Earnings Call Transcript - BMO Q3 2025

Operator, Operator

Good morning, and welcome to the BMO Financial Group's Q3 2025 Earnings Release and Conference Call for August 26, 2025. Your host for today is Christine Viau. Please go ahead.

William Darryl White, CEO

Thank you, Christine, and good morning, everyone. This morning, we announced another quarter of strong earnings growth and progress against our ROE rebuild objective. Third quarter earnings per share increased 22% to $3.23 and net income of $2.4 billion was the highest quarter on record. Pre-provision pretax earnings of $4 billion were up 13% with good contribution from every operating group. Credit was well managed with lower provisions compared with last year and last quarter. Our CET1 ratio of 13.5% remains strong as we continue to execute share buybacks to return excess capital to our shareholders with ample flexibility to deploy our balance sheet to support client growth. We continue to invest to drive sustainable growth across our businesses, including our recently announced acquisition of Burgundy Asset Management. Return on equity improved to 12% for the quarter. Execution against each of our ROE rebuild strategies, U.S. P&C improvement, normalizing PCL, overall operating performance and capital optimization is driving tangible results. Year-to-date, revenue growth was 12% and PPPT is up 19%, with strong all-bank operating leverage of 4.7%. We've now delivered positive operating leverage for 6 consecutive quarters and we expect continued PCL normalization to support ROE going forward. This remains our #1 imperative and Tayfun will elaborate further. We achieved these results in what remains an uncertain economic environment. In recent months, some trade-related risks to the North American economy have eased, though the final outcome is unclear and geopolitical challenges persist. Canada's economy is navigating a period of modest growth amid shifting policy and global trade pressures. Most industries remain USMCA compliant and government programs are beginning to roll out to support the most impacted industries, limiting the negative impact. Despite slower job growth, consumer spending has remained resilient. For the U.S., despite headwinds from higher interest rates, and tariffs, strong corporate earnings, a resilient labor market and continued consumer spending have helped maintain resilience in the U.S. economy and should support growth in 2026. This quarter, we announced important changes to our organizational structure in U.S. banking to accelerate our performance even further. We've brought together our U.S. Personal and Business banking, Commercial and Wealth management businesses under the leadership of Aron Levine. Aron brings 3 decades of U.S. banking experience and will lead our go-to-market strategy, optimizing the strength and scale of all 3 businesses to drive greater synergies and superior one-client service. We've also announced new co-leaders in Canadian P&C with Matt Mehrotra leading Canadian Personal and Business Banking; and Sharon Haward-Laird, leading Canadian Commercial Banking as well as North American integrated solutions, including treasury and payments, cards and customer connect centers. These changes reflect both BMO's deep strength in talent development and our ability to attract exceptional leaders. Turning now to highlights in each of our businesses. In Canadian Personal banking, we continue to drive top-tier, high-quality customer growth with deep relationships. BMO checking account growth is nearly double the industry benchmark, as measured by Argus Advisory driven by strong acquisition. These results are underpinned by robust digital and branch performance, fueled by the strength of our data and marketing capabilities and our commitment to real financial progress for our customers. For example, our market-leading savings amplifier account has now surpassed $12 billion in deposits, attracting another $2 billion since last quarter. And we recently launched BMO preferred program for investors designed to help families build and preserve their wealth with reduced fees and personalized financial guidance. This innovative program is attracting good mutual fund flows of $1.4 billion to date while deepening customer relationships and growing households. Canadian Commercial Banking had broad-based loan and deposit growth over the last year. We're seeing a pickup in conversations as clients gain greater clarity on the environment and prepare to move forward on their business plans. Client growth remained steady, supported by increased referrals between commercial, wealth and capital markets and continued momentum in digital engagement. Our integrated Treasury and Payment Solutions delivered strong performance with fee revenue up 23% year-to-date across our North American platform. In U.S. P&C, continued momentum in PPPT growth reflects strong positive operating leverage through disciplined expense management and balance sheet optimization. ROE is improving and the changes to our structure I mentioned earlier will help accelerate our progress going forward. We continue to see good client acquisition in U.S. PNBB in both the Midwest and West markets with over 90% coming from new checking clients, including 8% year-over-year growth in checking account acquisitions in our West markets. In U.S. Commercial Banking, client engagement is strong, even as borrowers remain cautious amid policy uncertainty. In our Emerging Middle Markets business, one of our highest return segments, we've deployed enhanced tools for faster, more predictable loan decisioning and deeper client insights, which are driving quality originations. One client referrals between this segment and Wealth Management are up 27% over last year, and fee income from Treasury and Payments continues to perform strongly. Our Premium Commercial Banking Franchise was again recognized by World Finance Magazine as the best commercial bank in both Canada and the United States. We were also named the Best Private Bank in Canada for the 15th year in a row, a testament to the exceptional service and strategic expertise our teams deliver. BMO Wealth Management had a strong quarter with record revenue in Wealth and Asset Management delivered by continued growth in net new assets as we continue to strategically invest in talent and innovative products. The announced acquisition of Burgundy Asset Management will further expand BMO's wealth management and financial planning capabilities. Upon closing, we will be adding one of Canada's most respected independent investment managers known for its high-caliber team rigorous investment process and dedicated service to private clients, institutions and family offices. We look forward to welcoming BMO's teams and clients to BMO. In BMO Capital Markets, PPPT has consistently been strong this year. The third quarter benefited from strong underwriting and advisory fees as we captured more mandates and executed on pipelines that had been building. We're winning more lead positions as we maintain a consistent focus on building talent and capabilities to support client needs. Trading revenue was strong across products, driven by our ability to respond quickly to evolving market conditions and client demand. In the U.S., we saw good momentum in mid-market investment banking activity, and we're well positioned for profitable growth in the markets where we compete. Across our businesses, we continue to invest and deploy digital and AI capabilities to drive value in our businesses and for our clients, balancing innovation with disciplined risk management. We're seeing tangible value from AI in several areas, including decisioning, customer experience, software development and employee productivity. We recently launched LUMI Assistant, BMO's award-winning AI-powered tool that equips frontline teams with real-time simplified access to critical policy and process information to provide advice and guidance to clients. This quarter, we also received the 2025 Celent Model Bank award for payments innovation for 5 separate digital payments and client experience initiatives. Our strong performance this quarter is evidence of consistent execution on our plan to rebuild ROE while continuing to manage risk effectively. Investments we've made in the business, paired with BMO's award-winning culture with industry-leading employee engagement are helping to power the progress we make for our clients, colleagues and the communities we serve. With that, I will turn it over to Tayfun.

