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Bank of Montreal (NYSE:BMO)

F1Q 2014 Results Earnings Conference Call

February 25, 2014 02:00 PM ET

Executives

Sharon Haward-Laird - Head of Investor Relations

Bill Downe - Chief Executive Officer

Tom Flynn - Chief Financial Officer

Surjit Rajpal - Chief Risk Officer

Mark Furlong - Group Head, U.S. P&C Banking and Chief Executive Officer, BMO Harris N.A. (Chicago)

Frank Techar - Chief Operating Officer

Cam Fowler - Group Head, Canadian Personal & Commercial Banking

Tom Milroy - Group Head, BMO Capital Markets

Analysts

Mario Mendonca - TD Securities

Sumit Malhotra - Scotia Bank

Robert Sedran - CIBC

Michael Goldberg - Desjardins Securities

Peter Routledge - National Bank Financial

Steve Theriault - Bank of America Merrill Lynch

Operator

Please be advised that this conference call is being recorded. Good afternoon. And welcome to the BMO Financial Group's Q1 2014 Earnings Release and Conference Call for February 25, 2013.

Your host for today is Ms. Sharon Haward-Laird, Head Investor Relations. Ms. Haward-Laird, please go ahead.

Sharon Haward-Laird

Thank you operator. Good afternoon, everyone. And thanks for joining us today. Our agenda for today's presentation is as follows. We will begin the call with remarks from Bill Downe, BMO's CEO; followed by presentations from Tom Flynn, the Bank's Chief Financial Officer and Surjit Rajpal, our Chief Risk Officer. After their presentations, we will have a short question-and-answer period where we will take questions from prequalified analysts. (Operator Instructions)

Also with us this afternoon are Frank Techar, Chief Operating Officer; Cam Fowler from Canadian P&C; Mark Furlong from U.S. P&C; Tom Milroy from BMO Capital Markets; and Gilles Ouellette from Wealth Management.

On behalf of those speaking today, I note that forward-looking statements may be made during this call. Actual results could differ materially from forecasts, projections or conclusions in these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results to assess and measure performance by business and the overall bank.

Management assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Both Bill and Tom will be referring to adjusted results in their remarks. Additional information on adjusting items, the bank’s reported results and factors and assumptions related to forward-looking information can be found in our annual report and in our first quarter report to shareholders.

And with that said, I will hand things over to Bill.

Bill Downe

Thank you, Sharon. And good afternoon to everyone on this call. Bank of Montreal’s first quarter results reflect growth in revenue and strong operating group performance especially in Canadian personal and commercial banking. BMO is showing sustained momentum and a growing balance sheet.

Our U.S. segment reported earnings of US$300 million in the quarter with a significant contribution from personal and commercial banking, wealth and capital markets. We are clearly seeing the benefits of our diversified North American presence. We have good opportunities for growth across our U.S. businesses in an environment of improved household finances and growing consumer confidence. In addition progress in debt ceiling and budget negotiations in the U.S. will benefit business investment in our large North American commercial banking platform.

Few highlights from our first quarter results both reported and adjusted net income were $1.1 billion. On an adjusted basis, backing out acquisition-related amortization of intangible assets, earnings per share were up 7% to $1.61. Revenues were $4.1 billion over 8% ahead of last year and ROE was 14.5%. Provision for credit losses was down from the prior quarter and Surjit will provide more detail on credit later in the call.

Volume growth was strong in the quarter with loans up 11% and deposits up 13% reflecting strong business performance and some lift from strengthening U.S. dollar. BMO’s common equity Tier 1 ratio was 9.3% at the end of Q1 after absorbing previously disclosed items related to counter-party credit risk, IFRS accounting changes, as well as business growth. Our capital position is strong and will continue to be for the balance of the year.

Turning to the operating groups, Canadian P&C net income was $486 million, up 8% from a year ago. Loan growth continued to be robust with the total portfolio up 10% from last year. Total loans have increased over $30 billion or 20% in the past two years. Momentum in top-line growth accelerated this quarter with revenues up 7% and strong operating leverage up 2.3%.

Enhanced sales force productivity and better quality conversations with customers are driving results. Personal deposits were up over $6 billion or 9% from a year ago primarily due to growth in term products and it was also strong year-over-year growth in commercial deposits of 14%.

