Bank of Montreal (NYSE:BMO) Q3 2015 Results Earnings Conference Call August 25, 2015 2:00 PM ET
Executives
Sharon Haward Laird - Investor Relations
William Downe - Chief Executive Officer
Thomas E. Flynn - Chief Financial Officer
Surjit Rajpal - Chief Risk Officer, BMO Financial Group
Cameron Fowler - Group Head, Canadian Personal and Commercial Banking, BMO Financial Group
Darryl White - Group Head, BMO Capital Markets
David R. Casper - President and Chief Executive Officer, BMO Harris Bank N.A. and Group Head, Commercial Banking
Gilles G. Ouellette - Group Head, Wealth Management
Analysts
Mario Mendonca - TD Securities
Sumit Malhotra - Scotia Capital
Meny Grauman - Cormark Securities
Steve Theriault - Bank of America Merrill Lynch
Robert Sedran - CIBC
John Aiken - Barclays
Gabriel Dechaine - Canaccord Genuity
Peter Routledge - National Bank Financial
Darko Mihelic - RBC Capital Markets
Operator
Please be advised that this conference call is being recorded. Good afternoon and welcome to the BMO Financial Group's Q3 2015 Earnings Release and Conference Call for August 25, 2015. Your host for today is Ms. Sharon Haward-Laird, Head, Corporate Communications and Investor Relations. Ms. Haward-Laird, please go ahead.
Sharon Haward Laird
Thank you. Good afternoon, everyone and thanks you for joining us today. Our agenda for today's investor 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 pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one question and then re-queue.
Frank Techar, Chief Operating Officer, Cam Fowler from Canadian P&C, Dave Casper from U.S. P&C, Darryl White from BMO Capital Markets and Gilles Ouellette from Wealth Management, are also with us this afternoon to take questions.
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 performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Bill and Tom will be referring to adjusted results in their remarks, unless otherwise noted. 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 our third quarter report to shareholders.
With that said, I will hand things over to Bill.
William Downe
Thanks Sharon and welcome to everyone joining us on the call. BMO delivered very good results in the third quarter with net income above $1.2 billion for the first time up 6% from a year ago which was also a very good quarter. These results are in line with our expectation that performance would improve in the second half of the year. Credit performance was good and consistent with the past three quarters at approximately 20 basis points and our common equity tier 1 ratio was 10.4.
During the quarter we bought back 2 million shares and our book value per share increased 19% from the prior year to$55. There was good performance across our operating groups in the quarter particularly in the combined personal and commercial banking businesses which posted earnings of $792 million up 13% year-over-year and in wealth management where net income was up 10%.
Performance reflects the benefit of BMO's diversified business mix and confirms that the investments we have made are generating growth while ensuring that we keep pace with the new generation of banking customers. Our results this quarter also reflect our focus on expense management which has resulted in positive operating leverage of 2.7% excluding the impact of the stronger U.S. dollar. Tom is going to take you through the financial results and Surjit will provide more detail of our credit, but I wanted to note a few key items from the quarter starting with highlights from our operating group results.
Canadian personal and commercial banking net income was $557 million up 6% from a strong Q3 last year consistent with strengthening results in the second half of the year. We're seeing stable revenue growth, moderating expense growth and good credit performance. During the quarter we launched BMO AIR MILES World Elite MasterCard and BMO CashBack World Elite MasterCard expanding our premium product line to meet the needs of customers looking for the flexibility of cash rewards with the value of Canada's leading loyalty program.
U.S. personal and commercial banking had very good results with net income up 15% in source currency or 36% in Canadian dollars. The U.S. business continues to deliver good growth in commercial lending, steady growth in deposits and very good credit performance.
BMO wealth management continues to demonstrate momentum with adjusted net income up 10% from last year. The traditional wealth business has benefited from good growth in client assets while the insurance business is experiencing a more stable long-term interest rate environment than a year ago.
In the quarter International Finance Magazine named BMO the best wealth management bank in Canada noting our compelling offer and high standards of innovation and performance. Capital markets results this quarter were solid given the environment go down from last year's third quarter which had been particularly strong. Revenue was above $1 billion for the second quarter in a row with the contribution from investment and corporate banking showing sequential quarters of growth. Expenses were well managed down 1% excluding the impact of a stronger US dollar.
During the quarter BMO capital markets was recognized by Trade Finance Magazine as the best supply chain finance bank in North America for the second consecutive year.
