Bank of Montreal (BMO) 2011 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, and welcome to BMO Financial Group's fourth quarter 2011 conference call for December 6, 2011. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thanks for joining us today. Our agenda for today's investor presentation is as follows. We'll begin the call with remarks from Bill Downe, BMO's CEO, followed by a presentation from Tom Flynn, the Bank's Chief Financial Officer, and Surjit Rajpal, our Chief Risk Officer. After the presentation, we'll have a short question and answer period, where we'll take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question, and then re-queue. We'll wrap up the call at 3.00 PM. Also with us this afternoon to take questions are BMO's Business unit head, Paul Milroy from BMO Capital Markets, Gilles Ouellette from the Private Client Group, Frank Techar, head of P&C Canada, and Mark Furlong from P&C US.

At this time, I caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call. They are subject to risks and uncertainties. Actual results could differ materially from forecasts, projections, or conclusions in the forward-looking statements. Information about material factors that could cause results to differ, and the material factors and assumptions underlying these forward-looking statements can be found in our 2011 annual MD&A, and our fourth quarter 2011 earnings release. With that said, I'll hand things over to Bill.

Thank you, Viki. Good afternoon, everyone. As noted, my comments may include forward-looking statements. BMO generated strong financial results in 2011, with net income increasing in each quarter, and finishing the year with reported earnings of just under CAD900 million. The year was characterized by double digit revenue growth and continued momentum in our businesses, and it was highlighted by acquisitions that contributed substantially to our growing customer base. Again in 2011, BMO progressed against it's strategic priorities, and generated double-digit earnings growth across all of our businesses.

We announced and closed a strategic acquisition, positioning our US operations for quality growth, the addition and integration of the operations of M&I is enabling us to achieve the scale we've sought for our US Midwest P&C business, while significantly advancing wealth management by doubling our US private banking presence, and substantially increasing the number of financial advisors to support our expanded footprint of nearly 700 retail branches. We further developed our institutional asset management business through organic growth and acquisitions, including Lloyd George Management. Our global asset management business now manages over CAD100 billion in combined assets, and we strengthened our leadership across the Bank, and sustained a culture that focuses on customers, high performance, and our people.

Talking to you today, five months after the closing of the M&I purchase and the introduction of BMO Harris Bank, our expectations around performance, and our confidence in the potential of the business are unwavering. I'm pleased with our progress against all elements of the integration plan to date, and overall, we've exceeded our base case. While we're only in the very early days of realizing on synergies, we are already seeing results.

Turning to our financial results, driven by acquisitions reported revenue in the fourth quarter increased 20% year-over-year to CAD3.9 billion. Reported net income was up 21% at CAD897 million, representing an ROE of 14.3%. Reported earnings per share was up 8% to CAD1.34. And on an adjusted basis, net income was CAD850 million, and earnings per share increased slightly to CAD1.27. Consistent with our objective of increasing the retail component of our earnings mix, over 80% of BMO's adjusted operating revenue and net income came from our personal, commercial and wealth businesses in the fourth quarter. Fourth quarter specific provisions of CAD210 million were lower than last year, but higher than the Q3 level. While we continue to expect quarterly variability, we view credit as stable, and improving over the longer term. An CAD80 million general allowance increased total Q4 provisions to CAD290 million, and Surjit will provide more color later in the call.

BMO's full-year 2011 financial performance was strong, on both the reported and adjusted basis. Adjusted revenue increased 10% to CAD13.5 billion, adjusted net income was up 15% to CAD3.3 billion, and ROE increased to 15.3%. Adjusted earnings per share came in at CAD5.29, 10% above last year, and pre-tax pre-provision earnings reached a new high of CAD5.1 billion. As expected, provisions for credit losses declined from 2010 levels. Adjusted productivity was slightly elevated at 62.4%, reflecting expense growth related to business investments that were underway, and pre-dated the announcement of the M&I transaction.

In the lower growth environment that we're now facing, productivity will play a larger role in our success. In that regard, we're conducting a top-to-bottom review of the relationship between revenue and expenses, and we're confident in achieving productivity improvements. It's still early in the process, and tangible benefits are already surfacing. BMO remains well-capitalized, finishing the year with a pro forma Basel III common equity ratio of 6.9%. BMO's dividend payout ratio for the year was 53%, at the high end of our 45% to 55% target range.

Tom will take you through our group results in more detail, but let me touch on some 2011 highlights. P&C Canada's reported net income for the year was CAD1.7 billion, and on an actual loss basis, up 10%. This success was underpinned by the investments we have been making for our customers, particularly in front line staff, infrastructure, and technology. We made tangible progress in improving our customer loyalty, as measured by a net promoter score, and significantly improved the online customer experience, ranking second among public websites of our Canadian peers in 2011.

Share of wallet increased, as did the average number of products per customer, for both personal and commercial. We strengthened our branch network, opening or upgrading a record 58, including 9 new innovative locations. And we improved our sales force productivity, BMO's financial planners as an example, improved productivity by over 20% in 2011. P&C US increased it's net income 75% to $359 million in source currency. On an adjusted basis, net income was $394 million, of which $142 million was attributable to the contribution from M&I. We're very pleased with our early performance.