Tayfun Tuzun, CFO

Thank you, Darryl. Good morning, and thank you for joining us. My comments will start on Slide 8. Third quarter reported EPS was $3.14, and net income was $2.3 billion. Adjusting items are shown on Slide 39. The remainder of my comments will focus on adjusted results. We delivered strong earnings growth with adjusted EPS of $3.23 up from $2.64 last year and net income of $2.4 billion, up 21%, driven by strong PPPT growth of 13% and lower PCLs. Revenues increased 10% with broad-based growth across all businesses, including strong fee growth in Wealth and Capital Markets and continued NIM expansion. Expenses grew 7%, and we delivered positive operating leverage of 2.9%. Total PCL decreased $109 million from the prior year with lower impaired and performing provisions. Piyush will speak to this in his remarks. Moving to Slide 9. We are firmly advancing towards our 15% medium-term ROE target for BMO and 12% target for U.S. P&C. Over the past 3 quarters, we have been executing across each of the 4 key initiatives, which has resulted in 130 basis points of improvement to 11.1% year-to-date. U.S. P&C ROE increased to 7.5% year-to-date, driven by PPPT growth of 6% and positive operating leverage, lower impaired PCLs and progress on balance sheet optimization initiatives. The overall impaired PCL ratio continued to moderate from the peak Q4 last year and credit migration continued to improve supporting ROE going forward. Operating performance has been strong across our businesses with good PPPT growth in each of the operating groups and positive operating leverage of 4.7% year-to-date. And lastly, we remain diligent in our capital optimization initiatives as we continue to allocate resources to higher return businesses, including our announced acquisition of Burgundy Asset Management, while returning excess capital to our shareholders. Overall, we are pleased with the progress we are making on increasing our returns, and we'll continue to provide updates across these key initiatives in future quarters. Moving to Slide 10. Average loans grew 2% year-over-year, driven by growth in residential mortgages and commercial loans in Canada. U.S. commercial loans declined from last year primarily due to muted loan demand across the industry and declined from last quarter as new originations were offset by reduced exposures in low ROE relationships. Customer deposits were up 3% from last year, with good growth in Canadian Everyday Banking and Commercial Operating balances, partly offset by lower term deposits as well as higher balances in Wealth and Capital Markets. U.S. Personal Deposits declined due to lower noncore customer deposits. Turning to Slide 11. On an ex-trading basis, net interest income was up 9% from the prior year with good growth in all operating groups, supported by continued margin expansion. NIM ex-trading was up 16 basis points year-over-year and up 2 basis points sequentially. In Canadian P&C, NIM increased 1 basis point, reflecting higher deposit margins partially offset by loan growth exceeding deposit growth. U.S. P&C NIM was flat as higher deposit margins, including the benefit from deposit optimization activity was offset by the impact of lower deposit balances and loan margins. We anticipate continued margin stability at the all bank level in the fourth quarter based on the current market expectations and supported by our disciplined deposit management and asset mix improvements. Turning to Slide 12. Noninterest revenue was up 3% from the prior year and up 11%, excluding trading, driven by strong Wealth Management and underwriting and advisory fees in Capital Markets as well as continued deposit fee growth in our Treasury and Payment Solutions business. We also benefited from a gain on the sale of a nonstrategic portfolio of insurance contracts during the current quarter. Moving to Slide 13. Expenses were up 7% from the prior year, driven by higher employee-related costs and 4% excluding performance-based compensation. Our consistent approach to managing expenses in line with