Bank of Montreal (BMO) 2012 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the BMO Financial Group's fourth quarter 2012 conference call for December 4, 2012. Your host for today is Ms. Sharon Haward-Laird, Head, Investor Relations. Miss Haward-Laird, please go ahead.

Thank you, Operator. Good afternoon, everyone, and thanks for joining us today.

Our agenda for today's investor presentation is as follows. We will begin the call with remarks from Bill Downe, BMO's CEO, followed by presentations from Tom Flynn, the Bank's Chief Financial Officer; and Surjit Rajpal, our Chief Risk Officer. After their presentations, we will have a short question-and-answer period where we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question and then requeue.

Also with us this afternoon to take questions are BMO's business unit heads, Tom Milroy from BMO Capital Markets; Gilles Ouellette from the Private Client Group; Frank Techar, Head of P&C Canada; and Mark Furlong, Head of 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 annual MD&A and our fourth quarter earnings release.

With that said, I will hand things over to Bill.

Thank you, Sharon, and good afternoon, everyone.

Today, BMO reported a strong finish to a pivotal year for the bank. In the fourth quarter, we successfully completed the conversion of the core banking platform in the US and turned the page on the purchase of M&I, announced 24 months ago. With our stronger expanded North American platform, BMO is now the second largest Canadian bank, measured by the number of retail branches in Canada and the US, and adjusted earnings from BMO's US segment tripled from 2011 to over CAD1 billion, benefiting from growth in our business and strong credit performance. I'll comment further on a number of milestones achieved later in my remarks.

The bank had record results in 2012. Reported net income was CAD4.2 billion, or CAD6.15 per share. On an adjusted basis, net income was CAD4.1 billion, up 25% from last year. Revenues increased 10% to CAD15 billion, ROE was 15.5%, and return on tangible common equity was 19.6%. We also increased the dividend, grew loans by 7.4% and deposits by 7.1%.

With the majority of M&I conversion work complete and initiatives to improve productivity taking hold, the adjusted efficiency ratio improved in the quarter, and we reduced headcount by 700 during the year. BMO continued to build its strong capital position, finishing the year with a pro forma Basel III common equity ratio of 8.7%, assuming full implementation of Basel III reforms and the full impact of IFRS. Concurrent with our earnings release today, we announced our intention to establish a Normal Course Issuer Bid, subject to regulatory approvals. This will give us additional flexibility in managing capital.

Turning briefly to the operating groups, P&C Canada's reported net income for the year was CAD1.8 billion, up 3% on an actual-loss basis. We had good loan growth across most products, an increase of CAD11 billion, or 7.3%, supported by two strong quarters of sequential growth to end the year with momentum. Importantly, in the last two years, we have significantly shortened the average term to maturity of our mortgage book, reducing the risk to our customers from home ownership.

Our net interest margin remains above the peer average, despite margin compression, and we have continued to invest in this flagship business to generate consistent, quality, long-term growth, and we remain very confident in the success of our customer-focused strategy. P&C US delivered adjusted net income for the year of $579 million, in source currency, up 48% over 2011. Our fully integrated commercial banking team continues to perform very well, with strong momentum in core C&I growth, which increased 15% from one year ago. I'll comment further on our overall progress in the US in a few minutes.

Private Client Group had good growth in 2012. Adjusted net income increased 12%, to CAD546 million, with over CAD100 million contributed from the US. During the year, we made a number of strategic acquisitions to enhance our global presence and wealth offering for both asset management and private banking customers. BMO Capital Markets delivered annual adjusted net income of CAD949 million, with strong ROE of 20.2%. During the fourth quarter, we were recognized as the North American M&A Investment Banker Team of the Year by the Global M&A Network.

In sum, BMO achieved three of our four medium-term financial objectives in fiscal 2012. We delivered adjusted EPS growth of 18%, well above our target range of 8% to 10%; ROE was within our 15% to 18% target; and we maintained strong capital ratios exceeding regulatory requirements. In regard to the operating-leverage measure, we intend to meet this objective in 2013. Our medium-term objectives remain unchanged and have been set in the context of our performance, and that's the source of our confidence looking ahead.

Now I'd like to spend a moment highlighting our accomplishments since we announced the M&I transaction 24 months ago. We have achieved what we said we would. First, we have stronger, expanded platforms in North America in both banking and wealth management. We doubled our US footprint, adding both scale and reach. The conversion of our core banking platform was completed on schedule in October. We upgraded US online, branch, core banking, and mobile banking platforms at the same time.

Second, we have completed rebranding. Over 600 US bank branches have been refreshed, high visibility BMO signage and promotion have been put in place, and over 1,300 bank machines were raised to a new standard. We have increased our brand presence through our sponsorships and community affairs partnerships, supporting and being part of local communities, which has always been a guiding principle at the Bank.

This month, we are blanketing our US footprint with some of the strongest advertising and promotion the Bank has ever developed -- online, outdoor, broadcast, and in branch. We have launched an omnibus campaign that covers TV and radio, newspapers and magazines, billboards, branch, and digital for our brands BMO Harris Bank and BMO Private Bank.

In short, we have galvanized a valuable franchise, one with a leading position in markets we know very well. A significant increase in the value of our US business has been realized, and 100% of our efforts are now back on our first priority -- being in the market with confidence, growing our customer base, and building the Bank and its earnings as a consequence.

