Ellen Costello - Chief Executive Officer of Harris NA, Chief Executive Officer of Harris Bankcorp, Chief Executive Officer of Harris Financial Corp and President of Harris Financial Corp Russel Robertson - Chief Financial Officer Frank Techar - Chief Executive Officer of Personal & Commercial Banking for Canada BMO and President of Personal & Commercial Banking for Canada BMO Gilles Ouellette - Chief Executive Officer of Private Client Group and President of Private Client Group Thomas Milroy - Chief Executive Officer of BMO Capital Markets Viki Lazaris - Senior Vice President of Investor Relations William Downe - Chief Executive Officer, President, Non-Independent Director, Chief Executive Officer of BMO Financial Group and President of BMO Financial Group Thomas Flynn -

Sumit Malhotra - Macquarie Research Michael Goldberg - Desjardins Securities Inc. Cheryl Pate - Morgan Stanley Robert Sedran - National Bank Financial Mario Mendonca - Canaccord Genuity Darko Mihelic - Cormark Securities Inc. Gabriel Dechaine - Crédit Suisse AG John Aiken - Barclays Capital Peter Routledge - National Bank Financial, Inc. J. Bradley Smith - Stonecap Securities Inc. Andre-Philippe Hardy - RBC Capital Markets, LLC

Good afternoon, and welcome to the BMO Financial Group's First Quarter 2011 Conference Call for March 1, 2011. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. Ms. Lazaris, please go ahead.

Great. Thank you. Good afternoon, everyone, and thanks for joining us today. Our agenda for today's investor presentation is as follows. We'll begin the call with remarks from Bill Downe, BMO's CEO; followed by presentations from Russ Robertson, the bank's Chief Financial Officer; and Tom Flynn, our Chief Risk Officer. [Operator Instructions] We will wrap up the call at 3 p.m. Also with us this afternoon to take questions are BMO's Business Unit Heads: Tom Milroy from BMO Capital Markets; Gilles Ouellette from the Private Client Group; Frank Techar, Head of P&C Canada; and Ellen Costello from P&C U.S. At this time, I'd like to caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call, and they are subject to a variety of risks and uncertainties. Actual results could differ materially from forecasts, projections or conclusions in the forward-looking statements. You can find information about the material factors that could cause our actual results to so differ and information about the material factors and assumptions that were applied in drawing conclusions or making the forecast or projections in these forward-looking statements on Page 29 and 30 of our 2010 annual MD&A and on Page 5 of our first quarter 2011 report to shareholders. With that said, I'll hand things over to Bill.

Thank you very much, Viki, and good afternoon, everyone. And as noted, my comments may include forward-looking statements. BMO's first quarter results signal a strong start to 2011. This performance reflects continuation of the momentum we've demonstrated through 2010, momentum that's been building for the past few years. The quarter again featured good growth in each of our operating groups supported by consistent themes: strong top line growth, expense in line with expectations as we invest in our businesses, loan loss trends that are generally positive, a rising return on equity and continued strength in our capital position. We also continue to add depth to our executive management team. As most of you are aware, our CFO, Russ Robertson, will lead the Marshall & Ilsley integration and share the executive steering committee overseeing the process. And Tom Flynn has been appointed our new Chief Financial Officer. Both appointments are effective following our Annual General Meeting on March 22. I also want to acknowledge two other key appointments. Surjit Rajpal is succeeding Tom as Chief Risk Officer. Surjit's career with BMO, which in fact began in Risk Management, has spanned over 25 years. He's held important roles in our Capital Markets business and has deep understanding of credit and market risk positioning, making him an excellent choice. Second, Doug Stotz was recently appointed BMO's Chief Marketing Officer. Doug joins us from Bain & Company and spent 10 years with FleetBoston Financial where he was responsible for retail banking products. Doug brings to BMO some very specific expertise in customer analytics, customer profitability and building customer advocacy, and he'll play a key role in raising the profile of our brand in the U.S. The strength of our leadership provides confidence in our ability to execute on our strategic initiatives while maintaining visible…

