Bank of Montreal BMO Q2 2026 Earnings Transcript

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DATE

Wednesday, May 27, 2026 at 8:00 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Darryl White
• Chief Financial Officer — Rahul Nalgirkar
• Chief Risk Officer — Piyush Agrawal
• Group Head, U.S. Personal and Business Banking — Aron Levine
• Head, Canadian Personal and Commercial Banking — Mathew Mehrotra
• Group Head, Capital Markets — Alan Tannenbaum
• Head, Canadian Commercial Banking — Sharon Haward-Laird
• Head, Investor Relations — Christine Viau

TAKEAWAYS

• Adjusted EPS -- $3.67, a 40% increase, reflecting higher pre-provision pretax earnings and broad-based fee revenue growth.
• Pre-provision pretax earnings (PPPT) -- $4.4 billion, up 16% due to strong operating leverage and fee generation across multiple segments.
• Record Net Income -- $2.7 billion, supported by fee strength in Capital Markets, Wealth Management, and Treasury and Payment Solutions.
• Operating Leverage -- 4.1%, with revenue up 10% and expenses up 6%, resulting from efficiency programs and tight cost control.
• Return on Equity (ROE) -- 13.5%, up 370 basis points, reflecting capital optimization and core business performance.
• Return on Tangible Common Equity (ROTCE) -- 17.6%, up 480 basis points, highlighting franchise returns on capital deployed.
• Credit Metrics -- Provision for credit losses (PCL) stable at $739 million, with performing loan coverage at 69 basis points.
• CET1 Ratio -- 13%, not including the pending 28 basis point increase from a sale of the Transportation and Vendor Finance businesses.
• Share Repurchases -- 6 million shares bought back, demonstrating ongoing capital return to shareholders.
• Dividend -- Announced increase of 5% to $1.71 per share.
• Canadian P&C Deposit and Client Growth -- Core operating deposits rose 7% in retail and 8% in commercial; new commercial client acquisition up 18%.
• Canadian Commercial Loan Growth -- Outstanding loans up 2% both year over year and quarter over quarter, aided by mid-market client strength.
• Treasury and Payment Solutions (TPS) Fees -- Up 12%, indicating higher penetration and relationship primacy.
• Canadian Mutual Fund Sales -- Reached a record, up 49% year over year, showing investment relationship deepening.
• U.S. Banking ROE -- Grew 220 basis points to 9.3%, with $924 million record PPPT and sequential commercial loan growth of 4%.
• Wealth Management Net Income -- Increased 39%, driven by assets under management up 30% and ETF market share growth.
• Capital Markets Net Income -- Increased 46%, with $900 million PPPT and 19% revenue growth, underpinned by equities trading and advisory/underwriting fees.
• Efficiency Ratio -- Improved to 54.4%, pointing to expense discipline and business mix enhancements.
• Expense Outlook -- On track for mid-single-digit core expense growth for the full year, expecting positive operating leverage to persist.
• Asset Quality Trends -- Gross impaired loans at $6.9 billion, stable at 101 basis points; watchlist loans down 20% and impaired formations down 30% over 12 months.

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RISKS

• Chief Risk Officer Agrawal said, "there continues to be pressure and delinquency rates have been in an upward trend, reflecting as elevated insolvencies and rising unemployment, particularly in certain regions, including parts of the GTA." This is leading to increased provisions in the unsecured portfolio.
• Management noted consumer lending balances declined sequentially, "primarily in Canada, driven by declines in cards and muted mortgage growth, reflecting slower housing activity."
• Chief Financial Officer Nalgirkar said, "we expect delinquencies to continue to go up. But again, the unsecured book, we've taken a lot of derisking actions. Those are bearing fruit, but you will continue to see some rise in delinquencies. The point is that unsecured book is very small for us."

SUMMARY

Bank of Montreal (NYSE:BMO) reported broad-based earnings growth, underpinned by strong fee revenue across Capital Markets, Wealth Management, and Canadian and U.S. business lines. Management emphasized the completed optimization of the U.S. banking portfolio, shifting capital allocation toward organic growth in core markets. Strategic objectives include sustaining disciplined operating leverage, advancing digital and AI initiatives, and targeting a 15% ROE by the end of fiscal 2027. Management guided that upcoming divestitures will further strengthen both CET1 ratio and profitability, while deposit mix changes and asset quality remain ongoing areas of operational focus. Regional pressures in Canadian consumer credit portfolios, combined with flat sequential deposit balances, may shape near-term growth dynamics.

• CEO White stated, "with optimization actions now behind us, we delivered a strong sequential loan growth in the quarter" for U.S. banking, confirming this segment reached an "inflection point" for future profitable growth.
• U.S. commercial loan growth was described as "broad-based" across geographies and industries, with specific acceleration noted on the West Coast and management confirming plans to open an average of one financial center per month in Southern California for the next six months.
• In Wealth Management, 20 BMO ETFs received Globe and Mail recognition for 2026, reflecting strong product performance and advisor client uptake.
• Canadian Commercial Banking pipelines are described as "at historic levels" by Haward-Laird, with sequential loan growth expected to continue as economic uncertainty abates.
• Capital Markets head Alan Tannenbaum said Capital Markets expects to "deliver above our trend line -- historical trend line performance," though he cautioned that activity levels may "moderate" if market conditions change.
• Expense programs are on track, with $250 million in anticipated annualized savings, half to be realized in the current year, supporting enhanced efficiency metrics.
• Branch optimization and divestitures in the U.S. segment are now substantially complete, with the balance sheet positioned to support targeted organic and commercial client expansion.
• Bank continues to hold $4.7 billion in performing allowance, signaling a defense against potential macro downside despite watchlist and impaired loans trending favorably.

INDUSTRY GLOSSARY

• CET1 Ratio: Common Equity Tier 1 ratio, a key regulatory capital measure for banks indicating core capital relative to risk-weighted assets.
• Operating Leverage: The difference between the rate of revenue growth and expense growth; positive leverage means revenue is rising faster than expenses.
• PCL: Provision for Credit Losses, reflecting the anticipated loan losses recognized within a reporting period.
• NIM ex Markets: Net Interest Margin excluding contribution from trading operations, highlighting core deposit and lending spread performance.
• PPPT: Pre-provision pretax earnings, a measure of underlying operational profitability before credit costs.
• ROTCE: Return on Tangible Common Equity, net income available to common shareholders as a percentage of average tangible common equity.
• TPS: Treasury and Payment Solutions, banking services focusing on payment processing and cash management provided to businesses.
• RESL: Residential real estate secured lending, loan exposures underpinned by home equity or property collateral.
• AUM: Assets Under Management, the total market value of investments managed on behalf of clients.