Finally, we have enriched shareholders by generating excellent financial performance and enhancing the long-term value of the Bank. We delivered consistent earnings accretion throughout 2012, well ahead of our 2013 target, exceeding our business case. Credit performance has been better than anticipated, and recoveries on the acquired portfolio have paid for the cost of integration.

Cost synergies are expected to exceed $400 million, up from our estimate of $250 million at announcement, and realization is progressing well. The US contribution to total bank adjusted net income increased to 25% this year, up from 10% in 2011; and both our Basel II and Basel III common equity ratios have been rebuilt to above pre-transaction levels; and in the same period, our dividend payout ratio has come down.

Before I wrap up, some brief observations on the economic outlook. Negotiations between Congress and the President about taxes and spending are moving to a critical phase, and if an agreement can be reached relatively quickly, and I believe that's almost as important as the actual terms of any agreement, there will be a lift in business confidence that will accelerate investment and hiring; job growth will benefit; and consumer confidence and spending will strengthen. Assuming lawmakers do the right thing, and I believe they will, the US economy should strengthen through next year, pulling Canada's economy along with it, even with a strong Canadian dollar, fiscal tightening, and expected moderation in consumer loan growth.

To conclude, BMO's market position has visibly changed. This gives us confidence in our ability to produce quality and sustained growth across our North American footprint. The bank is fully repositioned, and customer loyalty has become a source of strength.

In 2013, we will move forward, taking advantage of the opportunities that flow from leading customer loyalty. We are running a business with a clear identity and a shared underlying infrastructure, and we will continue to capture the value of increasingly integrated North American delivery. We have clear opportunities for organic growth across all of our businesses. Commercial banking is a strength for BMO in both Canada and the United States. We are looking to leverage our expertise in a business-led recovery.

Capital Markets has a diversified, balanced portfolio of businesses. With leading expertise and relationships in strategic sectors, we are well positioned to leverage our US investments to drive better operating performance. Wealth management has established momentum.

With a strengthened US market position, we see particular opportunities in BMO Global Asset Management, which has CAD110 billion in assets managed, and in private banking with our premier service model. In personal banking, we have a differentiated customer-focused strategy, and we will drive growth from achieving industry-leading loyalty and delivering on our brand promise to make money make sense.

I'd like to thank our customers for the trust they place in the Bank; and in particular, acknowledge the customers who are part of the conversion of the core banking platform in the US for their continuing loyalty. We recognize that critical to the Bank's success is our ability to serve customers exceptionally well and help them succeed.

The Bank's employees are at the heart of our differentiation strategy. They continuously drive forward our vision to define great customer experience, and I'd like to acknowledge them for their commitment and the great improvements being made in the way work gets done more efficiently for our customers. As we look ahead to 2013, we are confident that each of our businesses is positioned to deliver quality, sustained earnings growth against a high standard of customer experience.

With that, Tom, I'll turn it over to you.

Thanks, Bill, and good afternoon, everyone.

I'll start on slide 9. BMO had a strong fourth quarter with good operating group momentum. Reported net income of CAD1.1 billion was up 41% from last year. On an adjusted basis, net income was CAD1.1 billion, up 35%; EPS was CAD1.65, up 38%; and ROE was 16.3%.

Our businesses delivered good results in the quarter. There was good loan growth in our P&C businesses in both personal and commercial in Canada and core C&I in the US, and the Private Client Group and Capital Markets had very strong quarters.

Adjusted provisions for credit losses were lower year over year and relatively stable quarter over quarter. Surjit will provide more color in this area in a moment.

Items were moved to arrive at adjusted income more similar in character to prior quarters and totaled of CAD43 million, or CAD0.06 per share. Slide 14 shows details on the adjusted items, including a restructuring charge of CAD53 million after tax, related to our ongoing focus on managing productivity.

Slide 10 shows highlights of our annual results. Total bank income and EPS were records. On an adjusted basis, revenue was CAD15.1 billion, up 10%; income, CAD4.1 billion, up 25%; EPS was CAD6, up 18%; and ROE was over 15%. Our retail businesses, in aggregate, increased significantly during the year and contributed over 75% of operating group adjusted revenue and income.

Moving to slide 11, adjusted revenue in Q4 was CAD3.9 billion, up 6.8% year over year and 6.7% quarter over quarter. Both comparatives reflect strong performance in BMO Capital Markets and PCG.

On an adjusted basis, net interest income was down 2% year over year and 2.7% quarter over quarter, as volume growth was offset by lower margins. Quarter over quarter, the more significant decrease was in BMO Capital Markets. Non-interest revenue, on an adjusted basis, was up 17% year over year and 18% quarter over quarter.

As shown in the graph on the right, adjusted total bank margin, excluding trading, was 202 basis points, down 1 basis point from last quarter. Decreases primarily in P&C businesses were offset by an increase in corporate.

Turning to slide 12, good revenue growth and our focus on productivity contributed to positive operating leverage in the quarter and a lower efficiency ratio. Adjusted expenses of CAD2.4 billion were up year over year and quarter over quarter, largely due to higher variable costs in line with strong revenues and increased initiative and technology investment spending, some of which reflected higher year-end related spending.