During the quarter, we announced the appointment of Cam Fowler as Group Head of Canadian P&C Banking. Cam has been a key member of the bank’s management committee for the past five years and has directly contributed to the advancement of our enterprise strategy. He’s been a prominent advocate of our brand and our commitment to customers and he is well prepared to lead a talented team and to build on the current momentum in the business.

U.S. P&C net income in the first quarter was a $164 million in source currency and earnings improved quarter-over -quarter as revenue was relatively unchanged with stable net interest income and credit losses were lower. Expenses have been well-controlled, while we selectively invest in the business to support future growth.

Our commercial banking team continues to deliver excellent volume growth with core C&I loans up $3 billion or 14% from a year ago and commercial deposits have increased by $1.1 billion.

BMO Capital Markets’ net income was $277 million, which included a growing contribution from the U.S. business. Revenue growth of 9% benefit from strength in both investment and corporate banking and trading products and our return on equity was 19%.

Wealth management net income was a $183 million, traditional wealth businesses were up 17% year-over-year with growth in client assets and higher transaction volumes. Assets under management of nearly $200 billion were up 17% from a year ago and 7% quarter-over-quarter.

Year ago, I highlighted wealth management's progress in two areas that are strategically important; asset management and private banking. At the time, we had just completed the acquisition of a Hong Kong and Singapore based wealth management provider and began operating as BMO Private Bank Asia, providing services to high network clients in the Asia-Pacific region.

We recently announced an acquisition to expand our BMO global asset management business which had grown to over a $130 billion in AUM and $175 investment professionals at the end of 2013. F&C as a diversified UK based investment manager with over 650 employees, including 250 investment professionals located across 8 countries mostly in Europe; they bring scale, investment track record and a well established brand network.

Our pro forma combined AUM at December 31, 2013 was approximately US$270 billion BMO Global Asset Management includes institutional asset management, our mutual fund business in Canada and the U.S. and our ETF complex on a single platform in 2013 this business contributed over 20% of our total wealth management revenue.

To wrap up, strong operating group performance resulted in another quarter with adjusted earnings over $1 billion. We gain market share in domestic personnel banking complimented by double-digit growth in both commercial loans and deposits. And our U.S. commercial banking team also continued to deliver excellent balance sheet momentum with double-digit core C&I loan growth.

Margins were stable on both side of the border and wealth management and capital markets posted robust revenue growth. Looking ahead we remain confident in the opportunities for growth across the bank throughout the year.

And with that Tom, I will turn it over to you.

Tom Flynn

Thanks Bill and good afternoon everyone. I will start on slide 8, EPS of $1.61 was up 7% year-over-year and net income was approximately $1.1 billion. As Bill outlined, operating group results were good, momentum continued in Canadian P&C and wealth management businesses. Capital markets revenues were up 9% with the strong contribution from its U.S. segment and U.S. P&C results improved significantly from last quarter which had above trend PCLs.

As you will have seen, we have simplified the definition of adjusted income to start the year; the only adjusting item in Q1 is the amortization of acquisition related intangible assets which was $22 million in the quarter. Credit related items on acquired purchase performing loan portfolio cost for the integration of M&I and run-off structured credit activities will no longer be an adjusting items given they are expected to be less significant this year, this approach will also simply the presentation of our results.

Adjusting items are detailed on slide 25, Q1 revenue was $4.1 billion, up 8% year-over-year or 6% excluding the impact of the stronger U.S. dollar. Net interest income was up 4% year-over-year and up 6% quarter-over-quarter due to growth in P&C businesses and revenue from acquired purchase performing loans. Non-interest revenue was up 13% year-over-year driven by growth in trading revenues and most other categories at non-interest revenue.

Non-interest revenue was flat quarter-over-quarter, as increases in most categories were more than offset by significantly lower security gains which were high last quarter, as well as lower insurance income and other income. Q1 expenses were $2.7 billion up 8% year-over-year or 6% excluding the impact of the stronger U.S. dollar, the increase reflects higher employee related costs including severance and higher technology and support costs related to the changing business and regulatory environment.

Expenses were up from Q4 primarily due to $66 million pre-tax or $46 million after-tax of stock-based compensation for employees eligible to retire that has expense in the first quarter of each year and higher severance.

