Please be advised that this conference call is being recorded. Good morning and welcome to BMO Financial Group’s Q2 2023 Earnings Release and Conference Call for May 24, 2023. 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 today are Ernie Johannson, Head of BMO North American Personal and Business Banking; Nadeem Hirji, Head of BMO Commercial Banking; Dan Barclay, Head of BMO Capital Markets; Deland Kamanga, Head of BMO Wealth Management; and Dave Casper, BMO U.S. CEO. As noted on Slide 2, forward-looking statements maybe 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 Tyson will be referring to adjusted results in their remarks unless otherwise noted as reported. I will now turn the call over to Darryl.

Thank you, Christine and good morning everyone. I’d like to begin by acknowledging the hardship faced by our communities in Alberta impacted by the devastating wildfires that threaten their homes and livelihoods. We are committed to standing alongside our clients and doing our part to make sure that they get the help that they need. I’d also like to welcome Nadeem Hirji, Group Head, BMO Commercial Banking, who is joining the call for the first time. Nadeem has a long track record of serving our clients, including leadership positions in risk management and commercial banking, where most recently, he was Co-Head of the Canadian Commercial Bank. Now, let me turn to the quarter. Against the backdrop of a shifting environment, BMO delivered solid performance, including the benefit of a full quarter of results from Bank of the West. Earnings per share were $2.93 and net income was $2.2 billion for the quarter and $4.5 billion year-to-date. Second quarter pre-provision pre-tax earnings were up 7% year-over-year and grew $6.2 billion year-to-date. Our performance reflects the continued strength in our highly diversified business mix with good PPPT growth in our Canadian and U.S. Personal and Commercial Banking businesses, up 8% and 29% year-to-date, respectively, while our wealth and capital markets businesses were impacted by weaker markets and lower client activity. While credit trends are beginning to normalize from historically low levels as expected, credit performance remains strong across our portfolios, reflecting our longstanding track record of superior risk management, a culture that is shared by our Bank of the West colleagues. Our CET1 ratio of 12.2% remains very strong even after closing the largest acquisition in Canadian history. ROE for the quarter was 12.6%, while return on tangible common equity improved to 17.2%. We also announced a dividend increase of $0.04, up…

Thank you, Darryl. Good morning and thank you for joining us. My comments will start on Slide 10. Second quarter reported EPS was $1.30 and net income was $1.1 billion. Adjusting items are shown on Slide 40 and include Bank of the West acquisition-related impacts for the initial provision for credit losses on performing loans and integration costs, which decreased net income by $517 million and $545 million respectively. The remainder of my comments will focus on adjusted results. Adjusted EPS was $2.93 and net income was $2.2 billion, up 1% from last year, including a $230 million contribution from Bank of the West. Excluding the addition of Bank of the West, net income declined due to higher PCLs. Revenue increased 3% and PPPT declined 4% reflecting good growth in net interest income from our P&C businesses, offset by weaker results in wealth and capital markets due to continued muted market environment. Total PCL was $318 million, including a $75 million provision for performing loans compared with a total provision of $50 million in the prior year. Piyush will speak to these in his remarks. Turning to Slide 11. The acquisition of Bank of the West contributed $230 million to net income, $1.1 billion to revenue and $755 million to expenses. Results this quarter have come in line with our internal expectations. On closing, we recognized purchase accounting fair value marks on Bank of the West’s loans and deposits and discounts on securities on our balance sheet, which accretes to net interest income. As previously disclosed, to manage the exposure to the impact of higher interest rates on capital from changes in the fair value of the assets and liabilities of Bank of the West between the announcement and closing of the acquisition, we entered into interest rate swaps that…