As shown on slide 13, capital ratio strengthened in the quarter. On a Basel II basis, the common equity ratio was strong at 10.5%, as is the Tier 1 ratio at 12.6%. Our pro forma Basel III common equity ratio moved up to a very good 8.7% in the quarter; and as a reminder, we calculate the number including the full impact of adopting IFRS. As you have seen, we announced today our intention, subject to regulatory approval, to establish a Normal Course Issuer Bid to repurchase up to 15 million common shares.

Moving to slide 16. In Q4, P&C Canada net income was CAD439 million. Results reflected higher volumes across most products and the impact of lower margins. There was very good loan growth in the quarter, with personal lending balances up 7.8% and commercial loans up 8.1% from last year. There was also good sequential loan growth for the second consecutive quarter, with total loans up 2.5% quarter over quarter.

NIM was down in the quarter due to deposit spread compression in a low-rate environment and changes in mix, including growth in loans exceeding growth in deposits. Lastly, expenses continue to be well contained as we actively managed productivity while investing in the Business. Q4 expenses reflect some uptick in investment spending late in the year.

Moving to slide 17, P&C US adjusted net income was $147 million, up 3% quarter over quarter, and down from strong results one year ago. Revenue of $743 million was up 1% quarter over quarter, due to higher fee revenue on the sale of newly originated mortgages and increases in commercial lending and deposit fees, partially offset by lower spreads. NIM was down 12 basis points from Q3, mainly due to deposit spread compression and lower loan spreads due to competitive pressures. NIM increased last quarter, and so the average quarterly change over the last two quarters is a more modest 5 basis points.

Expenses continue to be managed actively. We are achieving synergies, and at the same time, making some investments in areas to take advantage of growth opportunities. Core C&I loan growth continued to be strong. Balances are up 15% year over year and 4.3% quarter over quarter, and the pipeline remains strong.

Turning to slide 18. Private Client Group adjusted net income was CAD171 million, up 20% year over year and 48% from the prior quarter. Revenue was up 11% from one year ago and 16% quarter over quarter, driven by higher insurance results which benefited from changes to our investment portfolio and the annual review of actuarial assumptions. Assets under management and administration were up CAD40 billion year over year and a nice CAD20 billion quarter-over-quarter, due to market appreciation and new client assets.

Turning to slide 19. BMO Capital Markets delivered strong results with net income of CAD293 million and ROE of 25%. Earnings more than doubled from one year ago and improved quarter over quarter. The good performance reflects higher revenues as the market environment improved, our businesses executing on their strategies, and taxes.

Turning now to slide 20. Corporate had reported net income of CAD54 million and adjusted net income of CAD74 million. Year over year, adjusted net income was up CAD141 million, largely due to lower provisions for credit losses. As a reminder we record all acquired loan accounting items in the Corporate segment.

Quarter over quarter, adjusted net income was little changed, up CAD9 million. Revenues were up from the low level in Q3 due to a number of smaller items, partially offset by higher expenses as a result of higher technology investment spend in the fourth quarter.

To conclude, we are pleased with our performance in the quarter and for the year. We feel good about the performance of our businesses and how they are positioned heading into fiscal 2013. With that, I will now turn it over to Surjit.

Thanks, Tom, and good afternoon.

I am pleased to say we had another good quarter from a risk perspective. On slide 27, we show that the specific provisions of the legacy portfolio was CAD245 million, marginally up from CAD234 million in the prior quarter. The provision for the acquired performing portfolio was CAD103 million, a decrease of CAD10 million. The provisions this quarter included CAD71 million as a result of regulatory guidance related to certain performing US consumer loans.

The purchase credit impaired portfolio had a recovery this quarter of CAD132 million, versus the CAD118 million in the third quarter. Our focused management of this portfolio has resulted in CAD509 million of recoveries for the full year. As I have mentioned on previous calls, we have been proactively managing down this portfolio, and as the portfolio shrinks along with the associated mark, future recoveries will moderate.

Our impaired formations can be found on slide 29. Formations in the legacy and purchase performing portfolios were CAD787 million this quarter, compared to CAD791 million in the third quarter. Total gross impaired loans increased CAD109 million this quarter to CAD2.976 billion. This increase is related to previously mentioned regulatory guidance, which contributed CAD142 million to our formations.

On to a topic of broader interest -- the Canadian real estate market and consumer leverage. We remain comfortable with our exposures, as we have strong loan-to-value ratios on our mortgages and home equity loans. The quality of our new originations is high; and overall, we feel significant shift to fixed-rate products.

In closing, we have successfully integrated M&I into our credit-risk framework and culture and have reduced our impaired commercial real estate assets. We are comfortable with our risk profile; and through our strategic and capital planning processes, we continually assess our current and forecast portfolios in both expected and adverse environments. Our ongoing focus on a strong risk culture and risk management gives me confidence as we move into 2013.

Thank you, and we will now turn over to the Operator for the question-and-answer portion of today's presentation.

Thank you. We will now take questions from the telephone lines.

(Operator Instructions)

Gabriel Dechaine, Credit Suisse.

Just a big-picture question here, slide 5, I see the earnings growth by segment, and the one that jumps out at me is P&C banking 3% year over year. You are trailing your other segments, and more likely than not, your peers in Canada. I wonder what the action plan is for next year to drive earnings growth higher in P&C banking?