Thanks, Bill, and good afternoon. Some of my comments may be forward looking. Please note the caution regarding forward-looking statements at the beginning of the presentation. On Slide 10, you can see that first quarter results were strong with net income of $776 million or $1.30 per share compared to $1.12 last year. On a cash basis, current quarter earnings were $1.32. We delivered revenues of $3.3 billion and strong top line growth of 10.6% year-over-year with good contributions from all of our operating groups. BMO's capital position remains strong. Turning to Slide 11. I'll touch briefly on the main drivers for revenue growth in the quarter. Noninterest revenue of $1.7 billion was up 15% from a year ago largely due to strong increases in BMO Capital Markets, a Private Client Group, which Bill spoke about earlier. Net interest income was $1.6 billion in the quarter, up $95 million or 6.1% from a year ago mainly due to solid growth from our retail businesses. Quarter-over-quarter, net interest income increased $17 million or 1.1%, reflecting solid growth in BMO Capital Markets and P&C Canada, which was partially offset by a decrease in corporate services. The total bank net interest margin was down three basis points year-over-year. Solid increases in our retail businesses were offset by reductions in net interest income in BMO Capital Markets, specifically trading and in the corporate services. Quarter-over-quarter, margins were down seven basis points. There was good growth in P&C U.S. due to improved loan spreads and higher deposit balances as well as higher deposit spreads in the Private Client Group. That said, growth in BMO Capital Markets' lower margin assets and reduced net interest income in corporate services resulted in the overall reduction in the noninterest margin. Turning to Slide 12. Year-over-year expenses increased $207 million…

Thanks, Russ, and good afternoon. Before I begin, I'll draw your attention to the caution regarding forward-looking statements. I'll start with Slide 29 where we provide a breakdown of our loan portfolio. The portfolio is well diversified both geographically and by segment. 76% of loans are in Canada and 19% in the U.S. P&C consumer loans represent 64% of the Canadian portfolio, and 86% of these are secured. Our U.S. portfolio mix is 44% consumer and 56% commercial. The U.S. consumer portfolios are relatively evenly spread across first mortgage, home equity and auto loans. Despite economic weakness over the last few years, these portfolios have been performing better than peers. The U.S. C&I portfolio is well diversified and is performing reasonably given the environment. The U.S. commercial real estate-related sector continues to experience stress, and we expect it will take time for it to fully recover. This portfolio was approximately $3 billion in size or 9% of U.S. loans and less than 2% of total loans. Turning to Slide 30, where we provide information on impaired loan formations. Formations were $283 million for the quarter versus $461 million in Q4 and $456 million a year ago. The Canadian formations are $120 million, down from $172 million in Q4. U.S. portfolio continues to account for the majority of formations at $163 million with commercial real estate-related sectors making up the largest portion at 33%. Gross Impaired loan balances were down at $3.1 billion compared to $3.2 billion in Q4. Excluding loans covered by the 80-20 loss share agreements with the FDIC, impaired loans were $2.7 billion. Slide 31 details the provision for credit losses by line of business. The consolidated specific provision was $248 million, down from $333 million a year ago. Moving now to the business segment details that are shown in the tables to the right. P&C Canada provisions were higher quarter-over-quarter, primarily due to high consumer recoveries in the previous quarter. P&C U.S. provisions were relatively flat quarter-over-quarter. We expect provisions in this line of business to continue to be impacted by weak real estate markets and high unemployment through much of 2011. Capital market provisions remained low in the quarter. In general, capital market portfolios continue to stabilize. Turning to Slide 32. We provide a segmentation of the specific provision by geography and sector. The Canadian provision was $116 million, down from $138 million a year ago. The Consumer Loan and Credit Card segments continue to be the largest drivers of Canadian provisions at 38% and 35%, respectively. The U.S. provision was $132 million, well below the level of $190 million a year ago. To summarize now overall for the quarter, credit portfolios continue to benefit from an improving economy. Both formations and provisions are lower than a year ago. Assuming the economy continues to improve and unemployment starts come down in the U.S., we would expect this to continue. That concludes my presentation, and we can now move to the Q&A.

[Operator Instructions] The following question is from Mario Mendonca of Canaccord.

First, on domestic commercial. It would appear that after a few quarters of some pretty solid growth, it seemed to flatline a little bit. For Frank, is there anything you can point to?

Mario, I don't know what you're looking at specifically.

It's actually in the presentation.

Oh, so you're talking about the revenue?

Commercial loan growth. Commercial loans in Canada. I'm giving you a specific page reference.

Yes. Well, our commercial loan growth is up. I mean, the reason while I'm pausing here is because we had very strong growth in our commercial loans in the quarter.

It was flat.

Our commercial loans were up 7.8%. And so Q1 to Q4, in the zero to five category, our market share was up again. So like, if you're reading anything into it, you shouldn't. We still feel like we have growth and momentum in the business, and we're competing very effectively.