Moving to slide nine, our common equity tier 1 ratio was 9.3%. The drivers of the change in the ratio and risk weighted assets are shown in the slide. The change in the ratio from the fourth quarter was due to higher business driven source currency risk weighted assets, the phase in of the credit valuation adjustment for CVA risk capital charge, changes in IFRS accounting standards and the net impact of the stronger U.S. dollar. These declines were partially offset by the benefit from increased retained earnings. Risk weighted assets were up $25 billion from Q4 primarily due to increased business driven source currency risk weighted assets the phase in of the CVA and IFRS accounting changes and the impact of the stronger U.S. dollar.

Moving to slide 10, momentum from the second half of 2013 continued in P&C Canada with strong revenue growth of 7% and net income of $486 million up 8% year-over-year. Loan growth continued to be good with personal lending up 10% and commercial loans up 11% year-over-year. Deposit growth was similar up 11% from last year. Our continued focus on commercial deposits resulted in commercial balances increasing 14% year-over-year.

NIM was basically flat up 1 basis point quarter-over-quarter. Expenses were up 4% year-over-year reflecting investment in the business and ongoing work to simplify core processes. The quarter-over-quarter was primarily due to higher volume driven cost. PCLs were higher year-over-year with higher commercial losses partially offset by lower consumer provisions. Operating leverage was 2.3% and the efficiency ratio was 50.8%, an improvement of 110 basis points from last year.

Moving now to slide 11, U.S. P&C net income was US$164 million down from a strong quarter a year ago and up significantly from Q4 which had above trend PCLs. Revenue of $693 million was down 7% year-over-year as loan growth was offset by lower NIM and strong mortgage related revenues a year ago. Revenue was up 1% quarter-over-quarter due to loan growth and stable NIM. Total loans were up 2% year-over-year and 1% quarter-over-quarter. Core C&I loan growth continued to be strong with balances up 14% from last year. Expenses were relatively unchanged from the level of a year ago.

Turning to slide 12, BMO Capital Markets’ net income was down from a year ago and up 27% quarter-over-quarter. Revenue was up 9% year-over-year due to good revenue performance across the businesses and in particular from our U.S. segment. Quarter-over-quarter revenue was up 22% reflecting improved performance in investment and corporate banking driven by higher equity underwriting fees and corporate banking. Revenue in trading products was also good particularly in interest rates and equities.

Expenses were up year-over-year and quarter-over-quarter due to higher employee related expenses including severance and higher support costs both driven by changing business and regulatory environment. Stock-based compensation costs for employees eligible to retire expensed in the first quarter of each year contributor to the quarter-over-quarter increase.

Moving to slide 13, wealth management net income was $183 million up 8% from last year. Momentum continued in traditional wealth businesses with net income up 17% year-over-year reflecting growth in client assets and increased transaction volumes. Net income was down quarter-over-quarter as the prior quarter included $121 million after-tax security gain. Expenses were up 13% year-over-year, primarily due to revenue based cost and support cost, timing of initiatives spend and the higher U.S. dollar. Approximately half of the quarter-over-quarter expense increase was due to stock-based compensation cost for employees eligible to retire. Assets under management and administration were up 19% year-over-year.

Turning now to slide 14, the corporate segment had a net loss of $41 million compared to a net loss of $79 in the first quarter of last year and $22 million in Q4. Revenues were higher versus last year and last quarter, mainly due to purchased performing loan revenue, which is now included in corporate adjusted results and was higher this quarter and we expect looking ahead.

Year-over-year, this was partially offset by a higher group TEB offset.

Recoveries of credit losses were relatively flat year-over-year and down from last quarter, largely reflecting provisions related to the purchased performing loan portfolio. Expenses were lower year-over-year impart due to reduced costs associated with impaired loans.

To conclude, we had a good start to the year and feel confidence about how we're positioned for the balance of the year.

And with that, I'll turn it over to Surjit.

Surjit Rajpal

Thank you Tom and good afternoon everyone. Staring with slide 17, total provisions for credit losses were $99 million, a decrease of $90 million from the previous quarter. U.S. commercial and consumer PCLs decreased as a result of strong recoveries and lower new reservations.