Our results this quarter were delivered against the backdrop of a North American economy in which growth has been slower than expected a year ago and we do see encouraging signs in the U.S. including stronger employment numbers and a slow but steady improving housing market. This inevitably will have benefits for the Canadian economy which has felt the impact of weaker oil prices and moderating growth in emerging markets.
Despite perceptions that the economy outside of the oil producing regions would be impacted, activity has held up. Growth in Ontario and Québec is broadly unchanged and the relative strength of the U.S. dollar against the Canadian dollar will be positive for the export sector of the Canadian economy with a lag effect. We're confident about the future in the context of a North American economy has continued to expand.
We're making investments in key initiatives to grow the earnings of the bank and to provide a brand aligned customer experience. While banking remains fundamentally about people helping people, smart technology is becoming an indispensable part of how we compete. Workflow is being redirected from traditional channels to digital and mobile. We're differentiating ourselves by ensuring the bank's digital lineup lives up to our commitment to keep the experience personal while leveraging our investments north and south of the border.
We're also optimizing our physical footprint and enhancing the channel through which customers connect with us. Recently we expanded our ATM network installing more than 400 new ATMs at retail locations across Canada effectively increasing our out of branch network by almost 40% and expanding our customers' access to cash to nearly 2500 locations.
Last year I talked about some key online and mobile banking innovations, last quarter I talked about some key online and mobile banking innovations at BMO Harris Bank with the debut of our first smart branch and the launch of Mobile Cash. This quarter we continued to launch leading mobile technologies across the company. Personal and commercial banking introduced Touch ID in Canada, our mobile banking application for iPhones has been updated to include a log in option where fingerprints can securely serve as banking passwords, making us the first big bank in Canada to do so.
We also Touch ID and Passcode in the U.S. improving both ease and security of mobile transactions. BMO Global Asset Management launched a new iPad app designed to promote resource sharing and provide performance tracking for financial advisors and other investment professionals.
This quarter we also unveiled a redesigned flagship branch at first Canadian place which is more open and digitally enabled. Even on a transaction that may have originated online, customers recognize when it makes sense to speak with a banker. In this context the physical branch remains important. Investment we made at King & Bay demonstrates our conviction that the physical branch can provide seamless integration with technology. Customers are learning to navigate online products in branch while encouraging them to use their own devices while interacting with our bankers.
Working with our clients in this way is increasing adoption of new technologies that are making it easier for customers to do business with us. Every line of business is finding new ways to serve the fast changing needs of customers and we expect this kind of innovation, both to enhance the experience with our existing customers and attract new customers. Our strategy is clear and consistent, rooted in a deeply ingrained commitment to our customers and it is a strategy which will drive growth as our results today have demonstrated. And with that Tom, I'll turn it over to you.
Thomas E. Flynn
Okay, thank you Bill and good afternoon everyone. I'll start on Slide Eight. Q3 EPS of $1.86 was up 8% and net income of $1.2 billion was up 6% from a good Q3 last year. As Bill said, operating group performance for the quarter was good reflecting the benefits of our diversified business mix and execution on our plans. Adjusting items this quarter are similar to prior quarters and are shown on Slide 25.
Net revenue was $4.6 billion up 9% including 4% benefit from the stronger U.S. dollar. Higher revenue was largely driven by growth in Canadian P&C and wealth management. Net interest income was up 8% from last year benefiting from the stronger U.S. dollar employee and volume growth partially offset by a lower net interest margin. The quarter-over-quarter increase was also 8% reflecting the impact of three more days and a higher margin and volume growth.
On a net basis noninterest revenue was up 11% from last year with increases in almost all categories and was down 2% from the prior quarter due to lower insurance and trading revenues and security gains. Expenses were up 8% from the prior year. Excluding the impact of the stronger U.S. dollar expenses were well-managed up just 2% year-over-year and were relatively unchanged from Q2 just by three more days in the current quarter.
On a net revenue basis operating leverage was 1.4% and it was 2.7% excluding the impact of the stronger U.S. dollar. The effective tax rate was 19.4% up from 15.6% last year down modestly from Q2. The rate was 25% on a TEB basis, modestly higher than the prior year and unchanged from Q2.
Moving to Slide Nine, our common equity Tier 1 ratio was 10.4%, up 20 basis points from Q2. Capital levels increased due to higher retained earnings and the impact of the stronger U.S. dollar on cumulated other comprehensive income. Risk weighted assets increased by $9 billion in the quarter as shown on the slide, the majority of the RWA increase was driven by FX and business growth with this partially offset by changes in methodology.