revenue growth has delivered consistent positive operating leverage and efficiency improvements. And while we anticipate a typical fourth quarter sequential uptick in expenses, our ongoing commitment to positive operating leverage remains intact. Turning to Slide 14. Our CET1 ratio of 13.5% remained unchanged from last quarter, reflecting good internal capital generation, offset by share repurchases and moderate growth in source currency RWA. We completed 6 million share repurchases during the quarter and 15.7 million shares to date as of August. Given the strength of our capital position, we announced our intention to initiate a new normal course issuer bid in September pending regulatory approval for an up to an additional 30 million shares. Moving to the operating groups and starting on Slide 15. Canadian P&C net income was down 5% year-over-year as good PPPT growth of 6% was more than offset by an increase in PCLs. Revenue of $3.1 billion was up 6%, driven by higher net interest income, reflecting balanced growth in loans and deposits and higher margins, partially offset by lower noninterest revenue. Expense growth of 7% reflected higher technology and employee-related costs. Moving to U.S. P&C on Slide 16. My comments here will speak to the U.S. dollar performance. Net income increased by 42% with strong PPPT growth of 10%, positive operating leverage of 5% and lower PCLs. Revenue growth was driven by higher deposit margins, more than offsetting lower deposit and loan balances and higher deposit fee revenue in both Personal and Commercial Banking. Expenses were lower compared with the prior year as lower technology and advertising spend was partially offset by higher employee-related costs. Following the change to our U.S. organizational structure, beginning in the fourth quarter, we will be combining the financial results from U.S. Wealth Management with our U.S. Personal and Commercial business. Moving to Slide 17. BMO Wealth Management net income was up 21% from last year, driven by strong revenue in Wealth and Asset Management, up to 11% from higher markets, continued growth in net sales and higher loans and deposits. Insurance revenue increased due to the gain on sale I mentioned earlier. Expense growth of 8% was driven by employee-related expenses, including higher revenue-based costs. Moving to Slide 18. BMO Capital Markets net income was up 12%, driven by PPPT growth of 3% and lower PCLs. Revenue was up 7%, reflecting good performance in Global Markets, driven by increases in debt and equity insurances and higher trading revenue. Growth in Investment and Corporate Banking revenue was primarily due to higher underwriting and advisory fees as we saw good improvement in client activity during the quarter. Expenses were up 9%, mainly driven by higher employee-related expenses. Capital Markets performance continues to align with the guidance that we gave at the beginning of the year as a moderation in trading activity has been offset by stronger underwriting and advisory fees, reflecting the strength of our diversified businesses. Turning now to Slide 19. Corporate Services net loss was $123 million, reflecting higher revenue in the current quarter, partially offset by higher retained expenses. We expect a moderately higher corporate loss next quarter. In closing, we are pleased with the progress we delivered this past quarter. Revenue growth and expense management, along with further improvement in our credit performance, all continue to progress in line with the path toward our targets. The underlying fundamentals remain strong, and although the results will not always be linear, we remain firmly on track to deliver against our medium-term guidance. As we end the year, we continue to focus on allocating resources to initiatives that will drive sustainable earnings growth while maintaining positive operating leverage. Collectively, the progress we have made so far and the future steps that we plan to execute give us confidence in our ability to achieve our targets. I will now turn it over to Piyush.

