Bank of Montreal (BMO.US) Q3 conference call: 15% return on shareholders' equity enters the sprint zone. The US-Canada tariff storm is difficult to shake the main line of high returns

The Zhitong Finance App learned that the Bank of Montreal, Canada (BMO.US) handed over a report card of “surface setbacks and core improvements” in the latest fiscal quarter, which was dragged down by one-time projects such as sale of transportation and supplier financing business. Net profit declined year-on-year, but adjusted earnings per share and revenue exceeded market expectations, and profit before tax provision for various business segments set records. The bank also announced that it plans to launch a stock repurchase program of up to 25 million shares in the third quarter.

Overall, Bank of Montreal's core operating performance in the third quarter was significantly stronger than that shown by book profit: adjusted net profit increased 19% year over year to $2,859 billion, adjusted earnings per share increased 22% to $3.96 billion, profit before provision increased 13% to $4.5 billion, and adjusted return on shareholders' equity rose to 14%. Reported net profit declined 25% to 1.75 billion Canadian dollars, mainly due to expenses of 973 million Canadian dollars generated from the sale of transportation finance and supplier finance businesses, rather than the deterioration of main business.

Net profit from Canadian personal and commercial banking businesses increased 15% year over year; net profit from US banking business increased 9% in US dollars; net profit from wealth management increased 22%, and net profit from the capital market surged 45%. Among them, profit before capital market provisions increased 39% to 903 million Canadian dollars. The Group's revenue increased 11%, and active operating leverage reached 1.6%, indicating that growth was not solely driven by interest spreads, but was driven by loans, fund management and payment solutions, wealth management fees, and bond underwriting revenue.

BMO management maintained the goal of achieving a sustainable 15% return on shareholders' equity by the end of fiscal year 2027 during the performance conference call. The sale of 138 branches, transportation and supplier finance businesses and Canadian Moneris equity interests outside the core region of the United States is expected to release a total of about 50 basis points of common stock Tier 1 capital; after the exit of these low-single-digit return rate businesses, capital will be prioritized for customer relationships and organic loan growth with an expected return of more than 15%. Share repurchases are the remaining capital use after meeting high-quality credit requirements.

Credit loss provision fell from $739 million in the previous quarter to $722 million, and provision for impairment loans fell to its lowest level in nearly ten quarters; the Tier 1 capital adequacy ratio for common stock remained at 13%, and it was announced that applications for additional repurchases of up to 25 million shares, accounting for approximately 3.6% of tradable shares. Management believes that the new tariffs only directly cover about 5% of Canada's exports to the US, and the relevant direct loan exposure is less than 1% of the total loan amount. Currently, it does not constitute a widespread credit incident. The provision for impairment loans in the fourth quarter is expected to be roughly the same as in the third quarter.

BMO management said that the bank sees cutting-edge AI technology as both an operational efficiency tool and a source of credit growth in North America: the insurance platform SmartDecision can reduce the underwriting decision time from the industry average of at least 28 working days to as fast as 10 seconds, while the frontline chatbot Lumi increases the productivity of new employees by 17%; management also said that the AI capital expenditure cycle in the US economy also brings multi-level financing opportunities to the agency. Management remains confident in long-term capital market profitability, increased return on Bank of America business, and the target of 15% return on shareholder equity for fiscal year 2027.

The following is the full text of the Bank of Montreal results conference call (artificial intelligence tool assisted translation):

Presentation session

Operator:

Good morning, welcome to BMO Financial Group's FY2026 third quarter results conference and conference call held on August 25, 2026. Today's presenter is Christina Vio. Please get started.

Christina Vio, Head of Investor Relations:

Thank you. Good morning everyone. Today we will first hear from BMO CEO Darryl White; followed by CFO Rahul Nargilkar and Chief Risk Officer Piyush Agrawal. Also attending the conference and answering questions were heads of various business groups: Matt Mehrotra, Head of Canadian Commercial Banking Business; Sharon Howard Laird, Head of Commercial Banking Business in Canada; Alan Levine, Head of Bank of America; Alan Tannenbaum, Head of BMO Capital Markets; Deran Kamanga, Head of Wealth Management; and Darrell Hackett, CEO of BMO America.

As a reminder, our conference call will end at 8:15am this morning. As described on page 2 of the slide, forward-looking statements may be made during this conference call, which involve inherent risks and uncertainties. Actual results may differ materially from these statements. I would also like to remind listeners that the Bank uses non-GAAP financial measures to calculate adjusted results.

Management measures performance according to both reporting and adjusted standards, and believes that both are helpful in evaluating underlying business performance. Unless otherwise indicated and clearly indicated as reporting caliber data, Darryl and Rahul quoted adjusted performance in their statements. Next, I'll hand over the phone to Darryl.

CEO and Director Darryl White:

Thank you, Christina. Good morning everyone. This morning, we announced another strong quarter of operating performance: earnings per share of $3.96, up 22% year over year; profit before provision before tax was $4.5 billion, up 13% year over year. These results reflect our continued focus on implementing the strategies outlined on Investor Day in March this year, which is to increase returns and accelerate growth.

All business segments have recorded pre-tax profits, and the capital market and wealth management business have maintained strong momentum; commercial loans in Canada and the US have continued to grow as we deepen the “one client” relationship throughout our business system. Our revenue achieved double-digit growth, and our operating leverage reached 1.6%; we kept pace with revenue growth while continuing to reinvest for future growth.

We continue to make substantial progress in achieving our goal of return on shareholder equity. The return on shareholders' equity again improved to 14% this quarter, an increase of 200 basis points over the previous year, continuing the growth momentum accumulated over the past seven quarters. The strength of our core operating performance this quarter further strengthened our confidence in achieving a sustainable 15% return on shareholders' equity by the end of fiscal year 2027.

Since setting out the path to higher returns, we have proven that diversified revenue growth, strict expense management, sound risk management, and proactive capital management can lead to tangible and sustainable performance results.

The key drivers we identified on Investor Day continue to support this progress. We have seen the number of customers continue to grow, fee-type revenue remains healthy, and the productivity of the entire group improves. Credit performance has improved, and provision for impairment loans has fallen to the lowest level in the past ten quarters, as a result of our proactive risk management and high portfolio diversification.

Our capital position remains strong, and our Tier 1 capital adequacy ratio for common shares is 13%. In his speech, Rahul will explain the impact of the announced asset sale transactions; it is expected that these transactions will contribute an additional 50 basis points of capital and support the increase in returns by reallocating capital to areas with attractive, higher returns, and longer-term growth opportunities.