Full Conference Call Transcript

Darryl White: Thank you, Christine, and good morning, everyone. At our March Investor Day, we laid out a clear execution focused plan to elevate returns and accelerate growth. Our second quarter results continue to demonstrate meaningful progress and momentum against these commitments. We once again strengthened return on equity and delivered strong EPS growth, driven by our focus on deepening client relationships, innovating to drive business value and optimizing for performance. Adjusted EPS was $3.67, up 40% from last year with pre-provision pretax earnings of $4.4 billion, up 16% and record net income of $2.7 billion, driven by robust fee revenue across Capital Markets, Wealth Management and Treasury and Payment Solutions. Operating leverage was strong at 4.1%.

Credit remains well managed and in line with our expectations with PCL stable from last quarter. We're well reserved with performing loan coverage at 69 basis points. Our CET1 ratio is strong at 13% and does not include the pro forma impact of the sale of the Transportation and vendor finance businesses, which we expect will add 28 basis points. This provides us with ongoing flexibility to support growth and return capital to our shareholders. We bought back 6 million shares this quarter and announced a dividend increase of 5% to $1.71. At Investor Day, we laid out a clear plan to deliver sustainably higher ROE and earnings growth. This quarter's results reinforce that trajectory.

Building on peer-leading performance in 2025, where we had #1 ROE and #1 EPS growth, we continued that momentum in Q1 and again this quarter, with Q2 ROE up 370 basis points from a year ago to 13.5% and EPS up 40%. Year-to-date, underlying ROE is up 200 basis points and EPS is up 30%. ROTCE strengthened to 17.6%, a measure that underscores the strength of our core franchise and our ability to generate top-tier returns on capital deployed. Our progress has been driven by core operating performance, the strength of our diversified businesses and our discipline around cost management, risk optimization and capital allocation.

In U.S. banking, ROE momentum continues to build up 220 basis points from last year to 9.3%. And with optimization actions now behind us, we delivered a strong sequential loan growth in the quarter. As expected, we believe that we've now reached an inflection point in this business that will drive an acceleration in profitable growth going forward. All of these improvements position us well to achieve and sustain our #1 imperative of a 15% ROE as we exit fiscal 2027. Each of our businesses delivered strong results this quarter. In Canadian P&C, we continue to execute our deposit-led client growth strategy with core operating deposits up 7% in retail and 8% in commercial year-over-year.

Canadian Commercial Banking saw a strong customer acquisition across segments. New client growth was up 18% compared with last year, with particular strength in our mid-market segment supporting stronger loan growth, up 2% from last year and last quarter. Treasury and Payment Solutions continues to anchor our client relationships with fees up 12%. In Canadian Personal and Business Banking, we're translating deposit strength to deepen investment relationships. Our teams delivered record mutual fund sales this quarter, up 49% over last year, including continued strength in our preferred program for investors. In U.S. banking, we're executing against our multipronged profitable growth levers.

In Q2, we delivered record PPPT of $924 million as our client focus and optimization efforts continue to lay the path to accelerated growth and elevated returns. Leveraging our top-tier commercial platform, unified U.S. banking model and differentiated treasury and capital markets capabilities, we delivered sequential quarterly commercial loan growth in the U.S. banking segment of 4% point-to-point, and grew TPS and advisory fees. Core retail operating deposits grew by 4%, and we're making progress on our de novo strategy, where over the next 6 months, we expect to open an average of one financial center per month in Southern California.

Together with our ongoing renovations and digital enhancements, these centers are designed to build deeper relationships, bringing together a full suite of personal business and wealth advice and products to meet our clients' financial needs. Wealth Management delivered record earnings, up 39% on strong markets and increased client assets. AUM was up 30% with continued strength in ETF market share and higher mutual fund sales reflecting strong fund performance. This past weekend, in the Globe and Mail's best ETFs for 2026 ranking. BMO was firmly among the leaders with 20 funds recognized for providing investors with differentiated value, performance and ease of investing, underscoring the breadth and the strength of our ETF lineup.

Capital Markets showed sustained momentum with PPPT of $900 million driven by equities trading and underwriting and advisory fees. We continued building strength in our market-leading franchises, including a #1 ranking in ECM and the top position in investment banking share of wallet in Canada as well as growing M&A activity in the U.S. Our world-leading Metals and Mining business led the way with multiple transactions this quarter. As we outlined at our Investor Day, we're anchoring our performance on three clear enterprise priorities. First, growing and deepening client relationships, grounded in one client advice that leverages the strength of our commercial bank. That approach continues to drive tangible benefits in Q2, contributing to higher fee income and client primacy.

In Canada, we had solid momentum in referral activity between commercial and capital markets and a 74% increase in referral revenue between commercial and wealth. And we continue to extend our leading treasury and payments business, including adding over 2,500 new business banking accounts across Canada and the U.S. year-to-date. Second, we're driving innovation for business value through digital first AI-powered solutions and actively advancing new use cases focused on relationship-led intelligence, applying AI insights to proactively identify and solve client needs. Our announcement this quarter to introduce 24/7 tokenized cash capabilities in partnership with the CME Group and Google Cloud reflects the growing importance of digital finance to our clients, an area where we're well positioned to lead.

We further advanced our AI strategy through the launch of the BMO Institute for artificial intelligence and quantum dedicated to the responsible application governance and oversight of AI at scale reflecting our commitment to innovating, developing and integrating technologies that will shape the future of financial services. We're consistently recognized for innovation leadership, including ranking first in eMarketer's 2026 Canada Mobile Banking features benchmark for the third consecutive year. The third priority, optimizing performance. As you'll hear from Rahul, we remain disciplined in optimizing performance through expense management and efficiency improvements. And we're also allocating capital to the highest return opportunities and continuing to strengthen the balance sheet, ensuring the flexibility to support growth and capital return to shareholders.