Also, the US margins down 12 basis points sequentially, is that an unusual decrease? What should we look for going forward?

And, the last one is on the buyback. I think I asked about that last quarter, and it got downplayed and now you're pursuing it. I think it's the right move. I'm just wondering what changed in your thinking in the span of a quarter?

Maybe I'll do them in reverse order, Gabriel. Thanks for the question. I think that, as always, we pay very close attention to your questions, and when there's merit in them, it stimulates thinking.

But as well, the capital build, as I think you note, has been very significant. We have restored our B-III common ratio, which was, as I recall, as low as 6.6% immediately after closing the purchase transaction, to 8.7% in this quarter. So, we have very clear visibility around the degree of flexibility that we have now in capital to invest organically, and I think the timing around reinstituting the capability to repurchase stock, as we have done in the past, is appropriate.

Obviously, it's not immediate because we are going to await regulatory approval. But, it's simply an integral part of long-term capital planning, and the timing seemed just about right.

Mark, why don't you comment on the US margin, and then we will let Frank take what I think was the larger question that you asked, Gabriel.

On the US margin -- this is Mark Furlong. Our view, this quarter's really pretty much the same as it was last quarter, that if you look at the average of the last two quarters, we're down about 5 basis points a quarter. The margin on a quarterly basis gets influenced by a couple basis points, depending on -- like last quarter on interest recoveries, we didn't get any this quarter.

Right now, we're in the period of time where -- just the absolute low level of interest rates on deposits and some competitive pressures on the lending side have caused those declines. So, that's really the near-term range, and it's hard to predict going forward, but that's really what's going on. It's really nothing different from what I talked about last quarter.

That 5-point average that you talk about, that's more indicative, you think, of --?

In the near term, I'd say yes. I don't see anything much bigger than that.

Refresh my memory, please, what was the interest recovery last quarter?

A couple basis points in the third fiscal quarter.

Okay, and Frank?

Thanks, Gabriel. For us, it's pretty simple, we need faster balance sheet growth, and I think you can see over the last two quarters, in particular in Q4, we had a really good quarter in the areas that we have been focused on most recently. Mortgage growth was 9.4%, commercial loans 8.1%, mutual fund balances were up 10%, commercial deposits 6.2%, and all of those were significantly above Q3.

So, as we have come through the second half of the year, as we focused on those areas, we are seeing much stronger momentum. There's no doubt that we have turned the corner and we are going to see stronger balance growth in 2013. I've got a lot of confidence that we are doing the right things from a balance-sheet focus perspective.

I will just point out a couple of other things, even though the 3% headline number looks a bit low, for the last three quarters of the year, our net income growth with actual losses has been over 6%. So, we have done better in the second half, and my expectation is we are going to carry that into 2013.

You mentioned the margin compression moderating. What's driving that in 2013?

Well, we are expecting to see the margin declines moderate in 2013 because of stronger balance-sheet growth, and we're going to continue to focus growth on certain credit products that we're comfortable with given the environmental risks that exist. We are happy with that growth and momentum, but we are turning our attention to deposit growth.

The single-biggest opportunity we have to mitigate the pressure on margins at this point in time is to increase our retail deposit growth, and that's what we are going to be turning our attention to. We are not expecting interest rates to change in the near term. We are going to continue to see pressure on deposit spreads going through 2013, and our biggest opportunity is to get the deposit side of the balance sheet growing faster.

Thanks, I appreciate the clarity.

Sumit Malhotra, Macquarie Capital Markets.

First one is a quick numbers question, hopefully, for Tom Flynn. Tom, you mentioned that the net interest income, or net interest margin, contribution in the segments was lower, but on an adjusted basis, you had a benefit in Corporate. If I've gone through -- now, the way I've gone through the adjustments, it looks like about a CAD50 million pick up, 50, quarter over quarter. Can you help me understand what's driving that?

There are a variety of items that go into the Corporate revenue item, and they move around quarter to quarter, they tend not to be individually large. I'd say what you're looking at is just, what I would characterize as, normal volatility or variability as we move through quarters, as opposed to anything more reflective of a fundamental shift in the level of revenue that we would expect. The Corporate revenues were low last quarter, and so to some degree, the uptick this quarter was just a normalization.

I'll leave it here, I'm kind of looking at it just on the net-interest income portion, and it does look like this quarter was materially better than the first three quarters of the year. Would you expect that this is more of a reflective level of what you think it will look like going forward, or will it revert to the larger negative that we saw earlier in the year?

I would look at it reverting to a number that's more reflective of the average during the year.

Okay, fair enough.

Then, my actual question is probably for Surjit or maybe Tom as well. If I look at the loan loss ratio for the bank in 2012, and if I go along with what's included in the adjusted number, you have a PCL ratio of roughly 19 basis points.

Surjit, you made reference last quarter to the recoveries likely starting to slow. That didn't happen this quarter, and I get the feeling you're indicating we will see that in 2013. So, relative to that 19 basis point level on the adjusted, what do you see as more reflective of the aggregate portfolio now that you've had M&I under your control for five full quarters?

Let me answer that question and more in terms of our legacy book as well. If you look at our legacy book in Canada, for the year, we had 35 basis points, and in the US, it's about 100 basis points. So, I think what you are expecting to see from the M&I portfolio is the same kind of performance as we are expecting in our own legacy portfolio down the road, so that's more like what we would expect. Now, this is unadjusted for any recoveries we may have.