These strong capital levels continue to provide us with the flexibility to support customer needs, invest in future growth, and return capital to shareholders through a combination of dividends and share repurchases. Let's talk about our various businesses. As I emphasized earlier, every business segment achieved record pre-tax profit before provision this quarter.

In the Canadian personal and commercial banking business, a deposit-led growth strategy continues to drive performance improvement. Operating deposits increased 7% year over year, and customers chose us because BMO provides trustworthy advice, innovative digital capabilities, and personalized solutions. At the same time, customers are concentrating more of their financial relationships on BMO.

Mutual fund sales achieved through our financial center increased 33% over the previous year, and strong market share increases the penetration rate of investment products in the retail customer base. We're building a deeper level of customer loyalty; BMO Blue Rewards has had strong initial engagement since launch, weekly registrations have increased 65% compared to pre-launch, and customers are actively participating in partner promotions that can really improve their financial situation.

The Canadian commercial banking business continued to perform well, with loans growing well, up 3% year over year; fees for fund management and payment solutions increased strongly by 13% compared to the previous year. Since the beginning of the year, the acquisition of new customers has been healthy, up 20% from the previous year, with the mid-tier market performing particularly well. As the official and exclusive financial services partner of the Canadian Soccer Association, we are proud to continue our decades-long tradition of driving the development of soccer — from grassroots soccer to the most influential events around the world, including supporting the men's national team to participate in this summer's World Cup, and looking forward to the 2027 Women's World Cup.

Our comprehensive marketing campaign around this year's World Cup reached 30 million Canadians, drove a 40% increase in visits to bmo.com, and helped us achieve our strongest quarter of net customer growth since this year. Our Bank of America business continued to save and grow. The return on shareholders' equity reached 9.8%, an increase of 90 basis points over the previous year; the return on tangible common equity reached 17.3%.

Investments in talent, technology and integrated market strategies are making good progress in net customer growth. Commercial loan activity continues to show a positive trend; after completing balance sheet optimization work in the second quarter, we achieved year-on-year growth in commercial loans for the first time.

Loan balances increased 4% month-on-month, and revenue from record money management and payment solutions increased 15% over the previous year. In the US retail banking business, core customer deposits across the entire business system increased by 2% compared to the previous year, with California growing 3%. Volkswagen's wealthy customer strategy has also made good progress, with investment capital inflows increasing 17% over the previous year. In terms of US banking, we have moved from an optimization phase to an inflection point that can accelerate profit growth.

The wealth management business achieved another strong quarter. Driven by extensive growth in the overall business system, net profit set a record, including an increase in the penetration rate of wealthy households into private banking services and a continued increase in net new assets. Our differentiated portfolio of exchange-traded funds and mutual fund products continues to attract client assets and solidify our position as one of Canada's leading investment managers.

Total long-term mutual fund sales and exchange-traded fund capital inflows both increased 19% over the previous year, reflecting strong fund performance and innovative product supply. Capital market business performance remains strong, with a record pre-tax profit of $903 million before provision, reflecting the advantages of our diversified business system and leading industry expertise.

The global market and investment and corporate banking business have made strong contributions; with our business strength and “one customer” collaborative connection, stock trading and debt underwriting performance have been strong. This quarter's results are further proof of the profitability of the capital markets business.

As demand for investment in critical minerals, energy infrastructure and resources continues to grow, BMO is helping clients execute transformative deals to strengthen their economies and support long-term economic growth. We also recently announced an agreement to acquire Euroz Hartleys Group's capital markets business, combining BMO's world-leading metals and mining business system with one of Australia's top investment banks and stock distribution platforms to create a truly integrated global service capability for customers.

Across all businesses, the power of a “one customer” strategy is creating measurable value. Increased referrals, stronger connections between business lines, and increased customer engagement are creating sustainable growth opportunities across the Group. On Investor Day, we highlighted the important value AI has created in many ways — creating business value for customers and our teams by personalizing customer experiences, enhancing team capabilities, and automating processes.

We are continuing to advance and integrate these important initiatives. This quarter, BMO Insurance launched another AI-driven platform, SmartDecision. Using predictive modelling, the platform can make an underwriting decision as fast as 10 seconds, while the industry average time required is 28 business days or more.

Our frontline chatbot Lumi takes speed and efficiency to a new level, streamlines the process of obtaining policy information for individual and commercial banking businesses in Canada, and increases the productivity of new employees by 17%. Lumi's application range is being expanded and scaled to support customer communication, starting with the mortgage renewal business.

We are now taking the next step in transformation to further strengthen our business model, expand the scale of related work within the Group, and accelerate value creation. On the trade side, Canada-US relations are undergoing a period of adjustment, and the resulting uncertainty poses resistance to trade-related industries and even broader domestic affordability between the two countries.

This relationship will remain extremely important to both countries, but some of the assumptions businesses have relied on for decades — particularly those relating to the predictability of trade policies — have been tested over the past year and a half. For the Bank, this has had two implications. First, we are closely monitoring its impact on customers and portfolios, and working with clients to address issues such as liquidity, investment decisions, supply chain adjustments, and market diversification. What I can report today is that they have adapted very well.

Second, our competitive position in Canada and the US is a strategic advantage for our customers. Our business spans diverse North American platforms to help customers cope with changes in both markets. Canada is closely linked to the US, and North America remains one of the most attractive economic regions in the world. We strictly abide by risk discipline, maintain close contact with customers, and are ready to support them as government policies and the external environment evolves.

In this context, the world is looking for investment destinations that can achieve long-term growth and enhance resilience in an increasingly uncertain environment, and Canada has tangible advantages: a stable financial system, abundant resources, world-class talent, and a platform to export to the world through the world's most comprehensive free trade agreement system.

The upcoming investment summit is a good example of Canada showing investors these advantages and competing for capital on the global stage. BMO is uniquely positioned to seize growth opportunities in this environment. Our quality commercial banking business was once again recognized by World Finance magazine and named the Best Commercial Bank in Canada and the US. Our leadership in treasury management and payment solutions has also been recognized by Global Finance; we have been named the best trading bank in North America for our continuous innovation in automation, real-time payments, data, and AI capabilities.

