Earnings Call Transcript
BANK OF MONTREAL /CAN/ (BMO)
Earnings Call Transcript - BMO Q4 2022
Operator, Operator
Good morning, and welcome to the BMO Financial Group's Q4 2022 earnings release and conference call for December 1, 2022. Your host for today is Christine Viau. Please go ahead. Thank you, and good morning. We will begin today's call with remarks from Darryl White, BMO's CEO; followed by Tayfun Tuzun, our Chief Financial Officer; and Piyush Agrawal, our Chief Risk Officer. Also present to take questions are Ernie Johannson from Canadian P&C; Dave Casper from U.S. P&C; Dan Barclay from BMO Capital Markets; and Deland Kamanga from BMO Wealth Management. As noted on slide two, forward-looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties. Actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tayfun will be referring to adjusted results in their remarks unless otherwise noted as reported. And with that, I'll turn the call over to Darryl.
Darryl White, CEO
Thank you, Christine, and good morning, everyone. Today, we announced adjusted earnings per share of $3.04 for the fourth quarter, closing out another strong year where we delivered record net income of $9 billion and EPS of $13.23. This year, we continued to execute on our strategy to strengthen and grow each of our diversified businesses to deliver sustained performance. Of note, including 2022, we've achieved consistent pre-provision pretax earnings growth and met our commitment to positive operating leverage in each of the last five years. Over that period, our efficiency ratio has improved by over 600 basis points to 55.8%. And we remain committed to delivering positive operating leverage and efficiency improvement going forward. We've achieved these consistent results against a rapidly changing economic backdrop that included the worst health challenge of our time and a wide range of interest rate and market conditions. For 2022, PPPT was up 7%, building on 19% growth last year. And operating leverage was 1.3% as we increased our investment in our business to drive revenue growth and absorb the higher impact of inflation. Return on equity of 15.2% this year remains above our midterm target, even while building capital through the year in advance of the acquisition. Our proven track record of dynamically managing our business and maintaining our strategic focus to deliver resilient operating and credit performance through market cycles gives me confidence that we are built to sustain performance in any environment. Turning to our operating group performance this year. We continue to benefit from our balanced and well-diversified business model. Investments we've made in our flagship North American Personal and Commercial Business Banking businesses, together with the benefit from rising interest rates, drove strong revenue growth that more than offset lower results in our market-sensitive businesses. In Canadian P&C, PPPT was up 15% this year with an efficiency ratio below 45%, as we continue to strengthen and invest in our flagship retail and commercial banking franchise. We've expanded our sales force and equipped them with digital tools that support them in developing full customer relationships. We offer a highly competitive suite of products and features that help customers make real financial progress, including BMO insights, savings amplifier account, Same Day Grace as well as BMO Visa Eclipse, offering flexible rewards on everyday purchases. Combined with our award-winning marketing and digital capabilities, these have led to strong customer acquisition, adding nearly 200,000 core net new customers this year. US P&C had its strongest year on record with PPPT up 16%, reflecting robust revenue growth and strong operating leverage. In Commercial Banking, we continue to expand and strengthen our presence in attractive markets such as Florida and Texas. We've added new functionality to our leading treasury and payment solutions platform, including enhancing the onboarding experience and digitizing billing, resulting in significant time savings for customers and employees. In addition, we've maintained our number two deposit share across our core branch footprint. And we've expanded access and reduced fees for underserved customer groups. With a return on equity of 18% and an efficiency ratio of 48%, we have the foundation and the momentum to execute the next step in our North American growth strategy, building a leading US regional bank together with Bank of the West. We expect the transaction to close in the first quarter of calendar 2023. Upon closing, we will significantly increase our US footprint, providing access to major new markets and offering improved convenience and capabilities across our national customer base. In BMO Wealth Management, we've made significant progress in transforming our North American platform over the past several years, divesting of lower-return businesses and positioning us to leverage our strength and accelerate future growth. Despite challenging markets in 2022, we delivered underlying revenue growth for the year, reflecting strategic investments in talent, technology modernization, and expanded investment capabilities that resulted in a record year for net new asset growth. BMO Capital Markets diversified businesses delivered resilient performance in a difficult environment with $2.3 billion in PPPT this year. We've maintained peer-leading market share in M&A in Canada and strengthened our position in key categories in the US, building a strong foundation that will enable accelerated growth as market conditions improve. Our competitive performance in 2022 was driven by our leading winning culture and an empowered team aligned to achieving our strategic priorities. We've elevated our focus on one client leadership, bringing the full suite of BMO's products, services, and advice to our clients and further strengthening collaboration and partnership across businesses. For example, over 80% of new investor line clients have a prior retail banking relationship with us. We've also enhanced product and coverage models to holistically serve our clients’ commercial banking, capital markets, and wealth management needs together. We've also made significant progress advancing our digital-first approach, aimed at enhancing employee and customer experiences to drive revenue and efficiency. We've invested across our businesses to modernize technology, expand the use of cloud and employ data-driven analytics. For example, in Canadian P&C, we're delivering open banking solutions that enable commercial clients to integrate their banking and accounts payable and receivable systems through innovative partnerships, such as FISPAN and Xero. We've enhanced our online banking platforms, driving loyalty through improved functionality and growth through market-leading digital sales. With over 90% of service transactions completed through self-serve channels, our frontline employees are able to focus on delivering leading advice when our customers need it most. As evidence of our progress, we received the highest customer satisfaction ranking in the J.D. Power 2022 Canada Retail Banking Advice Satisfaction Study, and our Canadian Mobile Banking App was recognized as the overall leader in the Q4 2022 Forrester Digital Experience Review for Canadian Mobile Banking Apps with the highest score in six areas. In support of our ambition to be our clients' lead partner in a transition to a net-zero world, we're leading the way with innovative advice and solutions. Through the BMO Climate Institute, we're