Bank of Montreal (BMO) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Bank of Montreal second quarter financial results conference call. During the presentation all participants will be a listen only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Tuesday, May 28, 2002.

I would now like to turn the conference over to Susan Payne, Senior Vice President of investor relations. Please go ahead.

payne|Susan|Payne|Senior Vice President, Investor Relations|Bank of Montreal|cf: Thank you, Cliff.

Good afternoon, everyone, and welcome to the Bank of Montreal second quarter fiscal 2002 conference call. I'd also like to welcome our retail investors and members of the media who have joined us in listen only mode.

At this time I would like to refer our listeners to our investor relations Web site at bmo.com to view our forward-looking statements and risk factors pertaining to these statements.

Today's overview of our second quarter results will be provided by Tony Comper, our chairman and CEO, Karen Maidment, our CFO, and finally Mike Maila, head of risk management.

Now I'd like to hand the floor over to Tony.

comper|Tony|Comper|Chairman and Chief Executive Officer|Bank of Montreal|cm: Thanks, Susan and good afternoon, everyone.

All in all, in looking at the quarter I'd say that we made good progress in a difficult environment. And while the increase in loan losses that we announced on April 25th and the weaker capital markets reduced the quarterly results, I think there is a number of positive trends which point to a stronger performance as the economy recovers.

Our exposure to the troubled telecom sector is small on a relative basis, as I think you know, and like many others we're feeling the effects of the unexpected and I'd have to say disappointing announcement from BCE regarding .

However, notwithstanding, we anticipate that annual provisions for loan losses will be lower this year than for fiscal 2001 as we gradually move out of the most challenging part of the credit cycle.

Mike as usual will take you through all the latest information at our disposal and the point I'd like to make is that at the end of the day we anticipate that we will benefit from our proven capabilities in credit risk management, and that includes the ongoing resilience of our diversified personal and commercial lending portfolios and I think as we've pointed out on previous occasions they account for more than two-thirds of our total loans outstanding.

The average provisioning ratio for loan losses over the past 12 years is about 20 basis points better than the average and we fully expect to maintain this advantage. And when we look at our assessment of all the information that's available to date we believe that loan losses for 2002 will also compare favorably with the average.

The fact of the matter is that sluggish capital markets have, of course, affected our investment banking group, where results are lower than the first quarter and that's due to a write-down on our investment securities portfolio and some narrowing of interest rate margins.

In the private client group, pretty good growth in revenues, up 13 percent over the first quarter and that was due to the inclusion of two months of results from the CSFB direct acquisition and improved client trading volumes in our full service investing line of business. And what's more, our integrated approach to building the business has produced a franchise in North America in the wealth management business that we believe is poised for growth as the markets improve.

Both our Canadian and U.S. direct investing businesses earned top rankings in the second quarter, as, in fact, did our BMO mutual funds.

I think the really most encouraging news this quarter comes from our personal and commercial operations. Net income is up 26 percent from a year ago and that was driven by a combination of strong revenue growth in the U.S. and a combination of solid volume growth and tight expense management in Canada.

In Chicagoland, Chicagoland Banking earnings are up 139 percent compared to last year. That resulted from continued strong loan and deposit growth, higher margins, strict cost controls and, of course, now we're including the acquisition of the First National Bank of Joliet. Having achieved double-digit revenue growth and 20 percent cost savings, Joliet is meeting the performance targets that we set for it when we did the acquisition.

Overall in the Chicagoland banking environment deposits grew organically by about 5 percent from a year ago, while the retail and small business loans grew 22 percent and 8 of that is attributable to Joliet.

Chicagoland Banking is now I think pretty well positioned to achieve its target of increasing loans outstanding by a billion dollars U.S. a year and that excludes acquisitions and that's for the next several years.

In the Canadian personal and commercial operations we worked pretty hard to address the challenges that we faced a year ago and I think the results indicate that we have indeed turned the corner. Last year the results were affected by the sale in 2000 and 2001, you may recall, of 84 lower potential branches and their associated balances. Today market share is on the upswing, costs are under control and we're investing in the future at a controllable pace.

Last year in our determination to substantially boost revenues we introduced a thousand new sales people into our branch network and today they are actively contributing to the increase in volumes that we're seeing. And what's more the rollout of our advanced sales and technology platform is going to enable the sales force to reap further volume benefits toward the end of this year and beyond.

I'd like to give you a little bit of a feel on a concrete basis for some of the progress that we've made.

Retail and commercial deposits have grown 25 percent from the same period last year at an increase of $868 million since the first quarter. So far this year retail deposits are up 28 percent and commercial deposits are up 16 percent.

From a market share perspective the retail operating deposits increased 55 basis points to 15.41 percent and that reflects the success of our premium rate savings products.

Residential mortgages grew 35 basis points to 14.77 percent and that's in a pretty competitive market.

In small business banking market share for loans up to $5 million increased by 39 basis points to 19.11 percent. We're already number two in this market and we continue to gain ground on number one.

The trend toward this increased volume in market share that we're seeing in our Canadian operations I think puts us in really good shape for stronger performance as interest rates start to move up, as they already have done in the Canadian context and as spreads widen and revenue growth will more closely match volume growth.