Thank you, Tayfun, and good morning, everyone. Our risk performance continued to reflect strong risk management discipline across the bank this quarter despite market volatility and economic headwinds. Starting on Slide 25. The total provision for credit losses was $1 billion, including the initial performing allowance of $705 million related to the Bank of the West purchase portfolio. Adjusting for this one-time charge, total PCL was $318 million or 20 basis points, up 5 basis points from prior quarter. Impaired provisions for the quarter were $243 million or 16 basis points, 2 basis points up from prior quarter, consistent with the expected trend to more normal loss rates. Moving to Slide 26. Excluding the initial provision for Bank of the West, the $75 million provision for credit losses on performing loans for this quarter reflected portfolio credit migration, model changes and economic uncertainty, partially offset by a modest improvement in some macroeconomic variables over the forecast horizon. We remain comfortable that our $3.3 billion of performing loan allowances provides good loss coverage over 4x coverage on trading four quarters impaired losses and approximately 2x coverage against 2020 losses. Turning to the impaired loan credit performance in the operating groups. Canadian Retail impaired loan losses was $163 million or 32 basis points, up from 26 basis points in Q1. In U.S. retail, impaired loan losses were $41 million or 32 basis points, up from 24 basis points in the prior quarter. This PCL increase in retail was due to continued normalization in both insolvencies and on delinquency rates in unsecured loans and credit cards. For residential real estate secured lending, we continue to view the risk from higher rates as modest given our high credit quality borrower base and low LTVs. As you can see on Slide 31, the riskier segment…

Thank you. [Operator Instructions] Our first question is from John Aiken with Barclays. Please go ahead.

Good morning. Not surprisingly, there is a lot of interest in the U.S. deposits. And Tayfun, you did a great job in terms of demonstrating the flows. But I was wondering if we could have someone talk to the performance of Bank of the West specific deposits during the quarter? And then secondarily, the performance of your digital deposit platform through the quarter, please?

Let me just make a very brief comment, and then I’ll turn it over to Ernie, John. I think we are obviously very excited about having Bank of the West expanded branch network and the ability to connect our digital banking platform with their physical presence, and they are doing quite well. I think we had the opportunity to obviously work with them early after we closed. And Ernie and her team are focusing on bringing their operations to the same targets that we have. So I’ll turn it over to Ernie for her comments on how that’s going.

Thanks, Tayfun. Just a couple of comments on the legacy Bank of the West franchise. They did experience – we did experience balances deteriorating largely due to some pricing and product choices that existed at that time. Remember now, they are not on our core platform. That will happen in September. But regardless of the fact that we’re on in our platform, we are able to adjust a few things in the franchise, and we were able to adjust some pricing, some product offerings, some campaigns and marketing to be able to introduce some changes that are more effective for that marketplace, and in fact, I’ve seen very strong results as a result of those changes. We have reduced the attrition rates or migration out of various products, being able to support growth of dropping reductions by 30%, 40% because we’ve offered out different products at different price points. And that’s been continuing through March to April and even through the past few weeks as we continue to monitor that. And we’re impressed by the receptivity of the market and to the colleagues in the field that are able to present these offers customers and be able to retain balances and grow at the same time. Bank of the West represents about a 50% increase in the overall retail balances that we have in the U.S. And just a point back to the digital deposit taking, BMO standalone as a business or branch network performed very well over the past quarter, growing quarter-over-quarter and outperforming the market in terms of retaining balances. We have not yet fully deployed our digital deposit taking capabilities across the 50 states. We’ve done a slow ramp-up. We will continue to ramp that up over the remaining quarters as necessary, and that is proving to be very profitable, at the same time as driving balances into the franchise. So more to come on that front, but I’m really encouraged to see what’s possible in the Bank of the West franchise with partial capabilities that BMO brings in and it only gets strengthened as we move past September through the conversion time period. So good overall strategy in the U.S. between the 1,000 branches we now have and the digital capabilities. So hopefully, John, that answers part of your question.

Thanks for the color. Appreciate it.

Thank you. Our next question is from Meny Grauman with Scotiabank. Please go ahead.

Hi, good morning. There are a lot of interest in the outlook for your U.S. business, broadly speaking, the U.S. P&C business? Is the U.S. still as attractive a market as it was when you first announced Bank of the West back in December ‘21. What’s your perspective on that?