The recoveries that you talk about, yes, I did indicate last time that it will moderate, and I said the same thing this time. One of the reasons why we don't have -- it's difficult to give you two specific guidances because we are adopting what I referred to in past of value maximization strategy, and at the same time, we balance that with our desire to reduce our credit impaired loans.

And to this point, we have had really good results, and we've got strong workout capabilities, and we are giving it focused attention, but we've never put ourselves under pressure to be able to sell for the sake of selling. And, we've had really good results. The market, also commercial real estate market in the US has helped, and that has picked up.

So, I think that number that you've seen in the past, on the one hand, is a very good number; on the other hand, what you are left with is now is about CAD1.7 billion in impaired assets with a mark of, I think it is about CAD445 million, so it has to naturally slowdown a little bit. But I would think the slowdown will be somewhat -- will be moderated. It will be gradual, but that doesn't mean there won't be variability. Long answer, I hope that satisfied you.

I'll leave it here, so from the level that we're looking at this year, it sounds like, just because of the recovery slowing, you are going to have a gradual uptick. But, in terms of how the actual portfolio is performing, you are not expecting a significant worsening in underlying credit quality. Is that a fair assessment?

That's a fair assumption. Over the year, we have recovered CAD509 million. And I would think, given where the mark is right now and the portfolio sizes, I think CAD200 million, CAD250 million would be an estimate that I would have, but I have no basis to giving you that estimate right now.

Thanks for your time.

Steve Theriault, Bank of America Merrill Lynch.

First, a follow-up question for Bill, if I could. Bill, you said you would await regulatory approval before using the buyback, so can I infer from that, that you would expect to use the buyback in the near term to do more than offset option dilution? Or, should we think of this a little further down the road once you get the B3 Core Tier 1 north of 9%?

Well, the 9% number I don't think we've ever used. The number is now well above the public regulatory guidance. I think going into 2013, the way we think about that buyback capability is to offset dilution, as we said and as we have historically done, recognizing in the last two years we haven't.

So, I guess you could entertain a little bit of catching up, if you will. But, the fact is, it's a good-sized program and depending on earnings in '13 and the continued build of capital, it's something that we would revisit, I think, later in the year.

Okay, that's fair --

I think the one thing that I would say, Steve, on the topic of capital is that it now puts us in a position where we have an awful lot of flexibility around reinvestment in organic growth in the Business. And with the conversion behind us, within our established footprint, I think there's a lot we can do to grow the Business, and we have the flexibility to do that.

Thanks for that. I wanted to come bank to Frank, also, for a minute if I could. Frank, you talked about balance sheet growth but mostly on the asset side. I note you've lost a little bit of share on the deposit side, and I think that's a focus for next year, but I was hoping you could talk a bit about your strategy with regards to deposit taking in general for 2013. Is there anything specific you have in mind which, hopefully, will benefit the margin after loan growth exceeding deposit growth hurting you a little bit this year?

Steve, I'm going to start with the commercial side. I already mentioned that our commercial deposits were up 6.2% this quarter. That, given the fact that we're expecting the business environment to be a little more positive than on the retail side, is important to us.

So, I'm really happy, and I'm confident about the expectations of continuing to grow our commercial deposits more rapidly in the future; and in fact, some of the retooling we have done in our business, focusing our sales force on a broader share of wallet, rather than just credit, is paying off. Just to give you a stat, our cash management sales in Q4 were up 28% over last year, and that's a big tie and link into our ability to attach ourselves to those core operating deposits of our customer, so that's number one.

Number two is, on the retail side, our share has been meandering down, primarily because of our competitiveness on the term book itself. Our growth in core checking and savings has been solid, on the back of continued investment in our distribution network, in our online capabilities, building our sales forces, and our great customer experience, and I would expect that to continue.

We do have some work to do on our term strategy, and that's under way. We do have to see stronger growth in both of those segments. We are well under way on the commercial side and more to come on the retail segment.

Has there been some near-term price pressure on the term side? I noticed some pretty aggressive marketing from one of your competitors in the last couple of weeks.

I think the answer to that would be yes, coming from two places. One would be the non-big bank competitors are always aggressive, given their funding options. And, my big five competitors, just depending upon which quarter it is, there seems to be someone who is strongly going after one part of the term market. I don't see it as a systemic issue, but it happens, and I expect it will continue to happen going forward.

Thanks, Frank. If I can squeak in one more, please, for Mark Furlong --?

Sorry, Steve, we've got a lot of people in the queue. If I can just ask people to try to keep it to one question and then requeue, or we're not going to get to everybody.

Okay, thanks, I'll follow up.

Okay, thank you.

Peter Routledge, National Bank Financial.

Just for Frank on, I guess the underlying question is on NIM compression, but I'm looking at -- you have a great table in the Annual Report. Table 9, page 106, shows that the yield on average Canadian dollar mortgages was 3.41% this quarter -- sorry this year, 2012. It was 4.15% in 2011. So, it sure feels like that mortgage product is really squeezing your NIM more than deposit compression. Do I understand that right? And then, what would be the drivers?