In the environment that we're in right now weak capital markets, a competitive retail lending environment, the low corporate loan demand and low equity valuations have really put the pressure on revenue growth and made it a significant challenge in many of our businesses across the enterprise. And as the recovery strengthens the positive indicators that I have mentioned, in combination with the strategic attention investments that we have made during the downturn should provide the revenue lift that we both need and that we anticipate.

As for the other half of the equation, if you exclude the cost of businesses acquired during the past year, expenses are essentially unchanged from a year ago. And compared to the first quarter expenses, in fact, are actually down and even after removing the benefit of the three fewer days in this quarter.

When we look at our ongoing expense management program we believe we have made very good progress in implementing discretionary expense reductions and hiring constraints right across the company and with especially notable results in our Canadian personal and commercial operations.

Let me also say a word or two about the expensing of stock options. For the past three years I think as you know we have disclosed the cost of stock options in the notes to our financial statements and starting in the first quarter of the year 2003 we're going to begin recognizing the compensation expense for new options granted after October 31st, 2002. On that basis we think that the stock option costs will be in the range of $0.02 to $0.04 per share in fiscal 2003.

Turning just for a moment to the acquisition front, I'm really pleased to report that the rapid integration of CSFB Direct into Harris Direct was completed successfully on the 8th of May. Client retention continues to be very strong and that puts us in really good shape for the ongoing expansion of the North America wealth management business.

On May the 10th we announced a further acquisition and that was the client account of Morgan Stanley's self-directed investing business. That's going to bring our total direct investing base in the U.S. to over 1.5 million accounts and when the deal closes Bank of Montreal will be the sixth largest direct investing firm in North America based on the number of client accounts.

I think even more significantly we've now got an affluent client base that is ideally suited for our plan to broaden and deepen the client relationships by offering our full range of wealth management products and services, which is the real gain here, and that's our fundamental strategic objective.

When we look at the broader picture, Bank of Montreal has made eight acquisitions in just over two years. I think that pretty clearly demonstrates our growth strategy, which is to expand selectively and substantially in the United States while continuing to invest in our core Canadian franchise.

And I think in the midst of far from ideal conditions the highly integrated transnational holdings of the Bank of Montreal Group, our companies on both sides of the border are starting to show the signs of the real potential that we believe is there and operating from that position of strength we're going to aggressively and selectively pursue only those acquisitions that meet our strict criteria and strict strategic and financial criteria.

That kind of wraps up my opening comments for the moment. What I'm going to do now is turn the proceedings over to our Chief Financial Officer Karen Maidment. Karen?

maidment|Karen|Maidment|Executive Vice President and CFO|Bank of Montreal|cf: Thanks, Tony.

All the numbers I'll speak to this afternoon exclude non-recurring items. And if you turn to slide two the financial snapshot you can see the results for this quarter were as expected, after allowing for the Teleglobe provision. Net income was 301 million, down 121 million or 29 percent from a year ago, and 71 million from the last quarter. Both of these variances are largely due to the provision for credit losses. In fact, if you think about Teleglobe and you look at the write-offs of the bank loans, which is 85 million after tax and the bonds of 15 million after tax, that's about $0.22 a share. If you add that to the $0.59 a share that we earned the normalized earnings for this quarter would be around $0.80.

The other items, and I realize there are a number of items like CLOs, CBOs and 724 write-downs, they all net out to virtually nothing. So I'll speak to those in turn but the quarter, as I look at it from a sustainability point of view, it's around $0.80 a share.

If you turn to -- Mike will cover the PCLs and you can see that they were 87 basis points, which is higher than a year ago, mainly due to Teleglobe, where we believe our provision for credit losses will remain for the year in the range of 775 million to 825 and you can see our capital ratios are in great shape at 8.61 percent, down slightly over Q1 as a result of the acquisition of CSFB Direct, but also benefiting from the reduction in risk-weighted assets.

Slide four shows the group performance, and as Tony indicated the personal and commercial showed slight improvement over the Q1 of this year. Q2 has fewer number of days so that's a factor but there is marked improvement over last year, while the other three groups' performance declined over Q1 in the prior year largely due to the challenging environment.

If you turn to slide six you can see the EPS is affected by the earnings that we've talked about. We have continued to benefit from the share buyback program that we put in place last year and as I indicated excluding Teleglobe it would be about $0.80.

ROE on page seven shows the same trend.

I'd like to stop on page eight at our revenue growth and talk about the components of it. You can see that the revenue growth was .8 percent over Q1 or $17 million. The acquisitions of Joliet, Guardian and CSFB, now known as Harris Direct, favorably affected revenue growth and this was offset by three fewer days in the second quarter, which is a major factor.

Looking at the components of revenue growth you can see that net interest income declined 88 million from the first quarter. Net interest margin for the bank declined five basis points and average assets fell about 3.2 billion.

Margins improved in the U.S. retail and business banking but declined in Canada as a result of the low interest rate environment.

Volumes improved both in Canada and the U.S. but declined in the corporate banking side.

In terms of the other income, it improved 105 million from Q1 but there is a number of unusual items that are booked in the other income. The CBOs we took a further write-down of $47 million this quarter, bringing the book value to $50 million.

We also wrote down our investment in 724 Solutions by 18 million, taking the book value to 6 million, and we saw increased securitization revenue on the bank's corporate loan securitization of 57 million. The net effect of these are virtually about 5 million after tax.

