidate it into home equity lines. But in terms of prepayment, this will be a phenomena that continues as we have low interest rates. Do I anticipate it to diminish? I think over the coming months, you will see that just as more consumers have taken advantage of that who were interested in taking advantage of made payments have done so. And then also as we go forward, we're going to see increased spend, if I can use that terminology and that will also be helping our overall lending growth versus the prepayment fees that you're speaking of.

[Gabriel Dechaine:]

What’s the size of any of these revenues over the past couple of quarters?

[Ernie Johannson:]

I don't have that on hand. We could probably come back to you with that as a proportion of our nerves .

[Gabriel Dechaine:]

All right, that would be great. Then, for whoever, maybe Pat, and business heads as well, like the inflation topic is of course top of mine everywhere. How are you thinking about the numbers we've been seeing lately, both from a positive and a negative sense, because it could suppress demand if people delay their decisions, they're buying decisions when prices are moving so fast and up, but it does help I guess from a credit risk standpoint on LTVs on what's on the books already. I'm mumbling here, but if you can give me a sense of how you're thinking about the inflationary story these days and how you're preparing for good or bad things?

[Pat Cronin:]

Sure, maybe I'll start, it's Pat, and then I’ll turn it to others. Specifically to the inflation that you're seeing in home prices, you're correct. With existing homeowners that has the effect of actually improving LTV, so that's a credit positive. We are looking though very carefully at existing originations. The elevated home prices may exaggerate LTVs and so, we're taking our risk management practices on housing is dynamic anyway. And so through the cycle, as prices change, we adjust our practices. And, we're routing more mortgages to manual adjudication, particularly where we're looking at areas where we've seen rapid house price appreciation, just to make sure that we're comfortable, but ultimately, our mortgages and loans are to the borrower's ability to pay, not the house price and so to the extent we're satisfied with that, then we're comfortable from a risk perspective. And then broadly, we are stress testing our loan portfolios against higher interest rates. Generally speaking, we do that anyway. As you know for sure, for consumer as well as commercial borrowers, when we originate we stress test against higher interest rates anyway, to make sure that they're -- that they can sustain their level of borrowing in the event of higher interest rates. But then we stress test the portfolio broadly and this will evolve over time, for sure, but what we're seeing right now is the stress that could be caused by inflation is definitely manageable within the earnings power.

[Gabriel Dechaine:]

Anybody else on the business growth side? Well, actually, I was thinking that Pat the stuff like, like are you seeing any commercial borrowers? Are their input costs are based on these -- on probably commodity prices that are soaring and that might be squeezing their margins? Are you seeing any of that at all?

[Dave Casper:]

Well, definitely seen, we're definitely seeing some input costs across the board. At this point, with I don't think any exceptions, most of this is getting passed on. And it's expected, which is, clearly, if this continues we'll have some inflationary pressures. But right now, our customers need to get the inventory. They're paying for it and it will likely get passed on. I don't see big margin pressures.

[Tayfun Tuzun:]

Maybe just one follow-on to that. Certainly, from a risk perspective, we're not seeing it driving wide scale stress in the portfolio. You would normally start to see that show up in negative credit migration. And in fact, for the second quarter in a row, we've had some pretty healthy positive credit migration across the wholesale book. So, it's obviously as Dave said, it's not, immune, but we're not seeing it show up broad base in terms of negative migration.

[Gabriel Dechaine:]

All right. Thank you.

[Operator:]

Thank you. Our following question is from Lemar Persaud from Cormark Securities. Please go ahead.

[Lemar Persaud:]

All right. My first question is on the interest rate sensitivity disclosure. First of all, thanks for providing that, I think it's useful. I'm just wondering if you could just answer this high level question, how much could these sensitivities change from quarter-to-quarter? I guess, where I'm going with this is that, one of the big downfalls on the structure of interest rate sensitivity tables that all the banks provide in their annual reports and MD&A is that it changes so much from quarter-to-quarter, and it's only really relevant for a specific point in time. So the sensitivity is, if this interest rate sensitivity table is subject to similar levels of volatility, it becomes a little bit yes, less useful for me. So I'm just wondering if you could offer some comments on that?