Peter, those numbers are the total bank numbers, which would include securitization activities as well. The P&C business is kept whole, that's the first point. Those are obviously customer yields, they are not spreads, and cost of funding has come down, as well, over that period of time. And, I think we've talked in previous quarters about our spread in P&C Canada, that flows into our P&L, not being under pressure. And, over the last two quarters, we have seen our mortgage spread on our entire portfolio move down in the order of 1 or 2 basis points.

That excludes securitization?

Excludes securitization.

Fair enough, and I appreciate that with respect to looking at the P&C Canada segment. A bigger picture, people are really not paying as much for a mortgage as they were last year, and although from a capital common equity Tier 1 ratio, it's not a capital-intensive product. If you start thinking about it on a leverage-ratio basis it kind of is, so is the mortgage product still an attractive product, strategically, for you and presumably for your competitors -- the Canadian mortgage product?

We think it is. We think it is, in certain circumstances, through certain channels at certain prices, with a focus on a broader share of wallet.

Peter, it's interesting, it wasn't so long ago that people were questioning the fact that our mortgage balances were shrinking, and now all of a sudden, it seems that there's a problem because they're growing faster than everyone else's. We have been very focused on growing our mortgage balances in a particular way with a particular segment, and we think that we have done a great job in 2012, and we are going to continue exploiting the opportunity that we have. Our credit quality has improved, we have brought new customers into the bank, and the returns we're earning on the products that we're selling at this point in time are attractive.

Okay. Any way that P&C -- the Treasury allocations might have exacerbated the decline in NIM?

No, we've had no change in Treasury allocations as we have over the last few years, as we've talked about our margins going the other way.

Okay, thanks.

Michael Goldberg, Desjardins Securities.

From what I understand, there were a few things impacting your insurance revenue this quarter, and I'm hoping that you can give us a little more color on it. There was your annual basis change that was positive, there was yield enhancement that was positive, and then there was the continuing impact of lower interest rates. Could you give us some idea of the impact of these components, just relating it back to the adverse impact of lower interest rates that you had in the third quarter?

Yes, thanks, Michael --

Andre Hardy, RBC Capital Markets.

Sorry, Operator, we haven't answered the last question yet, so we'll just let Gilles Ouellette answer the question before we move to Andre.

Michael, as you know, the results of the insurance line of business is very -- is impacted by interest rates, and -- just going by memory, here, the previous quarter the decline was something on the order of CAD45 million after-tax, and this quarter there was another decline of about CAD7 million. We are able to -- and there was a gain, also, from a year-end kind of actual assumption true up, I think in the order of about CAD10 million, but the bigger impact came from the fact that we were able to buy longer-term, higher-yielding assets, and that allowed us to release some reserves to the policyholders' liabilities.

When you look at the number from this quarter, if you go through the previous press releases, kind of a normalized number is something on the order of about CAD55 million to maybe CAD62 million a quarter for the insurance line of business. So obviously, it is growing every quarter, but it's also impacted -- this volatility comes from interest rate movements.

Okay with that, Michael?

Andre Hardy, RBC Capital Markets.

Small question, page 64 of your Annual Report, you talk about Canadian Alt-A mortgages being CAD5.7 billion, up from CAD3.9 billion in 2011, that's a 46% growth rate. Was there a change in definition, or was the growth rate really 46%? And if it was, what led to the growth rate being that rapid?

Hang on for one second if you would, Andre. Tom is just pulling the document out and looking at the page. What he may choose to do is come back to you.

What we will do is we will take that offline and get back to you. We've talked about the risk profile in the business, and we've been growing the mortgage business, but also growing it in a way that we think is market friendly and risk friendly, so there's been no deterioration in the underlying risk of the portfolio, but we'll get back to you on the specific question.

Thank you.

Chris Mustasio, Stifel Nicolaus.

This is Charles Nabhan for Chris Mustasio. My question is about the effective tax rate during the quarter. It was around 16%, and I realize that it's impacted by the runoff in the structured portfolio, which is somewhat of a wild card. But, looking ahead, do you see the tax rate reverting back to the 20% range, where it's been historically?

It's Tom Flynn. A few things on that, the reported number, as you said, was about 15.7%. We do focus more on the adjusted number because some of the items that go into reported are not taxed. The adjusted effective tax rate in the quarter was 17.9%, and that was up from 16.9% in Q3. On a normalized basis, looking forward, we have had this question come up before, and we've said that we expect the tax rate to be in the 20% to low-20% range going forward.

I appreciate the color, thank you.

Robert Sedran, CIBC.

I apologize if I missed it in your materials, but can you just tell me where you are in terms of the CAD400 million in synergies so far? And, now that the core banking conversion is done, should we expect the rest of these synergies to flow pretty quickly from here? In other words, basically H1 of '13, and you're going to be fully loaded with the synergies then?

It's Tom. On realization against the CAD400 million, we have said in the disclosures that we are through the two-thirds point, in terms of realizing the synergies. We did do the main core banking platform conversion in the fourth quarter. It was done late in the fourth quarter, and so the benefits of that are more likely to show up in a more pronounced way into Q2 of next year versus Q1.

In Q1, there's still some clean-up activities under way; and also, there's work to do just to dismantle the effort that we had underway to complete the core conversion. We are also investing in the Business, and so as you look at the segment results, you'll see the benefit of the synergies kicking in, but also investments that we're making in a couple of areas to grow the Business.