So after you consider these items the real increase is due to the strength in the private client from the new acquisition of Harris Direct and the slightly improved market conditions as well as improved M&A fees, debt origination fees and gains on bonds on the disposal in Harris.

If you look at slide nine you can actually see that trend further. The top part of the slide shows the second quarter results versus the first quarter in terms of revenue growth. While revenue growth was only up .8 percent in total, 1.5 percent was due to CSFB Direct, offset by reduction in core income, reflecting the fewer days.

When we look year over year the acquisitions increased our revenue by 3 percent and business growth was down reflecting the more difficult environment.

Interest margins on page 10 show the trends that I outlined earlier. The total bank margin is down five basis points over the Q1 of this year. IBG margin counts for about 20 percent of that and it declined 16 basis points, mainly due to the lower interest rate environment. PNC margin counts for about 80 percent of the total bank and that declined mainly due to the competitive pressures in the residential mortgages in Canada, offset by improved margins in the U.S. business, driven by product mix.

Page 11 shows the expense growth year over year and on a linked quarter basis. At the top of the page you can see on a linked basis the core expense reduction program that we've put in place is taking hold. In fact, expenses only grew 1 percent and that includes the effect of acquisitions. Acquisitions, CSFB Direct of $45 million, was 3.1 percent growth.

Strategic initiative spend was up 2.3 percent and therefore core spending was down 4.5 percent.

If you look at it on a year of Q2 '02 versus Q2 '01 you can see the total growth in expenses of 5.2 percent, which is largely due to acquisitions of 4.7 percent.

Turning to slide 12 you can see the PNC delivered strong volume growth. And while net income hasn't grown substantially on the late quarter it was up 26 percent over Q2 '01, and that was really driven by the strong volumes in the business and very significant expense control.

Pages 13, 14 and 15 highlight the significant volume growth. The sales forces generated strong volume growth and market share over the past year and the momentum continues in this quarter. Residential mortgage balances grew 12 percent over last year and continue to grow versus Q1 '02.

Personal loans and deposits on slides 12 and 13 exhibit similar trends and in the U.S. we've experienced strong loans and deposit growth, coupled by the growth achieved by the Joliet acquisition.

Turning to slide 16 you can see that the IBG earnings were down, reflecting a very difficult environment. The net income decreased 46 million from the record results of Q2 2001 due to lower revenues and challenging capital environments.

Net income declined over the first quarter of this year due to lower revenues related to investment security write-downs and narrowing spreads.

Turning to PCG on page 17 you can see that the acquisition of CSFB Direct was completed this quarter and the Guardian Group of Funds was completed in the third quarter of last year, and so revenue and expenses are higher related to these acquisitions.

The acquisition of CSFB Direct included approximately 13 million pre-tax or 8 million after tax of one-time acquisition expenses. We expect when we announce that deal we indicated that the one-time costs would be about 55 million U.S.; we still believe that will be the total and most of it will be incurred over the remaining two quarters of this year.

Significant revenue growth over both the prior year and Q1 reflect the acquired business and strategic spending partially offset by weaker equity markets and a challenging interest rate environment.

Slide 18 shows the significant growth in the private client group assets under administrator and assets under management. In fact, they increased to 276 million this quarter from 247 million in Q1. The amounts related to the acquisition of CSFB Direct were 18.8 billion, reflecting a 15 percent increase since the announcement.

Overall, the acquisition is going very well and slide 19 shows you the direct investing activity. Active accounts increased mainly due to the acquisition and in this challenging market environment we've increased the number of new active accounts.

The trades per day ratio has increased and customer assets have increased as well. We still anticipate further increases as markets return.

On slide 20 you can see that we've outlined that we have, in fact, reduced our first year operating costs by more than a hundred million, which we outlined at time of announcement. And while revenue in total is below where we would like it to be, revenue per account is trending -- that's trending lower and the trading activity has declined, but the average account size has grown almost 24 percent.

We've successfully retained a strong management team and we're seeing strong client retention, so we're very well positioned on this acquisition when markets return.

Turning to slide 21 you can see the corporate and Emfisys numbers. This includes a variety of items: corporate costs, provisions for credit losses, which are higher than the normalized level, as well as tax items. So you can see that the change is effective largely by the Teleglobe write-off of 85 million after tax, offset partially by the increased securitization revenue from the CLOs and reduced overall taxes.

The expense to revenue ratio was flat, as outlined on slide 22, which reflects revenues growing at almost the same rate as expenses.

Capital remains strong both in terms of the tier one and the total capital ratio as outlined on slide 23, and then 24 you can see we're managing the risk-weighted assets for the whole bank down with IBG coming down and risk-weighted assets growing modestly in PNC.

As we look at our annual targets on slide 25 you'll recall that we indicated targets of 8 to 12 percent cash EPS with the first half of the year being flat. In fact, because of Teleglobe we have not achieved that but we believe we can achieve it for the year.

Cash ROE at 13.7 is close to our target. The provision for credit losses will be higher, as we indicated, and we'll achieve our minimum 8 percent on the tier one capital.

In fact, if you think about our targets, when we set them we said we'd be conservative because of a very uncertain environment and, in fact, Teleglobe was one of those uncertainties that we can cover up in our targets and still achieve them. If you think about our targets last year, cash earnings per share was $2.68. If you add 8 to 12 percent on that you get $2.89 to $3.00. Year to date we've earned $1.34 so in order to achieve the mid point of the target we need about $0.80 a quarter for the remaining part of the year. As I indicated at the outset if you look at this quarter and you normalize it for the Teleglobe it's approximately $0.80.