[Darryl White:]

Very good question. These are clearly as of the date that they are run and they are published there will be quarter-over-quarter changes in this and changes in this number depending upon the actions that we would be taking during that quarter. So that clearly will have an impact on the sensitivity. At points in time, we may decide to invest a larger portion of the liquidity that were in which takes away, the remaining sensitivity on those balances. We may have, different hedging policies depending upon our perspectives that we execute during the quarter. The reason why we decided to give you the numbers without necessarily adding deposit liquidity, for example, that I mentioned, which would have shown higher sensitivities is partially due to that reason because we did not want to sort of really create challenges in comparing quarter-over-quarter numbers. But there will be some changes depending upon our rate management actions and also movements in the yield curve that occurs. So these are natural factors, and not necessarily related to any structural changes in sort of the underlying unhedged balance sheet.

[Lemar Persaud:]

All right, thank you. And then just maybe if I could squeeze another one in here, I'm just wondering if I could get some thoughts on the impact of the more stringent qualifying rates for domestic mortgages. Do you think that some of the really strong growth we saw this quarter just being pulled forward to get ahead of the higher qualifying rates, and then we could see a bit of a slowdown in coming quarters, maybe just some thoughts on that?

[Ernie Johannson:]

Yes, it's Ernie, I'll take that one. There will be some impact as a result of that increase, we called it the stress test, as you said. The impact will be, probably about 5% to 10% max from the perspective of impacted borrowers. That said, there are ways in which they can obviously find a lower priced house, being able to either, find more equity somewhere from parents and gifting and all those sorts of good things. So it's very difficult to understand what the full impact will be. They may actually just end up these consumers going to a lower priced house in that case. So, overall, there will be some sort of moderation to the extent of being able to say what exactly that's going to be it's difficult to say, but we can assume just given what we're seeing right now in kind of housing prices and sales, that there will be some moderation that would be our expectation over the next little while, but it will still remain a fairly robust mortgage market in Canada for sure over the next little while.

[Lemar Persaud:]

Great, thank you.

[Operator:]

Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.

[Mario Mendonca:]

Good morning. Tayfun the typical last year guidance on net interest income for the year being flat, given the comments on the apparent momentum in your loans, commercial and also on the retail side, I was a little surprised by that. It was also sort of surprising in the context of the move we've seen in the U.S. five-year and the Canadian five-year in the quarter. So maybe what I'm getting at here is, assuming the loan growth remains good, and perhaps even accelerates as Dave suggested, where will the margins come in? Because that's the only other explanation or are you pointing us to lower margins in Canada and the U.S., or lower margins outside of the domestic P&C franchise?

[Tayfun Tuzun:]

Yes, again, another good question. Partially, if you go back to Slide 16, we are expecting NIM to be relatively flat. And, that's partially as a result of the right side of that slide where the reinvestment yields currently are still below those that are coming off from prior investments of either our equity roles or deposit roles. So that still is a phenomenon that continues to put some pressure on NIMs. In terms of year-over-year comparisons, in Canada, for example, although we are benefiting from mortgage growth, which is elevating our average loans, relative to past year is obviously that's we are not necessarily seeing much growth in credit cards, which has higher spreads. Also that's also playing a role both in the U.S. as well as in Canada. The composition of the loan portfolio is slightly changing until, personal borrowing, including credit cards picks up which has higher spreads. So, there's nothing really unique about the guidance and if we end up seeing stronger average loan growth in the second half of the year, then what we're anticipating, then you would see a pickup in NII. So, I think in general, the guidance is, pretty much in line with both what's happening on NIM, as well as in sort of the composition of the loan portfolio.

[Mario Mendonca:]

That's not to on it, even if the domestic or sort of rather if the total bank margin is essentially just flat going forward for the remainder of this year, I can't see how BMO doesn't grow the NII. It just, the numbers don't, they just don't add up. NII grows year-over-year if your margin is flattening. I don't know if this is sort of like a mathematical truism . So maybe this is something we could take offline, because I just don't, I don't follow your guidance very well.

[Tayfun Tuzun:]

Yes, I think, no, it probably goes back to sort of the yield on earning assets. That is changing a little bit. But again, we can discuss, I guess we're giving you a guidance as we see it today. But is there an upside? There may be some upside to the guidance, depending upon how the second half moves.