I'll be more specific. On Page 25 of the presentation, Q4 to Q1, commercial loans flat. I guess that's what I'm getting at.

Well, the other thing to keep in mind is there is some seasonality in the Commercial business. And so Q1 is always one of those quarters where it is a little soft relative to coming out of the back half of the year.

So I guess there's nothing there that you'd highlight then?

Yes, there's nothing there. In fact, our expectation is the growth is going to continue to accelerate as we go into this year. I'm really optimistic about the commercial sector.

And then last question perhaps for Tom Flynn. Domestic consumer delinquencies. I'm referring here personal loans. This is the second consecutive quarter where that's taken a slight move upward. Are we looking at the secured book there? Because I understand that your HELOCs are included in your personal loans. Is there anything you can highlight there?

The number is up a little bit. I wouldn't highlight anything in particular. There's a little bit of seasonality that inflates the numbers slightly in the first quarter. And I think we've just seen a bit of a pause in the rate of improvement in credit after coming off of the highs, and our expectation would be that assuming the economy continues to do well, those numbers will gradually start to come down. We don't see any reversal of the fundamental trend.

On the related point, I guess what I'm getting at here is the bank has enjoyed some very strong personal loan growth over the last two years. Is there any reason to believe that, that personal loan growth, stronger than your peers, is manifesting itself in some weakness on the credit front?

I would say no. We have not compromised our credit standards in the pursuit of growth. We have had good growth in the card portfolio, which has higher inherent loss rates. And so you could see consolidated Canadian consumer numbers move up a bit because of a slight mix change, but our card numbers compared to peers are still best in class.

The following question is from Steve Terrio [ph] of Bank of America.

A question for Bill Downe. Bill, there continues to be lots of chatter on U.S. regional banking M&A. With the M&I deal and it's integration challenges, do you feel like you have your hands full for the time being? Or could you conceivably consider any more meaningful additional deals over the next year or so while the M&I deal closes and you get the integration going?

I would prefer, Steve, if you said, we're fully occupied rather than we have our hands full. I think we are fully occupied. This is the opportunity in M&I around growth within the six-state market, including Illinois. It's something that I think is going to give us organic growth on top of the acquired growth, and that's really where we want to keep our attention focused.

Another question on M&I but maybe for Tom or for Russ with respect to the Tier 1 common impact. When I looked through all the pro formas you've given us, it looks like the negative impact from M&I from a Tier 1 common perspective is maybe 20 or 30 basis points worse than when you announced the deal. Am I in the ballpark there? And what's the difference attributable?

The difference attributable to a couple of things depending on how you're looking at the numbers. First, when we talked about the impact on the ratio at the time we announced the transaction, we modeled in an assumed $800 million capital raise. And in the pro forma number that we've included in the press release, we've assumed zero common equity raise, and we've noted that we expect the raise to be less than $400 million. So going from $800 million to zero is about 35 basis points on the impact. In addition, we've been working to refine some of the numbers that go into the assessment of the ratio. And our deferred tax balance is up a bit. RWA are up a bit. And we've also factored in the Lloyd George acquisition, which is about five basis points. So the total of those things is about 35 basis points in total on impact.

And then one last numbers one, if I might. Just given the December changes to counterparty risk, versus the $23 billion you gave us last quarter, could you update us on that number, please?

Yes, the $23 billion is what we disclosed as the estimated impact of the counterparty credit risk changes as they existed at the time we announced Q4. Those rules have since been amended, and the current estimate is that the impact is approximately half of the $23 billion. And that's about a 40, 45 basis point delta on the ratio.

The following question is from John Aiken of Barclays Capital.

I hate to pick on the Capital Markets given the strength that you guys exhibited in the quarter. But when we look at the disclosure on the U.S., the contribution is down significantly in the preceding three quarters, and now we're at a loss. But even if you back out the provision for the tax, we're still materially below where we were at in the run rate. Is there's some structural difficulties in the business? And can you get contributions back up in the near term with, I guess, maybe some tailwinds from the economy?

Yes, hi, John. Tom Milroy. Thanks for the question. I just want to say that we're actually encouraged by the U.S. performance quarter-over-quarter. We had to go up because of the tax provision. You have to go up a few lines. But if you look in the pack on Page 10 and you go up to a pre-provision pretax basis, you'll see we grew from $44 million in Q4 to $76 million in Q1. And we think that, that line will be reflected going forward in the bottom line is growing and growing in the right direction. So as we step back and look at it, we see the early signs of the work and the attention that we have in terms of pursuing our North American distribution strategy starting to come through in the numbers.