So as we look forward we're not assuming significant improvements in the underlying environment in IBG or PCG but we do see continued growth in the personal and commercial as well as continued focus on expenses.

With that I'll turn it over to Mike, who will cover the credit.

maila|Mike|Maila|Executive Vice President, Head of Risk Management Group|Bank of Montreal|cm: Thanks, Karen and good afternoon, everyone. I'll speak to the credit risk picture first and then comment briefly on the trading risks.

On the loan portfolio management front we made progress this quarter in a volatile and challenging environment. As mentioned on slide two, gross impaired loans declined relative to the first quarter, notwithstanding the classification of Teleglobe loans in that category.

This, plus the following three factors shown on slide three, form the basis for the revised guidance with a provision for credit losses for this year, which was announced on April 25th: First, the continued strength of our consumer and commercial loan portfolios; second, the reduction of our telecom and cable sector exposure, as well as the provisions we have now put in place against the most troubled sub sector there, namely long haul fiber; and third, the fact that with the exception of Teleglobe our corporate loan portfolio is performing in line with our expectations.

Let me comment briefly on each of these points.

As slide four indicates, the generally stable consumer and commercial portfolios represent 72 percent of the overall loan portfolio as of quarter end.

And as the next slide shows the 90-day delinquency ratio for our consumer portfolio is stable this quarter and significantly lower than a year ago.

With respect to provisions for the consumer portfolio they remain fairly steady within a narrow range.

For the next single largest portfolio, namely the Canadian commercial loan book, as you can see on slide six the ratio of gross impaired loan formations declined significantly this quarter.

Moving to telecom and cable on slide seven, outstanding loan exposure to these two sectors has reduced by about 10 percent over the past year.

And as slide eight indicates, impaired loans of 334 million to the troubled long haul fiber sub sector are provisioned to a level of 79 percent with remaining net impaired loans of 70 million in that sector.

Moving back to the overall loan portfolio on slide nine, formations of gross impaired loans, excluding Teleglobe, are on track with expectations. In addition, we were successful in selling about 300 million in problem loans during the quarter at prices, which met or exceeded our estimated realization values for these loans. The write-offs associated with these sales total about $100 million.

Turning now briefly to the trading revenue and risk picture on slide 11, you can see that notwithstanding a marked to market loss on Teleglobe bonds held in the trading portfolio, trading revenue performance was relatively consistent and within risk limits in the quarter.

Finally, let me describe briefly the other reports that you'll find in the appendix to this presentation. In the first two slides, 13 and 14, we disclose gross loans MBAs and the net impaired position for the communications and the power and power generation sectors respectively.

Slide 15 summarizes the evolution our exposure to Argentina, which has been halved over the past two quarters, and discloses the net impaired picture by counter-party category as of the end of the quarter.

The next two slides, 16 and 17, provide further information on market risk, structural and trading respectively, and the last slide discloses our major equity investment portfolios including a breakdown of our merchant banking and venture capital investments, which are well diversified by sector and counter-party.

I will now turn it over to Susan.

Thanks, Mike.

In addition to Tony, Karen and Mike, the following individuals are available to answer your questions: Bill Downe, Deputy Chair, Ron Rogers, who heads up the Personal and Commercial Client Group, Al McNally of the Harris Bank, Gill Ouellette from the Private Client Group, from the Investment Banking Group Yvan Bourdeau and Lloyd Darlington, head of Emfisys and e-business.

Cliff, we're now ready to open the line for questions.

Thank you. Ladies and gentlemen,, if you would like to register a question please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

To allow everyone an opportunity to ask a question, we ask that once your question has been answered you return to the queue for further questions.

If you're using a speakerphone please list your handset before entering your request.

One moment, please, for the first question.

Our first question comes from Jamie Keating of Merrill Lynch. Please proceed with your question.

Thank you and good afternoon. And thank you, Mike, for passing on the corporate loan book information. That's going to be very helpful and I think it tells a good story.

I wanted to ask a bit more on your loan sales. Could you clarify for me, I'm lost, where you realized 200 million on $300 million loan sale or did you realize -- what's the amount you realized on what portion and where did the write-down you referred to I think of 100 million go through?

Jamie, taking the package of about 12 transactions we did throughout the quarter we realized approximately $0.67 on the dollar. Some transactions were below that. One transaction was above. And as a result the write-offs you will see in the supplementary package are approximately 100 million as part of the total write-offs shown for the quarter.

Okay, so the gross amount of the loans was 300 originally, Mike...

Excuse me?

I'm sorry. Was the gross amount of the loans originally 300?

That's correct. So we sold 300 with proceeds of about 200, wrote off about 100.

Got you. One more quick follow-up, if I may, and this may be more for Karen. If I could ask on slide 13, 14 and 15, what influence the acquisitions had on those underlying growth rates in dollar values, whatever is easier, if you could help us out on that?

Thirteen, 14 and 15 is PNC volume growth rates and the only acquisition that would impact that would be Joliet and it would be around 1 or 2 percent on those numbers.