bridging the science, policy, and economics of climate change and supporting our clients as they adopt and scale climate solutions. BMO Capital Markets ranks as the number one sustainability structuring agent in Canada. And the announced acquisition of Radicle Group, which is expected to close later today, will add to our leadership in carbon credit development capabilities. Our progress in support of a just and sustainable economy was recognized at COP27, as the top-ranked financial institution globally by the World Benchmarking Alliance's new Global Sustainability Benchmark. As we look ahead to 2023, the macro environment remains uncertain with inflation and higher interest rates expected to slow the economy in the near term. Real GDP growth in both Canada and the US is expected to be close to zero, and we expect interest rates to peak by the end of the first calendar quarter with lowering rates starting in January of 2024. At BMO, we'll continue to dynamically manage our capital and resources just as we have through the last 205 years to grow our businesses and support our customers. So looking forward, 2023 brings tremendous opportunities to expand our reach, strengthen our businesses, and deliver long-term value for our shareholders, both organically and through the addition of the Bank of the West. As we continue to grow our diverse client base, we have more opportunities than ever to support our financial progress for our customers and communities. I'm confident that guided by our purpose-driven strategy, we are uniquely positioned to deliver consistent financial performance over time. I'm proud to be part of a highly engaged, empowered, and aligned team at BMO, and I thank our employees for your dedication to providing exceptional service to our valued clients. I'll now turn it over to Tayfun for more details on our financial results for the quarter.
Tayfun Tuzun, CFO
Thank you, Darryl. My comments will start on Slide 9. Fourth quarter reported EPS was $6.51, and net income was $4.5 billion. Adjusting items are shown on Slide 44 and include the impact of fair value management activities related to the acquisition of Bank of the West, which this quarter increased net income by $3.3 billion. As previously disclosed, we also recorded a legal provision, which decreased net income by $846 million. The remainder of my comments will focus on adjusted results. Adjusted EPS was $3.04, and net income was $2.1 billion, down from $2.2 billion last year, as pre-provision pretax earnings growth of 7% was more than offset by higher provision for credit losses, compared with a recovery in the fourth quarter of last year. Performance in our P&C businesses continued to be very strong with year-over-year pre-provision pretax earnings growth of 13% in Canada and 33% in the US, as continued strong loan growth and margin expansion helped grow revenues at double digits. The muted market environment lowered results in Capital Markets as well as in Wealth Management. Total revenue was up 7% year-over-year, reflecting strong growth in net interest income, partially offset by lower fee income and securities gains as well as the impact of divestitures. Total PCL was $226 million, including a $34 million provision for performing loans, compared with a total recovery of $126 million in the prior year. Moving to the balance sheet on slide 10. Loan growth was 17% year-over-year and 6% quarter-over-quarter. On a constant currency basis, business and government loans increased 17% from the prior year, with strong growth across all operating groups. Consumer balances were up 9%, reflecting diversified growth in the P&C businesses and in wealth. Average customer deposits increased 8% year-over-year and 4% sequentially, as we remain focused on growing our core deposit base. Looking ahead, we expect full year loan growth to be in the high single-digit range, reflecting strong diversified pipelines and matching similar growth rates in deposits. Turning to slide 11. Net interest income was up 18% and up 27% on an ex-trading basis from last year and up 7% quarter-over-quarter, driven by strong balance sheet growth and margin expansion. Net interest margin ex-trading was up 20 basis points from last year and 3 basis points from last quarter, due to a higher rate environment, partly offset by growth in lower-yielding assets. During the quarter, the increase in loan yields continued to outpace the increase in the cost of customer deposits. In fiscal year 2023, based on the forward curves in Canada and the US, we expect high single-digit NIM expansion compared to full year 2022, based on expanded deposit margins and higher long-term rates. As we are approaching the end of this rate cycle, our NIM expansion in the next 12 months will be more moderate than the past 12 months, due to changing deposit mix and rising deposit betas. Moving to our interest rate sensitivity on slide 12. A 100 basis point rate shock is expected to benefit net interest income by $499 million over the next 12 months, including the impact of a higher capital base pre-Bank of the West closing. We expect our asset sensitivity to decline post-closing, while coinciding with the anticipated end of the current rate cycle. To date, deposit betas have outperformed our expectations, and we expect them to move higher for future rate hikes. Moving to slide 13. On a full year basis, expenses were in line with our expectations, up 4% from the prior year or up 2% excluding the impact of the stronger US dollar and higher performance-based compensation. Lower expenses related to the divested businesses were reinvested in targeted areas to drive revenue growth and efficiency improvement including in sales force expansion and technology. We delivered positive operating leverage for the year of 1.3% and improved our efficiency ratio by 70 basis points. We expect to deliver positive operating leverage again next year. Moving to slide 14. Our capital position remained strong with a common equity Tier 1 ratio of 16.7%. Excluding the benefit from fair value changes related to the Bank of the West transaction, net of the legal provision, the CET1 ratio increased 37 basis points from the combined impact of strong internal capital generation and common shares issued under the DRIP, partially offset by growth in risk-weighted assets. Source currency risk-weighted assets were higher, reflecting growth in our commercial lending businesses, which was largely offset by capital management actions. As discussed previously, the cumulative incremental capital of 150 basis points generated by the fair value management actions since announcement last December is expected to be offset by higher goodwill on closing due to the impact of changes in interest rates since the announcement. We remain well-positioned to close the Bank of the West transaction, which we expect will be later this quarter. Moving to the operating groups and starting on slide 15. Canadian P&C delivered net income of $917 million, down from $933 million in the prior year. Strong pre-provision pre-tax earnings growth of 13% was more than offset by higher provisions for credit losses. Revenue was up 11% from the prior year. Net interest income increased 15%, reflecting strong balance growth and higher margins. NIM increased three basis points from last year due to higher deposit margins. The six basis points decline sequentially reflected loan growth exceeding deposit growth, tighter loan margins, and a shift to lower spread deposits, which more than offset higher deposit margins. We expect NIM in our Canadian P&C