Moving now to our operating group performance and starting on Slide 10, Canadian P&C net income was $557 million, up 6% from a good Q3 last year and 14% from Q2. Revenue improved to $1.7 billion up 4% from last year and 6% from the prior quarter. These results are consistent with our expectations for improved performance in the second half of the year.
Total loans were up 3% from last year and deposit growth was good at 6%. Personal loan growth excluding cards was 2% with mortgage growth of 4%. Commercial loan growth was 7%. NIM was stable quarter-over-quarter. Expenses increased 5% year-over-year. The quarter-over-quarter increase of 4% was primarily due to the impact of three more days in the current quarter and continued investment in the business. The efficiency ratio of 49.7% improved 90 basis points from Q2. Credit provisions were down from the prior quarter and the prior year.
Moving now to U.S. P&C on Slide 11, net income was $235 million Canadian up 36% from last year. In the comments that follow I will speak to the U.S. dollar performance. Net income of U.S. $186 million was up 15% from last year driven by stable revenue disciplined expense management and good credit performance. Revenue of $727 million was relatively stable from last year as the benefit of higher balances and noninterest revenue was offset by lower NIM. Loan growth was 4% driven by double-digit growth in C&I loans.
Revenue was up 3% from Q2 largely reflecting three more days in the current quarter. NIM was relatively stable, down 1 basis point from Q2. Expenses continue to be well managed up 2% year-over-year due to high employee related costs and expenses were up 3% from Q2 largely due to three more days in the current quarter. Credit provisions were down from last year and stable from last quarter.
Turning now to Slide 12, BMO Capital Markets had net income of $274 million lower than strong performance of a year ago. Net income was down from Q2 largely due to higher provisions. Revenue was $1 billion up 2%. Excluding the impact of the stronger U.S. dollar revenue was down 2% from the prior year due to lower investment banking client activity and was flat from Q2. Expenses were well managed excluding the impact of the stronger U.S. dollar down 1% from last year primarily due to lower employee expenses and flat from Q2. Provisions were up from the prior periods and the ROE was 15.6%.
Moving on to Slide 13, well management net income was up 10% year-over-year. I know that this is the first quarter with full F&C results in both comparative quarters. Traditional wealth earnings were up 8% from the prior year and 5% from Q2 driven by good growth in tie in assets. Insurance net income was $56 million up 16% from last year which was impacted by interest rates.
Net income in insurance was down strong from a strong Q2 which had an above trend benefits from portfolio changes and rates. Expenses were up year-over-year primarily due the impact of the stronger U.S dollar, higher revenue based costs and continued investment in the business. Expenses were up modestly from Q2 due to the impact of three additional days in the current quarter. Assets under management and administration were up 13% year-over-year driven by favorable FX and market appreciation.
Turning now to Slide 14 the corporate services segment had a net loss of $69 million compared to net loss of $54 million in Q3 of last year and $121 million in the prior quarter. Excluding the group TEB adjustment revenues were higher year-over-year and from Q2 primarily due to higher treasury related revenue. Provisions were up from the prior year and from Q2 due to lower loan-loss recoveries. Expenses were below trend down both year-over-year and from Q2.
To conclude, our results this quarter reflect good operating group performance and we're consistence with our expectations from improved performance in the second quarter of the year and with that I will hand it over to Surjit.
Surjit Rajpal
Thank you, Tom and good afternoon everyone. We had another good quarter from a risk perspective. Starting on Slide 16, Specific PCLs remained stable at the $160 million or 20 basis points. PCLs for Canadians PMLC [ph] were lower largely because of a $28 million decrease in the consumer segment reflecting improved performance as well as a sale of charged off loans. USP and CPC [ph] had a stable quarter-over-quarter. In capital markets PCLs are up primarily due to an increase on the previous provision of the oil and gas loan corporate PCLs were higher as a result of lower recoveries.
Going to Slide 17, formations were $559 million up from $454 million last quarter with the increase coming from capital markets, the largest contributor being oil and gas in the U.S. The GIL ratio remained steady at 66 basis points and gross impaired loans increased by $118 million due the impact of the stronger U.S. dollar.
Ur oil and gas exposure remains modest at 2% of total loans more than half of which is investment grade. Consistent with my comments on prior calls, the oil and gas portfolio will see some strain under the prolonged period of low prices and as you would expect we are watching our portfolios carefully.
Although in Alberta we have seen a slight quarterly increase in delinquencies in some consumer products, there is no discernible trend. Consumer delinquencies in Alberta are down year-over-year and remain below national average. Over time we expect a benefit in some sectors in Canada from the low dollar and more broadly across North America because of low oil prices.