Thank you, Karen. Thanks, guys.

operator|||||m: Thank you. Before I move on to the next question I must ask that to allow everyone an opportunity to ask a question we ask that you refrain your questions to one question and if you have a follow-up question to please queue up once again.

Our next question is from Heather Wolf of Goldman Sachs. Please proceed with your question.

Afternoon, Heather.

wolf|Heather|Wolf||Goldman Sachs|f: Hi. Good afternoon. A quick question on the CBO write-downs. I was under the impression when we chatted about this -- I guess it was about a year ago -- that you all believed that there would be no more CBO write-downs. I guess my first question is did I understand that correctly at the time and my second question is what has changed since that time to propagate further write-downs?

Heather, it's Karen. You're right, at the time last October 26th we took a major write-down on CBOs reflecting the deteriorating credit spread environment. What has changed since then is there have been defaults that have taken place in the post-Enron type environment and we've had to reflect those in the underlying CBOs.

Okay, so this is more of a credit default issue as opposed to a spread issue?

The credit defaults are what triggered the write-down, yes.

Okay. Thank you.

operator|||||m: Our next question is from Melanie Ward of RBC Capital Markets. Please proceed with your question.

ward|Melanie|Ward||RBC Capital Markets|f: Thank you. I'm wondering actually who is buying the corporate loans when you're talking about the 12 different transactions. Can you give us a bit of a feel for how that market is, how deep that market is? A lot of the banks are talking about probably accelerating, in some cases, the sale of some of their corporate loans.

I'm going to get Mike to handle that, Melanie. First let me welcome you back. Mike?

Thank you.

Melanie, it's a spotty, occasionally illiquid market that is developing. The buyers tend to be institutional investors who have set up special funds for that purpose. Depending on the name and the type of transaction you have you can do various amounts and it's a matter of being ready with a sense of what the value is that you are prepared to take and when the window of opportunity opens up to execute.

Thank you.

operator|||||m: Our next question is from Quentin Broad of CIBC World Markets. Please proceed with your question.

broad|Quentin|Broad||CIBC World Markets|m: Yes, just to follow on Melanie's question, Mike, the loan sale activity particularly as you note the Global Crossing, the Enron, et cetera, it looks a little bit rear-view mirror like, obviously reflecting the write-downs you took on those loan sales.

Are you doing any loan sales that would be prospectively loans that may not be purely while looking a little troubled to you, your activity is being more proactive and aggressive in mitigating future loan risk rather than trying to take care of what would be past concerns you've had?

Quentin, the answer is yes, there are several tools that we use and typically there are sales of both performing and problem loans. As we've discussed before, there is a non-core relationship portfolio that the investment bank has identified, and it's been an ongoing effort to move paper where we see no prospective relationship going forward.

On occasion also we have used the credit default swap market and credit derivatives, which was a budding market just a couple of years ago and has added some debt and liquidity.

It's a combination of these tools across the board.

Thank you.

It's driven too, Quentin, by -- essentially the starting point is our assessment of the intrinsic value of the loan situation and if we believe that there's more value to be gained by holding it and working it out we'd probably go in that direction as opposed to just running for the exits.

operator|||||m: Our next question is from of Standard Life Investments. Please proceed with your question.

matheson|Neil|Matheson||Standard Life Investments|m: Hello. It's also a question for Mike. I just wanted to get -- you indicated roughly what the Teleglobe charge was precisely, but total telco and cable provisions taken so far this year, can you give me what that is?

Teleglobe, I'll start off and then I'll give it to Mike, was 140 pre-tax, 85 after, about $0.19 a share.

Mike, do you want to turn to the...

Okay, on the communication front it's approximately 300 million, of which the vast majority is telecom and cable.

That's year-to-date?

Year-to-date for the combination of Q1 and Q2, correct.

Okay. Thank you very much.

operator|||||m: Our next question is from Ian de Vertauil of BMO Nesbitt Burns. Please proceed with your question.

devertauil|Ian|de Vertauil||BMO Nesbitt Burns|m: Hi. Can you hear me?

Good afternoon, Ian. Yes we can.

I hope that's not my one question.

Looking at the direct investing numbers, this is probably a question for Gill. The 814 of active accounts, does that include Northwest Trust? And if it doesn't, then presumably the number is, you know, the 814 is 852 if we'd add it up, the numbers you gave us at CSFB. And is that -- I mean, are those sort of where you thought they would be in terms of active accounts, and maybe a bit more color on how you think that's going generally? Thanks.

Ian, with respect to active accounts we've lost very few accounts because of the change of ownership, but what has happened, though, is that just before we bought CSFB they had instituted an inactivity fee and as a result of that we've lost something like, I think, roughly around 25,000 accounts. But these were accounts that were inactive and not much in the way of balances. But because of the change of ownership, though, we've lost very, very few accounts and we're very happy on that front. And when we bought CSFB last November, we bought $16.3 billion in assets and at the end of April those assets were 18.8 and in the interim the account side has gone from 35,000 per account up to 43,000. So we're certainly happy with what's happened in the first two months.

Thanks.

operator|||||m: Our next question is from Rob Wessel of National Bank Financial. Please proceed with your question.

wessel|Rob|Wessel||National Bank Financial|m: Hi. Good afternoon. I guess I have just one question. On slide 13, on the communications slide with the granularity on the telco and cable, can you just go over which balances you feel are moderate to low-risk or things you feel that you have a high degree of comfort in?