Piyush Agrawal, Chief Risk Officer

Thank you, Tayfun, and good morning, everyone. Our credit performance this quarter was in line with expectations. Key credit metrics continue to normalize with slower migration rates and lower formations to the watch list. Starting on Slide 21. This quarter's total provision for credit losses was $797 million or 47 basis points. Impaired provisions of $773 million or 45 basis points were relatively stable compared to the prior quarter. Looking at the operating group results, Canadian Personal and Commercial Banking impaired losses were $489 million, up $13 million from the prior quarter. This was driven by higher losses in the Canadian unsecured retail portfolios reflective of unemployment and insolvency trends in Canada. We continue to take proactive measures to manage losses within these portfolios, including early engagement with customers. In U.S. Personal and Commercial Banking, impaired losses were $240 million, down $7 million by lower losses in the U.S. Commercial businesses. Capital Markets impaired losses were $33 million, up $5 million from the prior quarter. Turning to Page 22. The performing provision on credit losses was a build of $24 million. While the macroeconomic outlook has become more positive vis-à-vis the environment after last quarter's tariff announcement, uncertainty remains around the impact from trade policies as well as fiscal policy developments. Moreover, we continue to watch unemployment trends in Canada. All of these factors were considered in our performing allowance assessment for the quarter. With this $24 million build, our performing allowance stands at $4.7 billion and coverage is strong at 70 basis points over performing loans. Turning to Slide 23. Impaired formations of $1.8 billion were stable relative to the prior quarter. Gross impaired loans increased 3 basis points, driven by higher impaired loans in Canadian Commercial Banking. Our impaired provisions have been trending down this year in line with our expectations. At the same time, we remain cautious as the full impact from the current tariff announcements have yet to flow through the economy, and the policy environment remains evolving. We are actively managing risks through disciplined portfolio management and direct client engagement. We also expect monetary policy to be supportive. Against this backdrop, our prior guidance of high 40 basis points remains unchanged. The bank is adequately provisioned and has strong capital and liquidity levels to manage current and emerging risks. I will now turn the call back to the operator for the Q&A portion of the call.

Gabriel Dechaine, Analyst

Just want to ask about the U.S. loan and revenue growth outlook. There's quite a few moving pieces in there. I know earlier in the year, the outlook was for a strong second half, but obviously, a lot has changed in the macro environment. So I'm just wondering what the updated view on loan growth would be? And if you can layer into that answer, the impact of, I'll call it, de-banking, whatever you want to call it, because it sounds like there's some lending or client exposures that you're exiting because they don't meet your ROE targets. There was a story in the press last week that you're maybe looking to sell the Transportation Finance business. I don't think you want to comment specifically on that one, but may be generally. And yes, let's just go with that.

William Darryl White, CEO

Gabe, it's Darryl. Thanks for the question. I'll give it a start, and I might kick it over to Aron actually and has made his debut here to give us some perspectives as you said, a few weeks to look into these questions with us as well. So look, when you think about loan growth for us, I don't have to remind you this, but in general, in the United States. We're talking more about wholesale loan growth than we are consumer loan growth. And when I step back from it, I'm actually quite comfortable with where we are, and I'll explain to you why I say that. This has been, as you know, for a very long time for decades, one of our best businesses and one of our more competitive businesses across the U.S., our Commercial business and our Wholesale Capital Markets business. And we've been at this for decades. And so I've always considered this to be a power alley, and I'm going to consider it a power alley for us as we go forward as well. At the present moment, I think what we're seeing is a combination of some macro factors that you referred to. But specifically for us, I see this as a really interesting and positive short-term reset. We're looking at managing our PCLs down. We're looking at optimizing through some low-return assets on the balance sheet. I would say in the meantime, it's interesting that utilizations are down a little bit. But originations are actually up underneath the cover. So that's good news and a good sign as we think about going forward. And as I go forward, I've said this to you before, all of you. My expectation for this business as we benefit from this reset that we've got right now gets really exciting because if the market grows, and we do expect it to grow as we go through the back half of this year and particularly into next year, you should watch us grow at market or better in terms of our asset growth. But Aron, why don't you jump in here on your observations?