And you talked in the MD&A about the growth in average earning assets was largely centered around the repo book. And again, that was client activities. Can you give us some sense as to how this contributed to the growth in trading in the quarter and whether this is a change in strategy for the bank or just largely truly demand driven?

Let me take that one again. I mean, this is all client activity and business we like. So the opportunity was to grow it in the quarter, and we did. I should also tell you that, that was a business activity that actually had dropped in 2010 below the level we wanted it to be at. So lower than historically where we've been and lower than where we were relative to our peers. In this quarter, what we've done as we've been able to grow it and grow our share back to about where we would expect to be going forward.

The following question is from Andre Hardy of RBC Capital Markets.

I also have a question on capital. The transition to Advanced Internal Ratings Based Approach, that's an increase in RWAs in Harris. How long do you expect it will take before you need to have the M&I book on a AIRB approach? And is that factored into your pro forma estimates?

It's Tom Flynn. The rules allow for basically a three-year transition period post close. And we'll start working on it actually pre-close, but I expect we'll look to take the three-year period. And we would expect significant positive migration in the portfolio between now and the end of that period, which would have a positive impact on RWA. And we also think that the credit mark that we've taken, which we think is appropriate and prudent, also significantly reduces the inherent risk in the RWA that we'll be picking up.

So three years from now, you don't expect a pickup relative to standardized methodology?

Well, obviously, a hard thing to forecast three years out, but I would absolutely not expect it to be of the magnitude that we've seen here in this quarter with the Harris AIRB.

The following question is from Robert Sedran of CIBC.

The 20 basis points-odd of pickup that you would get from a $400 million equity issue is near enough to zero that. I guess I'm wondering why not just scrap the idea altogether? Is there a potential that we don't do any here?

I think we're pretty clear about less than $400 million. We modeled zero. It is a possibility. I think as we've ticked off in the last 70 days since we announced the transaction, as we've ticked off the work that we've done, we've made good progress. We still have work to do. But I think you really have -- you defined the boundaries.

And just a quick question on the insurance revenue side. Maybe it's for Gilles. I guess the AIG acquisition has made you a little bit more market sensitive than you have been. In trying to forecast that line, what might be the right reference rate or right interest rate to look at? And can you perhaps give us idea of the sensitivity to that rate?

Yes, it's in the subpack. I think the current numbers are 100 basis points. 100 basis points up is about $80 million, and a 100 basis point down is about $70 million.

That's a parallel shift in the yield curve, you're suggesting?

Yes. But what happened, we had a great quarter this quarter. The Wealth Management businesses all kind of kicked in. Their revenues were good and net income was up, I think, really about 20%. But the insurance net income was up something like 66%. And primarily, the reason for that is that the previous quarter, rates had ticked down and that impacted our revenues. And then this quarter, we got it all back. And so the revenue was up a little bit. But, I mean, from quarter-to-quarter, I don't expect to see a big change. Although directionally, we expect rates to be going up, and we expect to benefit from that Insurance business going forward.

The following question is from Peter Routledge of National Bank Financial.

One quick follow-up on the counterparty credit risk. You say it dropped 50%, 5-0. Do you still include the assumption that there will not be a centralized credit counterparty for OTC derivatives? And will that number drop even further if we get one?

We have not assumed that there will be a central clearer. And so if one was in place, the number would drop. And I think it's fair to say the expectation is that one will be in place.

In Canada for Frank and related to Mario's question earlier. We see a slowdown in household lending, but Bank of Canada data, it looks like overall household credit is up a bit and up by more than the large Canadian banks that have reported so far. So Frank, in your view, is this the making of an end of cycle in Canadian residential lending, both on the mortgage side and just consumer lending side? Why or why not? And if so, what sort of risk is there to BMO in the unsecured household lending book?

I don't know how to define a cycle exactly. It's clear that we are going to see some slowing, and we've started to see that already. My expectation is we're not going to go to zero. We're going to have some level of growth available to all of us in the marketplace as we move forward. And predicting what that level is, is difficult to do at this point in time. But I think you pointed out that the growth levels are still pretty healthy. The interventions from Finance have yet to take place, so we don't know what the impact of those are going to be on consumer preferences at this point in time and consumer behaviors. And I think we'll just have to see how that plays out. So my expectation is we'll continue to see growth, but it'll be at a slower level than we are now, and it's hard to predict what that level is.