Our differentiated capital markets expertise, particularly in metals and mining, energy and infrastructure, can fully seize this market opportunity; our growing wealth management platform and strong deposit base support all of these capabilities, creating important opportunities for us to continue to expand our customer relationships and achieve sustainable profitable growth.

Most importantly, we remain focused on our top priority: to achieve and maintain a 15% return on shareholder equity by the end of fiscal year 2027 by fulfilling the promises made on Investor Day — to achieve higher returns, achieve faster profitable growth, and build a more resilient business system; all based on expanding and deepening customer relationships, creating business value through innovation, and optimizing operating performance.

I would like to thank all the BMO team employees. It is their commitment to our customers and community that has driven our shared success and convinced me that we will continue to create long-term value for our shareholders. Next, I'll hand over the phone to Rahul.

Chief Financial Officer Rahul Naljirkar:

Thank you, Darryl. Good morning everyone. I will begin my statement on page 10 of the slides. Third-quarter reported earnings per share were $2.38 and net profit of $1.8 billion. The adjustments are shown on page 45 of the slide, and include $973 million in expenses, mainly relating to goodwill involved in the announced sale of transportation finance and supplier finance businesses.

The next presentation will focus on adjusted results. Earnings per share were $3.96, up 22% from the previous year; net profit reached a record $2.9 billion. The return on shareholders' equity was 14%, an increase of 200 basis points over the previous year; the return on tangible common equity was 18%, an increase of 240 basis points; and the return on assets was 72 basis points. These results show that we are strongly implementing our strategic priorities and achieving strong core operating performance across all of our businesses, while continuing to optimize our business portfolio and invest in future growth. Pre-tax profit before provision increased 13% year over year to $4.5 billion. All four business segments set record pre-tax profits, and active operating leverage reached 1.6%.

Revenue increased 11%, and growth was broad-based, reflecting the benefits of a diversified business portfolio. Wealth management and capital markets businesses continued to achieve strong fee revenue growth; Canadian personal and commercial banking and US banking businesses benefited from increased net interest spreads and balance sheet growth.

The total provision for credit losses fell to $722 million, and provisions for impairment loans and normal loans were reduced. Piush will further explain in his speech. As Darryl mentioned, we have announced three strategic deals aimed at optimizing our business portfolio, including the sale of 138 US branches outside of our core business area, transportation finance and supplier finance businesses, and Canada's Moneris business.

Although these businesses contributed moderately to revenue and earnings this quarter, they fell short of our long-term growth and return on shareholder equity goals.

We expect that the completion of these transactions will increase the first-tier capital adequacy ratio of common shares by 50 basis points, increase the overall return on shareholders' equity, and enable us to better achieve the growth and return goals proposed by Investors Day; we will allocate capital and resources to opportunities that meet growth and return expectations.

Let's move on to the balance sheet on page 11 of the slide. We are seeing increased loan growth in both Canada and the US, which makes us hopeful that net interest income will continue to grow. Average loans increased 3% year over year and 2% month over month. With the completion of balance sheet optimization measures, the year-on-year growth rate of US commercial loans turned positive this quarter, up 4% month-on-month.

Commercial loans in Canada increased 3% year over year and 2% month over month. Canadian consumer loans experienced moderate growth across all loan products. Average deposit balances remained flat year over year and month over month. Core operating deposits increased 8% year over year, but this was offset by active cuts in time deposits between the two countries. Improved deposit structures are still an important source for maintaining the resilience of profit margins.

Let's move on to slide 12. Excluding market business, net interest income increased 5% year over year, mainly driven by profit margin expansion and loan growth in Canadian personal and commercial banking businesses and US banking businesses, but partly offset by a decline in net interest income from the corporate services sector.

Excluding market operations, the net interest spread was 226 basis points, an increase of 5 basis points over the previous year, reflecting the continued expansion of deposit profit margins due to higher tiered reinvestment interest rates and improved deposit structures. Excluding market business, net interest spreads fell 3 basis points month-on-month; the impact of the increase in profit margins in various business sectors was completely offset and surpassed by the impact of the rise in the level of low-yield liquid assets and the decline in the net interest income of the corporate service sector.

Despite resistance from deposit competition and loan structures, our emphasis on core operating deposit growth and prudent loan growth is still reflected in the stable net interest spread trend in the US banking business and the Canadian personal and commercial banking business. In the Canadian personal and commercial banking business, net interest spreads increased by 2 basis points month-on-month, and the increase in deposit margins was partially offset by a decrease in loan margins.

In the US banking business, net interest spreads fell 1 basis point month-on-month, as the impact of rising profit margins on deposits and loans was offset by the impact of loans growing faster than deposits. Looking ahead, we expect core margin trends in Canadian personal and commercial banking and US banking to remain resilient. In the short term, quarterly net interest spreads may fluctuate slightly due to prudent liquidity management and balance sheet structure changes related to asset sales; however, improved deposit structures, stepped reinvestment, and strict pricing will continue to support the underlying net interest margin performance. We focus on increasing net interest income while maintaining a stable net interest spread.

Let's move on to slide 13 on the non-interest income. Non-interest income increased 26% year over year; excluding transactions, it increased 15%, reflecting the results we have achieved in continuing to deepen customer relationships across all businesses. The increase was mainly driven by increases in wealth management fees, debt underwriting fees, fund management and payment solution fees, and loan processing fees, but was partially offset by revenue effects from the sale of non-strategic insurance portfolios last year.

Let's move on to page 14 of the slide. Expenses increased by 9%; if exchange rate effects and higher performance pay were excluded, the increase was 6%. We continue to strictly manage expenses based on revenue growth rates to achieve positive operating leverage.

This performance reflects the benefits that have been realized from efficiency improvement programs, while we are selectively reinvesting in key growth areas such as talent, technology, and marketing. The efficiency ratio improved to 54.9%, and the operating leverage was 1.6%. We are still expected to achieve single-digit growth in core expenses and guidance on active operating leverage throughout the year.

Let's move on to page 15 of the slide. The Tier 1 capital adequacy ratio for common stocks remained strong at 13%, the same as in the previous quarter; strong endogenous capital growth after deducting dividends contributed 33 basis points to support business growth and share repurchases. Strict capital allocation is the foundation of our business model. In view of the strong capital situation, we announced a new normal issuer repurchase plan today. We intend to repurchase up to 25 million additional shares starting in September, accounting for about 3.6% of the total number of tradable shares, but is still subject to regulatory approval.