Aron D. Levine, Chief Financial Officer

Okay. Thanks, Darryl. Well, first let me say I'm just extremely excited by what I found here in the first month. I spent the opening month mostly listening to clients and teammates, and it's really reaffirmed 2 things that I felt before I came here. One, BMO has a terrific commercial business, a lot of talented bankers, great industry expertise. But I'm particularly excited about the strength that BMO has in relationships across the entire spectrum of businesses; business banking, commercial, corporate as well as our wealth advisers have a great deal of relationships. So when you think about the significant opportunity that gives us to not only grow on the commercial asset side but also the personal loan and deposit side, that's a great foundation to work off of. I'd also point out that when you combine the scale of the Personal business, not only the strength that we have in the Midwest but now the scale that we've acquired on the West Coast and the ability to serve clients across the entire wealth spectrum, mass affluent, high net worth, ultra-high net worth, there is a huge opportunity for us to expand with our roughly 4 million clients, especially in the mass affluent segment. So when you think about bringing together 3 lines of business, which is certainly a key mandate for me and deliver the full enterprise, and that, of course, includes our great Treasury Management platform, our global markets, our Investment Banking capabilities, the opportunity for us to win and grow. And as you see all the things Darryl talked about with ROE optimization working its way through, there's a real opportunity to have the momentum start to come through our results. So I'm very excited with the first month here, and the team is doing a great job in working together to drive us forward.

Gabriel Dechaine, Analyst

Just a quick one. You're moving the U.S. Wealth business into the segment makes sense geographically for us. Does that mean were we looking at CAD 60 million of earnings, and your 12% ROE target for the business will increase?

Aron D. Levine, Chief Financial Officer

Yes. The key to advancing the Wealth business lies in connectivity, which is essential. The Wealth business will significantly benefit from its ties to both the Personal and Commercial sectors, fostering collaboration among leaders to effectively meet client needs and deliver on various aspects of the enterprise. This synergy is a truly powerful combination.

Tayfun Tuzun, CFO

Gabe, we're not adjusting the 12% target. The 12% target remains because it's rather a small contribution.

Matthew James Lee, Analyst

Maybe on U.S. Credit, just a bit of a surprise to see a recovery of performing this quarter. I know you had a sizable bill last year, but does the release indicate kind of a more positive view on the U.S. economy? And maybe should we expect to see more performing releases if the economy proves resilient?

Piyush Agrawal, Chief Risk Officer

Yes, Matt, thanks for the question. It's Piyush. I would say there are a couple of factors that we always consider during our performing process, which varies due to the two different geographies. In the U.S., the release in performing is influenced by a few factors. First, the macroeconomic forecast for the U.S. has improved. Canada is also making progress, but tariff uncertainty is still a slight hindrance there. The U.S. economy has shown improvement, making the macroeconomic outlook a significant driver, along with the pace of ratings migration. The quality of the portfolio continues to stabilize quickly, which you can see reflected in our overall impaired performance in the U.S., which has improved more year-over-year compared to other regions. So, it’s this combination of factors that is driving the performing provision release in the U.S., balanced by the build you’re observing in Canada.

Matthew James Lee, Analyst

And as a quick follow-up, given the current economic outlook, do you think we've hit peak impaired PCLs in the U.S. yet?

Piyush Agrawal, Chief Risk Officer

I would say, given everything you've seen over the last 3 or 4 quarters, the answer is yes. Things have significantly improved. We've been managing our portfolios pretty tightly. So we have good control and handle on what's in our watch list and what's in our impaired. So I feel reasonably confident about that. At the end of the day, the hardest part is to give you a sense of the macroeconomic assumptions as we go forward. There will be quarter-to-quarter variability. We've talked about this in these calls, one or two files can move things because of the nature of our portfolio. But generally speaking, I would give you the confidence that we have passed our high point or the peak in the U.S.

Ebrahim Huseini Poonawala, Analyst

I wanted to follow up on the Canadian macroeconomic situation. It seems that client conversations regarding Canadian P&C are improving. I'd like to hear your thoughts on the overall growth and credit outlook in Canada. There's some uncertainty around tariffs, but looking ahead, do you feel more optimistic? There's ongoing discussion about whether the economy is still experiencing some form of recession, especially in relation to how bank stocks are valued. I'd appreciate your perspective on the direction we're headed. Additionally, do you think the Canadian administration could accelerate improvements if the situation is indeed getting better?

William Darryl White, CEO

Yes. Thanks, Ebrahim, for the question, Darryl. Look, I think where we are is we're sort of in the middle innings of this weaving through a very modest growth environment. I mean, at the end of the day, in the back half of the year, if we're in the zone of 1%, 1.5% growth, I wouldn't be surprised as we look around the economy right now. You're seeing a combination of factors where you've got impacted households, impacted industries who will do what you would naturally do when there's uncertainty, which has hit some pause buttons. But you've also got the fact that, as I mentioned in my prepared remarks, the vast majority of industries are USMCA compliant and are moving right along. So in this period, I'll call it pre the USMCA renewal window, the economy is sort of moving at a pace that you'd expect. It's not neither robust nor does it feel recessionary in Canada, and you've got some segments that will naturally slow down when that happens. As we look forward into 2026, I think, was sort of if I could paraphrase the back end of your question. I think it will depend greatly on both the macro and the trade file, and on particular initiatives that I think you're referring to. And we've definitely got a positive narrative in terms of pro-growth and pro-economy policy today that I think is a welcome improvement from what we had seen in the past. But at the same time, there, we need to see actions behind words. And as we get closer to those, if I could put those 2 factors together, you could get yourself into a more optimistic place for 2026.