BMO Harris Bank, has high brand equity and leading market positions in the Midwest. In retail deposit market share, we ranked number 1 in Wisconsin, and have moved up to number 2 in the Chicago market, increasing our share by 2 percentage points to 11.6%, and customer loyalty is strong. 2011 was a good year for the Private Client Group, and net income was up 13% to CAD518 million, driven by strong performance from traditional wealth businesses, up 31% from a year ago. Global banking and financial review named Harris Private Banking as 2011's best private bank in Canada. And it has recently released annual online brokerage rankings, The Globe and Mail ranked the BMO InvestorLine, first among banks and third overall.

BMO Capital Markets delivered a good year, with net income increasing 13% to CAD920 million, and a strong ROE of 20.4%. We built a team to successfully compete across our North American platform, with substantially expanded US equity research sales and trading. We were named a primary dealer by the New York Fed, significantly enhances our US fixed income capability. And Global Finance magazine named us the world's best metals and mining investment bank again. And just last week, BMO was rated best bank for Canadian dollar by FX Week.

To conclude, I'll highlight the current outlook from the BMO economics group. We expect the growth rate of the North American economy to expand from the current 2% level to closer to 3% by the end of 2012. Recent US data has been encouraging, and assuming the European challenge plays out in a somewhat orderly fashion, we expect sustained economic expansion, led by increasing business investment. In our Midwest market, we expect the economy to grow slightly faster than the national average. In Canada, support from low interest rates, firm commodity prices, and a gradual pickup in US demand, will help counter tighter fiscal policy and sustained65 growth. Following the Q&A session, I'll call on our group heads to provide an overview on the 2012 outlook for their respective businesses, and I'll wrap up with brief comments. And with that, I'll pass it over to Tom.

Thanks, Bill, and good afternoon. Some of my comments may be forward-looking. Please note the caution regarding forward-looking statements at the beginning of the presentation. Starting on slide 9, reported net income of CAD897 million was up 21% from last year, and EPS was CAD1.34, up 8%. Adjusted net income was CAD850 million, up 14% from last year. Adjusted EPS was CAD1.27, up 1%, reflecting shares issued for M&I. Net adjustments in Q4 were negative, and totaled CAD47 million, or after-tax CAD0.07 per share. Adjustments, all an after-tax basis, include CAD107 million credit mark related benefit on the acquired loan portfolio, which I will discuss more in a few minutes, integration and restructuring costs of CAD35 million, and amortization of acquisition intangibles of CAD25 million. We included the credit mark benefit as an adjusting item to show results more reflective of core operating performance, which will make for more meaningful NIM productivity and growth numbers, and given that the credit mark impacts could be large, and have some variability quarter-to-quarter.

Slide 10 highlights our good results for 2011. Total bank reported net income was a record, as was income in each group. On an adjusted basis, revenue was CAD13.5 billion, up 10%. Income, CAD3.3 billion, up 15%. EPS, CAD5.29, up 10%, and ROE was over 15%. Each of our businesses did well, with double-digit growth across the board.

Moving to slide 11, adjusted revenue in Q4 was CAD3.6 billion, an increase of 12% year-over-year, and 10% sequentially, largely due to the lift from M&I. Adjusted net interest income was CAD1.9 billion, up 16% from a year ago, and 10% quarter-over-quarter. Adjusted non-interest revenue was up 10% from Q3, with the acquired businesses improving results by 9%. As shown in the graph on the right, adjusted total bank NIM excluding trading was 214 basis points, down 5 basis points quarter-over-quarter, with this due mainly to lower spreads in BMO Capital Market and P&C Canada.

Turning to slide 12, adjusted expenses of CAD2.3 billion, were up CAD326 million or 16% year-over-year. Expenses related to the acquired businesses were CAD315 million. As shown in the table, excluding M&I, expenses increased less than 1% from a year ago. On the same basis, expenses were up 3.4% quarter-over-quarter due to employee-related costs, investments, and a strong US dollar, which accounted for a third of the increase. As Bill mentioned, in what looks like it will be a lower growth environment, productivity will be an important part of success. Recognizing this, we are stepping up our function -- our focus in this area across the bank in a deliberate way.

Slide 13 provides an update on the M&I acquisition. We're pleased with the contribution in the quarter, with the acquisition adding adjusted earnings of CAD148 million in total, and CAD124 million to operating groups. Based on our current outlook, we now expect that the M&I acquisition will be accretive to adjusted EPS for fiscal 2012, better than our assumptions when we announced the transaction. As a reminder, for reporting purposes, operating group financials reflect business results, credit provisions on an expected loss basis, net interest income based on contractual rates for loans and deposits, and amortization of acquisition intangibles.

The Corporate includes a number of items as shown on the bottom left of the slide, including restructuring costs, differences between expected and actual credit provisions, and the residual of the rate mark amortization and other corporate treasury items, which was not significant in the current quarter. The largest item impacting corporate this quarter relates to accounting for the credit mark in the acquired loan portfolio, and this resulted in CAD107 million in net income.