business to expand in 2023 relative to our Q4 margin. Moving to US P&C on slide 16. My comments here will speak to the US dollar performance. Net income was $489 million, up 19%, with very strong pre-provision pre-tax earnings growth of 33%. Revenue was up 18% with 26% growth in net interest income due to strong loan growth and margin expansion. The decline in non-interest revenue was mainly due to lower operating lease revenue and commercial deposit fees, which during higher interest rate periods, it's largely offset in net interest income. Expenses increased 4% due to higher employee costs and technology investments. NIM increased 42 basis points from last year and 18 basis points sequentially predominantly due to higher deposit margins. We expect continued NIM expansion but at a more moderate pace as deposit betas increase. On the balance sheet, average loans were up 14% from the prior year, reflecting very strong commercial growth. Average deposits declined 3% year-over-year and 2% from last quarter, in line with our expectations. Moving to Slide 17. BMO Wealth Management net income was $298 million, down from $349 million last year. Wealth and Asset Management net income was $221 million, down $70 million, as growth in net interest income and new client assets were more than offset by divestitures and weaker global markets. Insurance net income was $77 million compared with $58 million in the prior year. Expenses were down 9% mainly due to the impact of divestitures, partially offset by investments in the business. Turning to Slide 18, BMO Capital Markets net income was $363 million, a decrease from $536 million in the previous year, reflecting ongoing market weakness, but increased by 35% from the previous quarter. In comparison to the last quarter, revenue and investment in corporate banking rose by 23%, influenced by higher corporate banking revenue and fewer markdowns on loan commitments. Global Markets increased by 4% due to higher client activity. Expenses increased by 19% as a result of greater technology investments and higher employee-related costs. Turning now to Slide 19. Corporate Services net loss was $104 million, compared to $107 million in the prior year. To conclude, our overall results for the quarter and the full year were strong and continue to demonstrate the advantage of our well-balanced diversified business mix. We continue to focus on managing our company dynamically to continue growing profitably. Looking ahead to 2023, we expect the economic environment to remain challenging in the near term with continued increases in interest rates, slowing growth, and volatility in markets. We expect loan and customer deposit growth in the mid- to high single-digits on a year-over-year basis, and total bank NIM ex-trading to expand during the year as interest rates continue to rise. Overall, we expect the pace of expense growth to continue to slow while sustaining investments in key growth areas. At the same time, we will be maintaining our commitment to achieve positive operating leverage for the year. And with that, I will turn it over to Piyush.
Piyush Agrawal, Chief Risk Officer
Thank you, Tayfun, and good morning, everyone. We had strong risk performance this fiscal year, supported by the steady economic recovery during the first half of the year and the strong risk management discipline across the bank. Starting on Slide 21. For the fiscal year, the total provision for credit losses was $313 million or 6 basis points. Impaired provisions for the year were $502 million or 10 basis points, compared to 11 basis points in 2021. We recognized a release of $189 million from the performing loan provision this year largely due to the economic recovery and reduced uncertainty from the pandemic on credit condition in the first half of the year. In the second part of the year, we started building provisions on performing loans reflecting the weaker economic environment. Gross impaired loans decreased to $2 billion or 35 basis points compared to 46 basis points a year ago. Turning now to the current quarter on slide 22. Despite headwinds from inflation and interest rates, Q4 was another strong quarter in terms of credit performance. Total provision for credit losses was $226 million compared with a provision of $136 million last quarter. Impaired provisions for the quarter were $192 million or 14 basis points, up from $104 million or 8 basis points in the third quarter. Although, our impaired provisions for credit losses were up from very low levels in Q3, they remain lower than pre-COVID levels. Similar to last quarter, the strong impaired loan performance is due to low formations and low loss rates on those formations. Retail impaired losses were $117 million in Canadian P&C and $10 million in US P&C. The modest increase in impaired PCL is consistent with the underlying measures such as a modestly increasing delinquency rate in some unsecured products, which remain well below our pre-pandemic levels. In our corporate and commercial businesses, we reported impaired loan provisions of $25 million in Canadian commercial, $37 million in US commercial, and $5 million in capital markets. And while up from last quarter, they represent a gradual normalization that we have been expecting with no systemic concerns. Moving to slide 23. The provision for credit losses on performing loans was $34 million this quarter, reflecting the weaker economic outlook and portfolio growth, largely offset by continued reduction in pandemic uncertainty and portfolio credit improvement, including the benefit of risk transfer transactions this quarter. Given the strong credit profile of our current portfolio and our own forecast for impaired losses, we remain comfortable that our $2.5 billion of performing loan allowances provides adequate provisioning against loan losses. And to put that into perspective, this $2.5 billion provides coverage of 44 basis points over our gross performing loans compared with a coverage of 36 basis points before the pandemic. On slide 24, impaired formations were $499 million, and gross impaired loans were flat relative to the previous quarter. Both formations and the gross impaired loan rates are still below pre-COVID levels and are low compared to our last decade of performance. Turning to our mortgage portfolio. Our delinquency rates remain very strong. On Slide 26, you can see that over the coming year, only 12% of our portfolio is maturing. And of that, a very small portion is of lower credit quality. We are proactively reaching out to customers who we think are most likely to have future challenges at renewal. And we have had a positive customer response to this outreach. And there have not been any observable increase in delinquency at mortgage renewals. Over the past several months, I've had a chance to review our portfolios and underwriting standards and see for myself the high quality of the portfolio overall, the robust structures and underwriting practices, as well as the strong risk management capabilities and discipline. This sound foundation will serve us in good stead as consumers and businesses adapt to the impact of high inflation and interest rate increases, while the macroeconomic environment and geopolitical situation remains uncertain. So while we are pleased with the low impaired losses this quarter, we do expect our impaired PCL rate to gradually move towards our pre-pandemic experience through fiscal 2023 in the range of high teens to low 20s in terms of basis points. I will now turn the call back to the operator for the Q&A portion of this call.