Ebrahim Huseini Poonawala, Analyst

Got it. And if I could follow up, I guess, maybe for Aron. So one, congratulations on the new role. But just talk to us, like looking at Slide 9, I think, Aron, you mentioned strong foundation, great customer relationships. As we think about the U.S. P&C ROE at 8.7% headed towards 12% plus, it seems like the credit leverage is more or less baked in when we look at Q3 numbers. Just talk to us what you think in terms of identifying areas where you see the biggest bridge sort of to get that ROE improved. One, how quickly do you think it can be achieved? And does it require like tech investments, hiring of personnel to get there?

Aron D. Levine, Chief Financial Officer

Yes. Thanks, Ebrahim. I appreciate it, and thanks for the nice comment. Look, as you heard, we are doing a lot of great work around the ROE and efficiency. So the key next piece of the puzzle is how we deliver sustainable, profitable loan and deposit growth. And I think there's several things that we are already doing and in process that we can build upon. First, this idea of a unified business organization, it does allow us to accelerate the delivery of the full enterprise to clients. So you can see that in early results in the NIR, commercial strategies, services, capital markets activity and that ongoing pickup of how we deepen with existing clients and drive more of the enterprise to each one is a critical component. Second, you do have to invest in the business for sure. So we have technology investments that we'll be making, obviously, investing in our branch footprint through renovations and new centers. And as I talked about and probably critically important, investing in talent. Not only have we brought in some terrific leaders from the outside, but a lot of internal promotions of top talent, and we're seeing some of those benefits already come through on wealth, new asset growth and a growth in pipeline. So as always, it's a combination of all those things. You have to invest in the business. And you've got to really drive out the opportunity to leverage what we're great at, the scale we have, the North American capabilities, our really strong treasury and capital markets platforms. And so all of those things is what makes me feel very optimistic for our ability to show growth here, and that will come through as the ROE optimization work starts to pull itself through.

John Aiken, Analyst

Piyush, regarding the formations we observed this quarter, commercial real estate in this region experienced a slight increase. Was this driven by a single credit, or were there multiple segments of the portfolio involved?

Piyush Agrawal, Chief Risk Officer

John, yes, so there are some new formations in the commercial real estate, as you've seen on the Canadian side. I just step back, I mean, the portfolio generally has performed very well, in fact, better than our expectations. But we've been watching it closely for the last few years. And some of the files were in the watch list so that we were tracking those. But you're right, it's one idiosyncratic file that's one developer that moved into the impaired formation. And it's actually a combination of projects that we've lent to within the developer where you see this impaired formation increase. But these will get resolved as we have in the past. And so while we've also taken some impaired provision, we're also seeing some positive news happen in several of those projects as we go through the appraisals and the resolution.

Doug Young, Analyst

Just maybe bigger picture, going back to just some of the prepared remarks. I mean, Darryl, you mentioned in yours, I think credit improving, helping driving EPS growth. And then Tayfun, I think you talked about credit migration and the benefits that should have moving forward on ROEs. And so what I'm trying to go with this is, are you signaling basically that PCLs peak like this quarter is kind of the new high level and that we should be thinking about PCLs improving from Q3 levels over the coming year? And just trying to get a sense of that and thinking about the evolution of the impaired and the performing over that period.

William Darryl White, CEO

Yes. It's Darryl. I'll provide a macro perspective on your question, and then I'll have Piyush address the PCLs specifically. If you look at Page 4 of the presentation, the key point I wanted to emphasize is that several factors are contributing to our enhanced performance. We've made progress on each of the levers identified for the ROE rebuild, which I've discussed with shareholders since last year's fourth quarter. We've seen growth in our U.S. businesses, and credit has normalized from 66 basis points at its peak down to 45 today on the impaired side. There have also been some capital optimization efforts starting to yield results. Additionally, the total bank operating leverage is at 4.7% year-to-date. This combination is really what is driving our current outcome of 12%, and we are increasingly confident in reaching our 15% target at the total bank level as we continue on this journey. PCLs are one component of that formula, but not the sole factor. Would you like to comment on the PCL aspect?