Thanks for the question, Meny. My perspective is unambiguously yes. We play the long game, as you know. Look, the U. S. is the largest and most profitable banking market on the planet. And do we – you have to make a decision, I suppose, in the first place that you want to play there or not? And if you do, our view is that if you have a meaningful presence and you execute against that as we have for the last several years, you’ve seen us run a P&L that runs the same ROE and the same efficiency ratio in the U.S. as Canada, then you want to grow that. And it will go through cycles and some cycles will be a little bit more difficult than others. But my view is through time, and I think you’re going to see it’s going to get particularly exciting as we ramp up the next few quarters. The answer to your question is, emphatically, yes. And when you step back from it, Meny, when I step back a minute, let me tell you, if I were to clean sheet it, I would say, what would you want in terms of your positioning in the U. S. market? You’d want to operate at scale. And so there, I’d refer you to Page 6 of our presentation where we show that we’re in a pretty unique category of participants in the industry structure, number one. Number two, you’d want to be in markets where business is good and you can grow and you’re good at it, and we point out that we’re in three of the five largest markets in the U.S., 50 states digitally, that is differentiated. I give you my word on that relative to most of our regional banking competitors. And thirdly, ideally, you’d like it to be fully integrated into a bigger and broader North American business and balance sheet. And that’s what we bring. And so in the Bank of the West, that’s a general comment, I suppose, Meny, in particular, – when we look at the comment I made to you last quarter when we had this conversation that the expectation is that we would deliver an incremental $2 billion of PPPT by the end of 2025, it’s as a result of all of those things as we combine those businesses. And so far, keep in mind, we’ve owned that business for 79 business days, including U.S. weekends and holidays. And as I look out to fully synergizing the expenses by the end of only three quarters from now, first quarter of 2024 and then starting to build in the revenue synergies as we go through ‘24 and ‘25. I couldn’t be more confident. I would say, I’m more confident today despite the environment. I’m more confident today than I was when we made the acquisition announcement.

Understood. And just a follow-up, just on the regulatory side, which is definitely a concern for investors, it seems pretty reasonable that the Fed is going to have a regulatory response to the crisis that we’ve seen. So I’m just wondering how you view those risks specifically for BMO? There is regulatory uncertainty, but do you have a sense of how impactful the regulatory blowback, if you want to call it that, will be on BMO?

Yes. No, I know what you’re getting at, Meny. I would say as we’ve said to you, we are moving to a Category 3 bank in the U.S. I’d also take you back to the fact that we’ve said we were always built in the U.S. for more scale and more customer throughput and more assets, and that’s what we’ve brought to it. So whatever regulatory implications there are with the current environment, I feel very confident that we’re built to be able to handle them as they come. I don’t think you’re going to see a radical shock to our architecture in the U.S. at all. In fact, we think we’re built for it in the first place.

Are there any regulatory changes that you’re expecting?

None particularly, but it’s always an evolving. I mean I don’t have any announcements to make on behalf of the Fed, if that’s what you’re asking.

You got it. Thank you.

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Good morning. I’d like to follow-up with that line of questioning, I guess. I know you can’t talk about future regulation, if you have any thoughts there, I’d love to hear them. But just the FDIC levies that were announced a couple of weeks ago. I get to about $250 million cumulative impact of BMO, was that in the ballpark? You’re also saying you’re moving to the Category 3, you’re already built for that, that would suggest that you don’t need to build additional liquidity? And then finally, on Bank of the West, I’m just looking at the total balance sheet, loans plus deposits, I net out the fair value marks on loans and deposits. I’m still coming, I guess, 4% to 5% below where you expect it to be at least in the Q1 slide deck. Is that in the ballpark? And if so, how does that affect your accretion outlook?

Gabriel, this is Tayfun. So a series of questions there. In terms of the impact of the proposed FDIC assessment, that’s probably going to be closer to $300 million. And in terms of any expected changes on liquidity management, etcetera, related to new regulatory restrictions; look, we operate our balance sheet as a $1.3 billion balance sheet and our liquidity management approach is really not based on only our U.S. presence. And I don’t believe that there is going to be a significant change in the way we manage liquidity, whatever may come our way. In terms of the transition from a Category 4 bank to a Category 3 bank, there will be some investments mostly related to operational readiness because there is going to be a change in the frequency of data transfers, there is going to be a change in the way we track single counterparty credit exposures, etcetera. So those will require some operational investments, but we know what they are, and we are well prepared to do that. In terms of the size of the Bank of the West balance sheet, most of that change occurred prior to closing day. And what happened in 2022 is, as you know, Bank of the West had significant excess liquidity on their balance sheet with their transactional deposits. They had no wholesale funding supporting the asset side. So they basically were focused on maintaining and growing their margin, and they were willing to let go some of the deposits. That really is what constitutes the difference between their previous numbers versus the closing day balances. But again, from our perspective, that is not a huge impact. We’re basically looking at similar type of expectations in terms of their overall performance and contribution to BMO. And as Ernie articulated, we now obviously have a much different focus going forward in terms of growing both deposit side of their balance sheet as well as the loan side of their balance sheet across all businesses.