Earlier this month, we announced the sale of our transportation and vendor finance businesses, a transaction that is accretive to both capital ratios and ROE. Through our 19.9% equity investment, we'll benefit from ongoing income participation in a more capital efficient way while allocating resources to core markets with deeper client relationship opportunities. With the closing of this transaction and the previously announced branch sale in the fourth quarter of this year, we've effectively and successfully completed the balance sheet optimization program in the U.S. banking segment over the course of the last 6 quarters.

These deliberate actions have strengthened ROE and set the foundation to capture growth in our core U.S. markets, where the economic environment remains resilient with GDP growth expected to be 2.1% in 2026. The outlook for the Canadian economy remains mixed with modest near-term growth in GDP expected amid inflation and employment challenges in certain segments. In the medium term, the combination of greater clarity on USMCA and the impact of infrastructure investments have the potential to drive a stronger growth outlook for both Canada and the United States. Our business clients consistently tell us that improving Canadian regulatory competitiveness is essential to unleashing Canadian growth and unlocking Canada's potential.

Recent federal measures such as setting firm deadlines for project reviews and approvals within 1 year, streamlining consultations, establishing special economic zones and trade corridors nationally and simplifying regulatory reporting are positive, and they're a good start. Businesses operate across multiple jurisdictions and meaningful growth will depend on a coordinated approach and alignment across governments to drive a more competitive environment for business investments in Canada. In closing, Q2 is another step forward in delivering what we committed to at our Investor Day, stronger returns, faster earnings growth and a more resilient franchise. We're executing with discipline. The strategy is working, and I remain confident in our ability to continue building long-term value for our shareholders.

With that, I will turn it over to Rahul.

Rahul Nalgirkar: Thank you, Darryl. Good morning, everyone. My comments will start on Slide 9. The bank delivered strong operating performance this quarter with continued progress towards our 15% ROE target driven by execution of BMO specific levers we outlined at the Investor Day. Second quarter reported EPS was $3.53 and net income was $2.6 billion. Adjusting items are on Slide 45, and the remainder of my comments will focus on adjusted results. EPS was $3.67 up 40% from last year on record PPPT of $4.4 billion and lower PCL.

We delivered ROE of 13.5%, up 370 basis points ROTCE of 17.6%, up 480 basis points, ROA of 73 basis points and PPPT growth of 16%, with improvement primarily driven by core operating performance. Revenue increased 10% or 12% on a constant currency basis with broad-based revenue momentum across all our businesses, including continued strong fee growth in Capital Markets and Wealth Management and NIM expansion in both the P&C businesses. Expenses increased 6% and we delivered strong positive operating leverage of 4.1%. Total PCL decreased to $739 million with lower impaired and performing provisions. Piyush will speak to this in his remarks. Moving to Slide 10.

Excluding the impact of a weaker U.S. dollar this quarter, average loans were up 1% and average deposits were flat year-over-year. This quarter, the commercial loans grew sequentially in both U.S. and Canada with as-at balances, up 4% and up 2%, respectively, from broad-based growth across segments and geographies. Consumer lending balances were down sequentially, primarily in Canada, driven by declines in cards and muted mortgage growth, reflecting slower housing activity. Average deposit balances were flat year-over-year, excluding the impact of the weaker U.S. dollar and were down 1% sequentially.

We continue to see good growth in core personal and commercial operating deposits which was offset by our deliberate actions to reduce term deposits in Canada and U.S. to improve the deposit mix and the seasonal outflows in the second quarter. Turning to Slide 11. NII ex markets was up 4% year-over-year or 5% on a constant currency basis, driven primarily by continued margin expansion in Canadian P&C and U.S. banking as well as higher NII in Corporate Services. NIM ex Markets was 229 basis points up 12 basis points year-over-year, reflecting continued deposit margin expansion from higher ladder reinvestment rates and strategic actions to improve the deposit mix.

NIM ex Markets declined 4 basis points sequentially, driven primarily by higher levels of low-yielding liquid assets in corporate aligned with prudent liquidity management practices. These higher levels contributed to sequential NIM pressure, but are largely neutral to ROE. The core operating segment NIM ex Markets was stable sequentially reflecting continued deposit margin expansion offset by balance sheet mix. In Canadian P&C, NIM was down 2 basis points sequentially with higher deposit margins, offset by lower margins and product mix changes, including lower revolving card balances. In U.S. banking, NIM increased 3 basis points sequentially, driven by higher deposit and loan margins, partially offset by changes in mix as loans grew faster than deposits.

Our guiding principle is to manage NIM for stability through the cycle. There are several factors which impact our margins every quarter. In the near term, we expect bank NIM to be relatively stable with continued tailwinds from ladder reinvestments and deposit initiatives, offset by balance sheet mix and higher liquidity levels. Moving to noninterest revenue on Slide 12, NIR increased 20% year-over-year or 24% excluding trading, with strong growth in wealth management fees, higher advisory and equity underwriting fees and TPS fees. This reflects the strength of our One Client strategy in deepening relationships and driving higher fee penetration across all our businesses.

We benefited from onetime items this quarter, including elevated Canadian P&C card revenue as well as the prior year loss on sale of the U.S. non-relationship card portfolio. Turning to Slide 13. Expenses grew 6% and were up 3% excluding FX and higher performance-based compensation. Expenses were well managed and cost optimization continues to fund investments in talent and technology to drive growth and deliver positive operating leverage. Our efficiency ratio improved to 54.4% with positive operating leverage of 4.1%. We are on track to execute the previously announced efficiency program, which will generate approximately $250 million in annualized savings, half of which is expected to be realized this year.

We maintain our outlook for the full year of mid-single-digit core expense growth and delivered positive operating leverage for the remainder of the year. Turning to Slide 14. Our CET1 ratio remains strong at 13% and is at the higher end of our target range of 12.5% to 13%. Internal capital generation continues to strengthen adding 30 basis points this quarter. We continue to return capital to the shareholders, repurchasing 6 million shares during the quarter and had moderate growth in source currency RWA. Our capital strength and disciplined capital allocation is foundational to our operating model.