The following describes each business segment, starting on page 16 of the slide. Net profit from Canadian personal and commercial banking businesses increased 15%, reflecting a good 7% increase in pre-tax profit before provision and a decline in credit loss provisions. Revenue increased 6%, driven by increased profit margins, loan growth and strong core deposit growth. Non-interest income increased 13%, mainly driven by increases in mutual fund distribution fees, fund management and payment solution fees, and bank card revenue, but was partially offset by a reduction in retail deposit fees. Expenses increased by 4%, reflecting increased operating costs and technology investments.

The efficiency ratio was improved to 42.8%, and the operating leverage was 1.6%. Let's move on to page 17 of the slide to introduce the US banking business. The relevant data is presented in dollar terms. Net profit increased 9% year over year; return on shareholders' equity increased 90 basis points year over year to 9.8%, and return on tangible common equity reached 17.3%, reflecting the strong return on invested marginal capital.

This result was supported by strong core operating performance, with pre-tax profit before provision of $972 million, an increase of 7% over the previous year. Revenue increased 5%, driven by increased net interest income due to increased profit margins and increased commercial loans. Non-interest income increased 4%, mainly driven by record treasury management and payment solution fees and higher investment management fees.

Expenses increased by 3%, reflecting continued investment in talent and technology, while related investment was mainly funded by efficiency improvements, and operating leverage reached 1.7%. We're seeing strong momentum across the US business system, helping to increase returns and accelerate growth. Let's move on to page 18 of the slide. Net profit from wealth management increased 22% year over year. The strong performance was mainly driven by record wealth and asset management revenue, which increased 24% year over year, reflecting a strong market and continued growth in net new assets, deposits and loans.

Insurance revenue declined due to sales proceeds in the previous year, which were partially offset by favorable market changes in the current quarter.

Expenses increased by 22%, mainly driven by rising employee-related expenses, including increased costs linked to revenue. Let's move on to page 19 of the slide. Capital market net profit increased 45% year over year, mainly driven by a record pre-tax profit of $903 million before provision, which increased 39% year over year. Revenue increased 20% year over year; global market revenue continued to perform strongly, growing 27% driven by active stock trading activity.

Revenue from investment and corporate banking increased by 10%, mainly driven by corporate banking and strong debt underwriting activities. Expenses increased by 9%, mainly due to increased staff and technology costs. These results reflect both the constructive market environment and the benefits of our investments in product capabilities, resource allocation, and industry expertise.

Let's move on to page 20 of the slide. The corporate services sector recorded a net loss of $178 million, compared to a net loss of $123 million in the same period last year, reflecting declining revenue and rising expenses. This quarter's results show that we continue to make progress in meeting our priorities of improving returns and accelerating growth, as set out on Investor Day.

We are advancing a number of BMO's unique drivers, including improving US business returns, strengthening core operating performance, improving capital efficiency, and maintaining strict balance sheet growth. The adjusted return on shareholders' equity reached 14% for the quarter, and we are confident that we will reach our mid-term target of 15% by the end of fiscal year 2027. Next, I'll hand over the phone to Piush.

Chief Risk Officer Piyush Agrawal:

Thank you, Rahul. Good morning everyone. The North American economy continues to show resilience in the face of high geopolitical risks and changing trade patterns. The Canadian economy has resumed growth, and the US economy has remained steady, supported by AI-driven expansion. Meanwhile, Canada's labor market is still weaker than historically normal.

Energy-driven inflation has caused recent fluctuations, while additional tariffs announced last weekend present downside risks. Here's the quarter's performance. We're seeing the results of the steps taken over the past few years, including improving portfolio quality, maintaining strict underwriting standards, and proactively managing emerging risks.

As shown on page 22 of the slide, the total provision for credit losses was $722 million, down from $739 million in the previous quarter, mainly driven by a decline in provisions for impairment loans. Impairment loan losses decreased by $26 million to $708 million, equivalent to 41 basis points. By operating sector, impairment loan losses for Canadian personal and commercial banking businesses were $447 million, a decrease of $30 million from the previous quarter, mainly due to a decline in losses in the unsecured retail loan portfolio. Although consumer bankruptcy is still at a high level, we have begun to see some signs of stabilization due to our proactive risk management measures.

In view of ongoing trade policy uncertainties, we remain alert and continue to actively manage our investment portfolio through enhanced monitoring and early communication with clients. In the US banking business, losses were 223 million Canadian dollars, a decrease of 14 million Canadian dollars from the previous quarter, and both consumer and commercial losses declined.

Impairment loan losses for capital markets operations were $30 million. Let's move on to page 23 of the slide. Regular loan provisions remain a key advantage for us. The $14 million normal loan provision for the quarter was mainly driven by changes in macroeconomic outlook related to rising long-term interest rates, but was partially offset by improvements in portfolio credit quality.

The Bank's provisions are still sufficient. The balance of normal loan provisions is $4.8 billion, and the coverage rate for normal loans is 69 basis points. Overall, the underlying credit trend improved during the quarter. The wholesale loan portfolio continued to experience a net positive shift, further reducing the Watch List balance by $1 billion.

As shown on page 24 of the slide, the total amount of impairment loans was $6.8 billion, or 97 basis points, down 4 basis points from the previous quarter. New impairment loans of $1.5 billion were the same as in the previous quarter. Looking ahead, we are encouraged by the positive trends in our portfolio. The commercial loan watch list and the trend of impairment loans continued to improve, and the fundamentals of borrowers in the portfolio remained stable.

Meanwhile, the recently announced tariffs are an important development, and we are watching very closely their possible second-order impact on Canadian economic growth, employment, and business investment. Despite this, we don't currently consider this a very widespread credit risk incident.

Our portfolio is highly diversified. The areas most vulnerable to trade disruptions have been stress-tested, and underwriting standards remain stringent. Direct related exposure is manageable, less than 1% of the total loan amount, with a significant portion corresponding to investment-grade borrowers.

For us, the larger variable is still the broad macroeconomic impact Canada faces. We will continue to support our customers in addressing these policy changes. We also believe that government measures will help mitigate the impact on workers and businesses. Therefore, in the current environment, we are both properly cautious and confident in the resilience of our portfolio.

In this context, we expect credit loss provisions for impairment loans in the fourth quarter to be roughly the same as in the third quarter, with the 2026 guidelines remaining unchanged. All in all, the Bank entered the fourth quarter in a strong position, with solid provision coverage, highly diversified risk exposure, solid borrower fundamentals, and a level of capital and liquidity that can provide a high degree of flexibility in various economic scenarios.