Turning now to slide 14, we show the components of the credit mark related to accounting. First, a portion of the credit mark is amortized into net interest income over the life of the purchased performing loan portfolio, as higher effective yield. This accounting is similar in concept, that to the higher yield that would result if a bond was acquired at a discount to par. In Q4, the amortization or accretion of credit mark drove CAD161 million of net interest income. Over time, if the credit mark is correct, this NII will be offset by credit provisions.

The second item that increases revenues relates to the impact of loan repayments. When acquired performing loans are repaid, the amount of credit mark held on the loan is no longer required, so it is released, and recognized as interest income. In Q4, loan repayments increased net income by CAD110 million. This represents a true gain for the Bank. In effect, we bought loans at a discount to par, and got fully paid out. The third component of the accounting relates to PCLs. The specific provisions will be realized on the portfolio over time as required. In Q4, specific provisions were CAD118 million. In addition, general allowance will be taken as appropriate. In Q4, the general allowance was CAD80 million. The net credit mark related income of CAD107 million in Q4 was high, mainly due to the loan paydowns that occurred, and a relatively low level of specific provisions.

As shown as slide 15, capital ratios continue to be in good shape, with the common equity ratio at 9.6%, and Tier 1 ratio at 12%. Our Basel II common equity ratio will be lower by approximately 50 basis points in Q1 2012, after accounting for the changes coming related to the implementation of Basel 2.5, changes to introductions to deductions for insurance subsidiaries, and the beginning of the transition to IFRS for capital purposes. Our pro forma Basel III common equity ratio at year-end was in good shape, at 6.9%. This ratio reflects full implementation of IFRS and Basel III, and so is not impacted by the items that I mentioned will impact Basel II in Q1.

Moving to slide 18, P&C Canada delivered annual net income growth of 10% on an actual loss basis, and 4% reported. Revenues were up 4%, reflecting volume growth and some NIM pressure. P&C Canada maintained it's productivity ratio in the low 50% range, while investing in it's strategic agenda. Net interest margin declined 4 basis points quarter-over-quarter, mainly due to lower deposit spreads, and lower mortgage refinancing fees.

Moving to slide 19, P&C US fiscal '11adjusted net income was $394 million, up 77%. Q4 revenue and net income more than doubled from a year ago, reflecting good contribution from the acquired business. The adjusted productivity ratio of 57.3% improved notably. Fourth quarter adjusted net income was $171 million, with $111 million of that coming from the former M&I operations. NIM increased from a year ago, mainly due to higher deposit balances and in loans -- improved loan spreads.

Turning to slide 20, Private Client Group fiscal '11 net income of CAD518 million was up 13%. Excluding insurance business, net income was up a strong 31%. Net income in the quarter was CAD144 million, up 13% from a year ago. Earnings, excluding insurance were up 20%. Insurance earnings were down slightly from last year, but up from Q3.

Turning to slide 21, Capital Markets delivered good fiscal 2011 earnings of CAD920 million, up 13%. ROE was strong at 20%. Fourth quarter net income was CAD149 million. Lower revenues in the quarter reflect a weaker and more volatile trading environment, and subdued investment and corporate banking activities. Expenses were up 5.4% from a year ago, driven primarily by strategic investments in people.

On slide 22 for corporate, on an adjusted basis, there was a net loss of CAD44 million in the fourth quarter. The improvement from last year was driven largely by lower credit provisions, partially offset by lower revenues. Quarter-over-quarter adjusted results were better by CAD43 million, reflecting higher revenues and lower credit provisions, partially offset by higher expenses driven by the acquired business. Reported results were impacted by the adjusting items I spoke to earlier. Before wrapping up, I note that we have provided 2 slides, which summarize our MD&A disclosure on the transition to IFRS, as well as in the package. And with that, I'll turn it over to Surjit.

Thanks, Tom, and good afternoon. Before I begin, I would like to draw your attention to the caution regarding forward-looking statements at the beginning of the presentation. We begin on slide 31, where we provide details of our CAD208 billion loan portfolio, which includes the recently acquired businesses. There has been no significant change in the make up of the portfolios quarter-over-quarter, [inclusive] of the loans based in Canada. Given concerns about the Canadian housing market and household debt, I want to take a moment to address this in the context of our portfolios. Our total direct residential mortgage exposure is approximately CAD42 billion, which represents about 7.5% of the total value of Canadian-chartered bank residential mortgages, estimated to be CAD563 billion.

In addition, we have insured 70% of our managed portfolio, and 62% of our owned portfolio. The uninsured portfolio reflects solid home owner equity, with an average loan-to-value of 54%, based on July house price data. The level of uninsured balances in our total retail portfolio, and our conservative loan-to-value ratios in our real estate secured book has positioned us well. Nonetheless, we continue to maintain prudent lending practices, and regularly assess and amend our underwriting guidelines to adapt to changes in the risk environment, and our risk appetite. The US portfolio represents 29% of total loans, and approximately 37% of this is in [consumer] products. Together, our retail portfolios in the US and Canada, represent approximately 54% of the total bank loan, with more than 87% secured.