One part of end of cycle is slower growth. Another part could be higher credit costs. Is there any -- and I know we're in an apparently growing economy. Is there any risk of that in your view? I mean, do you see the potential for rising credit costs?

Well, I think in this environment, I would suggest that it's probably unlikely. But I would never say never, looking out maybe a little further into the future. I just think it's not the right thing to do for Canada and not the right thing to do just in general for the businesses. So I would be surprised if it happened early.

The following question is from Darko Mihelic of Cormark Securities.

I'm looking at Page 18 of your presentation and page -- I guess it's Page 8 of your supplemental, the personal and commercial bank. My question is, I guess when I look at the cash productivity level and the core cash productivity, and last quarter I guess there was an expense bump companywide, so we didn't make anything of it. But this is sort of second quarter in a row where the gap between your cash productivity and your core cash productivity is sort of wider than the previous sort of three quarters. Just curious as to why that is and how soon should we expect a return to like a lower level of cash productivity here in the U.S.?

It's Ellen speaking. That is pretty much largely made up of the impaired loan portfolio carry, and that has increased from about a 500 basis point drag to about 1,000 basis point drag. And until we start to see a decline in that portfolio and the cost of carrying it, I think it will be there for some time.

And should I read into the higher expected loss in the U.S. as sort of a forbearing of this? I mean, in other words, we should think about really an elevated expense based on your expected cost methodology or expected loss methodology, sorry?

There has been an increase in the expected loss impact in the numbers, but I think that the impaired loan impact is the bigger driver.

And I guess the last question, Ellen, it looks like the number of full-time employees dropped dramatically quarter-over-quarter. Can you...

Yes, that was the AMCORE. When went through the conversion process, There were about 400 employees that were impacted by that through the fall, and you're just finally seeing that show up in the first quarter numbers.

So shouldn't that squeeze the difference between the cash productivity and the core cash productivity number?

I don't know that it would have as much of an effect as the impaired loan impact. It does improve the productivity of the Personal business most certainly.

And maybe just one last question, the core cash productivity number. I guess the ultimate question is what is the goal here? Where can we get the U.S. banking platform to? When we had Marshall & Ilsley into the mix, what is the end goal? Is it mid-50s?

Darko, maybe I'll pick that one up. I think that if you go back and look at the levels that M&I was able to run at let's say five years ago, they had a very productive platform relative to the industry. And I think bringing down the combined expense-to-revenue ratio towards that objective is the right objective. It's going to be kind of hard in the remainder of 2011 and '12 to see that because we're going to have some additional expenses. We'll break them out, but we'll have some adjustment expenses. But that is a reasonable area to think about heading towards in the long run.

The following question is from Michael Goldberg of Desjardins Securities.

When you announced the Marshall & Ilsley acquisition, you indicated that the impact would be about 3% dilutive in year one and 2% accretive in year two. Based on what you know now, how have these expectations changed? That's the first one related to M&I. And second related to M&I, with Mark Furlong and the credit people coming from M&I be incented to deliver less losses then you've indicated in your purchase equation?

It's Tom Flynn, Michael. I'll try to answer that. To the first question, we're not coming out with revised guidance related to the accretion on the transaction. So we're sticking with the numbers that we earlier provided. In terms of incenting people to do better than we provide for in the mark, the answer is that the people who are responsible for managing that portfolio will be incented and motivated to perform well, to maximize value and hopefully to beat the mark, although the mark is what we think the inherent loss is in the portfolio. And we've talked about having the impaired loans that are being worked out managed away from the business so that Mark, when he's running the business, is able to focus on the integration and the go-forward business and not be distracted with the workout portfolio. So it's actually going to be managed by a team of experienced workout people within the risk group.

I've also got a question about your capital that you've talked about. Given what you've said about your pro forma Basel III capital ratios with and without the up to $400 million common share issue that you now foresee, would it be reasonable for us to look at this issue as the amount needed to ensure that your Basel III common equity ratio is somewhere greater than the 7% level by year end also taking into account expected retained earnings over the balance of the year?

It's Tom, Michael. It's a reasonable question to ask. A fair question, but the answer is no. We don't need that amount to be above the 7% based on our projections.

So you would expect that you will be above the 7% by year end?