The recently announced sale of transportation and vendor finance business is expected to add approximately 28 basis points to the CET1 ratio in the fourth quarter, enhanced our liquidity and will be accretive to the ROE by about 30 basis points as we allocate capital to support profitable organic growth. Moving to the operating segments and starting on Slide 15. Canadian P&C net income was up 15%, reflecting solid PPPT growth of 5% and lower performing PCL.

Revenue was up 5% from higher NII on margin expansion and loan growth and strong growth in NIR driven by higher commercial TPS fees, mutual fund distribution fees and elevated card revenues, partially offset by a reduction in certain retail deposit fees effective this quarter. Expense growth of 5% reflected continued growth investments offsets cost optimization efforts. Turning to U.S. Banking on Slide 16, which speaks to U.S. dollar performance. Net income was up 30% year-over-year. We saw continued improvement in profitability with ROE expanding 220 basis points year-over-year to 9.3%, supported by strong core operating performance including record PPPT of $924 million, up 9% and lower-performing PCL.

Revenue was up 5% on higher NII from margin expansion partially offset by lower average balances, reflecting optimization initiatives. NIR grew 16% or 7% excluding onetime impacts last year, reflecting success of One Client initiatives with higher TPS, M&A and wealth management fees. Expense growth of 2% reflected continued investments in talent and technology, net of cost optimization efforts. With the expected closing of the announced sales of our transportation and vendor finance portfolios, and 138 branches in the fourth quarter, our balance sheet optimization efforts will be effectively behind us. The business is well positioned to drive profitable growth in priority markets and deliver higher returns through its stronger operating model. Moving to Slide 17.

Wealth Management net income was up 39% from last year. Strong performance was driven by record Wealth and Asset Management revenue, up 21%, reflecting market appreciation, continued growth in net sales and strong balance sheet growth. Insurance revenue was up 27% on higher investment results. Expenses were up 15%, driven by higher employee-related expenses, including higher revenue-based costs. Turning to Slide 18. Capital Markets net income was up 46% year-over-year, driven by record PPPT of $900 million, up 31% and lower PCL. Revenue was up 19%. Global Markets revenue increased 15%, driven by higher equities trading revenue partially offered by lower interest rate trading. Investment and Corporate Banking revenue increased 26%, driven by a strong advisory and equity underwriting fees.

Expenses were up 11%, mainly driven by higher performance-based compensation. Turning to Slide 19. Corporate Services net loss of $86 million improved sequentially as prior quarter was impacted by severance charges and seasonally high expenses. We expect net losses to trend moderately higher for remainder of the year and the full year to be in the similar range as the past 2 years. In summary, the results this quarter demonstrate our continued progress to enhance profitability and accelerate growth. We delivered record net income and PPPT, continued ROE expansion driven by core operating performance and maintain strong operating discipline and balance sheet strength.

These results demonstrate consistent execution across our BMO specific levers and positions us well to continue to improve the returns and achieve our ROE target. And with that, I will now turn it over to Piyush.

Piyush Agrawal: Thank you, Rahul, and good morning, everyone. The North American economy has remained resilient even with the ongoing trade policy uncertainty over the past year. And more recently, the emergence of conflict in the Middle East has introduced additional risks to the global economy including higher oil prices and renewed inflation concerns. Against this backdrop, we remain focused on disciplined and proactive risk management, supported by ongoing portfolio reviews, early client engagement and maintaining balance sheet resilience and strong reserve coverage. The credit performance this quarter was in line with our expectations and reflective of the current environment.

As shown on Slide 21, total provision for credit losses was stable quarter-over-quarter at $739 million or 45 basis points with impaired provisions declining modestly to $734 million. By operating segment, Canadian Personal and Commercial impaired losses were $477 million, down $20 million from the prior quarter driven by lower losses in the commercial portfolio. In the consumer book, as we have been highlighting, there continues to be pressure and delinquency rates have been in an upward trend, reflecting as elevated insolvencies and rising unemployment, particularly in certain regions, including parts of the GTA. This has translated into higher provisions in the unsecured portfolio. Importantly, the RESL portfolio continues to benefit, including underwriting and solid loan-to-value ratios, providing meaningful protection.

We remain vigilant given ongoing macro uncertainty and continue to actively manage the portfolio. In U.S. Banking, losses were $237 million, up $35 million from the prior quarter, driven largely by lower recoveries in U.S. Commercial Banking. Capital Markets impaired losses declined to $15 million. Turning to Slide 22. Our performing allowance position remains a key strength. We started the quarter with a robust performing coverage of 69 basis points. The $5 million performing provision this quarter was primarily driven by the impact of model changes which were previously captured through expert judgment. The net impact of this was largely offset by positive migration and lower portfolio balances. The bank remains well reserved with $4.7 billion of performing allowance.

On Slide 23, gross impaired loans were $6.9 billion or 101 basis points, stable quarter-over-quarter. Formations were $1.4 billion, modestly down from the prior quarter. Our portfolio continues to benefit from strong diversification. Total loans of $685 billion are well distributed across sectors, products and geography. At our Investor Day, I provided some comments on our exposure to private credit. This portfolio remains small and well collateralized just under $6 billion or less than 1% of our total portfolio. We are selective who we partner with in this business, and we underwrite a large part of these loans and have good visibility in the quality of this portfolio, which continues to have a strong credit profile.

Overall, we continue to see an improving trend in our wholesale portfolio with net positive migration again this quarter. Over the last year, watchlist loans have decreased 20% and impaired formations are down 30%. Looking ahead, given the geopolitical landscape, we anticipate a softer economic environment and renewed inflationary pressure from higher energy prices. At the same time, expansionary fiscal policies and AI investment present important support for economic growth as we progress through the rest of the year. With this backdrop, we expect impaired provisions to remain in line with our previous guidance of mid-40s basis points range over the next couple of quarters.

The bank is well positioned to manage these risks given the diversification of our portfolio, our risk management capabilities underscored by a strong risk culture. We remain disciplined, and we continue to support our clients with our strong balance sheet and liquidity levels. I will now turn the call back to the operator for the Q&A portion of this call.

Operator: Your first question comes from the line of John Aiken from Jefferies.

John Aiken: Just wanted to -- your commentary about the domestic consumer softening. Are we expecting this to carry on through the second part of the year? I understand your guidance is not talking about consumer specifically, but it's the entire portfolio. But are we expecting to see some ongoing deterioration in terms of Canadian households. And do you have any expectation as to when that might maybe begin to moderate.