Yes, Rob. With respect to the most troubled sector, as I mentioned already, it's long haul fiber. CLECs also have been in difficulty but you can see that our exposure is fairly small. The powers in our portfolio we only have net impaired but the dynamics there are changing and probably wireless is the one where at the moment we have no net impaired and it continues to hold up.

Okay, great. Thank you.

operator|||||m: Our next question is from Jack of Salomon Smith Barney. Please proceed with your question.

jarva|Jack|Jarva||Salomon Smith Barney|m?: Thank you very much. I had a question for Karen. Can you please provide the split of the 50 million investment gain that you recorded between 724 solutions and residual write-downs, CBO write-downs, from what you started in Q4 of 2001?

Just to be clear I think you're referring to the supplementary package, other income, the investment gains?

That's right, yes.

The CBO, the 47 write-down is in there, as well as the 724 solutions of 18 million. So those are the two write-downs and there would be some gains that would offset that and that's why it's 50.

Okay. Thank you.

And then also, if I may, record capital market fees, can you comment what really contributed to this?

The capital markets in terms of other revenue?

Yes, that's right, 292.

Capital market fees were up substantially. You could see in the top of the chart there, securities, commissions and fees really reflect the full service investing on the PCG side.

I might also add, while you're looking at that page, securitization revenues are up from 58 to 124. That's the CLO write-off of 57 million that I referred to earlier.

Thank you very much.

operator|||||m: Ladies and gentlemen, as a reminder, please do pick up your handset when asking your question. Our next question is from Michael of . Please proceed with your question.

goldrig|Michael|Goldrig||Digital Securities|m?: Thank you. I wonder if you could give us some color on the continued weakness in your trading revenue and also explain why your variable comp is running at such a high level in relation to trading revenue and the capital markets revenue?

Michael, the trading revenue line is down over the prior quarter, but that includes the write-off of the Teleglobe bonds that I referred to earlier of $22 million.

In terms of the relationship to variable comp it really relates to the mix of business that's changed quarter over quarter.

The 67 million of trading revenue includes the Teleglobe bond write-off?

Trading revenue, if you're looking on page 12 of the supplementary package you can see that the trading revenue was 46 million last quarter and now is down to 28. That includes the write-off of the Teleglobe bonds, which was 22 million pre-tax.

I'm looking down below at the total trading revenue, 106 down to 67.

One-oh-six to 67. Oh, I see. Really what you're seeing there is a summarization of the components that are broken up above the line.

But that doesn't include investment securities. Were your Teleglobe bonds in your trading accounts?

Yes.

Yes.

Yes.

Okay, thank you.

Thanks, Michael.

operator|||||m: Our next question is from Steve Cawley of TD Newcrest. Please proceed with your question.

cawley|Steve|Cawley||TD Newcrest|m: Hi there. The question is in regards to the U.S. operation. You've certainly shown some promise on the P&C side there, on the personal and commercial side. I was wondering how much of that is coming from your initiative to expand into contiguous states? And, Tony, how satisfied are you with the profit levels that Harris has demonstrated until now and what do you think can happen there?

Yeah, I'll get Al to handle the first part and then I'll come back to it. Al?

mcnally|Al|McNally|Chairman and CEO|Harris Bank|cm: On the P&C side, the business that is done outside Chicagoland and the contiguous states is essentially the auto lending business, which is going very, very well. The activity remains focused in Chicagoland, which still is a very fragmented and unconsolidated marketplace and really offers us still tremendous opportunity for growth, which we're obtaining. And I think with that, Tony, I'll turn it back to you.

Throw some numbers though, Al. Do you have numbers for us?

Of the loan growth of 14 or 15 percent that we're getting ex-Joliet, about two-thirds of that would be in Chicagoland, perhaps slightly more.

The broader question, though, is that those are pretty substantial and pretty aggressive numbers. We're not unhappy with the growth rates. Where Al and I are not happy is the destination of where we want to be, and that's why we've announced the substantial branching program that's going to augment the kind of organic growth we're seeing. That marketplace is still very fragmented. There is increasing competition, no doubt, but it's a fragmented market. Now that we're fully consolidated on all the platforms we're into aggressive growth and you can see it there, but we're going to continue to push that because the opportunity is now to grow in that marketplace.

operator|||||m: Our next question is from Jim Bantis of Credit Suisse First Boston. Please proceed with your question.

bantis|Jim|Bantis||Credit Suisse First Boston|m: Hi. Good afternoon.

Good afternoon, Jim.

Mike had made a comment earlier about the reduction of the non-core relationship portfolio and I wondered if you can give us a little bit of color of that in terms of the size of the portfolio you're trying to reduce in relationship to the corporate loan book and the type of economic capital that will be freed up on this and perhaps the timing associated with this program.

Jim, I'm going to get Yvan Bordeau to address that question of yours.

bourdeau|Yvan|Bourdeau|President and COO|BMO Nesbitt Burns|cm: Yes, so several years ago we decided to go and review the entire portfolio of corporate loans, portfolio of IBG, you know, there to identify whether or not we had so-called sub-optimal loans and that would probably have very low probability of increasing the return from the loan, given the fact that we would only obtain lending business from those clients and no other type of collateral business.