Piyush Agrawal, Chief Risk Officer

Sure, thanks, Darryl. Doug, it's Piyush. Looking back over the past three quarters, we've made significant progress across all of our portfolios to achieve our 45 basis points, which we are very pleased with. This reflects a strong turnaround from our situation at the beginning of '24 to where we are now. There are two aspects to consider regarding PCLs. The first is the improvement in credit performance, aligning with our guidance from last year based on the economic outlook at that time. Our projections for credit performance and fundamentals remain solid, as evidenced by our metrics in the third quarter. The second important aspect is the additional impact from changes in the macroeconomic outlook and the tariff environment. While we have a good understanding of our portfolio, various external factors like trade policies, the timing of federal funding programs, and changes in interest rates all affect business investment in both Canada and the U.S., particularly business sentiment. Additionally, macroeconomic variables such as unemployment remain a concern, with unemployment in Canada still high at around 6.8% to 7%. It will take some time before this reflects in our metrics, with a 3- to 6-month lag for improvements to show in our overall PCL metrics. Overall, when I consider all of this, we are likely to see fluctuations in the current environment, but I will provide clearer guidance as we move into the next quarter, hopefully with more certainty and resolution in the upcoming three months.

Doug Young, Analyst

And just one is, one follow-up. It sounds like you're seeing even some of this is right, you seem more confident in the U.S. versus Canada. Is that a fair interpretation?

Piyush Agrawal, Chief Risk Officer

I'm confident about the quality of our books in both North and South. It's the economic uncertainty that just needs a little bit more resolution, especially for Canada.

Paul David Holden, Analyst

I want to talk about the operating leverage a bit. Obviously, a very good result as you've highlighted year-to-date positive 4.7%. Wondering how we should think about that going forward? I know your medium-term objective is roughly 2 points a year. So you're running ahead of objective this year. Does that mean any of the forward benefit or opportunity has been pulled forward? Or can we still expect sort of 2 points a year in future periods?

Tayfun Tuzun, CFO

Paul, it's Tayfun. No, there is really no pull forward relative to our expectations, and we continue to watch revenue trends. We continue to adjust our expenses accordingly to achieve that positive operating leverage. Our commitment is very firm to continuing to operate with positive operating leverage. We would like our efficiency ratio to come down further from where it is today. So as such, our plans remain intact and we aim to achieve positive operating leverage as we look ahead towards that 15% ROE target.

Piyush Agrawal, Chief Risk Officer

Thanks, Paul. Generally speaking, we have stated in these calls and meetings that our appetite for risk and our risk culture are both strong. We have made some adjustments to underwriting, hold sizes, and the number of approvals, which are starting to yield results as we review our portfolios. The U.S. currently benefits from a more favorable environment than Canada. Additionally, our Q3 results reflect a downturn in retail, which is more evident in Canada where our portfolio is larger. Consequently, the losses in Canada are indicative of trends in unemployment and insolvency. On the wholesale side, Canada is currently aligning with the economic environment. I believe conditions will improve from here, and while we have seen negative migration, it has been slowing down, which is a positive sign moving forward.

Mario Mendonca, Analyst

Piyush, you mentioned uncertainty quite a bit. However, listening to Darryl's opening remarks in response to questions, it seems you've pointed out USMCA and your economist estimates that the effective tariff rate of goods from Canada to the U.S. is only 5.5%. You also mentioned government support and monetary policy, which suggest less uncertainty. So, Piyush or Darryl, when you speak about uncertainty, what specific aspects are you referring to? Are you discussing the renegotiation of USMCA in 2026, the housing market, or is there something else I might be missing?

William Darryl White, CEO

Yes. I don't believe the forensic analysis points to anything specific, Mario, that you may not already be aware of. I've mentioned this before. Earlier this year, I felt a high level of uncertainty. Now, it’s somewhat lower; however, that doesn’t mean uncertainty has disappeared entirely. While some aspects are still uncertain, many are less so. At the start of the year, we lacked clarity on U.S. policy direction, but we have more insight now. We were also uncertain about the future landscape of the Canadian government, including which party would lead and the associated policies. Furthermore, we had limited understanding of how client behavior would align with policy changes in both countries, especially amidst the rate environment. While assessing rates is always challenging, there seems to be a general agreement on the direction of interest rates in both Canada and the U.S. Overall, while uncertainty remains—particularly in areas like geopolitics and trade—it has lessened, leading to greater confidence in our outlook today compared to six months ago. Piyush is indicating that he has nothing to add.