Operator, Operator
Thank you. We will now take questions from the telephone lines. Your first question is from Ebrahim Poonawala from Bank of America. Please go ahead.
Ebrahim Poonawala, Analyst
Good morning. I had a question around just the commercial customer base. One, give us a sense, maybe Darryl or Dave Casper if you're on the line around how the commercial borrowers are holding up in the face of the higher interest rates? And secondly, just a sense of where the demand is coming from. I think, Darryl, you mentioned 0% GDP growth next year. In that backdrop, where are you seeing loan demand coming from? And are there areas where the bank is tightening lending? Thank you.
Darryl White, CEO
Ebrahim, thanks for the question. It's Darryl. Dave is on the line. So Dave, why don't you give it a start? And if I have anything to add, I will.
Dave Casper, U.S. P&C Executive
Sure, it's an excellent question. To start with the clients in Canada and the US, they are performing quite well. Their capital bases are strong, likely stronger than they were before the pandemic, with only a modest impact observed so far. Some clients may feel the effects more than others, but many of our borrowers have interest rate protection in place. The demand across our businesses is seeing a slight decline as the economy weakens, and I expect this trend to continue into the New Year as we enter a recessionary phase. While we experienced robust loan growth and strong client acquisition this year, particularly in areas like asset-based lending and auto dealerships, I anticipate a reduction in growth rates next year, although there will still be good growth and client acquisition. Over the past couple of months, our team, including Darryl, myself, and others, has engaged extensively with clients. There remains a sense of optimism, but it has tempered compared to last year due to various dynamics in both the US and Canada. Overall, the health of our business is strong, and we continue to see positive momentum on both sides of the border, adding valuable clients across our commercial, wealth, and capital markets divisions. That's a lengthy response, but I hope it provides a good starting point, and perhaps Darryl can add more.
Darryl White, CEO
Yeah. The only thing I would add, Ebrahim, is when I listen to Dave, I agree with all that. And I would say you should think about it in the category of what you might naturally expect to happen. We do see a little bit of slowing down in the client base. We do not see a slamming of the brakes. The consequence of that is we come from a pretty healthy position. The book is healthy. The momentum is good. We tend in this business to outperform the market in most environments. And I would expect that we'll do the same going forward next year. You probably won't see the loan growth next year that you saw this year. But you're still going to see loan growth because the customers that we select tend to be the good ones, and they tend to have good performance through time. And we tend to go where they go. That's what I think you should expect.
Ebrahim Poonawala, Analyst
And then just one quick follow-up, Darryl. There's a lot of chatter about interconnectedness between banks and non-banks. Any risk that you see particularly for the system or for BMO in terms of banks providing leverage to the non-bank entities?
Darryl White, CEO
Yes, Ebrahim, that's a question we hear often. I wouldn’t say that I see that risk increasing based on what you mentioned. I apologize if I misunderstood your question. Regarding the interconnectedness between banks and non-banks, I don’t perceive a significant difference in the current environment, and I don’t see an elevated risk. We consistently monitor the situation and track market trends, but I don’t find any reasons to be more concerned now than I was a quarter or two ago. Piyush, do you have anything to add?
Piyush Agrawal, Chief Risk Officer
I mean, I would just say that the proof is in if you look at the last one or two quarters, there hasn't been a shortage of events that have happened in the market, and we've all come out very well. So the interconnectedness, while it's there, it's well contained, Ebrahim. And I think banks like us, which have a very good risk discipline in how we manage our client exposure and which client comes in. So again, within this non-bank space, you've got a wide variety of clients, and I know some have been in the news. But we've actually come out very well. So I actually feel very good about the target market, the client base we have and the structures we have with them. So I wouldn't highlight any area of concern in this space yet.
Ebrahim Poonawala, Analyst
Makes sense. Thank you.
Operator, Operator
Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. A question on capital. Tayfun, where do you see your CET1 ratio on deal close of Bank of the West, if you could give us an update on that?