Slide 32 presents details of the total US loan portfolio in US dollars. I would first like to note that we are seeing some signs of improvement in the US economy. Business balance sheets have improved, along with an increase in manufacturing outputs, and a year-over-year easing of the unemployment rates, which in November dropped to 8.6%. The US portfolio of $61 billion, consists of $23 billion in consumer, $28 billion in C&I, and $10 billion in commercial real estate. The consumer portfolio consists of 36% first mortgages, 36% real estate secured lines, with the remainder in auto and other consumer loans.

The C&I portfolio is well-diversified across industries, with the largest sectors being owner-occupied commercial mortgages at 18%, manufacturing at 16%, and financial institutions at 15%. Exposure to the commercial real estate sector is $10 billion, with approximately $8 billion of this from the acquisition. 72% of the total is investor-owned commercial mortgages. Commercial real estate portfolio represents about 16% of the total US owned portfolio. As I mentioned last quarter, we continue to actively manage this portfolio, with a focus on reducing distressed assets.

Turning to slide 33, the situation in Europe has resulted in significant turmoil in the global markets, requiring added awareness, and of course, disclosure. On this slide, we provide an overview of our relatively moderate European exposure. Total direct exposure to Greece, Ireland, Italy, Portugal, and Spain is modest, at CAD203 million. The direct exposure for the remaining countries in the Eurozone is CAD5 billion, with approximately CAD3.5 billion with sovereign counterparties, of backed by sovereign. These sovereign exposures are largely cash products. I would note that we remain alert to the evolving European situation, and are proactively managing our exposure. We provide additional disclosure on our European exposures in the annual Management Discussion and Analysis.

Turning now to slide 34, where we provide an overview of the gross impaired loans and formation. Formations of CAD543 million for the quarter. CAD185 million of this is related to the acquired portfolio, CAD81 million of which, is backed by an 80/20 FDIC loss share. The increased formation of the core portfolios is primarily due to a few large accounts, mainly in the financial sector, as well as in Canadian manufacturing and agriculture sectors, where continued economic weakness, and a high Canadian dollar are impacting [exposures].

On slide 35, we provide details of the provision for credit losses. The consolidated specific provision was CAD210 million. In addition, there was an CAD80 million increase in the general allowance, which was related to the acquired portfolio. The table to the right provides the business segment details of the provision. P&C Canada provisions are relatively flat over the quarter, with the consumer portfolio contributing the majority, at CAD130 million.

P&C US provisions were up this quarter, to CAD69 million. The US commercial portfolio provisions increased to CAD30 million this quarter, primarily from the commercial real estate sector. The consumer portfolios represent the largest share at CAD39 million, although it's lower quarter-over-quarter. Capital Market provisions continue to be modest at CAD10 million.

Turning to slide 36, we provide a segmentation of the specific provision by geography and sector. The Canadian provision was CAD102 million, up from CAD94 million last quarter, and CAD98 million a year ago. The consumer loan and credit card segment contributed to the largest share, at 39% and 25% respectively. The US provision was CAD108 million, and increased from CAD80 million in the third quarter. The personal lending segment contributed the largest, at 29%, followed by the commercial real estate investor owned sector at 26%. The acquired portfolios contributed about CAD30 million to the provisions this quarter.

On slide 37, we note that the trading and underwriting market value exposure dropped quarter-over-quarter, from CAD16.7 million in quarter three, to CAD12.3 million in the fourth quarter, mainly due to reduced interest rate exposures in both our debt product business and our liquidity pools, partially offset by high equity risks. Interest rate VaR exposure on our AFS portfolio was also -- almost unchanged over the quarter, and continues to be concentrated in portfolios holding significant asset [soft] positions in Canada mortgage bonds, government of Canada bonds, and US Treasury.

In closing, I am pleased with our performance this year. We have made a substantial acquisition. Our core book continues to perform well, and our risk culture is growing stronger. As we look forward, we must maintain our awareness of the risk environment, and the challenges therein. In particular, the European situation, the elevated consumer debt levels, and potential Canadian housing price correction. As I mentioned earlier, we regularly assess our lending practices to ensure that we remain prudent, in light of continuing market conditions, and within our risk appetite. And we can now move to the Q&A.

(Operator Instructions).

The first question is from Andre Hardy of RBC Capital Markets. Please go ahead.

Thank you. Just a clarification, please. And then a question for Bill Downe. The clarification is on the derivatives exposure to Europe. It looks like you're giving us a number that's the mark-to-market, net of collateral. What would that number be, if you looked at it, based on future exposures, like some of the banks have disclosed it? And my question for Bill Downe is, around the EPS guidance over the medium term. It's been reduced. Is that because the starting point on credit, will make for tougher comparisons? Or it's a more conservative view on your potential revenue growth?

Thanks, Andre. I'll take your question, and then the question on the European exposure, I'll pass back to Surjit. There are a couple of contributing factors. This time last year, we expected that the rate of economic growth in 2011 would be a little bit more robust than it turned out to be in the latter part of the year. I do think that, that there is some moderation in, in the expectation around the rate of credit recovery. I think it will continue. But to your point, the US housing market continues to struggle. And it will -- I think it will just take a little bit longer, for us to see a recovery in that segment. So that is a -- a contributing factor. That said, I, I'm still quite optimistic, that we will have acceptable economic growth, and that will support the growth of all of the businesses. Surjit, I'll turn it over to you to talk about the European exposure.