Sorry, by the date that it comes into effect, Q1 of '13.

No, but I'm asking by the end of fiscal 2011.

We don't really view that as the target by the end of fiscal 2011. The Basel III rules are being phased in effective Q1 of '13, and regulators globally are encouraging institutions to meet the new standards essentially as quickly as possible. And we're very comfortable with where we'll sit relative to the 7% on the implementation date of Q1 '13.

Well, let me just ask it a different way. If you're not at 7% by the end of 2011 and all other things permitting, would you be in a position to increase your dividend at that point?

Michael, before Tom proceeds further, I think we're in a such hypothetical area that it's really not productive. What we've said with respect to the dividend is that we'll increase the dividend consistent with earnings. As the earnings from the acquired property kick in, I'm sure that, that will provide ample incentive for a dividend increase.

The following question is from Cheryl Pate of Morgan Stanley.

A question for Ellen on the sequential improvement we saw on the net interest margin. 15 basis points was higher than I would have expected. Can you give us some color on what product is really driving the improvement on the lending spread there? Is it more commercial or consumer? And any thoughts on the sustainability of the increase relative to sort of the competitiveness of the market currently?

The drivers, and actually I look at it more on a year-over-year basis because it's a pretty big lift year-over-year, are really loan spreads. We've been in a mode where we've been repricing existing loans as well as new originations at higher levels while exiting our portfolio of lower spread loans. So that's giving us a lift. At the same time, we have deposit volume growth. And while that's being offset by deposit spread compression, it's still adding to our margin growth. I would say that the outlook for margins, in my view, would be flat because we'll start to feel some downward pressure on pricing on the loan side as we head into the balance of the year. Most of our repricing efforts on the existing book in commercial are pretty much finished, and we are seeing some competitiveness on the pricing side in the environment that we're in as banks are competing for loan growth.

And would you say most of the -- is it more commercially...

It's more commercial, yes.

And a second question for Frank. On the lower fee revenue from card this quarter, I'm just wondering how much of the higher reward costs would have any sort of seasonality aspect to it. Or is it really a bit of a mix shift on the core card portfolio driving the higher charges this quarter?

I assume you're referring to the move from $65 million down to $45 million in card fees. There were three reasons. One was we had lower-than-normal reward costs actually back in Q3 and Q4, and our reward costs are a negative NIR. So we actually had lower costs as a result of just the activity during those quarters, and we saw a pickup to more normal levels in this quarter. We also had lower card fees just in general, and seasonality and mix came into play on that front. Just our fees associated with the core business. And we also had lower Manaris [ph] revenue just based on lower transaction volumes during the quarter. So it was really three things that contributed. But the reward issue was more lower-than-normal costs in previous quarters rather than any change in this quarter.

The following question is from Sumit Malhotra of Macquarie Capital Markets.

First question is for Tom Flynn. Tom, when I look at the total allowance level of the bank in relation to ratios like the coverage ratio, total allowances to total loans, you certainly moved back in line or even, in some cases, ahead of the industry in that regard. And when I think about the comments here, Frank, and yourself does seem pretty positive on Canadian retail trends, Capital Markets doesn't seem like it's too much of an issue in the corporate book, yet BMO's been much more conservative than some of your peers in maintaining that provisioning level and the level of the total allowance. What's the possibility we start to see some drawdowns in that book as 2011 progresses given the improving parts in at least 2/3 of your portfolios?

I'd say the potential exists. Obviously, we think we have the allowance at the right level in the current quarter. You've seen U.S. banks draw down on their reserves, and that gets some attention in the press. I think less so generally in the case of the Canadian banks. So I would say the potential exists assuming that the positive trends continue.

If I'm remembering correctly in the last call, you had stated that your view at that time was provisions roughly flat with the back half 2010 levels and the beginning of '11 and then we'll see what happens from there. In the context of a continued very low default rate on the corporate side and a $200 million decline in formations, is that still your view or are we trending better than you may have thought three months ago?

I'd say we're trending roughly in line. The Capital Market provisions have outperformed generally over the last three or so quarters. We've had really strong performance, and we feel good about that. The U.S. P&C provisions have been sticky, and that reflects higher unemployment and weak real estate markets. And the hope would be that later in the year, we'll start to get some improvement there and a bit of a downtick. But I think it's more a case of that coming later in the year as opposed to earlier.