Tayfun Tuzun, CFO
Yes, our capital expectations have not changed since we announced the transaction last year. We still anticipate being at 11% or above starting in Q2 after closing the transaction. This outlook has remained consistent over the past four quarters and will continue to develop from there. We feel confident about our positioning for the closing.
Meny Grauman, Analyst
And so, Darryl, would you feel comfortable being closer to 11% on deal close? Is that still something that is acceptable to you?
Darryl White, CEO
Yes, Meny. We're very consistent in our positioning here. We believe today what we believe the last quarter when you asked this question that we'll be in the range that Tayfun talked about. And the answer to your question is yes.
Meny Grauman, Analyst
Okay. And then maybe just a follow-up in terms of how you're managing capital and the lead-up to this deal close. And just a question of – is there anything different in how you're managing capital? And specifically, are there certain types of business that you're saying no to because of your RWA considerations that you would otherwise see as to?
Tayfun Tuzun, CFO
Yes. Look, I mean, we had very strong loan growth during the quarter. Obviously, that should be a proof that we're still doing all the business with our clients that we have.
Meny Grauman, Analyst
Thank you.
Operator, Operator
Thank you. The next question is from Doug Young from Desjardin Capital Markets. Please go ahead.
Doug Young, Analyst
Yes, good morning. I would like to follow up on the CET1 ratio. I understand you mentioned it will be at or above a certain level in Q2. However, if the deal is finalized in Q1, could it be fair to assume that by the end of Q1, the ratio might fall below 11%? I'm just looking to clarify this point and whether the ratio would then increase above 11%.
Tayfun Tuzun, CFO
Yes. I mean, the comment that I made, we typically have referred to always the quarter following the closing quarter. We could fall below 11% at closing, if it closes earlier than the second quarter. But we will move above 11% in the second quarter.
Doug Young, Analyst
And maybe just a follow-up. Are there actions you are taking to grow the loan book? Are you also working on freeing up capital by divesting certain business segments or through securitization? Is there anything else you can highlight?
Tayfun Tuzun, CFO
Yes. And as you probably know, and we've talked about this a little bit over the past two or three quarters with our investors. For the past four, five years, we have been users of some of these risk transfer transactions. We're pretty good at it. We're pretty knowledgeable. And this year, it was not much different than past years in the way we have used these tools. And we continue to leverage these capabilities and the knowledge base that we have. Piyush, if you want to comment on that more?
Piyush Agrawal, Chief Risk Officer
Yes. I would just say that, as part of good risk discipline, any good bank, probably as a result of many of these risk dynamic practices, saw loan sales, syndication, synthetic transfers. All of these are just part of our toolkit. We've been actively using them. And as we get into the weaker economic cycle, it's a good place to think about your portfolio and dynamically manage. The good part of this also is, on the other side, we have investors who are putting pools of capital to play. And so there's a mutual dialogue always happening. And so, I think, this active risk management that continues and will continue through 2023.
Doug Young, Analyst
Great. I have a quick follow-up question regarding the NIMs. I think you provided some insights on the expected direction at the all-bank level, but I may have missed it. Could you elaborate on how this might play out in Canada and the US? Will it be more front-end loaded or back-end loaded? Any additional details would be appreciated. Thank you.
Tayfun Tuzun, CFO
We are very optimistic about our net interest margin, not only for this quarter but also for next year. I believe we will continue to outperform on a relative basis, similar to what we've achieved over the last couple of years. I have projected a high single-digit year-over-year expansion in net interest margin. The numbers show that in the US, we have seen strong net interest margin expansion. The situations in Canada and the US are somewhat different. In Canada, three factors contributed to this quarter's performance. First, we experienced strong loan growth compared to deposit growth, which nearly had a 5 basis point impact. Mortgage prepayments accounted for a few basis points, and the prime BA spread in a rising rate environment has been a pressure point this quarter. However, we anticipate that our net interest margin in Canada will grow. I'll pass it to Ernie for further insights on the business side. I expect that in the coming quarters, we could see nearly a double-digit expansion in our net interest margin in Canada. For the overall net interest margin, as we approach maturity in the rate cycle, the expansion in net interest margin will likely be smaller in the second half of the year compared to the first half. Now, I'll turn it over to Ernie for his comments from the business perspective.
Ernie Johannson, Canadian P&C Executive
Thank you, Tayfun, for the question. Our focus on achieving strong NIM performance has been crucial this year, largely driven by significant growth in deposits. We expect this trend to continue into next year, with NIM expansion anticipated as we concentrate on our core deposit growth and term deposits. As Tayfun pointed out, we expect a moderate prime in fiscal 2023 due to a slowing pace of interest rate increases, which will support our lending business moving forward. We don't anticipate significant changes in our mortgage prepayments, which negatively affected us this quarter, but we are committed to maintaining robust core deposit growth, where we've seen record levels of customer acquisition and overall core portfolio growth. In Canada, there has been a noticeable trend of customers moving into our term products, either shifting away from equity markets or transitioning from everyday savings accounts to maximize their earnings in the long term. Importantly, we are fully replacing the deposits that have shifted out of checking and savings accounts, which is a positive sign for our continued stability. Our everyday banking growth remains flat, indicating healthy replacement with quality deposits from both existing and new customers. Overall, we are optimistic about our growth in the near future, and I want to highlight that we’ve seen strong performance in P&C Canada, which we expect to carry into next year.