Andre, we have shown you the mark-to-market less the (inaudible) on that -- on the table that you see. And I suspect you are talking about -- when you talk about expected exposure, you're talking about future potential exposures.

That's right.

And if you look at it on that basis, our total European exposure -- I don't have a number in front of me, but it would be somewhere in the region of CAD4 billion to CAD5 billion.

That's helpful. Thank you.

Thank you. The next question is from Robert Sedran of CIBC. Please go ahead.

Hi, there. Good afternoon. Tom Milroy, just a couple of questions on the trading. That slide 37, those 2 big spikes, in particular, at the end of October, were presumably all [CBA] or mainly CBA? Can you give us any color as to what that was, and how much of an impact, the CBA might have been quarter-on-quarter? And then on a related note, I noticed and Surjit mentioned I believe, that the VaR is down quarter-on-quarter. Should I assume a lower level of revenue as well, then going forward, or should I not make that link?

Well, why don't I first-- before I go to the revenue question, let me deal with the, the question on the CBA that you have, and those 2 days that are high. Those two days really represent both our [normal] trading activity, as well as our CBA. And during the quarter, we did make some enhancements to our methodology. And we -- I'll give you some examples, we incorporated a risk (inaudible) model to calculate the expected exposure profile. We also introduced a deep (inaudible) correlation, and that helps when you look at -- there is always a connection between default, between counterparties that are (inaudible), particularly financial. And then we also refined our calculation, with respect to our -- the (inaudible) curve, to more align it to the market. Because you don't have very much of a market in the [CVS] with respect to banks. So we use that to refine our methodology. And the number you see there, is a reflection of the, both our normal activity, as well as CBA. Having said that, quarter-over-quarter the CBA did not move very much -- it almost remained flat. That number is very tiny. Having -- your question -- with respect to whether that's a reduction in the -- in our --

It was whether a reduction in VaR, implies a reduction in outlook for revenue as well

The reduction in VAR, really is a -- is a function of where we were, in terms of risk taking. But it's not -- and it's largely explained -- has to do with some of our risk in our liquidity pool, as well as in our debt products business. But I'll ask Tom elaborate, if he thinks there is anything beyond that.

No, I don't.

Okay.

Thanks.

Thank you. The next question is from Steve Theriault of Merrill Lynch. Please go ahead.

Thanks. Good afternoon, everyone. For Frank Techar, please. So Frank, revenue growth has been on the decline now for a few quarters -- I think four, last four consecutive quarters, and approaching flat Q4. So can you talk, can you refresh us on your outlook for revenue growth for next year? And then on the expense side, the efficiency ratio at 53% this quarter -- in the past, you broached the idea of an efficiency ratio below 50% next year. Is that still realistic, given your updated plans for investment spend, and the grind from lower rates? And then just sorry, lastly, if you could address -- I noticed the market share in commercial was down, I think 60 or 70 basis points this quarter, pretty big swing. If you could talk to that a little bit as well?

Sure, Steve. Thanks. I'm certain now, that you were paying attention to Viki's comment about one question. I think that was three, might have been four actually. (Laughter). But I'll -- but I'll give it a whirl. Just a couple of comments about the year, since I have the floor. We started the year with a little more optimism about the Canadian prospects for economic growth, as Bill mentioned, and about the level of business activity investment, and even interest rates, relative to our outlook. We started the year with more optimism than we ended with. And given the trends that we saw, we had a solid year, with stronger balance sheet growth than in 2010, in P&C Canada.

And we did it, with a really solid performance, from a margin compression perspective as well, just down 2 basis points for a full-year. We did continue to invest in the business, as you mentioned. And while pointing out that our revenue growth over the last few quarters has been in decline, our expense growth has been in decline as well, over those 4 quarters. And we did moderate that growth, as we saw our top line start to decline as well. And it allowed us to maintain our productivity ratio in the low 50s, which was my commitment, when we started the year. We ended up, full year at 51.9%. So we're -- and paying attention to the prospects on the top line, as we continue to invest in the business. And we did have solid earnings growth of 10%, using actual losses.

I just might point out, it's our 13th consecutive quarter with year-over-year net income growth. So overall, a solid quarter. But we did have to react to some things, that we didn't anticipate when we started the year. So as I, as I look out into 2012, my expectation is the trends that we're seeing currently, are going to continue. The top line is going to be growing slower than we saw back in 2010. And as a result, we're going to have to react from an expense perspective. I don't think it's realistic for us to be looking at a productivity number below 50, as we go into 2012. We're going to be working really hard this year to deliver a positive operating leverage for the business. And that's what we're -- and that's what we're starting the year on. And we'll see how the top line plays out.

Relative to commercial growth and commercial market share, we did see a little softer growth this quarter than our competitors, in our commercial loan growth. We have been taking, what I'd characterize as a cautious approach to underwriting risk in our commercial real estate segment. And for us, that represents about 20% of our Canadian commercial portfolio. And this management action has resulted in slower growth, as we've gone through 2011. And it's also had an impact on our June market share levels. In fact, the contributions from our commercial real estate segment, basically made up about 3 quarters of the decline -- sorry -- made up a portion of the decline in our share from March to June.