Secondly and lastly for me is on BMO Capital Markets for Tom Milroy and maybe, by proxy, for Bill Downe. $257 million in earnings this quarter, in line with some of the better quarters you posted in 2009, 2010. Yet this was accomplished with a tax rate higher than 40%. When I hear you speak, you're -- not to put too much emphasis on tone, but it sounds like you're confident in the sustainability of your revenue stream now than you were in that 2009 and early 2010 period where trading spreads were perhaps well, we now know they were unsustainably wide. First off, is that an accurate statement, that the revenue stream in your mind is more sustainable where we are right now?

I mean, I think it's fair to say that we had a terrific quarter. And it was -- frankly, not only was it strong, it was better than expected. But I think you're right, when we look at the business, we think the quality of the mix and the quality of the earnings is better and more predictable than it was. That being said, I just want to caveat. This is a business where it's difficult to get out ahead yourself for each quarter because the market will determine a number of the factors that impact the performance of the business. But I am more confident in the business than I was in the earlier period. I also think you're right to point out that we're able to deliver this notwithstanding we had the tax charges relating to prior period, which had that impact, obviously, on the overall tax charge of the bank by inflating it roughly 300 basis points.

So I'll wrap it up here for you again, Tom, on trading, specifically. When we look at the last two quarters, if I look at it on a TB [ph] basis, it's about $350 million this quarter, $275 million last quarter. Have the effects of aspects such as changes in the capital rules that we've been waiting for, competition returning to the market, do you feel that, that has now run its course and it's basically a reflection of what activity levels are that will determine trading? In other words, are spreads where they should be in your mind?

, I'm going to separate it. There's two pieces to that. I mean, obviously, the impact, the NOL [ph] would be related to the capital charges. We haven't had the full impact of all the capital that we expect going forward under Basel III that we'll have to carry. So we're keeping an eye on that. We're going to carry more capital. There's a bunch of things we can do to minimize that, but that will have an impact. Looking at the market itself, the market tone is pretty good. And so if it continues, I think these are -- I think that it kind of spreads where we are. It's a very productive market environment, but not what I say that it's hugely overheated

The following question is from Gabriel Dechaine of Credit Suisse. Gabriel Dechaine - Crédit Suisse AG: The M&I acquisition. And you're starting to talk about revenue synergies. Now when they reported their Q4, I was caught offguard by the amount of decline in their loan book. Granted we did expect some of that to come down. But in consumer lending, for example, it was also a pretty big decline. Maybe you can give us your sense of when you think asset growth of the combined businesses in the U.S. could turn positive and expand a bit more on these revenue synergies that you're starting to talk about. Is this tied to the Packers' win in the Super Bowl?

It's not a question that you really ought to ask a Bears fan. Never in my years. But with respect to asset growth and the revenue opportunities, I think we're looking at post-closing when the teams are working together in the market. But I will tell you that I've been in seven cities in the Midwest area, both calling and meeting with employees in the last 60 days, and I have confidence in the tone of the market, in the commercial banking market. What you may be seeing in the asset numbers is the workdown of the real estate portfolio. In both our Commercial Banking business, we have an exit portfolio that we're working down, and then we have the reduction in the real estate portfolio. So I think that's going to, it's going to moderate the reported asset growth level. At the same time, I expect that people are going to become more active, and you're going to see new revenue coming from both the noninterest product stream and from interest spreads. So I would look midyear and beyond as we have control of the teams. The second element of it is that I think the way that we go to market, the relationship with customers, the value that's placed on relationship banking is very consistent between our two operating models. And as a consequence, I think that with a long history of very long relationships that we see in the M&I customer base, we're going to find business coming back to us. And I'm hopeful that as we approach closing, the visibility of our people, the confidence of our people in the combined workforce will spur that on. Gabriel Dechaine - Crédit Suisse AG: So I'm just trying to get a sense for when we see that legacy book in M&I kind of hit its bottom and start, on a combined basis, generating growth in loans.

Maybe Tom can give you some parameters around the real estate book in total, and you can make some deductions yourself.

Sure. So I'm not sure I'll answer the question specifically, but I'll give you a little more color. The commercial real estate book that they have is about $12 billion in size. They have been effectively reducing that portfolio. It's much lower than it was two or three years ago. And we want to have commercial real estate as a smaller portion of the combined loan portfolio. At the same time, we don't want to achieve that objective in a way that destroys value. And so we're going to work the portfolio down through time in a way that keeps one eye on the objective of getting it down and another eye on economic value. We haven't definitively landed on the sort of steady state size of the real estate book, but we're expecting that it will be below half of the current level. Gabriel Dechaine - Crédit Suisse AG: And then just on the dividend. Before you did the deal I recall, Bill, you were suggesting that precrisis having a 45% to 55% payout ratio was a good strategy. But as you saw acquisition opportunities much better postcrisis, that the implication was that such an elevated payout ratio wasn't the most optimal strategy. What's the thought towards bringing that payout ratio down from where it is now?