Thank you.

Thank you. Our next question is from Doug Young with Desjardins Capital Markets. Please go ahead.

Hi. Good morning. Just maybe to clarify on the Bank of the West versus last quarter and what we saw on Page 39. And the deposit side, I kind of get the loan side looks a little bit lower than what you kind of threw in to last quarter slide deck. And so I am just confused as to what the difference would be on the loan side?

So, there is an impact on the mark, which is I believe a couple of billion dollars. And then in general, I would say there is really nothing unique or different about the loan side of their balance sheet, except that they are facing the same type of environment that we all are, a little bit of softer loan growth. And also, I would point out that transitions like these with large acquisitions, always tend to slow down new customer onboarding acquisition. So, there is going to be a little bit slow out of the gate, but we expect that activity, especially post conversion on Labor Day to normalize from the current level. So, this is nothing unusual in terms of what we have been expecting.

Okay. I guess that’s what I was looking for. And then just on the hedge unwind and the impact and you walked through the details in your prepared remarks. And so maybe I am a little confused on this. So, I kind of get – you get a negative hit from the unwind of the unrealized loss because you are kind of crystallizing that, but you are going to spread it over the period of time in which you flow through the marks. I thought that negative fit would be kind of closely matched with the loss – or sorry, with the gain on the mark, but you are saying it’s a net positive impact and it will…

Yes, it is – it was a net positive this quarter. It will be net positive. It’s probably going to get smaller and smaller as we go forward. And basically, what happened is the combination of the hedge position and unwinding those initial swaps, booking the gain against higher amount of goodwill and then overlaying new swaps against the treasuries that we had brought us back really to the day one announcement accretion numbers. So, all that’s left now for the next few years is for the net amount to accrete back. It’s going to get smaller and smaller as the calendar moves forward.

And can you remind me what the dollar figure you said, what was that dollar figure?

It was $103 million pretax this quarter.

Pretax. Yes. Okay. So, when I think of the – for Bank of the West, I think it was $317 million pretax pre-provision earnings from Bank of the West alone, that $103 million is embedded in that. Is that correct?

Yes.

Okay. And then just clarification lastly, I apologize for the number of questions here. But negative operating leverage sounds like that’s what you expect in fiscal ‘23, but I am a little confused? So, you expect to show some positive – movement towards positive operating leverage to the back half of this year or it’s just going to be negative and in that fiscal ‘24 you are anticipating material positive operating leverage? Just want to get some clarification on how to think about in the back half of this year?

Yes. So, let me provide some clarification because with Bank of the West and without Bank of the West, these numbers tend to differ from each other. With Bank of the West in 2023, clearly, there is a larger negative operating leverage because of the dynamic of their expense base. And on a standalone basis, we still had negative operating leverage this quarter. And overall, the expense trends actually are very much in line with what we expected coming to this year. We did actually say very early this year, we significantly curtailed sales – headcount expansion. We changed the timing of some of our technology investments. So, we anticipated that on a quarter-over-quarter basis this year, we would see either flat or declining expenses, and that’s what we exactly have seen in the first quarter. Now, in the second quarter, quarter-over-quarter, our expenses have declined. What you are seeing in our negative operating leverage numbers is really the follow-through impact of the expenses that we added to our base last year. Once we – when those are true, and they are going to be very shortly, we are going to be through them, our expense growth will decline towards low-single digits and on a BMO standalone basis. On top of it, you also now have the cost synergies that, especially towards the end of this year and to the first quarter of next year that are going to show up, which by itself has – is going to create positive operating leverage. What we are now saying is, as we look at our expense base and in a relatively weaker revenue environment, we also tend to make other expense decisions at BMO standalone in order to get back to our targeted efficiency ratio, which always was around 55%. We will continue to assess those. We will make those decisions. And combined with the Bank of the West synergy pickup, these additional decisions that we are looking at we expect those to generate meaningful positive operating leverage in 2024.