Canadian commercial and consumer PCLs are also lower than the previous quarter though commercial PCLs remained elevated due to few accounts. The recovery on the purchased credit impaired portfolio was $117 million, while we continue to have loan sales in resolutions over half of the recovery was due to the return of a few accounts to current status.

The purchased credit impaired portfolio is now down to approximately $600 million with the credit mark of $51 million.

Moving to the next slide, absence the impact of foreign exchange commissions are largely flat quarter-over-quarter. Those impaired loans decreased further this quarter to just below $2.5 billion because of improvement in the U.S. commercial portfolio. Overall I am pleased with our performance this quarter which is reflective of continued improvement in the U.S. economic environment and stable conditions in Canada.

I will now turn it over to the operator for the question-and-answer portion of today’s presentation.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone line. (Operator Instructions) The first question is from Mario Mendonca with TD Securities. Please go ahead.

Mario Mendonca - TD Securities

Good afternoon. Probably a question for Tom, I understand the logic in the change in the performing bringing that back in the core makes sense. It will be helpful to understand though is $248 million that you referred to on page 42 of your report to shareholders that’s the future credit marks that will fall back into NII overtime. That helps the period over which that will fall into earnings and whether that should approximate the increase in PCLs also from that purchased performing portfolio?

Tom Flynn

Okay. It is Tom here. I will take that. A couple of things the total amount of the credit mark that will amortize is around $300 million so in total it’s a little bit higher and it’s broken down into different pieces in the disclosures. And that will phase in, into income over the next probably three years for the most part, and I say for the most part, because there is a bit of a tail to it related to some of the retail portfolios that have alert longer term to them. The amount of amortization that we had in the current quarter or revenue that we had in the current quarter is above the average that we expect over the balance of the year and that was partly due to pay downs that we had in the current year.

So if you’re looking at modeling this going forward, I’d reduce the current level of revenue and spread it out over around three years.

Mario Mendonca - TD Securities

One thing to be clear on, when you referred that the 300 million that amortizes incentive comp is that the NII component or is that net of the PCL?

Tom Flynn

No, those are all gross numbers, so those are gross numbers. And to refer to the PCL component, this quarter the revenues did exceed the PCL. There will be variability quarter-to-quarter, but we’re not expecting this to be a really big contributor to income through time.

Mario Mendonca - TD Securities

Am I reading it currently, so net, net -- net of it, so you’d expect the numbers to be fairly modest?

Tom Flynn

Correct.

Mario Mendonca - TD Securities

And then just for final clarification, you referred to 300 million but again on page 42, it’s first to 248, the number, that difference isn’t big but I want to make sure I understand the difference?

Tom Flynn

Yes, there the difference relates to a portion of the credit mark that is attributable to revolving credit, revolving loans and it’s disclosed in the first paragraph on page 42 of the disclosures.

Mario Mendonca - TD Securities

I will read it more carefully. One final question then, expenses in the corporate segment, so non-interest expenses in the corporate segment dropped fairly significantly this quarter relative to last and relative to the year ago quarter; is there something obvious there that I just can’t remember?

Tom Flynn

The corporate expenses move around a bit quarter-over-quarter. The number is down on a year-over-year basis in part because of lower cost associated with working out impaired portfolio. So that’s a contributor and as well pension and benefit costs are down a little bit in corporate and that helped.

Mario Mendonca - TD Securities

Thank you.

Operator

Thank you. The next question is from Sumit Malhotra with Scotia Bank. Please go ahead.

Sumit Malhotra - Scotia Bank

Good afternoon. This is probably also for Tom Flynn. Looking at page 40 of your supplement and looking to understand some of the growth in the RWA this quarter, specifically in the credit portion we see about 6.4 billion attributed to methodology and policy changes and also a decent amount for the model update and the model update was a key driver for market RWA. I think you gave some color in your prepared remarks Tom, I was hoping you could give us an idea what the key moving parts were to drive this magnitude of increase?

Tom Flynn

Yes. So the methodology and policy change of about 6 billion includes the change for the CVA which is about 4 billion and it also includes about 2 billion related to a change in our treatment for an entity that we’ve got a 50% interest in, as a result of a new IFRS accounting standard and so those two basically drive all of the change. So CVA is 4 and the change in joint venture accounting is 2.