We're not making any adjustments to the range at the present time. I think the calculation I did on my pad was that in this quarter, I believe we're within the range. And now we have a digestion period here with the acquired asset. So I think it delays the discussion of that. We acquired these assets and the customer base because we believe it's going to drive future growth and more profitability. So I think let's look beyond the 12 months to 18 months of integration as being a period where we'll probably see much stronger revenue generation that will contribute to dividend growth. Gabriel Dechaine - Crédit Suisse AG: And then just lastly, any further thought on the Florida and Arizona branches? There has been some M&A activity in those regions in the smaller regional banks. Are you committed to these areas? Because they don't seem to fit into your discussion when you talk about the bulk you have in the Midwest.

Well, I think by virtue of the fact that it's simply a smaller footprint, we haven't spent as much time talking about it. And a big portion of the book would be the impaired real estate portfolio that, as Tom said, will be managed separately. We have a business in both Florida and Arizona, have had for a long time, so we're familiar with the market. And M&I's locations would enhance both our Florida and Arizona presence. We really want to spend more time in the market thinking about how we would configure that, but it hasn't been left out for any other reason than when you look at that Midwest market with a GDP and a population equivalent to the size of Canada, I just don't want anyone to miss the fact that this six-state area is essentially a doubling of the whole market. But we've pursued our strategy, successfully pursued our strategy in Arizona and Florida and are going to be thinking of ways to use these branches to enhance it.

The final question is from Brad Smith of Stonecap Securities.

A question for Bill Downe. Bill, you've got the team directionally pointed in the U.S. at this point in time. Can you talk a little bit about non-North American growth opportunities M&A and things like that? I know that you've been moving some capital into the Asian market. What do you see there for the Bank of Montréal?

First of all, with respect to China and India, it's a progressive story. Our Trade Finance business, which was really the beginning of our presence in China almost two decades ago, continues to grow. And with the uptick in economic activity in North America and a very significant increase in two-way trade but also in exports, that business is growing. Our investment banking presence, physical presence in both China and India is a couple of years now in the run, and we're seeing more activity there. Really, a building of the reputation of the firm. And in very significant sectors, our reputation, the bank's reputation in investment banking is allowing us to get in front of some high-quality opportunities. Currency Trading business remains very strong. But the Asset Management business is the one that's really merging, I think. When you put together the business that we have in Canada, United States, Europe, a toehold in Middle East with Lloyd George and the presence that they have in China and a small portfolio in India, almost $1 billion, we're approaching $110 billion of total AUM in BMO Asset Management. And this is a more significant business, and it's a global business. So I look for both the attraction of client dollars into our combined capability and the ability for us to bring emerging markets in a broader array to our domestic North American investor base. I think that's certainly an area for future growth. I also think that as we grow our Commercial and Investment Banking business in the U.S., it's highly complementary to the North American business, and it provides much bigger distribution opportunities to our sales force, our equity in that sales force in Europe. So I expect to see some growth there. But the heart of the business of the company is the strength of the North American, underlying North American franchise and our ability to do business into those other markets as a consequence of that. So I think it is a prominent part of our long-term thinking, and it's incremental growth, I think, will be how it's defined.

I guess from your comments, Bill, then there's much of a probability of a banking or intermediation P&C-type effort in the Asian market. It's more a wholesale and wealth management strategy. Is that the correct way to characterize what you said?

Yes, I think for the time being, wholesale and wealth management. Wealth management takes you into the personal segments. And obviously, as that Personal business grows on the Wealth Management side, and as you know, we have a significant investment in a Chinese mutual fund company, it does open up the opportunities. But we've built many strong relationships with large Chinese intermediaries, which I hope we can work within partnership as opposed to I think where you're going was are you getting ready to buy a P&C bank. And that would be a different story.

Thank you. I would now like to turn the meeting back over to Ms. Lazaris.

Great. Thank you for joining us on the call today. And as always, if there any further questions, please contact Investor Relations group. Have a great afternoon.

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