Doug Young, Analyst
Very helpful. So just to clarify, Tayfun, you say double-digit. Is that off Q4?
Tayfun Tuzun, CFO
Yes, it's off Q4.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Good morning. Just to clarify, the timing of the Bank of the West close, you still expect Q2 of 2023? I didn't come across any shift. Your peer kind of pushed it back a little bit…?
Darryl White, CEO
Yeah. Gabe, I didn't see what they had to say. I can only speak to ours. We're saying first quarter of 2023. Is it first fiscal quarter or first calendar quarter, we don't know, but that's a pretty tight range. So as I think about it today, we're rounding third base, and everything is occurring the way we thought it would occur. So I think you can think about it in that range. It's pretty tight and pretty soon.
Gabriel Dechaine, Analyst
Got it. Thanks. Now, for the capital position, and I look at the RWA inflation, and I thought with the loan growth, especially in commercial that you had, we would see a bigger number there. But four basis points of core Tier 1 consumption from RWAs. You're usually 20 up into 40. Were you particularly active in the credit risk transfer transaction this quarter, or is there another explanation?
Tayfun Tuzun, CFO
No. We were. We had a number of credit risk transfer transactions over the past 90 to 120 days that have actually had an impact on the net growth numbers in RWA.
Gabriel Dechaine, Analyst
And is there a big revenue you would give us given those activities?
Tayfun Tuzun, CFO
No. The cost of these transactions compare very well with respect to cost of equity in general.
Gabriel Dechaine, Analyst
And then the last one, sorry.
Piyush Agrawal, Chief Risk Officer
I was just going to say that, Gabe, as part of these risk transfers over time, these are actually positive for the bank because it frees up capital. And so as you're earning fees from clients, you actually get to redeploy capital at the current market price across different areas. So from a risk management, it's a win for the bank. It's a win on the net revenue over time. So I consider this very positive.
Gabriel Dechaine, Analyst
I'm looking at your wholesale loans, and the total balance is up $60 billion to $70 billion year-over-year. About a quarter of that comes from the non-bank financial services category. Can you provide more details on that?
Piyush Agrawal, Chief Risk Officer
You're looking at the overall loan book? So...
Gabriel Dechaine, Analyst
Yes, loan…
Piyush Agrawal, Chief Risk Officer
Yes. Our financial structure is clearly a broad framework, which includes many subcategories. If I break it down, we will have exposures to banks, broker-dealers, other investment companies, as well as sponsor lending companies, private equity, and others. Each of these carries a distinct risk profile. We have maintained relationships with these clients for a long time, and they are well-structured. There are various forms of lending involved, and we feel confident about the quality of the loans and their performance across all of these categories. I’m not sure if you're referencing something that has been in the news lately, but I would just say...
Gabriel Dechaine, Analyst
No.
Piyush Agrawal, Chief Risk Officer
Then...
Gabriel Dechaine, Analyst
It's straightforward. It's a significant figure. When they emerge, I want to know what's included and gain a clearer understanding of it. Among the categories I mentioned, is there one or two that...
Piyush Agrawal, Chief Risk Officer
No. And they're all well managed, all within our limits, concentrations. All that is good. So I wouldn't add anything that's significant.
Gabriel Dechaine, Analyst
Okay. Thank you. Have a good day.
Piyush Agrawal, Chief Risk Officer
Thanks.
Operator, Operator
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good morning. I want to go back to the credit risk transfer transactions. I just want to better understand how that comes through the P&L if it doesn't have a big impact on revenue. Is it flowing through the expense line? Like there must be some kind of costs associated with it. So just wondering where we can see that. And if there's any disclosure that would help us quantify the size of that program and the potential earnings impact.
Tayfun Tuzun, CFO
Yes, Paul, it will come through both depending upon the transaction. We don't have current disclosures that lay it out for you. But let us take that back and see if we can provide a bit more clarity on how those transactions impact our income statement.
Paul Holden, Analyst
That would be helpful. Thank you. And then second question is with respect to credit line utilization, I guess, particularly on commercial and corporate customers, is it kind of back to pre-pandemic type levels, above, below? And is there any kind of potential headwind there with the debt capital markets now opening back up in a potential terming out of debt, if you will, from customers and then a repay down on those credit lines?
Darryl White, CEO
Why don't we have Dave and Dan help you with that question, Paul. Dave?
Dave Casper, U.S. P&C Executive
Yes. I think that on the commercial side, it's not quite back to pre-pandemic levels, but we are seeing good growth in a couple of areas. One is our auto dealer business, which has begun to recover. You will notice that there are more cars on the lot, though not yet at the pre-pandemic levels. This has actually benefited us by increasing our outstanding balances and utilization. The other area is asset-based lending, which is strong right now. However, this will likely slow down as companies prepare for the holiday season, then it will decrease over time. Overall, everything is within our expectations. I’ll hand it over to Dan regarding the capital market side.
Dan Barclay, BMO Capital Markets Executive
Yes. And I think our experience is, we're still below pre-pandemic on utilization. It's up a little bit the last couple of quarters, but nothing that I would say is concerning, percent or so. And then, I think, the more robust opening of the markets is good for everybody. So that's a good outcome.
Paul Holden, Analyst
Okay. Got it. I’ll leave it there. Thank you.
Operator, Operator
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please, go ahead.