The other big factor was one of our competitors restated their multi-residential mortgages from consumer to commercial in that period. And that had about a 3 quarter -- it made up about 3 quarters of the decline for us, from the -- from the March to June period. So 2 factors, one, restatement on the share side. And the other one is, we're just taking a cautious approach to underwriting risk in our real estate portfolio. I will say that our spreads, in our loan book overall, and the spreads in our commercial loan book have held up really well. We've seen no decline in our loan spreads from '10 to '11. And our commercial loan spreads have actually increased year-over-year. So we're feeling good about the quality of the portfolio, and the earnings power of that portfolio, notwithstanding the softness in the growth on the balance sheet.

Thanks for that, Frank.

Thank you. The next question is from John Reucassel of BMO Capital Markets. Please go ahead.

Thanks. Just a question for Tom Flynn. Just to clarify, on slide 13, I think you've talked about contribution from M&I of CAD112 million, on an adjusted basis. So is that the base number, we should assume coming out of M&I, Tom? Is that the number to build upon?

Well, looking on slide 13, we showed the numbers adjusted at the top, reported at the bottom. The total adjusted income in the quarter was CAD148 million. And you see how that broke down by group. So the way I would think of it is, the contribution going to the groups was CAD124 million. And that's sort of normal business contribution, including the impact of allocating expected losses to the businesses. And we allocated about CAD40 million of expected loss to P&C US, in that 112 income number. And then corporate was CAD24 million. So our expectation is that going forward, we'll be in that kind of a range.

In the next quarter, we're going to have to absorb in P&C US, the introduction of interchange. And for the total segment, that's going to have an impact of sort of CAD10 million to CAD12 million in the quarter. We've talked about that number before. So that's a little bit of a head wind, coming into the quarter next year. And as you know, at the beginning of every year, we adjusted our expected loss methodology. And the expected loss numbers will tick up a little bit in the first quarter, just given recent performance. So long answer to the question, but I think in the range of what went to the operating groups this quarter, at 124 to the 148, that was the fully adjusted number.

Okay. So -- just so -- if we're -- if from someone from the outside looking in, BMO has spent roughly CAD4 billion to buy M&I, the -- the CAD124 million, net some of the expected loss and the Durbin -- or the interchange, that's a reasonable number to look at as a base, as -- to the return potential, to grow from -- for the M&I acquisition, is that correct?

Correct. Yes.

Okay, thank you.

Thank you. The next question is from Michael Goldberg of Desjardins Securities. Please go ahead.

Thanks a lot. First of all, Bill, tell us what -- what conditions have to be, in order for the dividend to increase? And secondly, a more specific question, you're trading revenue was down 37% in the quarter, with particularly weak equity trading, and underwriting and advisory was down 46%, while your variable comp overall for the Bank was up in the quarter. So can somebody give us an update on the prospects, for both trading and underwriting and advisory? And also explain why the variable comp increased, while major revenue drivers were down significantly in the quarter?

Thanks, Michael. I'll let Tom speak to the trading revenue prospects, and the comp in the quarter. With respect to dividends, there has really been no change in our expectation, around the timing of dividend increase. As you saw, our payout ratio in the year was 53%, which is -- remains at the high end of the range. So I think that it's really earnings growth that brings us down below the middle part of that range, that we're driving for in looking, in looking to the future, at when dividend increases will take place. And there's a couple of back drops that I think are important. One is that most of the -- of the efficiencies and synergies that will come out of the acquisition are related to the platform conversion, the technology conversion that doesn't take place until the end of next year.

And as well, up until this point, there has been plenty of variability in the expectations of what the -- of what required regulatory capital standards might be. I think that we're in a good position now, I think where we have global visibility, even to the point now, of being able to anticipate what a national significant financial institution layer would be. So I think there's less concern now, about the uncertainty of capital requirements. And you saw our Tier 1 common ratio at the end of the year was at a healthy 6.9%, fully implemented. So really then, I think it's a question of getting the 2012 conversion done, and the synergies underway. And I can say, we're looking forward to that. And with that, I'll turn it over to Tom Milroy, and he can talk about the trading question.

Yes. And I'll talk about both trading and the underwriting and advisory. Maybe I'll start with underwriting and advisory. That business was down, we think, like the rest of the industry. We really feel pretty confident, we didn't lose any market share, but it was a period when a lot of clients backed away. I mean the bright note there, is that our pipelines continue to be very healthy. And so we're looking for -- a market opening, and we'll be seeing higher activity levels. In terms of the trading performance, in Q4, it was really a result of both, the general market conditions, and then how we're positioned.

In terms of the market, like others, we suffered from higher market volatility, and weaker client activity. In terms of our positioning, our positioning was such, that we actually -- and that's where we actually got caught. We had losses, both realized and our mark-to-market. But as we think about our positioning, we continue to think about it an over a longer period of time, than a quarter. And we're very comfortable, with how we're positioned. And we think it's reflected in our performance, when you look at it for the whole year, where we performed well -- and frankly, better than all our competitors. I mean, we were down, but not down as much. So we're pretty pleased with that. With that, I'll pass it over to Tom Flynn to speak to the compensation.