Rahul Nalgirkar: Yes. Thanks, John. I would say the benefit of the diversification is you're seeing the improvement in our wholesale. And so just to give that probably one liner, we were at about 60 basis points, improving to 50, 40 and now down in the 30s which is offset by some of the weakness you're seeing in the macros, especially in Canada. So within that, we expect delinquencies to continue to go up. But again, the unsecured book, we've taken a lot of derisking actions. Those are bearing fruit, but you will continue to see some rise in delinquencies. But the point is that unsecured book is very small for us.

On the secured side, we actually have very high LTVs -- sorry, very low LTVs, well around 60%, and the portfolio continues to benefit from higher FICOs. So I don't see any change in our guidance as it relates to secured mortgages. There is some pressure building. But I think that's transitory. We are working with our consumers in the secured book to help them get over a temporary phase. And what I'll tell you is from our experience, 9 out of 10 delinquent borrowers are self-correcting and the place where we do take action -- we're seeing a very high recovery rate north of 98%, 99%. But our goal really is to help our consumers.

And so there's an early reach program, we have multiple tools, but we want to see our consumers in their homes and we are working with them to find them good handy solutions to come out of the delinquency stage.

Operator: Your next question comes from the line of Matthew Lee from Canaccord Genuity. There is a small delay Matthew.

Matthew Lee: Can you hear me?

Christine Viau: Yes, we can.

Matthew Lee: Okay. So the transportation and vendor finance transaction was pretty consistent with kind of the broader effort to improve U.S. ROE. As you look across the U.S. business today, do you still see additional opportunities to refine that portfolio, maybe acquisitions, distributions, balance sheet repositioning? Or do you feel like the business mix will largely be where you'd like it to be once this transportation sale closes?

Darryl White: Yes. Matt, it's Darryl. Thanks for the question. Look, when we began the program around optimization 6 quarters ago, this is really the time at which we thought the program, if I could put it that way, would be complete. And it's also the shape of the portfolio that we expected by the time we would complete. So the portfolio today is where we like it. It's focused on full consumer relationships. It's focused on regional scale and density, where we have a right to win and where we compete. So I think the way you should think about it is that the optimization program is effectively complete. We've improved the ROE. We've improved the efficiency.

We've built capital and we've got capital, therefore, to invest principally organically, I will reemphasize in the markets where we can continue that multiproduct and multipronged fully vetted relationship with the clients that we've been talking to you about. So nothing new in my answer. I'm just reconfirming to you that this is where we thought we would get to. And we're at a really good place now to accelerate the growth in the portfolio from where it is now.

Matthew Lee: Okay. Great. And then maybe a quick one for Alan. You had previously framed capital markets at around $750 million in quarterly PTPP as a run rate to the cycle. As you look at the business today, do you think that framework still remains appropriate? Or are there aspects of the franchise and earnings profile that are proving maybe more durable than originally contemplated?

Alan Tannenbaum: Thanks, Matt. I appreciate the question. And reflect, obviously, that we feel good about the broad-based performance in our business this quarter, which really is a reflection of some of the investments that we've been talking about. If you reflect back to our Investor Day, broadening out our product capabilities, the asset classes that we are transacting and is really reflected in this type of performance. So feel great about all of those elements. And as we look forward, we see pipelines are very strong in those businesses where it's visible, the M&A business, the ECM business. However, as you know, these businesses are subject to market conditions.

And as long as markets remain constructive, we see clients that are prepared, willing and anxious to transact. So feel good about that forward look. However, we are seeing some modest moderation in activity levels. And as we think forward, what we are focused on is delivering above our trend line -- historical trend line performance. So what that means for a specific number, I'll leave to you, but we feel good about the forward look.

Operator: Your next question comes from the line of Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine: A couple, I guess, NIM type questions. Well, the outlook, you're saying stable and that's where people use a lot, but I just want to assess a few trends here. The U.S., we've got loan growth. Sounds like they're accelerating, which is great to see, but I'm just wondering how that outlook changes given maybe loan growth continuing to outpace deposit growth, and then at the treasury level, you've taken some actions. It looks like more lower-yielding assets? Some mix change and maybe more wholesale funding from the sounds it or at least temporarily. Are these factors going to outweigh the tailwind, which is mainly the reinvestment yields that are higher -- rates that are higher.

Rahul Nalgirkar: Gabe, thanks for the question. This is Rahul. So let me take the second part first, and then I'll go to the first one. The higher corporate low-yielding liquid assets was just a function, as I mentioned in my prepared remarks about prudent liquidity management. We've got a few variables going on. As you are aware, we've got two pending dispositions in the next few quarters. We've got some upcoming debt maturities and obviously, the uncertainties from the geopolitical situation linger around there. So we've been navigating with caution as we manage these variables. And in the next few quarters, we do expect these levels to remain higher as we pass through this. So that's part of the impact.

Now I think one thing important to note there is why it might have pressured NIM sequentially, they are largely immaterial for the ROE standpoint. So that's one noting. The second part, as you asked the question on the outlook. Look, we think the margins will be relatively stable as we look ahead. We still have tailwinds from the laddering investments for a couple of more quarters. We have a lot of effort going on across all the businesses to improve our mix, and that will be a tailwind. Now obviously, as loan growth in both the countries picks up, there would be some mix. And obviously, these higher liquidity levels for the next few quarters would be there.

So when you add it all together, I think we expect a relatively stable NIM. Now it might bump around here and there in every quarter. So.

Gabriel Dechaine: So that loan growth in the U.S. and in Canada, but I'm focusing more on the U.S., it should soak up some of that excess liquidity at the moment. And then just a follow-up on the U.S. It sounds more bullish in the outlook. And I guess is that -- is it wrong to conclude that an acceleration of C&I loan growth will absorb that excess not just the liquidity, excess liquidity, but that excess capital generated from the transportation finance division such that, that 30 basis points of ROE expansion could be within the next year sort of thing?