I'll now turn it over to the operator for the question and answer portion of today's presentation.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca
Good afternoon. Just I'll start with the stress tests that you referred to probably for Surjit. Can you just restate your stress tests with oil at say $35, $40 and Sharon help me think through this but if you could just restate it first before I get to my question?
Surjit Rajpal
We had done a stress test at those levels, $35 for one year followed by $50 the second year and it has been almost nine months since we did that test. What we did was refreshed the test and we rode forward that same scenario. So we assumed $35 for the next 12 months and $50 for the 12 months thereafter. Meaning our starting point was the actual impact of the 5 to 8 months on our portfolio. And then we ran that stress test we saw a small increase in our total losses and again there was nothing that I would say was not manageable at all, very similar to the conclusion we came to the last time around. And in those scenarios the PCOs of the bank go up anywhere past the historical average of the bank so around 40 basis points or so.
Mario Mendonca
Okay and so when you do that stress test you are obviously taking into account some of the offsets in the U.S. and in Eastern Canada from low oil or I mean not carry on and go back that is from lower oil prices and maybe softer dollars, is that fair?
Surjit Rajpal
We do, but in this, in the refresh that we did, we muted some of those given that it could take a little while before some of those benefits are received.
Mario Mendonca
And again in these stress tests, I'm just – I want to want to make sure you understand this because the numbers that the banks are referring to are low in terms of the losses and when I speak to some investors, they are questioning, certainly I'll be honest to you the bankers providing the stress test information but just, yes the numbers are just so low and people are questioning us. So what I want to get at here is, when you do these stress tests, where does unemployment kind of that go [ph]?
Surjit Rajpal
Well, let's see, so let's start out by saying that when we do these stress tests we isolate what we call high impact areas. And when you look at it from that perspective you take the oil reasons. And Alberta being the big one, and therefore when you look at it in the perspective of the impacted regions it becomes somewhat less of a factor.
For example in Alberta the consumer loans are 15% of the total bank's book and in commercial it is slightly, almost a similar number. So the impact of oil and gas again, when you look at it, you got to look at it in the context of the portfolios that we have. In the oil and gas portfolio, go to the oil and gas portfolio is the E&P sector. And the E&P sector for us is close to 70% of our total book and half of it is corporate, half of it is borrowing base.
And overall, just to put things in perspective, our investment grade portfolio is more than half the total exposure of $6.6 billion [ph]. Now the other sectors are pipelines and services and pipelines are actually doing quite well and the service sector which is less than $1 billion of our portfolio so far has performed well in that some we expect to see some strain in which we haven’t yet seen. But in our stress test we have assumed a fairly large impact on these portfolios.
So I just wanted to put that into perspective for you in terms of the size. And the portfolio itself overall is just about 2% as I said in my remarks. And that's why it seems a little – it seems messy but a little unreal when I say it is in the 40s but they are also starting with a base of 20 basis points on our PCLs.
Mario Mendonca
And then for perfect clarity you are not just assuming about 2% of you are stressing the consumer portfolios and operate as well, was it materially higher?
Surjit Rajpal
Absolutely, good question. That is correct. The other one that we've assumed in Alberta is just information to answer your question was doubling. And right now it is at six I think when we started the last stress test it was at 4.7, so we thought it would double in our stress test scenario.
Mario Mendonca
Okay, then the final sort of related question then is, capital signed PCLs are 40, do those earnings, do earnings grow, does EPS grow in those stress tests or does it decline modestly.
Surjit Rajpal
Tom, do you want to address the EPS question?
Thomas E. Flynn
We'll I'll answer, but at the high level we do not give guidance, but the math to look at PCL growing from the current level to the low 40s is pretty straightforward and so you can think about that in relation to the growth that we have been producing and we would expect with an overall North American economy that is doing reasonably well to be growing the bank's earnings.
Mario Mendonca
But the reason I'm asking the question Tom, is the increase in PCLs is not the only thing that would happen under your stress test. It would be a lot of other things going on with loan growth, because if unemployment spiked for example and operator that is why I am asking the question because to stress test your capital you would have had to estimate your earnings as well and that's why I am asking the question if earnings go down in those stress tests?
Thomas E. Flynn
And I'll stand by the answer. We don’t give earnings guidance. We've tried to be quite detailed really in the response to the questions around the impact of oil, both primary and secondary knock on impacts and with that people are able to form their own view around what the whole might look like.
Mario Mendonca
Thanks.
Operator
Thank you. The following question is from Sumit Malhotra from Scotia Capital. Please go ahead.