Sumit Malhotra - Scotia Bank

And the two model updates on the market risk and credit RWA, just trying to get an idea what is you change and whether this is something that has the potential to move back the other way or whether it’s something that you feel is going to be sustained at this level?

Tom Flynn

I think the model updates aren’t likely then else to change. In the quarter, the total risk weighted asset number was up quite a bit as you’ve seen. And we do expect some of that to revert and in particular a good portion of the increase in the market risk, risk weighted asset that we had in the quarter, we do expect to come back over the next quarter or two.

Sumit Malhotra - Scotia Bank

And if taking that last statement into account and I’ll stop here, if we go ahead and look at this on a pro forma basis after the proposed acquisition, you’re clearly going to have some organic build, but you get closer to the 8.5 level. Does this -- and this is probably more for Bill Downe, does this tamper your expectations and what the bank may be able to do on a return to capital basis or additional capital deployment basis for the balance of 2014?

Tom Flynn

It’s Tom. I’ll keep on going. I guess the first thing I’d say is that we expect the acquisition of F&C to close in the third quarter and so we do have two quarters of builds to come and our expectations that we’ll be above 9, given the capital that we’ll build and also the reduction to risk weighted assets that we’re expecting in market risk, which could be in the order of 20 basis points. And then on the return on capital, we do expect to be basically not active under the buyback prior to the close of the acquisition of F&C, given that it will consume some of our excess capital. We were active with the buyback last year, bought back over 10 million shares and feel good about that. And through time, as we’ve talked about, we want to be in a position of capital strength and we’ll deploy that capital through acquisitions that make sense, organic growth and share buybacks, when the ratio would otherwise be getting higher than make sense.

Sumit Malhotra - Scotia Bank

That’s really helpful. Thanks for your time, Tom.

Operator

Thank you. The next question is from Robert Sedran with CIBC. Please go ahead.

Robert Sedran - CIBC

Hi, just first off a quick clarification on the performing the $300 million -- performing portfolio. Is there anything, Tom, that would bias number up or down? I know pay downs may change the timing of when is the revenue comes in, but is there anything that might make that number get larger or smaller than the 300?

Tom Flynn

Not really. It basically is what it is at the current time, it will come down over time. And the only thing that will really accelerate the decline is paybacks. And we did have some of those in the current quarter which increased the revenue number.

Robert Sedran - CIBC

Okay. And I just want to ask about the U.S. margin. I guess -- and I’m sorry if I missed in the prepared remarks. But I guess the guidance had been for little bit more margin pressure to be felt through this year and the margin end up being up a basis point quarter-on-quarter. Was there something unusual in the quarter or are we more confident now that a stable margin is the more appropriate view from here for the year?

Mark Furlong

Hi, this is Mark Furlong. So we had some interest recoveries that was positive to the margin this quarter. But, I’d say overall, we continue to think that there are -- continue to believe will be downward pressure on the NIM. As you said last quarter I said it’d be about 4 to 8 basis points. We feel like it could be more towards maybe the lower end with that range. This quarter we had better performance and we will continue to have some upside performance in future quarters in part due to the interest recoveries like this quarter and with improving credit environment.

There will be some variability though from quarter-to-quarter based on things like competitive pressures and interest recoveries and things like that, but it’s overall. When we look at the new business we are adding, the new business is generally at lower spreads than our existing portfolio but we really like the diversity and the credit quality of the customers we are adding. So, over the long term I think this will still be good revenue growth story.

Robert Sedran - CIBC

Mark, we’ve been hearing a little bit about competitive pressures in the Midwest in particular, if you were to back out the impact of those interest recoveries, would the margin have been actually down that sort of 4 to 6 basis points this quarter?

Mark Furlong

No, it would have been down 2. And so there is variability between quarter-to-quarter. The competition isn’t consistent quarter-to-quarter, it’s always there, but we would have only been down 2, so my estimate would have been little bit high then.

Robert Sedran - CIBC

Okay, thank you.

Mark Furlong

You are welcome.

Operator

Thank you. The next question is from Michael Goldberg with Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thank you. I wonder if we could get some additional color on growth in business funding in Canada and the U.S.; where is it coming from and what’s the sustainability like?