Lemar Persaud, Analyst
Hi. One thing that stands out to me is the strong sequential mortgage growth relative to peers. Obviously, we're seeing a slowdown across the industry. Can you maybe talk to us about what you're seeing in terms of mortgage spreads? One of your peers suggested that they are a bit tight relative to historical levels. And if that's true and the growth is unprofitable, maybe talk to us about the value proposition and taking market share in mortgages at this time. Perhaps it's something around franchising and cross-selling opportunities. Any color there would be helpful. And then, maybe if I missed it, but could you talk about the outlook for mortgage growth looking forward in 2023 in domestic?
Ernie Johannson, Canadian P&C Executive
Sure. Thanks, Lemar. It's Ernie. I will provide a summary of our strategy. Our approach in the mortgage market focuses on strengthening relationships with current customers while also attracting new ones. We recognize that the mortgage business is a key product during a phase when we can integrate services with our customers. We tackle this in a few ways. Our highly effective mortgage specialist sales team is consistently engaging with customers to seek out more mortgages and business opportunities, which subsequently brings in new clients to our franchise. We then work to build comprehensive relationships with these clients, and we see considerable success. Most of our customers initially come to us for a mortgage and eventually become our primary clients. And that is really a fuel for our overall growth, whether it be deposits, credit card, business, et cetera. We've been successful over the past as we've been retooling that team, our digital capabilities, to be able to sell accordingly and including our HELOC business as well. And so that's been our focus, is really around valuable, sustainable customer relationship growth. In terms of the market right now, as you can imagine, with the prime CA spread, it is a little challenging. It is a very competitive marketplace, as all of our competitors are looking as we are for new customer growth. It is profitable. And at the total relationship perspective, it's extremely profitable. Mortgage customers with other products at our bank are phenomenally more obviously profitable than a single service customer. So our focus is around quality growth, long-term customer relationship build and bringing new customers into the franchise. Moving forward, I mean, we think we see some slowdown in the housing market. We all are experiencing it. We will continue to play at market. Our strategy is to be at market in our proprietary mortgage businesses. So we'll run where the market goes and keep pace in that direction. Hopefully, that answers your question.
Lemar Persaud, Analyst
Yeah, that's helpful. And then maybe if I could switch gears over to Dave Casper on commercial loan growth. One of the things we've seen coming out of the pandemic is that BMO was able to maintain above-market rates of commercial loan growth, particularly in the US. Could you remind us of what drove that outperformance versus your peers? And then secondly, are those factors still present in the current environment? Thank you.
Dave Casper, U.S. P&C Executive
Well, first of all, we have grown really well in the US as we've expanded both geographically and some of our specialties. So I've talked about some of the specialties, and Darryl mentioned some of the geography whether it's Florida, whether it's Texas, whether it's expanding, just we have a very strong franchise. And frankly, we have an excellent record of getting referrals from our existing customers. I expect that will continue. And I'm particularly excited as we move into the New Year what's going to happen with our Bank of the West colleagues. These franchises together, they'll both be better. We'll expand geographically. We'll expand through our existing specialties into the West Coast. The momentum that we have right now, I just feel so good about it is it's going to move into the Bank of the West. So I expect the continued growth in our client acquisition, whether it's loans or deposits. And as I mentioned earlier, our ability to cross-sell into commercial, into our capital markets business and our wealth business and those businesses referring back into commercial. It's a very, very positive story.
Lemar Persaud, Analyst
Okay. So it sounds like you think you can continue to outpace your US bank peers. Is that a fair statement?
Dave Casper, U.S. P&C Executive
I believe we will keep attracting new clients. A significant portion of our business growth, nearly 90%, comes from existing clients, where we are either the sole bank or the lead bank. This is where we see our actual profitability. As Ernie mentioned regarding her business, being the sole or lead bank means we don’t have to compete for ancillary services, and I think this will allow us to continue to succeed given our offerings.
Lemar Persaud, Analyst
I appreciate the time.
Darryl White, CEO
Lemar, it's Darryl. If I may just compliment Dave's answer just now provokes a thought for me, which I think might be helpful to your question, which is when you think about the franchises, the fact that 90% of the clients are sole or lead, that's a very deliberate and unique strategy for us. We've talked about that for years. This builds a premium franchise in commercial banking in Canada and the US. When you put them together, they're the fourth, fifth largest commercial bank on the continent. That has important advantages because the fragmented market in the United States that you're questioning Dave on is a really interesting one where we've got a lot of capabilities there for relative to hundreds and hundreds of players in that market structure who arguably don't. And so the share can come there and the ability to have positive client selection as you go through that and add clients, so add capacity through the pandemic and today, not just rely on your existing installed base to do more or borrow more is very important. So that's a very deliberate strategy, and it couldn't come at a better time, frankly, because here we are about to add the franchise from the Bank of the West as well. So I think it's really important to acknowledge the job the teams have done in both personal and commercial, but also the market structure that we've quite deliberately decided we wanted to take advantage of.
Lemar Persaud, Analyst
Thank you.
Operator, Operator
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. Tayfun and Darryl, you both made the point that your capital expectations around the Bank of the West haven't changed from a year ago when you announced the deal. So from the outside looking in, it does sound a little different. What I mean by that is I think last quarter, you said you would expect the CET1 ratio to be comfortably above 11% at close, and sub-11% at close isn't comfortably above. So what I'm curious about is what's changed? What made this outlook change from last quarter?