Does that imply, Tom, that perhaps not a net decline in expenses as we look into next year? Or, is just the magnitude of the synergies still to come enough to give you a lower expense rate as you look into the second half of next year compared with what it was this year?

We expect expenses to be down on a net basis. The synergies will outweigh the investments.

Okay, thank you.

Brad Smith, Stonecap Securities.

This would be a question for Bill Downe. Bill, looking at the P&C segment for the Bank, I note the return on equity that you're presenting in your supplementary has fallen from about 29% in the fourth quarter of 2010 to around 18%. And, I was wondering, in view of the sharp correction in that return, if you don't think it would be helpful to provide us with a breakdown between the Canadian and the US return in that regard so that we could see how it's moving, and perhaps, provide a little bit of guidance as to where you think that's going to recover to as we go forward?

Thanks for the suggestion, Brad, and we will take that under advisement.

I think one of the challenges in that return on equity calculation is the US business has, as I'm sure you appreciate, significant goodwill and customer intangibles, so doing a direct ROE comparison between the mature Canadian business and the acquired business is a little bit problematic, but we will look at return on tangible common equity as a way of evaluating return on tangible common equity as a way of expressing progress. But I think, clearly, it's our expectation that the much larger business, with the synergies out of it, over time is going to move to a return that looks a lot more like Canada, at least on a tangible-return basis.

Right, and I would simply make the comment that shareholders are earning a return on the entire investment as opposed to just the tangible component.

One last question on the ROE, if I look through this segment report, 29% to 18% in the total P&C, it's down also from 39% to 30% in the Personal Client Group. The only place where it's up at all from Q4 2010 to where we are today is up 5% in the Capital Markets, and yet the consolidated ROE hasn't moved at all, it's around 15%, 15.5%. I think that leaves me with the conclusion that the bulk of that maintenance of the consolidated ROE is coming from the Corporate segment. Would that be correct?

It's Tom, Brad. I think the biggest contributor across the groups to the ROE trends that you're looking at relate to us moving to allocating more capital to the operating groups in response to the Basel III changes. And, it's clear that the banking sector needs to operate, will need to operate, with higher capital levels, going forward, than it did before the downturn. And in response to that, we've increased the allocations of capital to our businesses, and that has had some downward impact on the segment ROEs.

Mario Mendonca, Canaccord Genuity.

A question, perhaps, for Surjit and for Bill. Surjit, you're helpful in offering us that CAD200 million to CAD250 million guesstimate, and I appreciate that that's all it was for the recoveries in the impaired book. It's about half of what the bank had this quarter, sorry this year. If you tax effect that, that takes out a good amount of growth, looking out to 2013. It takes out roughly CAD0.25 from EPS in 2013, relative to what it was in 2012.

Bill, this is where it would be helpful if you could offer some comments. Your growth objective is 8% to 10%, and I appreciate it's medium term, but if you've given up as much as CAD0.25 from one year to the next, or about 4% of EPS, are you really offering us a growth objective that's well above 8% to 10%, or should we just interpret this as a medium-term objective and not get too fixated on year to year?

Tom is looking at me like he understood your question (laughter). I'd have to ask you to repeat it, but I'll let him answer, and then if I need to provide a supplemental, I will.

Sure.

I'll take a shot at it. The adjusted earnings for the year were CAD6, as you know. They did benefit from a very strong credit performance, and a good part of that related to the recoveries on the M&I impaired loans.

As we think about earnings going forward and our earnings target, a couple of points. The first would be that we do issue mid-term targets, so we do not view the targets as being one-year targets. They are defined as mid-year targets, and they are targets that we would expect to achieve over the mid term, on average.

Looking back at this year, we had 18% EPS growth, so growth significantly in excess of the mid-term target. And, as we look forward to next year, we are focused on growing on the base of adjusted earnings that we had this year, recognizing we've got a headwind from potentially lower recoveries on the M&I portfolio, as Surjit talked about, but we are focused on generating growth off of that base.

Again, so the main point to take away from this is that the 8% to 10% is medium term, not annual?

That's correct.

Thank you.

We said the same thing one year ago, as well.

We said the same thing one year ago, and you saw the results for the year. I think that it is a medium-term target, you have to bear that in mind, but you also have to bear in mind that in 2012, we had heavy integration costs. There's no question in my mind that overhead numbers are probably higher because of the amount of work that was going on in connection with integration, and we have some fairly significant costs that related to workforce adjustment. And if you take all of that into effect, as I said in my opening comments, we have a great deal of confidence in the ability of the businesses to grow in 2013.

Thank you.

John Reucassel, BMO Capital Markets.

Just a couple of numbers questions, could Tom Milroy, or someone, help me with trading? Was there a CVA adjustment in the quarter, and if there was, how much? And, if I missed it, I apologize. Then, for Frank, could you give us your LTVs on your HELOCs, and what's happening in the HELOC portfolio?

It's Tom. Why don't I just start that -- when we look first at the quarter, and then at the year, there's CVA in our business all the time. In the quarter, it would have accounted for about half of the quarter-over-quarter increase in the interest rate trading line on page 12 of the [supp-pack] that you see, so that's where it was. For the year, the number was a few million dollars and not material in any fashion, so I think that when you look at the trading numbers for the year, they are pretty good and not impacted one way or the other by CVA.