Thanks, Tom. Just a couple of things on the expense and comp related question. And the first would be, a statement of principal that it's important to us, and we know it's important to everyone, that we have an appropriate relationship between compensation expenses generally, and revenue. What I would point to specifically, would be the numbers for the year. And these are disclosed in our sub pack. But for the year, our performance-based compensation was up a total of 7%. Excluding the impact of M&I, it was up 4%, and that's a lower percentage growth than we had in income, which was up 16%, and EPS, which was up 10%. So overall, we did have an increase in total performance-based comp, but it was at a lower rate than growth in the bottom line. And we think that we maintained an appropriate relationship between the expense base and revenue.

Thank you.

Thank you. The next question is from Gabriel Dechaine of Credit Suisse. Please go ahead.

Good afternoon. Just to go back to one of Frank's comments on the expectations of more of the same in 2012, i.e. a challenging environment. I would like to tie that back to your NIM outlook. Considering the big challenges, in the form of mortgage repricing, that's an ongoing process, and what sounds like a significant funding gap, at least a noteworthy one, you mentioned in your annual report. And then on the commercial lending, the lost market share -- you talking about backing it down from some segment of the marketplace. Can you talk a bit more specifically about the condo market, if that's included in that commentary, and what you're seeing there? And where I would see that on your balance sheet possibly, or in your disclosures in Canada?

Yes. Sure, Gabe -- Gabriel. It's Frank, back to the NIM question. We did see a 4 basis point decline in our margin, on a sequential basis in Q4. And the primary reason for that is, we're experiencing lower deposit spreads, in this low interest rate environment. As I've said earlier, our loan spreads are holding out well. And in some cases, they are even higher this year than they were last year. So it really is just the low interest rate environment.

We're feeling really good about our ability to compete. And we're doing a good job I think, of holding the line in that competitive environment relative to our pricing. And when you look back over the last couple of years, we've moved from a spot where our margin in P&C Canada used to be one of the lowest -- and on an absolute basis, we are now the highest of the big 5 banks. So overall, we feel pretty good. When we look into 2012, we're going to see those trends continue, I mean rates, we don't expect to be increasing any time soon, and the pressures on margin will continue to be there. But we would expect that our margin decline will moderate, as we go through 2012. We're not expecting to see as much decline, as we saw this year.

But why not?

Well, we're, we're continuing to change the mix in the business. And that's been a big, a big factor in why we've improved so much, relative to the other players. And that's going to continue in 2012 as well. Stronger deposit growth would be one of those areas for opportunity for us in the coming year. And then relative to your other question about commercial and market share, and in our real estate segment, the business that we would do for builders involved in the condo markets across Canada, would be included in the commercial real estate segment in our portfolio. And we've been cautious over the last year or so. And I would expect that we're going to continue to be cautious in underwriting that risk going forward.

All right. Thank you very much.

Thank you. We'll take the final question from [Brian Clark] of Bruyette and Woods. Please go ahead.

Good afternoon. Thanks for taking my question. Maybe just a quick follow-up. I guess, Frank, on that -- can you size that -- the portfolio at all for us, to the exposure to developers in Canada? And if any way, how much of that is to condo developers in Canada?

Yes, we're -- I don't believe we've disclosed that in the past. I'm not prepared to do that now. Just suffice it to say, that our entire commercial real estate book is 20% of our P&C Canada commercial book. And that would include many different sectors.

Okay.

Obviously builder/developers, investor owned, commercial mortgages, and all of those sectors. So that's as far as we're willing to go at this point.

And maybe just a follow-up on, overall loan growth expectations for 2012 in Canada? If any, can you talk about commercial growth expectations, versus the consumer growth expectations for '12?

Yes, I think -- my view would be the same, as we started 2011 with, that we would expect to see stronger growth on the commercial side, than on the consumer side. And we experienced that through the first few quarters. We took a little different position relative to our appetite, I think in a couple of sectors, and that affected our growth through the back half of the year. But overall, I think there's going to be more opportunity for stronger growth in the commercial side, than on the consumer side of the business as well.

Okay, great. Thank you.

Thank you. I would now like to turn the meeting back to Mr. Downe. (no audio -- in progress) I would now like to turn the meeting back to Mr. Downe.

I'm going to repeat myself, in the event that my microphone wasn't on. I'm going to turn the call over to our business heads to say a few words about the outlook, from their respective business. I'll start with Mark Furlong, then ask Gilles, Tom and Frank to make some comments.

Thanks, Bill. This has been a great year for the P&C US business And I am personally pleased to have been part of the combination of [F&I] and Harris. Over the course of the last five months, it is impressive at how focused our teams remain on our customers. And I would like to thank our employees for their hard work and determination over the past year, and our customers for their loyalty. We're now intensely focused on conversion activities, which are still on track to be completed in late 2012. We continue to roll out our new brand, (inaudible) BMO Harris Bank, strategically across all of our markets, with full rebranding to be done by the end of December 2012. By the end of December, we will have fully renamed about 220 branches in Illinois and northwest Indiana.