Got it. Appreciate the color. Thanks.

Thank you. Our next question is from Scott Chan with Canaccord Genuity. Please go ahead.

Good morning. Maybe talking just a couple of cleanup questions, I am still going through it. But in terms of the Bank of the West contribution, they just hit your wealth management in U.S. P&C segment. Did that hit any other segment at all?

No, those are the two main points. And corporate obviously has some impact as well.

And just on corporate, I noticed the preferred equity dividend shot up to $95 million. In total, it was $127 million versus $38 million last quarter. Was that due to Bank of the West? And how do we…

Actually – yes, I think that really is dependent upon the frequency of the preferred dividend payments. Some of them are semiannual, some of them had different frequency. We actually are happy to share with you the details as to – on a quarterly basis, what amount of preferred dividends we pay out. So, we be able to give you the details for you to track that.

Yes. That would be super helpful. Just knowing nuances on every other quarter. And just lastly on capital, you talked about the first phase of the B3 reforms this quarter, like looking out to future quarters, do you have visibility if there is going to be in that or negative net positive or negative impact on further phases?

So, the next important date is the first quarter of next year. That’s when the trading rules will come in. And then as you know, between now and the first quarter of 2026, the fore factor will go up by 2.5% every year. But the more important quarter of all for the next 3 years is probably going to be next year’s first quarter, which is going to have a negative impact on capital and we will shortly share with you our assessment of what that may be once we conclude the work that’s currently underway.

Okay. Alright. Thank you very much.

Thank you. Our next question is from Paul Holden with CIBC. Please go ahead.

Thank you. A couple of questions for you, I guess first, thanks for the additional detail on the CRE portfolio on Slide 30. And on that point, just hoping you can provide some more color around the exposure in California, just given the focus in that market, maybe you can give us a context of how much is office, how much might be more exposed to like San Francisco, L.A., sort of those regions that were reading a whole lot about?

Sure. Thanks Paul. So, we have given the CRE portfolio overall, I would say is that on Page 30, you see 14% of our total CRE of $67 billion is in California. We haven’t broken down within that specifically office or other areas, but I would say you can take a general mix of the broader portfolio of what we have. But when I step back, I would say that the strength of our CRE portfolio remains pretty strong. Within that, we have got a deep dive across all of our large properties and exposures and the office for BMO is 1% of the total book. So, as you have seen in the disclosure, 10% of our CRE is office, which equates to 1%. We will over time obviously provide more disclosure. But I think the jump-off point of the strength of the relationships we have built over the last 20 years, 30 years, both at BMO as well as at Bank of the West actually positions us very well. And so again, we added some California with the Bank of the West portfolios. But I feel very good about the quality. You can see that in our impairment book, there is a very normalized trend coming in. And we are watching the news and tracking with our borrowers, what’s going on. So, I wouldn’t highlight any significant area of concern. I would just also add that we have got the credit marks from the Bank of the West portfolio. We have got the opening provision. So, despite a very high provision coverage overall, we have a significantly higher coverage on commercial real estate that we have been carrying for the past few quarters. So, obviously, we will track this. I think this is a topic which all of you and us are interested given all of the news. But where we are today, I feel very confident about the quality of our book.

Got it. Okay. Thank you. Second question is with respect to commercial and corporate loan growth, it would be great to hear an update on how you are viewing or what your growth appetite who looks like right now, hearing a lot about regional, U.S. regional banks pulling back in terms of credit underwriting standards, wondering if you are slowing growth intentionally or if you are seeing less demand in certain pockets, maybe just a broad update there in U.S. and Canada would be helpful? Thank you.

Yes, sure. Let me begin and then maybe I will ask Nadeem to jump in from a business perspective. I think overall, you have seen our risk underwriting criteria. We are through the cycle lenders with deep relationships. And I think that continues the trend. We are not walking away from new lending or new relationship. It’s really a function of the economy. And so you are seeing business activity slow down. So, within that loan portfolio growth, there is a lot of recycling happening. We are growing the book. I think growth will be slow coming off the back of all of the things you are hearing and seeing probably in the mid-single digits and then more focused on some of the other sectors, again, just from a balanced portfolio growth. But I am pretty confident, just given the quality that growth will continue, albeit slower, just in line with any of the other banks. I think with closing the Bank of the West acquisition now, you can see we are again in a position of capital strength. And so I think our relationship lending continues. And I think we have said to you in the past, 90% of those are sole bank, lead bank, and we expect we will continue to capitalize on that. Nadeem, would you add something?