[Mario Mendonca:]

Okay, maybe a different type of question then. The FX fees just was really good this quarter. Was there anything special in there or was that? I'm not referring to FX trading, I'm talking about the FX fees, non-trading, they were just very good this quarter. Was that just really good client activity in the quarter or was there something else going on?

[Tayfun Tuzun:]

Yes. There's nothing unique on in that line item in terms of any quarterly one time impacts. It's just client activity.

[Mario Mendonca:]

Okay. Thank you.

[Operator:]

Thank you. Our last question is from Scott Chan from Canaccord Genuity. Please go ahead.

[Scott Chan:]

Good morning. So on the capital markets that obviously is very solid in the quarter, could you offer us any kind of guidance that you see over the next few quarters in terms of DCM, ECM or M&A advisory activity?

[Pat Cronin:]

Great, well, thanks for the question. Obviously very satisfied with the quarter. Great to see the investments that we've made and the portfolio adjustments really start to pay off. I think it also is a demonstration of the diversification of our platform, both in terms of product markets, and clients. As we look forward, I think we'll continue to see the benefit of the investments we made across the platform, particularly in the U.S. We've seen the strong results we've had year-to-date, we expect those to continue on as we go. Our pipelines remain very strong. M&A in particular, has been building and growing. We have very strong quarter and equities, and a leveraged finance. I think as M&A activity is continuing to pick up over the balance of the year, we'll continue to see strong revenue growth there. I think we'll also benefit as we look forward to the portfolio choices we've made in terms of what we've been doing driving our cost structure down, you saw our efficiency ratio is less than 55% year-to-date and I think we'll continue on that benefit. And then I think we'll also continue to have a benefit in the strong credit environment that we've experienced and that's going to continue on. So all in all, strong performance we expect coming into the balance of the year.

[Scott Chan:]

Great, and maybe lastly for Darryl just on the capital side, got to ask it to set one ratio at 13% pro forma higher with the asset management sales. So assuming that RC does lift restrictions later this year, at this point today what are your kind of capital priorities, including M&A? Thanks.

[Darryl White:]

Yes, thanks for the question. Short story unchanged. The first use of our capital is for our clients and devoting it to their benefit and their growth. I think we've shown that in the past and expanding environments where we've been able to grow and take that whitespace that we talked about earlier in the call, we've been able to do that and increasingly profitable returns, so that would be priority one. And then you're into the tree on deploying it to dividend increases versus buybacks. I'm not going to get into the speculative game of when that will be possible. That will be to the regulator's decision, but when it is, you would expect us to be active there, absent, being active on the M&A front and on the M&A front I'll go back to a framing I think I've given before, I talk about this in terms of tools and discipline. As far as tools are concerned, without question, we've got lots of them. We've got excess capital, we've got operating momentum, we've got a great team, and we've got good muscle, I would say in terms of the success that we've had and the acquisitions we've made. So tools are great. But they don't come at the expense of discipline and discipline for us as strategic. It's cultural and it's financial. And I think I've said before, you have to be careful not to swing at every pitch. There are lots of pitches, but lots of them are in the dirt . So if you see us active, it will be because we landed something that meets both the discipline and the tools. And if you see us not active, it'll be because we haven't found something that goes over the discipline bar. So I'll leave it at that.

[Scott Chan:]

Yes, I like that analogy. Thanks a lot.

[Operator:]

Thank you. That concludes the question-and-answer session. I would now like to turn the meeting back over to Mr. White.

[Darryl White:]

Okay, thank you, all of you for your questions. Let me wrap up quickly here with four key summary themes. Number one, our results for the first half of the year as I said earlier are clearly very strong with our ROE, our EPS growth and our operating leverage all above our midterm targets. Number two, we're not stopping there. We are moving the bar significantly higher on our expenses and our efficiency commitments and we have strategies in place to do more. Number three, our credit quality will remain a differentiator for us, as it has for decades. And number four, our purpose driven strategy is delivering consistent performance, the strong momentum and the clear potential across all our businesses, the advantage business mix is ready for more especially with an accelerating economic backdrop that we're driving into. So I'm highly confident that as the economies reopen, we're going to continue to accelerate through the next year and beyond. Thank you all for participating in this morning's call. We look forward to speaking to you again in August.

[Operator:]

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