As Bill discussed, our view is that the US midwest economy is expected to strengthen moderately in 2012, with the second half likely stronger than the early part of the year. For P&C US, we are working hard to grow our business and strengthen our financial performance. We are pleased with the resiliency of our net interest margin. However, we expect to have more downward pressure. We are seeing commercial loan demand slowly improving, and consumer demand is expected to remain constrained. As you know, we will continue to see intended loan run-off, as we diversify the US loan portfolio, but expect to see moderately stronger loan growth in the second half of fiscal 2012.

And finally, as the year progresses, we expect to realize more of the synergies contemplated in the integration. Our adjusted productivity ratio in the fourth quarter was 57.3%. We will make further progress on improving this ratio over the course of next year and into 2013, although we will continue to experience pressure on the top line. Our highly attractive footprint top tier deposit market share, which is now number 2 in Chicago, and the growth in this quarter, actually increases that position.

Our deep commercial banking expertise, strong customer loyalty, all provide an enviable platform from which to drive revenue growth, and improve profitability. In summary, we're in a great position in the market. We're focused on our customers, and we have great confidence in the business. Gilles?

Thanks, Mark. When I look at our business in the past year, I am pleased with the -- our results, particularly in the traditional wealth business. Our net income this year was up 31%, and that's in spite of the fact that we are operating in very volatile markets, particularly in the last six months. And under a lower interest rate environment during the whole year. We're continuing to focus on improving the client experience, because we think this is a way to grow our assets, particularly in these turbulent times.

Our client asset this year grew significantly, up to (inaudible). And obviously, the bulk of this was because of the M&I acquisitions. But what's really positive for us going forward here, is that our underlying net new assets growth really improved this year. The integration of M&I is a top priority for us this year. The successful integration of M&I, will not only provide us scale in the US, but our North American platform is going to allow us to accelerate our growth. So we're looking forward to another successful year next year. Tom?

In terms of Capital Markets, notwithstanding a weaker fourth quarter, we had a strong year, which was reflected both in record revenues and net income. This was the third year running, that we've had -- that we delivered growth in revenue, this year combined with strong earnings and ROE. Our outlook remains cautious. In the short-term, we expect higher than normal volatility to continue in light of the continued impact of the Euro crisis, which puts pressure on our operating performance. That being said, with the resolution of the Euro crisis, and the recovery of the US economy, clients will come back into the market, and our performance will bounce back.

While we expect there will be volatility across quarters, as market conditions improve, our trading products business are well-positioned to take advantage of opportunities. And investment and corporate banking is well-positioned with healthy pipeline. The investments we made in our business, in both people and our distribution platform, provide us with another source of growth, as we build on our North American wholesale strategy. Together with our unified approach to client coverage, this will position us well, as the economy recovers. We believe our strategic investments provide us with a well-diversified and balanced portfolio, that enables us to achieve our financial objective, without outside volatility. Frank?

Okay. Thanks, Tom. In P&C Canada, our focus continues to be changing the way banking is done, and delivering a differentiated customer experience. And with that, we're going to continue to talk to our customers about controlling spending, growing, saving, borrowing smartly, and investing wisely. And in an environment where rates remain low, and legitimate questions continue to exist about future economic growth, the level of household indebtedness, and property valuations in certain markets, I would expect to see that our current business trends are going to continue into 2012, as I've already mentioned. Continue to believe that our strategy is working well, and we are going to continue to invest in our front line capabilities, but as I mentioned, at a slower pace than we saw in 2011.

Margins are going to continue to be under pressure. But as I've said, decline -- the decline will moderate for us. And we are going to continue to take a cautious approach to underwriting risk, in both our consumer and commercial real estate segments. Our balance sheet is stronger today than it's ever been. And our margin, as I said, has gone from one of the lowest a few years ago, to the highest of the big 5 banks, and we are confident in the -- in our strategy. Customer loyalty in both the consumer and customer segments are at record levels, and we're starting to get some external recognition for our work.

As I mentioned, our balance sheet grew faster in 2011 than in previous years, and our sales force is larger and more productive than it's ever been. So overall, we're confident in the strategy. We're confident in the path that we're on, and our ability to compete. And I would expect 2012 to be another good year for P&C Canada. Over to you, Bill.

Great. Thanks, Frank. Looking forward, the MD&A captures our medium term financial performance objectives. They remain consistent with our expectations of strong competitive performance, and increased productivity. For adjusted EPS, we're looking at an average annual growth rate of 8% to 10%, generating adjusted annual operating leverage of 2% or more, earning average annual adjusted ROE of between 15% and 18%, and maintaining strong capital ratios that exceed regulatory requirements.

We're confident in our ability to perform strongly against our peers, through a number of differentiated growth levers. First, continual -- continued successful integration in the US. Second, strength in commercial banking. Third, expected return on investments we've made across our businesses in people, technology, and distribution, including our US Capital Markets business. And fourth, continued success in our flagship, P&C Canada business. Thanks very much for joining us today. We look forward to reporting to you after the first quarter, and good afternoon.

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