We believe these factors enable BMO to continue to support customers while carefully managing risk throughout the cycle. Next, I'll return the phone to the operator and proceed to the question and answer session of this meeting.

Q&A session (AI-assisted summary and translation)

Operator: [Operator Instructions] Our first question came from Matthew Lee of Canaccord Genuity.

Matthew Lee, Canaccord Genuity Research Department:

Maybe ask Alan to answer a question first. The return on shareholders' equity in the US business is currently progressing quite rapidly to around 10%. Can you rank the key drivers...

Christina Vio, Head of Investor Relations:

Can we hear the first question, operator?

Matthew Lee:

These drivers include accelerated growth in core bank loans, continued growth in wealth business, normalization of credit costs, or further balance sheet optimization? Given the progress you've made since Investor Day, has this ranking changed in any way?

Christina Vio, Head of Investor Relations:

Sorry, please wait a moment. Operator, are you still online?

Operator:

Yes. Can you guys hear me? Ladies and Gentlemen, we are having technical issues with our line. [Technical glitch] Our first question came from Canaccord Genuity's Matthew Lee.

Matthew Lee:

Can everyone hear me?

Operator:

Yes, we can hear you, Matt. Sorry for the delay.

Matthew Lee:

OK, no problem. Maybe Alan can answer this question. The return on shareholders' equity in the US business is now rapidly advancing to around 10%. Can you rank the key drivers for the increase from 10% to 12% — was it faster core bank loan growth, wealth management business growth, credit costs normalized, or balance sheet optimization further? Given the progress you've made so far since Investor Day, has this ranking changed in any way?

Alan Levine, Head of BMO's American Business Group and President:

Matthew, I'm Alan. Can you hear me now?

Matthew Lee:

Hello Alan. I can hear you now.

Alan Levine:

OK, great. Sorry about the technical issues you just ran into. I think the question I heard from you is about the path to achieving a 12% return on shareholder equity. So I'm answering that; I think that's your question. If you remember what we said and emphasized over and over again on Investor Day, the way to understand this path is actually one-third of three, right? One-third is due to an increase in the size of clients' assets and liabilities, one-third from an increase in handling fee revenue, and another third from improved efficiency and normalization of credit loss provisions.

On all three fronts, we are indeed seeing positive trends. We mentioned the positive momentum of commercial loan growth, up 4% month-on-month, and this builds on the growth already achieved in the second quarter. We are seeing strong growth in fee revenue, particularly in the fund management and payment solutions business, which increased 15% year over year on top of the 23% increase in the previous year.

The consumer business also achieved good growth, with core consumer operating deposits increasing by 3%. Of course, in terms of improving efficiency and normalizing credit loss provisions, our efficiency ratio improved by 90 basis points year over year, and actually improved by 300 basis points since 2024. As a result, good progress has been made in all of these areas. We still have work to do, and we must continue to implement the strategies we have outlined: drive the growth of high-quality loans and deposits; work closely with all fee-based businesses — including money management and payment solutions, capital markets, and wealth management — as is currently the case; and continue to achieve strong efficiency improvements through cost management and the normalization of credit loss provisions, as Piush pointed out.

I would like to emphasize the importance of investing in the cost management process, including a significant increase in talent investment. We've invested more in the technology model. As a result, we continue to invest in long-term growth, as all of this is aimed at achieving long-term success. With a return on shareholder equity of 9.8% and a return on tangible common equity of 17.3% this quarter, we are clearly making progress and will continue to move towards our ultimate goal every quarter.

Matthew Lee:

Ok, this helps a lot. As a result, approximately one-third of each of the 200 basis points of future increases will be due to these factors.

Operator:

The next question comes from Bank of America's Ibrahim Punawala.

Ibrahim Punawala, Bank of America Securities Research Department:

Maybe ask Darryl to answer this question first, then Alan and Matthew can add more. Please update your judgment based on current market conditions — Darryl, you just mentioned that the impact of tariffs may be manageable. However, when considering the current growth trend, we might start with the Canadian economy; previously, I felt that the Canadian economy was accelerating, commercial loans were growing, and the housing market was stabilizing.

Please talk about your best judgment on the impact on the Canadian economy in the context of tariff uncertainty. On the US side, how much lending activity do you think is likely to be driven or affected by the AI capital expenditure cycle, whether directly or secondarily?

CEO and Director Darryl White:

Ibrahim, I'm Darryl. Thanks for the question. As you summed up in your question, we think the impact of the recent round of tariffs may be manageable. I think I've heard [INAUDIBLE] the word “probably.” The first point I want to make is that I think this is definitely manageable, and I'll explain why below.

Taking a step back, I'd like to re-emphasize the point made earlier that we're focused on helping our customers cope with change. This isn't a new situation. “Liberation Day” was already 16 months ago, and many changes have occurred during this period, and companies have been dealing with these changes. I would like to remind everyone that during this time, as the supply chain continues to be adjusted, the Canadian economy has continued to grow; in fact, the economic growth rate has increased, and the unemployment rate has also declined.

This forms the context of our current environment. I think it's important to remove emotions from this question and observe them from an objective, rational perspective, so I'm not adding emotional color, but rather supplementing objective analysis. Compared to last weekend, if we go back to the benchmark status quo today, the difference is the imposition of Section 338 tariffs. The impact of these tariffs is concentrated, but at the same time, they only apply to 5% of Canadian exports to the US. Of this 5%, Piush has already described our positions from a loan and risk perspective, and I think the associated risks are very, very manageable.

I think we have to recognize that whatever impact this may have, it will most likely be mitigated in many ways. We expect the Canadian Government to announce support mechanisms later today. The government has plenty of fiscal space. Also, as I mentioned before, Ibrahim, the customer has adapted very well and has proven that they are capable of making adjustments very well.

The last thing I want to say about this is that this is a very interesting moment and another beneficial catalyst. I want to repeat what I said before: the Canadian federal government and provincial governments have an opportunity to understand the significance of this moment and use it to drive transformative policy adjustments — actually breaking down interprovincial trade barriers, maintaining the speed of project review and approval processes, and ensuring that Canada is actually competitive in terms of taxation, and not waste this moment. So, combining all the factors, I'm still going back to my original judgment: are the relevant effects manageable? Of course it's manageable. In fact, the challenges ahead may also contain some opportunities.