Aron Levine: It's Aron. Let me jump in on that one. So look, first of all, really pleased with the second quarter, important about the loan growth as it was broad-based, right? So we had growth across commercial real estate, asset-based lending, diversified industries as well as across geographies. So we're seeing the benefits of the bankers we brought in across the country, especially on the West Coast. And what you're seeing is that strength of the commercial bank that we've talked about really coming through as that optimization program has kind of winded up.

So we feel very good about the outlook for the rest of the year, really pointing towards what we've said in the past, which is delivering that sort of mid-single-digit loan growth for the rest of the year. So far in May, we're seeing the continued momentum. Pipelines are strong. So we'll just continue to sort of drive this as we have and continue on the path we're on.

Operator: Your next question comes from the line of Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala: Good morning. I guess just on this margin and ROE question, maybe Darryl and Rahul for all of you or one of you, I guess. But as we think about incremental growth, right? When you think about Canada, super competitive, all the banks are going after the same sort of set of clients, immigration is slower U.S., super competitive on deposit pricing, we're already seeing that in terms of promotions over the last few months. I get that there's some excess liquidity that you can absorb in the U.S. that should be -- help the margin.

But as we look out over the next 12 months, can you just talk to us in terms of how to think about the dynamics? Is the incremental growth a sub-15% ROE business that's coming on? Like how do you think about that? And is it different in Canada versus U.S. that as growth comes up, that on a relative basis should be a headwind to NIM and ROE and then maybe you make up for that by just overall efficiency.

Darryl White: Well, let me -- you tagged both of us, Ebrahim. So maybe we'll tag team on the way through your question. I'm going to start with the strategic imperative. And then, Rahul, if you got anything further to add on the NIM and the margin positioning you should. So look, as you know well, we are competing heavily in both markets. Both markets are competitive with different dynamics around them, as you point out, Ebrahim, in the commercial business, in particular, where we've got very strong market shares in Canada.

We've got loan growth in the quarter of around 2%, which I think is an important marker because it's higher than where it's been, but we're also being very selective in where we choose our growth, and we're being selective around full client relationships and higher returns. So are we putting on business that's sub 15% return. The answer is absolutely not. We're very clear on that new business being well above that hurdle. And then in the U.S. we've got clear market share opportunities given the strength of the franchise, which we didn't invent in the last few quarters. It's been there for decades.

But now we've very significantly repositioned it with a variety of efforts that really started in 2023 and with the addition of the Bank of the West, 6 quarters of optimization that we've come to the end of. And we've added the capacity that Aron talked about earlier. So there, we're able to compete with a pretty disparate market in terms of how we grow the business. But again, what we have in common is we're very selective about that growth.

We're able to be in a position where we can have higher-quality business come on the books relative to we think some of our competitors, and we're going to continue to do that to drive it single-digit outcome that Aron talked about earlier. Rahul, would you add any?

Rahul Nalgirkar: Yes. The only thing I would add to that, Ebrahim, is I do appreciate the fact that, yes, in this rate environment, deposits would be slightly under pressure, but we also acknowledge the fact that there are a lot of deliberate initiatives going across both the countries across all the businesses to grow core operating sticky deposits in both the businesses. So while the environmental headwinds will be there, we are very much focused on the tailwinds what we can control. And the ladder reinvestments also have some room left for a couple of quarters to go. So as I put it all together, yes, NIM expansion, I said, relatively stable relative to what we have seen in the past.

But in that context, to add to Darryl's point, our tech fees also grew year-over-year 20%. And I think that's how we look at this package as we kind of look at outperformance returns through the cycle.

Ebrahim Poonawala: That's helpful. And I guess just a separate question on the U.S. The back half of the year is supposed to be sort of the pickup in momentum on lending as you've done with the optimization. Obviously, there's concern that the higher rates, some of this war-related uncertainty in the Middle East conflict could sort of derail domestic CapEx in the U.S. and the momentum. When you think about sort of your client conversations, has that changed for the worse over the last 30 to 60 days? Like how would you sum up just overall loan demand and growth outlook in the U.S. looking out back half into next year?

Aron Levine: Ebrahim, it's Aron. Thanks. No. In fact, our March and April has -- we've seen momentum growing. That's been what drove that quarter-over-quarter. It's really picked up over the last 60 days. Our clients are active, certainly cautious and certainly taking into account the macro environment. But again, given that it's been broad-based, we're seeing growth across all of our different segments and across different diverse industries, across geographies. That diversity of gives me comfort as we can continue to drive and we're seeing pipeline and strength here in the first couple of weeks of the third quarter.

And so I feel comfortable that we're on the path that we've set for ourselves again around that mid-single-digit growth for the year.

Operator: Your next question comes from the line of Doug Young from Desjardins.

Doug Young: Most of my questions have been asked and answered, but I've got just a few quick ones. So I think, Rahul, you talked about strategic actions to improve deposit mix and benefit NIMs. I think that's been mentioned a few times. Can you just remind us like what some of those are and if they're different between Canada and the U.S.?

Rahul Nalgirkar: Yes. Why don't we start with Canada and then we can go to the U.S. to talk about some of those initiatives?

Mathew Mehrotra: Yes. So Doug, it's Matt speaking. Just for the overall Canadian P&C business, we have had very strong operating deposit growth. That's been a consistent feature of our franchise in the retail business that's driven by very strong net client growth on a relative basis. in our commercial business, very strong TPS performance and again, also a strong client growth that has given us the optionality to optimize our deposit mix, which has been favorable and a tailwind to NIM, and we see those underlying trends continuing.

Aron Levine: Yes. On the U.S. side, again, as you heard Darryl mentioned, our core deposits are up 4%. I'm really pleased with seeing the work we've done on the mass affluent segment, of course, which is very important. It's up 20% year-over-year coming out of our financial center channel. So the work we're doing, bringing the business together, especially our consumer business and our business -- there's a lot of opportunity working with corporate clients and commercial clients on helping drive core operating accounts. So a combination of sources that are available to us that we can better penetrate -- but between mass affluent and the other work, we're already starting to see some results of that effort.

Doug Young: And I hope like when we kind of roll that up, is there any way to quantify the benefit that you would have seen in the quarter from these actions? And what level of benefit you could see like quantitatively over the next year?