Frank Techar

Hi Michael, it’s Frank. I will start with Canada. Business growth that we've seen in our lending book in Canada has been pretty consistent for the last year or so. And there is no one place that is despite where most of that is coming from. We've got diversification across the country, we've got good diversification from a segment perspective and that's part of the plan and the strategies and tactics that we have in place are bringing that there. So expectations for the future are strong growth again on the back of something that we’re very good at, we’re very good at it here in Canada, we’re very good at it in the United States. But there is not one place where we've got over representation flowing into the growth profile for the business.

Michael Goldberg - Desjardins Securities

So would you say that this growth has been inline with your expectations or better than your expectations?

Cam Fowler

Well, speaking for the Canadian business, the growth has been inline with our expectations, we've got investments continuing to be made in the business and we believe we can even have stronger growth as we look forward, Michael. So this is -- as I said this is a business that we've been good at for a long time and our intention is to continue to grow rapidly.

Do you want a comment about U.S. I’ll turn it over to Mark for that?

Michael Goldberg - Desjardins Securities

Fair enough.

Mark Furlong

So, I could almost repeat what Frank said and really market-by-market and national segments by national segment, we've had growth quarter-to-quarter and year-over-year in U.S. And it is pretty much been that way for the last probably 8 to 9, 10 quarters. Really been diverse it’s been and then commercial real estate of course has picked the last three quarters and that’s been diversified geography and diversified property type as well.

So to echo Frank’s comments in the U.S. we really have a strong commercial and a strong business banking team and it isn’t a surprise to us that we are having this kind of growth and that we feel optimistic based on what’s in pipeline when we look forward into future quarters. I mean we really feel like we have some really strong momentum going broadly across the U.S. markets and see no reason why we should reduce expectations on continuing to grow strongly.

Michael Goldberg - Desjardins Securities

Okay. And separately but sticking to the balance sheet personal demand and notice deposits looks like they are up about 5% from the fourth quarter or 20% annualized. Can you tell me what’s going on there and how sustainable that is?

Tom Flynn

Yes. It’s Tom Michael, a portion of the increase both quarter-over-quarter and year-over-year would related to the move in the currency and so that would give the numbers a lift. And then as I said in my comments we have seen good growth in the deposit business in really both businesses P&C Canada has had good performance overall particularly good in commercial with I think our fourth quarter in a row of double-digit deposit growth. And on the commercial side of the business and we’ve had good performance in the operating P&C U.S. business as well and to help with the margin we have let some of legacy longer term higher cost term deposits in the U.S. run off.

Michael Goldberg - Desjardins Securities

Thank you.

Operator

Thank you. The next question is from (inaudible) with Cormark Securities. Please go ahead.

Unidentified Analyst

Hi, good afternoon. My question is about U.S. capital markets you saw a really strong quarter in Q1 and I am wondering what’s driving that and whether that’s sustainable going forward at the level we saw in Q1?

Tom Milroy

Hi, it’s Tom Milroy, [Manny]. Thank you very much. The U.S. had a really strong quarter this time as you saw the net income for the quarter up quarter-over-quarter almost 50%, revenue up 26%. So it was pretty encouraging. We saw the revenue coming really across both the investment in corporate banking and trading businesses. We had stronger equity underwriting and loan syndication and we just think it was a quarter in which the bunch of things fell into place. We are I am not sure (inaudible) businesses there is some variability quarter-to-quarter, but if we look at the U.S. business we are very encouraged about what we see where we are and we think going forward this will continue to perform well.

Unidentified Analyst

Thank you.

Operator

Thank you. The next question is from Peter Routledge with National Bank Financial. Please go ahead.

Peter Routledge - National Bank Financial

Yes thanks. So a question for Frank just on comparing growth improved provision income in P&C Canada and P&C U.S. and the trends are very different. And Mark spoke about good organic tough competitive positions, I guess from your advantage point in your relatively new role, what are your objectives to the U.S. and what plans for a change you have?

Frank Techar

Thanks Peter for the question. The U.S. at this point in time as Mark has described over the last few quarters is kind of a tale of two cities. The commercial business in our business banking segment has been performing extremely well and we've seen a lot of growth.

On the consumer side not only because of some of the regulatory changes but also because of some of the competitive and economic realities in the marketplace, top-line growth has been a little bit more of a challenge. So as we look forward, our focus is on continuing to build on the momentum we have in our business segment and really focusing on changes to the business on the consumer side in particular, our consumer lending and card businesses are couple of the areas that we are focused on over the next little while.