Darryl White, CEO
Sorry, Mario, if we gave the impression that anything is finalized, we didn't communicate very well. I should clarify that nothing has changed. We've consistently stated that we expect the ratio to be comfortably above 11% in the first quarter after the close. We're looking at the calendar and anticipate that will be in Q2 of this year. We maintain that expectation, and we're not signaling any change at all.
Mario Mendonca, Analyst
So comfortably above. Maybe the nuance there is I heard at close and your message was that it was post-close, the quarter after.
Tayfun Tuzun, CFO
Yes, it's been always post-close, Mario.
Mario Mendonca, Analyst
Correct. That's a detail I missed. You have indicated, like some of your peers, that there is a slowdown and we might be approaching a recession, whether mild or not. How do you view your capital ratio, which seems a bit tight in the short term? How do you see it holding up in a situation where risk-weighted asset density might increase as the economy slows? Are you concerned about that at all?
Tayfun Tuzun, CFO
Yes, that's a good question. Our stance has always been that three factors influence our capital management. The first is how regulators perceive capital, which is beyond our control. The second factor is the current and anticipated economic environment, which affects how we set our management targets. The third factor is our capital position relative to our peers, as it's crucial for us to avoid being an outlier. As we look ahead to the changing environment, these factors will guide us in determining our capital levels, and we will keep you updated over time.
Mario Mendonca, Analyst
So putting it all together, where we stand today, there is a very modest risk of needing to raise capital to complete this deal. Is that correct?
Tayfun Tuzun, CFO
To get the deal done?
Mario Mendonca, Analyst
Yes, to get the deal done to support your capital ratio over the next few quarters. It's unlikely there would be another capital raise. And I ask it bluntly that way because that was exactly the speculation that I was hearing during the quarter. Not from people that are inside the bank, of course, just that's the speculation.
Tayfun Tuzun, CFO
Yes, my comments really involve not just the deal, but our overall approach to capital. As Darryl and I mentioned regarding the transaction, we believe our capital ratios are appropriate.
Mario Mendonca, Analyst
Okay. Thank you.
Operator, Operator
Thank you. The next question is from Joo Ho Kim from Credit Suisse. Please go ahead.
Joo Ho Kim, Analyst
Hi. Good morning. And thanks for taking my question. Just firstly, on the cards growth, the growth was very strong in Canada this quarter. Just wondering, if you can comment on what you're seeing on the revolving balances? And how you think about cards growth next year? And if that's a meaningful, kind of, contributor to your margin outlook next year for the business? Thanks.
Ernie Johannson, Canadian P&C Executive
Thanks, Joo Ho. It's Ernie. I'll answer the question. Our cards business has had a strong performance improvement year-over-year and continues. It's a function of a number of things. One is, we've recently launched out several new very effective products that are relevant for Canadians overall, and as a result, have had record increases in our acquisition. So we're growing new customers into our franchise, cross-selling within our existing franchise. And then overall, we're benefiting from an improvement in general market conditions on spending. So our balances are indeed up. Our revolve rate, as you point out, revolving balances, they're not up to where they were pre-pandemic. And we don't expect them to be moving there right now. They will over the course of next year. That will, in fact, improve our overall cards business performance. But we're starting to see a nice pickup in our overall business model, whether it be the number of customers we have, their spend and their engagement level. They're spending in a variety of categories. And then also, we're seeing some improvement in our overall balances. The other thing to note is just recently, we've launched an interesting new product against our card base, which will help again encourage our customers to continue to do the prudent thing around their finances. And it's a little bit like a buy now pay later but a smarter option called PaySmart, which allows our customers, again, to be able to do some small lending on their credit cards. So, overall, I'd say the performance is strong, will continue and be supportive of our overall revenue growth next year in the personal business and also NIM, as you rightly pointed out, but to a lesser extent, just given the size of the balances involved.
Joo Ho Kim, Analyst
Thank you. That’s it for me.
Operator, Operator
Thank you. And our last question is from Scott Chan from Canaccord Genuity. Please, go ahead.
Scott Chan, Analyst
Good morning, everyone. I have a quick modeling question for Tayfun. Regarding the preferred shares, the dividend and the expense this quarter were significantly higher than last quarter, with $77 million compared to $47 million. Can you provide details on the activities for this quarter? Are there any upcoming activities you are aware of? Additionally, is this a sustainable rate moving forward?
Tayfun Tuzun, CFO
Yes. I think we had a new issuance in the quarter, about $1 billion, and that impacted the quarter-over-quarter change in the coupons. That's the delta between Q3 and Q4.
Scott Chan, Analyst
Was it at the start of the quarter?
Tayfun Tuzun, CFO
It was in September, I think.
Scott Chan, Analyst
September?
Tayfun Tuzun, CFO
Yes.
Operator, Operator
Thank you. This concludes the question-and-answer session. I'd like to turn the call over to Darryl White.
Darryl White, CEO
Well, thank you, operator, and thank you all for your questions. I'll conclude the morning with a few key and important themes. The year's overall results were very strong with PPPT growth of 7%, continued positive operating leverage for the fifth consecutive year. Our expenses remain well managed, particularly given inflationary pressures. We've committed to delivering operating leverage again in 2023. Our credit performance remains strong. We've got significant allowance that enables us to protect and, I will say, grow the bank. And we're going forward from a position of strength with an advantaged mix that's set to perform in any environment. I'm confident that our purpose-driven strategy will continue to deliver consistent financial performance. So I want to thank all of you for participating in today's call. We look forward to speaking to you again in the New Year. Thank you.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.