On the US side, I don't think this will actually have much impact on the US economy. The US economy is mainly driven by its own factors, which of course include the downstream effects of AI transactions and capital expenditure cycles. This cycle is real, and like many other organizations, we participate in it through different parts of the AI ecosystem. Hope this answers your question.

Operator:

The next question comes from Raymond James's Stephen Bolan.

Stephen Bolan, Raymond James Company Research Department:

There's just one problem. Can you briefly discuss the issue of domestic stability and the reduction of buffers? Obviously, this is expected to release more surplus capital into the loan business. So I'd like to know where your focus is going to be. Will they invest in loans that are more profitable, but are also likely to be riskier? Or will it match the government's agenda and focus on supporting defense and infrastructure sectors — areas where credit risk may be lower but profit margins are also lower? How will this additional capital be allocated to the loan business?

CEO and Director Darryl White:

Ok, thanks for the question. Or Darryl to answer. The short answer is: no change. As you have seen, despite a steady domestic buffer downturn, we have not announced a change in the target capital level. We said on Investor Day that we plan to maintain the Tier 1 capital adequacy ratio for common shares between 12.5% and 13% — sorry, I meant the Tier 1 capital adequacy ratio for common shares. We are here today to maintain that goal. I think this quarter has proven that; in fact, the last few quarters have been excellent examples. As you can see, capital's endogenous capacity has now reached 33 basis points; if you look back at the quarters introduced by Rahul, this figure should have been in the high range of about ten basis points or the low of 20 basis points before.

This helped us a lot, and enabled us to have a set of capital allocation options: first, to meet the good customer growth needs emerging in both markets; while at the same time investing in a growth agenda. As you can see, we have seized some real opportunities to invest this quarter; and finally, we still have sufficient capital to pay dividends and buy back shares.

So there's actually no change. Risk appetite has of course not changed, and it will never turn to chase another part of the risk curve or yield curve. Our strategy is fully in line with what was stated on Investor Day. Hope this answered your question.

Operator:

The next question comes from Doug Young from Tegarten Bank Capital Markets.

Doug Young, Research Department, Tegarden Securities:

Darryl, I remember you said that this quarter showed the profitability of the capital markets sector. I know capital market business performance may fluctuate greatly, but the return on shareholders' equity this quarter was over 16%, and your target should be 15%. Can you talk about whether this profit performance is sustainable compared to the past? Is the sector currently more profitable than it was in the past? Maybe you can talk about why.

CEO and Director Darryl White:

Ok, thanks for the question. Since you asked me a question, I'll answer it first, but I'll also ask Alan, who runs the business every day, to add. The short answer is: yes, profitability is above historical levels. The market environment has always been constructive, and our team has provided excellent services to our customers in this constructive market environment.

But at the same time, I would like to remind you that over the past few years we have invested heavily in the capabilities of this business in Canada, the US, and international markets. Therefore, what you are seeing now is a combination of market demand with our ability to serve this demand, while also reflecting an improvement in our own capabilities.

So from a sustainability perspective, I'd say we're definitely more demanding of ourselves than we were a year and a half or two years ago. Alan, please add.

Alan Tannenbaum, CEO and Group Head of BMO Capital Markets:

Thank you, Darryl. Thanks for the question Doug. The only thing I want to add is that, as Darryl mentioned, we have gone through an investment cycle that includes talent, technology, and product range expansion. Doug, you can see this in the diversification of performance, right? This quarter, we focused on the strong performance of the stock derivatives business and partial issuance and underwriting business.

Earlier this year, we talked about the strong performance of the commodities business and the metals and mining M&A business. Therefore, this investment cycle and diversification of business convinced us that these results are sustainable.

Doug Young:

Thank you for your answers. One more quick question. It sounds like your holdings are higher than normal in terms of liquidity. Can you quantify how much of an impact this quarter had on net interest spreads? Obviously, I'm referring to the impact at the level of the whole industry. Will this drag continue for a few more quarters?

Chief Financial Officer Rahul Naljirkar:

If you quantify the reason why net interest spreads fell by 3 basis points month-on-month this quarter, close to 2 of these points are related to the higher liquidity held by the corporate services sector. I think, given the actual situation, I would describe it as prudent liquidity management.

As you know, we still have some unfinished asset sales transactions, especially in the fourth quarter; we also need to consider the macro and geopolitical situation. Additionally, we are seizing the opportunity to pre-finance some of our debts that are about to mature. Combining all of these factors, this is how we manage liquidity. However, we expect much of this impact to return to normal after the end of the fourth quarter and the completion of asset sales.

Operator:

The next question comes from Mario Mendoza of TD Securities.

Mario Mendoza, TD Cowan Research Department:

I'd like to talk about credit card loss provisions. I know it's not a big part of the BMO business, but it seems like it could be a very useful indicator to observe the credit status of Canadian consumers. Can you explain why this indicator may suddenly drop drastically? I'm referring to the year-over-year and month-on-month decline in credit card loss provisions. Was there anything special about this quarter? Or is the financial situation of Canadian consumers being repaired?

Chief Risk Officer Piyush Agrawal:

Mario, I'm Piush. I'll answer first, maybe Matt can add. What you see is the combined result of the gradual improvement of Canada's macroeconomic environment. You see a slight drop in the unemployment rate, and there are some favorable seasonal changes in bankruptcy data. But what's really important is that we've been taking a series of very targeted measures to proactively manage and reduce portfolio risk while refocusing our high-quality customer base.

This has caused balance growth to slow down for a while, but we think we are now at a turning point. We are seeing positive month-on-month growth and expect portfolio performance to continue improving as we enter next year. This is why we remain confident about the overall situation in the fourth quarter, although we know that some policy changes will have some second-order effects as we enter 2027. Matt?

Matthew Mehrotra, Head of the Canadian Personal and Commercial Banking Group and Co-Head of Canadian Personal and Commercial Banking:

OK. Just to add to the growth aspect, we achieved a month-on-month increase in our balance for the first time in five quarters, which is very good. Our number of premium accounts grew 47% year over year. So, as Piush said, this strategy is working. We have taken targeted actions to realign our portfolio and are growing among the customer groups identified on Investor Day.

Mario Mendoza:

OK. Let me ask a slightly different question. For many years, Canadian investors have wanted to discuss Bank of America mergers and acquisitions. Your bank has always been the acquirer in the past. For example, the valuation gap between the Bank of Canada and regional banks in the US is probably the widest I've ever seen. Will this influence your views on Bank of America mergers and acquisitions?