Yes, sure. I would say that if you look at the countries, North and South, U.S. is definitely slower than what we see in Canada. But we are still doing deals, and we are still doing loans. And there are pockets that when you look at agri, you look at food, we are still seeing good volumes there dealer finance, media finance, there is good volumes in those as well. But areas where leverage finance or CRE, those are areas, of course that have slowed down dramatically in the U.S. and will affect our growth. In Canada, those areas have slowed down as well, just not to the same degree. So, as Piyush said, we are still growing, we are still doing deals. The volumes are down as they would be in any cycle, but our risk appetite, as Piyush said, and I will just back up one more time and say it, is that we go through cycles, we are not in and out of industries. But we are looking at capital, we are looking at risk optimization and return, and we are looking at long-term relationships, and that’s how we get through cycles time and time again.

Alright. Thank you. That’s it for me.

Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.

Good morning. In the past, when a particular asset class came under some pressure, the banks have given us some outlook on the loss content in that particular asset class. Comments were around, hey, in a stressed environment, we could see x 100 basis points of loss content or some of that effect. Is there any way to size that in the context of commercial real estate as a whole and maybe office specifically, in a stressed environment, have you given some thoughts to what the loss content in those businesses could be? I appreciate that these are not massive parts of BMO’s portfolio, overall loans, but it would be helpful to get some outlook there.

Yes. Thanks again, Mario, it’s Piyush. I would begin by saying that we have come off a very benign cycle. And so in the early parts of this year, we have been hinting to you or telling you actually outright that we are normalizing. And so these trends are really normalizing versus stress. Now having said that, from a risk management perspective, we have a good discipline of regularly stress testing our portfolios over time. When the normal loss rates have been zero to 1 basis point in commercial real estate for us over the last 8 years, 10 years. And I just said, we are significantly over-provisioned compared to that loss rate. I feel pretty good about where we are headed. So, unlike some of the news items you hear, there is a large stratification within commercial real estate, the preponderance of multifamily, which is doing very well, single family. But yes, we have looked at office. Again, I will reiterate, office is 1% of our book. Within the 1%, as you look at the disclosure between REITs and medicals that are doing extremely well. I can then segment down to certain office classes, A, B or C in urban and suburban, and we have done a deep dive. So, in our stress test, we don’t see any immediate worries now, but we know there is blood in the water, there will be impacts as rates rise, as cap rates change. And so in due course, we will come back, and you will see those in the results, if there is something that is of a higher concern. If you go back to the 30-year history, our loss rates overall are 30 basis points across the portfolio. In that, some stresses here and there. But at the moment, I don’t have much more to offer other than we feel very confident about our overall portfolio.

Did you say 13 basis points or 30 basis points of losses over the last 30 years in commercial real estate?

No, we said overall across the entire portfolio, it’s three, zero, 30 basis points. And here coming off the benign cycle, and so you are seeing our loss rate this quarter at 16 basis points unimpaired. So, we have still a long way to the normalized average before we start thinking about stress.

Well, I don’t want to put words in your mouth, but it sounds like what you are saying is that the loss content on your commercial real estate and on office based on the work you have done to-date, the loss content is still very, very modest. That seems to be the message you are sending, unless I am misinterpreting it?

No, that is correct. The loss content from the performance we have seen and the formations and the early watch list we have, we feel pretty strongly about it.

Got it. Thank you.

Thank you. Our next question is from Lemar Persaud with Cormark. Please go ahead.

Thanks. Maybe just to start off, I just want to summarize one of the prior answers to the loan growth question. Would it be – I am going to ask you very directly, would it be fair to suggest that BMO has not changed any of its underwriting standards in the U.S. or Canada? And then if that’s true, then would it be fair to suggest that in the commercial loan growth in the U. S., excluding Bank of the West, so that sequential decline, I think it was 4%, should reverse in future quarters because there has been sometimes since we have seen commercial loan growth this soft excluding perhaps some like one-time negative impacts in the U.S. like PPPT runoff or etcetera. So, I just want to be really clear on that part.