Mario Mendonca, Analyst

Okay. Slightly different question. Back in 2024, when PCLs were elevated, especially in the U.S. One of the questions that came up was would this result in weaker loan growth in the U.S. And I certainly didn't get the impression then that that's what we'd expect. And so now we're seeing this optimization. What I'm trying to figure out now is, is this a response to the PCLs? Or is this just an ROE optimization story? Or does it really matter? Because...

William Darryl White, CEO

No. Sorry, you finish up. Sorry, I cut you off, go ahead.

Mario Mendonca, Analyst

What I meant to say is, if this is a PCLs issue, then it usually has a lasting impact. If it's related to PCLs and it requires changes to your risk outlook, risk culture, or underwriting process, those changes tend to stick around for a long time. So I'm trying to understand which situation we are facing, or does it not really matter to you?

William Darryl White, CEO

Yes. And when I rudely started to cut you off. What I was going to say is it's very much the latter. It's very much the ROE optimization journey, and it includes all the inputs that we've talked about. And I also mentioned that if you scratch underneath the surface, we're seeing good net originations against some intentional exits that are rolling off. And as I kind of think about the quarter that is ahead and then the 4 quarters that go into '26, we get to that leveling stage at some point where we're comfortable with the baseline, and I would see us at that point, resuming what we've been really good at for decades, and this is the challenge for Aron and the teams to make sure that we flex that muscle when the market is there and it's constructive. And if it is, you should expect us to be at the market. We're not going to let the market get away from us in a business that we're really good at.

Mario Mendonca, Analyst

So potentially 2026 because the U.S. banks, the regionals, the money centers are all putting up pretty strong growth. So the market is there.

William Darryl White, CEO

I agree with that. It might be more accurate to say 2026, but it could also be in the fourth quarter of 2025, which we are currently in. We are already partway through it. As we think ahead, we focus on quarters and years rather than individual days. In the coming quarters, if we grow at market levels, that would be a positive result. If we grow slightly above market, that would align with our historical performance.

Shalabh Garg, Analyst

Impaired credit performance is improving, and delinquency levels seem stable. Can you provide some color on the changes in asset quality that drove the credit RWA higher? And also on what helped the decline in the asset price piece?

Piyush Agrawal, Chief Risk Officer

So I think the credit RWA is a function of multiple things. One, you've got some asset growth in some areas, asset declines. So some of those can change the RWA. I think that's came down a little bit. You also had the portfolio as it every quarter shortens that helps you. But then you've got credit migration. And we still have some negative credit migration, except it's lesser than what we've had in the past. So the migration, the negative migration increases the source RWA as well. So credit RWA grew a little bit, primarily due to the migration, in-building those are models and everything else that happens, which is customary and annual processes. And is there a specific sector where this was reflected more? Like I'm guessing unsecured within the Canadian portfolio could be one. Just if you can provide some color on this? No, we look at everything. I mean, there are some industries that are beginning to have positive credit migration, some that are negative. So I can't call out a sector that is very different or a source of some large credit movement within the overall portfolio.

Operator, Operator

There are no further questions registered at this time. I will turn the call back to Darryl White.

William Darryl White, CEO

Thank you for your questions this morning, everyone. I would like to summarize by stating that we are maintaining momentum with the ROE strategies we discussed earlier this year. We are doing this with a consistent focus on effective risk management, digital transformation, and client-centric innovation. We will continue on this path and work toward building a future-focused bank with profitable and sustainable growth. Before I conclude, I want to recognize the contributions of Nadim Hirji and Ernie Johannson. Since joining BMO in 2003, Nadim has been a strong advocate for our commercial clients. As Vice Chair of BMO Commercial Banking, he will keep supporting the growth of the Commercial Banking franchise across North America, emphasizing the optimization of growth, risk, and return. Ernie will be retiring early next year after leading BMO's North American Personal and Business Banking group since 2020. Under her leadership over the past five years, Canadian PNBB has consistently shown top-tier revenue growth and increased market share through industry-leading digital sales, improved branch performance, and the addition of over $90 billion in deposits, while enhancing our Canadian P&C efficiency ratio by 580 basis points. She also spearheaded the expansion of our U.S. Retail business, including overseeing the successful conversion of Bank of the West. Both of these businesses are stronger now and well-positioned for accelerated growth moving forward. Ernie, thank you for your significant contributions to BMO. Thank you all again, and we look forward to speaking with you in December. Thanks, everyone.

Operator, Operator

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