With that, I will turn it over to Frank.

I think Surjit is going to pipe in on the HELOC question, John, thanks.

The average loan to value on the Canadian HELOC is [53.1%].

Okay, so not materially different from the mortgages?

No.

Okay, thank you.

Cheryl Pate, Morgan Stanley.

A question for Mark Furlong. Looking at the portfolio in the US, I'm wondering if you could first give us a little bit more color on the particular areas of strength in the C&I portfolio, just wondering if it's more targeted industry growth, or is there market share gains in specific MSAs, any color you can share there? Then secondly, on the consumer portfolio, outside of the indirect auto, are you where you'd like to be in terms of balances, particularly on the mortgages home equity, or should we expect further shrinkage in the consumer side?

I'll start with the commercial portfolio. It's really not geography driven so much as industry driven. What we see building up in pipelines and the performance for this year, the corporate finance business has done well and continues to do well, and I see the pipelines early into 2013, I suspect we'll have another good year. The equipment finance business that joined from the acquired organization, and we had some pent-up demand going elsewhere that now is coming through our organization.

We have a financial institution business that's done well, a national food and consumer business that's also done well and expect that we'll continue to see growth in that, a dealer finance business that was larger in the acquired bank, but building in our bank, and that has great expectations to continue to grow.

What I'm trying to say is really, if you look segment by segment, all of them seem to be positioned very well to grow, and the pipelines stayed strong all during the year and actually grew a little bit more in the fourth quarter, so a good sign for going into 2013 and gives us good optimism on the commercial side, see no reason not to have the expectations that we'll have another good year.

I'd also tell you that on the commercial real estate side, after going through some shrinkage in 2012, that I think that portfolio is finding a floor. And, we will begin to see growth in that portfolio in 2013 as well too, based on pipelines and things closing at the end of the year and early into '13, so feel very good about that.

On the consumer portfolio -- just to take a little turn here. On the mortgage portfolio, just as a reminder, you'll recall that we sell if you pick the quarter 60% to 65% of production, and that's what we did into the fourth quarter as well. And I expect, based on what we see in the pipeline, that the 30-year and 15-year fixed are still the kinds of loans that have performed well in the secondary market and with good spreads and expect that will continue to do that.

And, we focus really, on the mortgage side, on growing the total servicing portfolio, so we can build the relationships, and -- not that we don't want to retain the balances, but we do, we just want to make sure that the price -- the portion that we originate, that it is priced well to go into the secondary market, that that's where it goes and really don't want to keep 30-year fixed-rate mortgages, and really not 15-year fixed-rate mortgages on the books.

Home equity shrank during 2012, but when you look at the home appreciation that's occurred in the US the last four or five months, almost any service that we look at projects that to continue to improve in 2013. The mortgages under water, in total in the US, continuing to decrease month by month. That, in itself, is going to build up some purchasing power for consumers, and that will give us some wind in terms of being able to grow that portfolio as well too.

The pipeline -- I should have mentioned, by the way, in mortgage, the pipeline in mortgage was over $1 billion at the end of the year, so hitting all-time highs for us real close. Home equity pipelines are relatively flat in the third quarter and fourth quarter, but we can see there will be some demand building.

Business banking, which you also see in there, which is the middle to smaller-end business portfolio, I think also is nearing the bottom, and you should begin to see some growth in that portfolio as well too. So, we really feel pretty good about each one of the portfolios and the sales teams that are chasing it and that are responsible for those portfolios, and expect to see as we move later into the mid part of 2013 to have caught almost all those portfolios.

In terms of growth, we really feel pretty good about where we are at. If you think about all of the change that took place in this business, during the course of the year, pretty remarkable where we're at and really the high quality of franchise we ended up with, and the high-quality customer base we ended up with, and really have an employee base as well in the P&C US business, it's really energized by where we're at. All the markets that -- I should say, the two biggest markets we're in, we had good growth in terms of deposit share, which tells you that's building relationships. I could go over that in detail if want, if you ever look at the US numbers, but feel really good about where we're at.

Then, finally, the -- really for the first time, we have an integrated advertising campaign that launched early in November and has really been a big push both for the employee base that went through the integration exercises in the last 18 months or so, but as well really in creating brand awareness across the entire footprint. And, that really didn't exist before. Certainly, in one of the franchises, and a lesser extent maybe in Chicago, so I would tell you that the campaign is strong. It's strong in all the markets we do business in and will be one of the tools that drives customers into us over time.

I'll just conclude by saying, we feel very good about where we're at in the portfolios, feel very good about the strength of the activity we have underway in each of the markets.

Great, thank you, I appreciate the color.

Cheryl, thank you for the question; and Mark, thanks for a full answer to the question as well. I think it really fits in with the whole call and the points I want to make in wrapping up around what's been accomplished in the last two years. Because, we've combined two organizations that are now operating as one with tremendous opportunity. We're expanding in a six-state area with a population in gross domestic in excess of Canada as a whole.

Across the whole Bank, our employees are energized by the strength and capabilities of our businesses and are focused on opening new customer accounts and adding products to customer relationships; and at the same time, enhancing productivity. We delivered record financial results this year, and we are confident in the earnings momentum of the bank.

I want to thank you all for joining us today. And, if I don't speak with you individually, I wish you all the best for the year end and the holidays.

Thank you.

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