Yes. Sorry, Piyush, again. I would say that the risk appetite is a through the cycle risk appetite and our risk underwriting hasn’t changed. Now, in that given seasonality, given cyclical trends, we will tend to overstress more of the underwriting at origination. But this really is much more a function of the market than it is a function of us in that market. And so loan growth demand is slowing down. You are seeing that across the banks, you are seeing across sectors. And so as economic activity picks up, as there is more confidence in the market, I think we will start to see more originations, and we will be there for our clients. We continue to, like I said, manage through the cycle. In the risk appetite, we manage through our concentration risk management. And all of those have held us in good stead over the many years, and we don’t plan to change any of that.

Otherwise put, Lemar, it’s Darryl, just to help on the question. I think in time you will be exactly right. The question is how much time will it take for you to be exactly right, meaning the vast majority of the catalyst for the decline in loan growth is in fact if not the entirety of it is demand, it’s the market. We haven’t changed underwriting standards and we don’t change our approach to managing our clients. And so as we work through this phase of softening, economic activity, that should be the outcome. As that phase turns, then you should see a return to positive loan growth for us particularly in commercial and as you know our strategy has always been in good markets when loans are growing broadly in the industry and commercial in both Canada and the U.S. Our strategy is to outperform that market when that occurs and that would be our intent today, no change.

Thanks. And then my next question, I want to turn to U.S. P&C margins. I am looking at your waterfall on Slide 14. It seems to suggest that excluding Bank of the West, margins have turned negative on the standalone business if you will. It looks like it was a rapid shift in deposit margins comparing this waterfall versus last quarter’s, deposit margins turned to a negative drag on this. Was this directly related to the U.S. regional bank turmoil and then could you talk to the outlook for U.S. specific retail managed just as a means for my modeling?

Yes. So, there are two elements here, you are seeing actually what the Bank of the West contribution was to U.S. P&C NIM. We are quite pleased with pretty healthy contribution to our margins. The impact of faster deposit re-pricing clearly has an element of very strong competitive markets in the U.S. with respect to deposit rates. We tried to sort of maintain a stable approach to how we price our deposits, but the market over the past 90 days has accelerated and we are feeling the impact of that on our margins. There is also an element of migration to term deposits which looks a bit more stronger in Canada. But in Canada it’s actually coming slowly to an end probably over the next couple of quarters will it run through the migration impact on Canadian margins. In the U.S., my expectation is that until the market achieves that balanced picture, we will probably continue to see more faster re-pricing of both commercial and retail deposits. I suspect by the end of this year, with also the Fed hopefully coming to the end of their rate increase cycle that pressure will come off.

So, it sounds like then relative to that 3.96, we could see that come down a bit and then hopefully switch course in 2024, is that fair?

Yes, but not meaningfully. I mean as I look ahead, both in Canada as well as in the U.S., we are seeing a fairly stable net interest margin in our P&C businesses and the same message holds true for our consolidated margin as well. So, we are not expecting significant pressure on these margins.

Okay. Thanks. That’s it for me.

Thank you. We have no more further time for questions. I will now turn the meeting over to Darryl White.

Well, thank you, operator, and thank you all for your questions. I have two important thoughts to close the meeting with. One is to remind us all that BMO’s highly diversified business mix, strong foundation built on the strength, size, stability of our balance sheet, and fortified by our superior risk, liquidity and capital management is built to perform in any environment. And second, before we close the call, I want to take a moment to recognize, while he is here with us in the room, Dave Casper, who is retiring next month after over 40 years of service with BMO. Dave, as you all know, has been instrumental in BMO’s growth, particularly, but not exclusively, in the United States and under his leadership, our commercial banking businesses have become a top five commercial lender on the continent. Dave has also played, as you all know a very key role in the acquisition of the Bank of the West and has been a staunch supporter of all the communities we serve, but particularly the great City of Chicago. So, I will always be grateful for Dave’s legacy of outstanding leadership at BMO. With that, I thank you all for participating and we look forward to speaking to you again in August. Thanks everyone.

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