Rahul Nalgirkar: Yes. Sure. So I mean quarter-over-quarter, I would mention though our average deposits declined as a function of both seasonality and our deliberate actions on term and CD side. But underlying that was well north of $2 billion increase in deposits on these core sites. So while what we are looking at is trading off volume for wider spread here, and that's what we see as saw in these core deposits.

Doug Young: Okay. I'll leave it that there and then just elevated card revenues in Canada, what drove that? And can you quantify it?

Mathew Mehrotra: Doug, it's Matt speaking again. We did see above-trend card fees. As you know, we're always managing the volume-driven costs in this business. And we did see an improvement in that. The improvement was reflected in a bit of outsized performance this quarter, but will deliver sustainable gains to a lesser degree in future quarters, but it was basically just the management of our volume-driven costs, and we're seeing the benefit of that.

Operator: Your next question comes from the line of Mario Mendonca from TD Securities.

Mario Mendonca: I have two questions, both on credit, one from a short-term perspective on a little longer term. First, Piyush, if you could look at your Slide 28. We've talked about this before. The move in credit card PCLs is big. It's a move here. What I'm trying to understand now is, are your credit card customers the same as your personal loan customers and the same as residential mortgage customers or would it be right and suggesting that your residential mortgage customers have much higher credit scores than your credit card customers that there isn't that much overlap.

And the reason I ask the question is I worry that the spike in credit card PCLs could be the canary in the coal mine for everything else. So help me understand that.

Piyush Agrawal: So thanks, Mario. So if I look at this, I think none of this should be a surprise. I mean we've been talking about this for a few quarters, and we've been signaling the weakness that you're seeing in macro Canada, plus you just saw the print on the insolvencies, it's at an all-time high. So both the insolvency as well as some of this weakness is what you see play out in the unsecured segment. Matt and I have talked at these calls about our segment, which is -- which skews a little bit more mass and the work to change that over time takes a few quarters. We are beginning to see the benefits.

Our overall loss amounts are flattening. What you see is the rate change and the rate change is a multitude of factors, especially the denominator impact because our overall book in that segment is shrinking. We are replacing it with more value segment, more premium but those are slow build-outs, especially in a quarter where -- or in an economy where, again, like I said, the unemployment is high and new to Canada has slowed down quite a bit. So I'm not worried about the spillover impact from the unsecured card fees to the secured side, again, given the value of the collateral and some of the primacy that people have around the mortgages.

I don't know, Matt, if you want to add something?

Mathew Mehrotra: Yes. Mario, the only thing I would add is that the underlying credit quality of these books is very different. They're very different businesses. The pressure that you're noting in the card portfolio. Consistent with my prior comments, it does reflect the mix of our book and broader macroeconomic conditions. Piyush did mention the performance that we're seeing in our premium growth, which has been positive. We're up 8% year-over-year in that area, reflecting partnerships with Porter and growth within our existing franchise. But we don't expect spill over to use your language, the underwriting standards in the businesses are very different.

Mario Mendonca: So I want to flip over to a different more longer long-term question on credit. It's my observation that credit cycles and I'm not even sure if this is a credit cycle, it's hard to tell, to be honest. Credit cycles or Canadian banks over the last, let's say, 25, 30 years, the amplitude of the credit cycle seems to get lower and lower each time something plays out. what I'm struggling to understand is, is this because our banks -- the loan mix has changed or banks to become more disciplined in their lending, capital standards require it? Or is it simply because we have had a cycle. We haven't really had a recession.

And the moment we have a recession will -- the banks will just reveal themselves to be exactly have always been, credit cycle, cyclical plays, which is in the past why they've traded at low multiples. And asking this question, I'm honestly trying to figure out what is the market doing in taking bank multiples to where they are, are essentially saying banks aren't cyclical anymore. They don't have credit cycles. So anybody with a long memory sitting at that table today, maybe help me think this through.

Piyush Agrawal: Yes. I'll just answer briefly, Mario. All of us are long memories, we've been around lots of cycles. When I look at what we are seeing right now, from a risk return perspective, it is yet a very profitable portfolio. The point we are looking at right now is that the unemployment rate has crept up, inflation is hurting and rates haven't gone down to where they were 4 or 5 years ago. So all of those are staying in the consumer psyche. I think the impact of the fiscal policy rollouts haven't fully come in. All of these will benefit. To me, it's a little bit transitory. You can see what's happening in the Middle East.

I think there are puts and takes in the larger Canadian economy. And from a credit cycle, we may not be in a recession, but we are treating the softness as one in terms of helping our customers and derisking wherever we can. So I don't see this as a stress scenario. To me, we're managing very well through this, and we've taken early action. And what's really important is the benefit of the diversification of the portfolio especially in retail, wholesale, U.S., Canada, all of those are helpful puts and takes into my overall guidance. And I don't see that change.

In fact, I'm still standing by what I said at Investor Day, that by the end of '27, you should see us get down to our mid-30s.

Mario Mendonca: But our bank is different today than they were 15 or 20 years ago. Do they not have the same amplitude of credit losses and cycles they had -- that's what I'm trying to figure out.

Darryl White: Well, it's Daryl, Mario. So I think banks are different than they were. I can't tell you exactly over the course of the next 15 years how credit cycles will play out. You ask a reasonable question there. But I do think when you look at the quality of the portfolios, the quality of the underwriting standards, the use of technology to guide outcomes and predict where we can help clients sooner than we would have to use your time frames, 10 or 15 years ago. and the sophistication around which all of that is managed speaking for our bank, it is a different approach.

It's different underwriting, and that should provide over the course of time, like-for-like better outcomes, and that's what we're seeing.

Operator: Your next question comes from the line of Paul Holden from CIBC.

Paul Holden: I'll ask a couple of quick ones. So just going back to Aron, you made it very clear that the improvement in U.S. commercial loan growth is broad based, including geography. So I just want to drill down on that for a moment, particularly on California, just given the importance of that region in terms of the growth plan. I understand it's very, very early in that strategy, but just want to get any color of the growth in California specifically?

Aron Levine: Yes. I think we -- Tony has done a terrific job, and we've really built out a very strong team, as we've talked about, really starting with Investor Day. Bringing in not only talent from the outside in leadership positions, but a significant number of new bankers throughout the state, but also the development of talent from within and the growth there strong sort of legacy BMO bankers that have always performed well. So I think what you're seeing is this combination of the new talent, the new leadership, combined with the strength that BMO has in industry expertise local delivery.