Peter Routledge - National Bank Financial

When do you think, I don't want to presumably but are we (inaudible) pre-provision income this year i.e. quarter over quarter growth?

Tom Flynn

Well, I think we're confident that the second half of the year is going to look better than the first half of the year. The year-over-year growth question, we're working as hard as we can on that front. And as Mark said, quarter to quarter, we're going to see variability continuing in the market just given the dynamics. So, I'm not in a position to go out on a limit this point in time relative to where we are today.

Peter Routledge - National Bank Financial

Okay. Thanks very much.

Operator

Thank you. The next question is from Steve Theriault with Bank of America Merrill Lynch. Please go ahead.

Steve Theriault - Bank of America Merrill Lynch

Thanks very much. Couple of questions, first I think for Tom. Tom just on currency, I want to make sure, I understand this correctly. In the capital section you highlight that source currency from new business created a 50 basis point headwind in Q1. So what scenario would create additional headwinds there? Is this driven by future moved in the currency or business mix by geography or something like that?

Tom Flynn

The 50 basis points from business driven source from RWA tries to give the growth in risk-weighted assets excluding the impact of the strengthening U.S. dollar. And so we just hold the currency constant in giving that number. So we are not suggesting that there is anything else going on other than backing of the dollar.

Steve Theriault - Bank of America Merrill Lynch

And so if the dollar stays at around $1.10 or $1.12 where it ended January 31st probably not a big item?

Tom Flynn

Well, it’s not a big item on the capital ratio, but I go back to the earlier comment about how the business driven risk-weighted growth included higher market risk assets in the quarter and we do expect some of those RWAs to decline over the next quarter or two.

Steve Theriault - Bank of America Merrill Lynch

Yes, okay. And I wanted to go back to your server related currency question, trying to run through the sensitivities in earnings for the weaker C dollar. In there you know that your sensitivities are all disclosed assuming no hedging outside your exposure to the C dollar versus U.S. dollar. Can you tell us a bit about like is there an effect any hedges in place currently?

Tom Flynn

Our hedging practice on U.S. dollar varies through time. And in the current quarter, a portion of our U.S. earnings would have been hedged, but it was not the majority of the earnings.

Steve Theriault - Bank of America Merrill Lynch

But a material one, I guess?

Tom Flynn

I don’t, I really don’t think it was that material at the end of day. It was less than half of the total earnings would have been hedged.

Steve Theriault - Bank of America Merrill Lynch

Okay. And then I had a last question on regulation, which is Bill (inaudible) off the hook through whole Q&A session. So, I’ll ask, we’re few days post the Fed posting 400 plus page document on foreign bank holding companies. So based on your first impressions, any sort of initial sense on whether holding company requirements, minimum leverage, do you think have that will have much of a material impact on your business, appreciating of course that’s being faced in over a long period of time?

Bill Downe

Well, thanks Stephen, thanks for giving me the opportunity to participate in the call. It was, it’s been such a good quarter that I was hoping somebody would let me speak. I think from our perspective, first of all you are right, the phase in gives a lots flexibility to 2016, but from our perspective, because we’ve run the U.S. bank as a U.S. banking subsidiary of a holding company, we’ve historically maintained the capitalization and the leverage as though it was a domestic institution. So there are some, there will clearly be some details in the final interpretation that will be important. But the overall impact on BMO Financial Corp, the U.S. holding company and BMO Harris Bank is going to be very little. And so I think on a relative competitive basis, having run that bank the way we did as a discrete well capitalized institution, stood us in very good stead going through the period of challenge during the crisis. And it means that as we look at this new body of regulation, we don’t expect to be materially impacted. So, it was actually a good news piece.

Steve Theriault - Bank of America Merrill Lynch

Thanks very much for that.

Bill Downe

Yes. Thank you. And thank you to everyone for being on the call.

Operator

Thank you. There are no further questions registered at this time, I would now like to turn the meeting over to Ms. Haward-Laird.

Sharon Haward-Laird

Thanks everyone for joining us today. If there is any follow up questions, we are happy to take them in Investor Relations. And have a great afternoon.

Operator

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

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