If you were to look at page nine in the supplemental information package, you will see there the first thing that we have is 2,000 in quarter two, where our risk weighted assets were approximately 84 billion. As of the last quarter they were down to 60 billion, so that's a reduction of $24 billion during that period and nearly half of that reduction came from elimination of so-called sub-optimal loans in our portfolio.

We still have a sub-optimal loan portfolio that we're looking after and trying to reduce as quickly as we can. Unless, obviously, a client decides that through negotiation they will increase the prospective returns from those loans, and we have authorized sales or we just inform the client that those loans will not be renewed at maturity and that the outcome of that initiative that we took about two years ago that has really reduced the number of risk-weighted assets.

In terms of capital being allocated to IBG you will see also on the same sheet on page nine that actually capital, allocated capital, to IBG has increased during that period, even though the risk-weighted assets have come down. And that's primarily due to more sophisticated capital allocation methodology within the institution as well as a migration, risk migration, of our portfolio over the last 24 months as the cycle has worsened. And therefore more economic capital is required to support those loans.

Having said so, as we were reducing our risk-weighted assets, there's no question, from a regulatory point of view, we've contributed to the enterprise to maintain a very healthy tier one capital ratio.

That's a great response. Thank you.

operator|||||m: Our next question is from Susan Cohen of Dundee Securities. Please proceed with your question.

cohen|Susan|Cohen||Dundee Securities|f: Thank you. You mentioned that spreads have been narrowing on mortgages and investment banking. What kind of trends do you see going forward for net interest margins?

Susan, it's Karen. I did indicate that spreads had been narrowing, particularly on the retail side in Canada. We do see them widening if and when interest rates begin to increase. So that's really on the personal and commercial business in Canada we can see some spreads widening with rates increasing. There is some offset to that in the IBG, which you'll see the spreads tightening up.

Okay, thank you.

operator|||||m: Our next question is a follow-up question from Heather Wolf of Goldman Sachs. Please proceed with your question.

Just a quick question regarding P&C growth in the U.S. It does appear that you've had some fairly strong mortgage growth, and I assume that that's from the refinancing boom that's been going on in the states. Can you give us a little bit of color on how much of Harris' growth is driven from the mortgage refinancing boom and what plans you have in place for when the refinancing activity starts to slow in a rising rate environment?

Al?

Yeah, I can give you broadly that the loan growth we've had has really been spread across all the lines of business. Just take the last month, April. We had record home equity loans in . We had commercial banking, while the market is still pretty flat, we've been able to grow that about 5 percent in these more difficult periods for that sector. And the auto lending as well has been substantial. In fact, in April in purchased mortgages as opposed to re-fis, and in home equities and in auto sales it was an all-time record month for us in all three of those sectors. So really we're getting it broadly based.

Having built the distribution system and built the deposit base up to about $12 billion, what we're doing now is building consumer, consumer lending and mortgage and commercial banking lending, small business lending right across that distribution network and there's a lot more there for us to obtain.

Okay, so you don't think any kind of slowing refinancings would have a material impact on Harris?

I don't believe so. The purchase market itself has remained very, very strong. The re-fi boom, of course, has come away but as I said just this April was an all-time record in purchased mortgages. So we don't build our mortgage business based on the re-fi boom.

Great. Thank you.

operator|||||m: Our next question is from Jamie Keating of Merrill Lynch. Please proceed with your question.

keating|Jamie|Keating||Merrill Lynch|m: Yeah, thanks. Forgive me if you already mentioned this, I was looking for the amount of your credit default, swap book or the portfolio thereof and if any of it pertains to the telecom portfolio?

Jamie, we haven't actually mentioned it but we've done a number of transactions with an aggregate value where we've bought protection to the tune of approximately $450 million in a variety of industries.

Thanks, Mike.

operator|||||m: Our next question is from Ian de Vertauil of BMO Nesbitt Burns.

Thanks. Slide 15, the communications, does that include the suppliers to the telecommunications industry? If it doesn't, can you tell us how much it is and the split between investment grade and non-investment grade?

Ian, the answer is no it does not include the communication suppliers. That particular sector is actually not material for us. Let me just get you an approximate number. It's less than 50 million in terms of communications equipment suppliers.

And is that investment grade or non investment grade?

I don't have that for you, Ian. I'm sorry.

Thanks.

operator|||||m: Our next question is from Rob Wessel of National Bank Financial. Please proceed with your question.

Hi. Slide 18 of Mike's presentation for the equity investments portfolio, I know that there's a little bracket here and I think it's for the sectoral composition of merchant banking and VC portfolios. For media and telecom can you give the dollar amount exposure and can you also give some indication to write-downs taken in the total portfolio, maybe, say, this year or in the last four quarters?

Okay, Rob, as you can see the pie chart is well diversified. I can give you the balance for the sector. Approximately it's 20 percent of that total, so that would come to approximately 160 million or so.

And the second part of your question, sorry, Ian?

Rob, yeah, can you just give some idea as to how many or the order of magnitude in dollar value perhaps of write-downs that you've taken to date in the merchant banking and VC portfolios, say, you know, whenever recently, say over the last four quarters?

In the last quarter it was of the order of 10 to $12 million, Rob.

Have you been taking write-downs even prior to that?

That's part of our ongoing evaluation of the portfolio and we follow GAAP and the appropriate valuation rules.

In fact, there have been some -- it's Karen -- there have been some pickups in that portfolio as well, so we've seen some fluctuation.