DARYL WHITE:

Mario, I'm Darryl. We use a full set of evaluation criteria when considering mergers and acquisitions. As you pointed out in the question, I acknowledge that there have indeed been some favorable market changes at the moment, but I don't think our position has changed. Our top priority is to drive the business to meet the return on shareholder equity targets that have been stated to you over the past few years and re-emphasized on Investor Day. I've said this before.

So even at the risk of getting boring and repetitive, I want to say it again: is it possible for us to carry out mergers and acquisitions in the US? This will only be done if extremely strict conditions are met. We will consider mergers and acquisitions from the perspective of further advancing regional density and regional-scale strategies, which Alan has always explained very clearly.

Second, we won't consider any deal that could delay the fulfillment of our shareholders' return on equity commitments by even one day. As a result, the range of possible actions we can take is actually quite narrow. At the same time, I can confirm once again to all shareholders that our top priority today is organic growth.

Operator:

The next question comes from Paul Holden of the Canadian Imperial Bank of Commerce.

Paul Holden, Capital Markets Research Department, Canadian Imperial Bank of Commerce:

Darryl, with regard to organic growth priorities, and the endogenous growth in common tier 1 capital mentioned earlier, this quarter was once again very strong, reaching 33 basis points. What I want to ask is the use of this capital, right? This quarter, we saw 21 basis points for share repurchases and 12 basis points for risk-weighted asset growth.

I'd probably prefer to see the ratio of the two reversed, right? In other words, more capital is used for balance sheet growth and organic capital investment. Shares are still being repurchased, but the scale of the repurchase is slightly smaller. What I want to ask is if this expectation is reasonable? First, are we likely to see risk-weighted asset growth consume 20 basis points or more of common stock Tier 1 capital? Second, if this expectation is reasonable, can we reach this level in 2027?

CEO and Director Darryl White:

OK, Paul, thanks for the question. The answer is: it's possible. You indicated in your question that we have the ability to allocate capital flexibly across the quadrants you mentioned. I think the key point is that we don't artificially create needs. As long as there are high-quality growth needs in our customer base that we target and continue to explain to you, we will meet those needs. As a result, I'm not going to turn down any quality customer growth opportunity to buy back shares now.

Things don't work that way; it's the other way around. So what really determines the answer to your question is the market—the market here refers to the real economy. As long as there are high-quality growth opportunities, such as commercial banking, as we all know, we have been very good at this business in both countries for decades, we will support this growth; share repurchases are a remaining option after meeting these needs, not a driver of capital allocation.

Paul Holden, Capital Markets Research Department, Canadian Imperial Bank of Commerce:

I'll ask one more question if I can. Regarding the US business, apparently, as you have emphasized, loan growth has performed well, but there has been a slight compression in net interest spreads. From a strategic perspective, can you take some steps in terms of deposit growth to keep the net interest spread generally stable? Or do we have to expect net interest spreads to shrink to a certain extent as loans grow strongly?

Alan Levine, Head of BMO's American Business Group and President:

OK, I'm Alan, I'll answer. Remember, when considering net interest spreads, our primary focus remains the path to improving shareholder return. Over the past 12 months, we've done a lot of work on deposit optimization. As you can see, net interest spreads increased by 20 basis points year over year. Now, we're really starting to shift to growth, including the loan-side and deposit-side growth we talked about earlier.

We have very good customer relationships in the commercial banking business, and have made real progress in using these relationships to drive the development of fund management and payment solutions, both on the deposit side and on the fee side. In the consumer business, as explained on Investor Day, we are implementing a very critical and clear strategy. I would like to highlight three areas of focus.

The first is the Dazhong Wealthy Client Business, which is a cooperation between consumer banking and wealth management business. You've heard some data before, showing that there has been good progress in this area. The second is “workplace banking” cooperation between consumer banks and commercial banks. This is also an area with real opportunities. Finally, as we truly focus on improving the customer experience and overall productivity of the entire financial center network, we still have an opportunity to continue to drive deposit growth, particularly the core operating accounts we are focusing on.

Therefore, on the one hand, it is necessary to promote the development of fund management and payment solutions — the business covers everything from commercial banks and the emerging mid-tier market to the larger mid-tier market; on the other hand, it is necessary to promote the growth of core operating accounts in the consumer business through multiple measures. Combining these two aspects, we have full confidence in the path we are currently taking.

Operator:

The next question comes from KBW's David Conrad.

DAVID CONRAD:

Most of my questions have been answered, but I also want to ask about the sustainability of capital market profits. Can you talk about some of your core expertise in the product system and how it fits into the Canadian government's potential budget, government spending, and infrastructure investments?

Alan Tannenbaum, CEO and Group Head of BMO Capital Markets:

Thank you, David. Thanks for the question. It's also a great opportunity for me to highlight the business strengths you mentioned, including metals and mining, power, utilities and infrastructure, and the industrial sector — I think we excel in these areas. So, looking at macro trends, you mentioned some of Canada's infrastructure investments, which we think will present excellent opportunities.

In the previous question, we also mentioned the AI opportunity; we saw this opportunity in multiple dimensions. Many of the opportunities are highly aligned with the areas we have already invested in. At the same time, as we all know, the market will change; some areas where productivity is low for us and our competitors this year, such as some core fixed income businesses with extremely low volatility, may reverse in the future and create better opportunities for us.

Therefore, opportunities in specific areas, business diversification, and the investments we have made are what make us believe there is room for continued growth in these businesses over the next few years.

Operator:

The next question comes from National Bank Finance's Gabrielle Deshener.

Gabrielle Deshena:

I want to go back to profit margins and the differentiation between the corporate services sector and the operating sector. Can you explain when these balance sheet structure issues in the corporate services sector — such as holding a large number of low-yield securities — will be adjusted in the next few quarters as asset sales transactions are completed? You used the term “resilient” when it comes to profit margins, especially in the US business, but also in Canada.

If — my main focus is on the US business — loan growth is clearly accelerating, but deposit growth still lags behind loan growth, can you expect profit margins to remain stable? Or are profit margins likely to decline even after the fourth quarter when financing for the transportation finance business is reallocated?