The partnership with Capital Markets, I think, continues to really grow and strengthen, and that's been a tremendous part of our success that we're seeing. You hear us talk a lot about our partnership with treasury and the TPS business and the growth we're seeing there. So I think just the execution of working with clients broadly and really leaning into where we're strong in terms of our industry expertise and local delivery is all what's supporting that growth.

Paul Holden: Okay. Okay. So if I take away from that answer, so the growth in California is kind of on par or similar-ish to the rest of the U.S.

Aron Levine: Yes. I think in the last 60 days, we've seen actually probably a little of an acceleration in the West relative to other parts of the country. So again, all of the things I just talked about are actually driving a little bit of again, coming off a little bit of a lower base we're starting to see a little more acceleration of success on the West Coast. Again, leveraging the acquisition we made and the client relationships that we had on the West Coast and just doing a really good job of now providing a broad relationship across banking, capital markets and treasury.

Paul Holden: Okay. That's perfect. And then maybe quickly turning to commercial loan growth in Canada, also a bit of a pickup quarter-over-quarter there. And it's like you're not the only bank that's seen that so far. So just wondering what's driving the growth in Canada and particularly against the context of what looks like a fairly lackluster economy.

Sharon Haward-Laird: It's Sharon. Thanks for the question. Yes, this was a bit of an inflection point for us in terms of loan growth with the first sequential loan growth of 2% that we've seen for a while. And I would describe it as pretty broad-based across industries, geographies, nothing in particular, slightly higher utilization. But mostly just good client growth. And as Darryl mentioned, we've seen strong client acquisition. And so although our pipelines are at historic levels, I as soon as the uncertainty clears, I think we'll see even stronger growth.

Paul Holden: Okay. So at 2%, you think is kind of a sustainable type growth rate in the near term and then maybe even accelerating from there?

Sharon Haward-Laird: Yes. I think we'll continue to see sequential quarter-over-quarter loan growth. And as I said at Investor Day, kind of low single digits, if caution remains, and it could be higher than that if we get some tailwinds from the macro.

Operator: Your next question comes from the line of Mike Rizvanovic from Scotiabank.

Mehmed Rizvanovic: Want to go back to Aaron on the U.S. business. We've obviously seen a pretty good pickup on the C&I side industry-wide and you sound relatively bullish on the outlook. But can you sort of delineate for us how much of that is just market-driven versus some of the things that you're changing in the business to potentially maybe -- and can you potentially maybe outgrow peers if there is a bit of a pullback, can BMO stand out because of the primacy initiatives that you're pushing through right now?

Darryl White: Yes, thanks. Look, it's certainly -- you get the benefit of both. Obviously, as the economy is strong in the U.S., that is obviously helpful in terms of the activity levels that our clients are pursuing. And we benefit for that. We benefit a little bit from utilization growth, which is helpful there. But what I'd say is, what we are seeing is the strength of the commercial franchise. Again, the fact that we now have this West Coast base through the acquisition and then the new leadership and talent coming in and really being able to work with clients. So I think we have -- we're really starting to see the good first step in the second quarter.

As we talked about, pipelines have been building and we were starting to see strength that would better come through as the optimization kind of program ended. So I think we can continue to deliver, as we stated, that mid-single digit, but most importantly, very profitable and sustainable growth, which is really important.

But I think equally important, we got to keep in mind to loan growth is the fees side of things and our ability to drive noninterest revenue, the growth in capital markets that we're seeing across FX and M&A and continued progress on the treasury side, again, 2% year-over-year improvement on penetration, and there's huge upside for us within our own client base as we've talked about at 58% penetration, we want to get to 70%, 75% -- so there's a long way to go there but the team is executing and working well on that front.

Mehmed Rizvanovic: And I think I might have missed it earlier, there was a comment about the pace of branch openings. I think it had been in reference to California. Was that one per month?

Darryl White: Yes. Yes, exactly. So one per month in Southern California, and then that will be the rest of this year. We're excited. Lot those centers in San Diego and L.A., great locations. And again, a design that is focused on delivering for mass affluent clients really delivering banking lending and investments, which is a key to the way we think about the financial center channel going forward.

Mehmed Rizvanovic: Okay. So 1 per month, but that's part of the 150. Was it 150 not over a 5-year period, the pace seems a bit lower. Does it accelerate maybe in year 2 and beyond?

Darryl White: It does. Yes, you're absolutely correct. It is 150 [indiscernible]. We -- right now, we think we'll get to about 27 to 29 new centers next year. So you'll see that pace significantly increase next year and then as the years go on. So yes, just timing of some of the ones that might have opened in the fourth quarter this year on in the first quarter, and that's just timing. So we'll have a bigger number for '27.

Mehmed Rizvanovic: Okay. And then just quickly, apologies for the multiple questions. But just on the Personal and Business Banking side, that book has been a bit stagnant the last, call it, 6 or 7 quarters. And I know it's less of a focus for you, Aron, but anything to add there in terms of the slight underperformance versus the industry focus .

Aron Levine: Yes. Well, I wouldn't say it's less of a focus. It's obviously given my background. It's a really important part of our business and one that I'm excited about the ultimate opportunity. The team is executing well, the first step we've worked hard on repositioning through an optimization program of reducing the higher rate deposits and focusing on core operating deposits, both on the consumer and the business banking side. And so that is just given the scale and really focusing on every day, improving the client experience and just delivering sustainable growth over time. So the team -- we're working hard. I'm seeing improvements I mentioned earlier. Mass affluent segment, up 20% of assets from our financial center channel.

That's one indication. We have others, and so we'll work through it and seeing progress.

Operator: That concludes the question-and-answer session. I'll now turn the call over to Darryl White, CEO, for closing remarks.

Darryl White: Thank you, operator, and thanks, everybody, for your questions this morning. I'd just reiterate that our second quarter results continued to demonstrate the disciplined execution on the plan that we outlined for you in March at our Investor Day. We've shown you today that we've made meaningful progress against those commitments and we have strong momentum towards our goal of elevating returns and accelerating growth. And with that, I will look forward to speaking with all of you again in August. Thank you.

Operator: This concludes today's meeting. You may now disconnect.

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