Okay, great, thank you very much.

operator|||||m: Our next question is from Jim Bantis of Credit Suisse First Boston. Please proceed with your question.

Hi. Just a follow-up question regarding Harris Bank and the concentrated lending towards auto lending. It was my understanding that a lot of the smaller regionals over the past year and particularly the previous year had suffered significantly on the auto lending and auto leasing side. Perhaps you could just give me a little bit of color what are you doing differently and why is that scenario different to what's occurring right now?

I'll take it and then I'll give it to Al. We're not a big player in auto leasing and the quality of the paper that we do in the auto financing is at the prime end of that, Jim.

Al, do you want to answer that?

Yeah, absolutely we remain in the A kind of paper and we've really seen very little increase in delinquencies in that sector at all during this period.

Where the players who were big in auto leasing get really whacked, of course, as you know, is in the residual value assumptions in certain categories of autos like SUVs and all that kind of stuff. The residual value assumptions were quite out to lunch and they got pretty beat up in that.

Okay, thanks for the color.

operator|||||m: Our next question is from Neil Matheson of Standard Life Investment. Please proceed with your question.

Yes, hello. It's coming back just on the cable and telecom area again probably for Mike. Within cable, Mike, is some of that in the UK or Europe and if so can you tell us how much?

Most of it is in the U.S. The proportion would be de minimus in the UK and Europe.

Okay, thank you.

It's not significant.

Fine. Thank you.

operator|||||m: Our next question is from Jack of Salomon Smith Barney.

Thank you very much. Karen, when you got your assumption about the EPS growth, how many more shares are you planning to repurchase by the end of the year and how many have you done so far?

In fact, we have not repurchased any shares this year and we don't have an active share repurchase program, so nothing is assumed in those targets.

Thank you.

operator|||||m: Our next question is from Jamie Keating of Merrill Lynch. Please proceed with your question.

Thanks. And this may be for Tony but also if Ron has any input, if he's around, or someone, I'd love to hear from him as well. It looks like we've turned the corner here on revenue growth versus expense growth and the ratio I thought looked quite favorable this quarter. I wonder if you could talk about how that fits in the second half. Are we getting more traction on the expense side and where is it coming from and I'd just love some color on that.

I'll start and then I'll turn it over to Ron, who's been doing a particularly outstanding job in terms of getting it right between growing the business and holding the expenses, but it's been across the board. We've been focusing on headcount reductions. We've been focusing on maintaining our salary build flat, no general increases. We've been trying to stay away from eliminating positions that are customer facing positions and that means targeting it more internally and then going after what you would expect we would go after in this kind of climate, travel expenses, discretionary advertising, business promotion, professional fees, et cetera, so it's a pretty comprehensive initiative, while we lean into the broader aspects of what we call our performance enhancement program, which are big chunks of process change, which are a little bit harder to get at and are going to take some.

So we're seeing so far traction on the first phase of that, which is just a fairly rigorous lean back on all the expenses this year, getting us into the traction that we're going to begin to see on the broader performance enhancement program.

Ron, do you want to add something to that?

rogers|Ron|Rogers|Vice-Chair, Personal & Commercial, Client Group|Bank of Montreal|cm: Jamie, there's not too much that I can add. It's primarily been focused on discretionary expenditures, very tight on that, and taking out as much as possible so that we can invest quite heavily in the new technologies we've been talking about.

On the revenue side what you're really seeing is the people that we've put into the system roughly a year ago being freed up to go out there and aggressively pursue business and you're seeing the kind of growth rates that they're generating, which is constituting market share gains at the same time and we anticipate that to continue.

Ron made an important point there, which I think warrants some underscoring, Jamie, which is that as we embarked on the overall, to keep a real right lid on expenses and go after that, we ring fence a couple of initiatives that we think are particularly important to future revenue growth and productivity in the branch land, which is we're overhauling all of the computer technology. We're about 30 to 40 percent through that and we're going to do 100 percent conversion within about an 11 to 12-month period of time.

Thanks. Good answer. Appreciate it.

Cliff, we'll now take our last question.

operator|||||m: Our last question is from Trevor Bateman of CIBC World Markets.

bateman|Trevor|Bateman||CIBC World Markets|cm: Oh, hi, good afternoon. My question just relates to Moody's recent opinion on the Bank of Montreal just published in March. And while the rating agency is fairly comfortable with your domestic corporate and commercial portfolio it did identify the Canadian auto supplier sector as one risk area that could contribute to growing non-performing loans in the future, though your exposure is not that troublesome. I was wondering what your outlook is on that industry and where you see it going?

We think it's in pretty good shape actually but I'll get Mike to turn to that.

Yes, the automotive sector is shown in the supplementary but around 800 to $900 million and the impairment there is not significant. It's a sector we're watching. You also have to look at the related sectors, which show up in manufacturing. So it has been under control and it's performing well to date.

Great, thank you.

operator|||||m: There are no questions at this time. I'll turn it back to you.

Thanks, Cliff.

Thank you for joining today, and as always if any of our listeners have any further questions please call investor relations at area code 416-867-6656 or e-mail us at bmo.com/investor relations. Thank you and good afternoon.

Thanks, everyone, for joining us.

operator|||||m: Ladies and gentlemen, that does conclude the conference call for today. We thank you for joining and ask that you please disconnect your line.