Chief Financial Officer Rahul Naljirkar:

OK. Thank you, Gabrielle. Let me answer these two questions. I'll talk about the corporate services department first, then net interest spreads. Regarding the corporate services sector, this is the result of a combination of falling revenues and rising costs. As I mentioned, part of the decline in revenue is related to prudent liquidity management and additional low-yield assets we hold as a result. Furthermore, the effects of hedging and interest rates on balance sheet positions always generate normal market fluctuations and change every quarter. These are some of the reasons for the decline in revenue, and as we shared last quarter, we had anticipated this direction of change.

Also, with regard to rising costs, as I mentioned in my prepared statement, we have consciously invested in some growth opportunities, in particular brand marketing, and this part of the cost is included in it. Taken together, therefore, the decline in revenue and the rise in expenses have formed the current results. We expect the fourth quarter to be roughly the same as the third quarter, which is our current assessment of the composition. That's the first part of your question.

Now let's talk about the second part, which is the net interest spread. In my prepared statement, I talked about the resilience of net interest spreads in core businesses, such as personal and commercial banking in Canada and banking in the US. I do recognize that changes in the loan structure caused by faster loan growth, as well as more intense competition in an environment where “higher interest rates last longer” will put pressure on. But Matt, Sharon, and Alan all talked about our targeted efforts to expand core operating deposits. Our core operating deposits increased 8% year over year, while total deposits remained flat.

Furthermore, we have always been very good at optimizing high-cost deposits when the balance sheet does not require the associated funds. Therefore, if you look at the concerted efforts to expand high-quality core deposits in combination with balance sheet liquidity management, these measures can offset the resistance we face. This is how we maintain resilience.

Gabrielle Deshena:

OK. Regarding credit prospects, I just want to confirm once again: do you expect impairment loan provisions for the fourth quarter to be at a similar level? As for 2027, I'm not sure if you made any statements. Considering this tariff dispute, is there still great uncertainty about the relevant prospects?

Chief Risk Officer Piyush Agrawal:

Gabrielle, I'm Piush. It is still too early to provide 2027 guidance. We usually provide relevant guidance at the end of the fourth quarter, and this time we will do the same. But looking back, we have indeed seen real improvements in the drivers of impairment loans. As a result, whether it's the watch list, the total impairment loan balance, or the retail business performance we just discussed, all give us a high level of confidence in the results of the fourth quarter impairment loan provision — that is, roughly the same as the third quarter.

Of course, some wholesale loan cases may always fluctuate by a few basis points, but the overall results should be in line with the full-year guidelines we gave in early 2026. What I want to say is that if you ask me my views on 2027 three days ago, I am confident that the relevant indicators will be in the middle of more than 30 basis points by the end of 2027 based on the judgment of Investor Day; however, as we continue to deal with trade policy issues and their possible second-order effects, we will continue to update our judgment and explain it to you at the end of the fourth quarter.

Operator:

The last question came from Royal Bank of Canada's Darko Mihlić.

Darko Mihlić, Capital Markets Research Department, Royal Bank of Canada:

I'll try to keep it short. I'm trying to model a few factors. First, with regard to asset sales, I'm guessing Moneris is probably the business that will contribute the most to future losses and profits. Can you remind me which business segment is Moneris' profit included in? Would you now like to explain how much profit each business unit will lose?

Chief Financial Officer Rahul Naljirkar:

Darko, I'm Rahul. Thanks for the question. Regarding the profits that will be lost, I will explain in two parts. In fact, Moneris isn't the main part. As you all know, we have sold 138 branches, and these branches have about $5 billion in deposits, so the revenue associated with them will decrease.

The transportation finance business is also one of the main components. The loan balance is close to $10 billion, equivalent to 15 billion to 16 billion Canadian dollars. As a result, the impact comes from multiple businesses. If you ask me, I'd say the ratio is probably roughly two-thirds and one-third, that is, two-thirds from the US banking business and one-third from the Canadian personal and commercial banking business. But having said that, I would like to remind you one more thing.

There is a clear strategy behind the sale of these assets. These businesses don't meet our long-term growth and return goals. We have always adopted very strict standards on which customer relationships we allocate capital and resources to; target customer relationships must meet expectations for higher growth and higher returns. We have taken these factors into account in the path to improving daily returns for investors that we have introduced to you.

As a result, our commitment to increase earnings per share and increase in pre-tax profit before provision on Investor Day remains unchanged. In fact, what we previously considered was to recover and reallocate these capital from single-digit shareholder return on equity businesses; although their contribution to profits is limited, our goal is to re-invest them into businesses with a return on shareholder equity of 15% or more. That's how we think about it. Hope this both answered your specific questions and explained our overall strategy.

Darko Mihlić:

No, that's very helpful. Let me also quickly ask about the month-on-month decline in the average common equity equity of the US business. Does this have anything to do with domestic stability buffers? How much will common equity decline after the sale of related branches and transportation finance businesses?

Rahul Nargilkar:

OK. As you know, this is already reflected in our reporting caliber data. I mentioned that we have already charged a goodwill fee in advance for the upcoming sale of the transportation finance business, which is the reason for the change in US business equity.

Darko Mihlić:

OK, I'm a little confused because this fee has already been billed.

Rahul Nargilkar:

Sorry, please repeat your question.

Darko Mihlić:

I thought goodwill fees were actually included in the corporate services department. So I'm guessing I misunderstood it. But anyway—OK. Regarding future declines, can you provide any information on how much common equity is expected to decline after the sale of US branches and transportation finance businesses? Is it possible to simply consider it on a one-to-one basis?

Rahul Nargilkar:

Overall, these asset sales will release us 50 basis points of common stock Tier 1 capital. Therefore, after recovering this capital, we will re-include it in the capital allocation framework. Obviously, as Darryl said, loan growth is the primary focus, and then we'll take all other factors into account in the dynamic capital management system.

Operator:

No more questions. I would now like to give Darryl White's concluding remarks.

CEO and Director Darryl White:

OK. Thank you to the operator and thank you all for the questions this morning. Finally, I just want to be very brief. Our performance this quarter and year to date reflects our continued strict implementation of the strategy described on Investor Day. We've increased our level of return.

We have achieved stronger profit growth, and the growth momentum of all businesses is increasing. Perhaps most importantly, we are well placed to build on this performance. In short, the results are good, the momentum is good, and our work is not over yet. Thank you all for attending the conference today, and we look forward to speaking with you again in December.

Operator:

That concludes today's conference call. Thank you all for participating. You can now disconnect.