Sumit Malhotra
Thanks and good afternoon. Maybe just to stay with Surjit around the similar topic, you mentioned that you saw the gross impaired loans increase for the energy portfolio this quarter. First off if we start there, the $105 million formation, your provisions this year for the energy book have been about a quarter of that. Can you talk to us whether this was one specific loan, whether there are few files that have started to turn and how you feel your provision for these if at all?
Surjit Rajpal
Well, from a provision standpoint we did I think I mentioned that we had taken a provision and an account and we took some more on it and that was in the capital markets so in terms of formations it is not one account, but there are a few small accounts that have been moved to the red line, but the number is not very large. When you look at our gross impaired loans, in the oil and gas sectors about $80 million there is a delta of $80 million since the last quarter. And that's not that large a number given the context in which you are examining this portfolio and the size of this portfolio. Did I miss any part of your question?
Sumit Malhotra
Well, I am going to go to the second part of it, but you've indicated that is going to be and it makes sense we are likely going to see some continued migration given what we've seen in the commodity price. And maybe this plays into the stress test question maybe it doesn’t. How does capital start to move are your CT [ph] one ratio start to move as you bake in more impairments coming to the producer portfolio? What kind of migration do you have to see to start to change your expected rate of default and how much deterioration of the book would there have to be to wipe out say a quarter of capital built?
Surjit Rajpal
Okay, to give you – I'll give you some sense, we do look at migration in our stress test and the migration is again, it is very similar to the PCLs extremely manageable it doesn’t wipe out any part of, or to any extent where I would call not manageable at all. There is clearly, there will be clearly a migration and we will see that happen if the prices remain depressed, but not to cause any alarm.
There will be, this is not going to happen overnight. This is going to happen over a period of time that will give us time to look at our forecast better quarter-over-quarter before we make other decisions with respect of capital. So, I think we will be quite comfortable that under this stress scenario we’ll have taken management actions appropriately well ahead of time. Tom you want to add anything to that?
Thomas E. Flynn
The only thing I’d add would relate to again a sense of proportion and the direct exposure is only 2% of the lending portfolio. I think it is about 3% of RWA and so it's hard to have a big impact on the total bank when those are the numbers. The portfolios in the region would have some impact as well as we've talked about, but again there proportion is our friend because the portfolio, Alberta is only about 15% of the Canadian portfolio which is only a part of our overall bank portfolio.
Sumit Malhotra
While you are here Tom, just a quick one to wrap it up for me, your bank efficiency and operating leverage look much better this quarter compared to the last few, although when I look at it on a segmented basis it seemed like the bulk of the improvement when I look at the adjusted expenses seemed to be in the corporate services segment. Your expense line there noticeably lower than we’ve seen in quite some time. Is this the benefits of the restructuring starting to come through? If so I would have thought it would been mostly in the capital market segment, but why don’t I stop and get your take on why that dropped so much and whether there was anything unusually low in the Q3 result?
Thomas E. Flynn
Sure. So, the operating leverage was better than we’ve seen and we think good in the quarter and the numbers that we reported that it was 1.4 and if you adjust for the stronger U.S. dollar overall as a bank about 2.7 and the improvement really was driven by work that’s going on across the bank. The restructuring charge that we took last quarter did help and our capital market business if you adjust for the currency which I think you need to do to really see the underlying expense trend, expenses were actually down 1% year-over-year, some of that would have related again to benefit of the restructuring that we took.
The corporate segment expenses were below our average level that we’ve been running out for say the last six quarters in the current quarter. Some of that is benefit from the work we’re doing to contain costs. There is some timing in that and we do expect a bit of a Q4 seasonal uptick to those expenses which isn’t unusual for us. So corporate helped this quarter, but isn’t the whole story and as we look into the next quarter, we’re focused on delivering operating leverage at the total bank that would be in the zone of what we had this quarter.
Sumit Malhotra
Okay, thanks for the time.
Operator
Thank you. The following question is from Meny Grauman from Cormark Securities. Please go ahead.
Meny Grauman
Good afternoon. Just wanted to follow up on the credit issues, more of a timing issue as I’m wondering are you surprised that you haven’t seen any issues in the Canadian oil and gas book in particular and more broadly in Alberta? And just sort of as a follow up to that is, how do you explain that? Is it really – we're just talking about sort of a lag effect playing out or are there other mitigating factors that stand in your mind as being important that you need to consider?
William Downe
The pace of these things happening is not entirely a surprise, given that after [indiscernible] declined in oil prices, they edged up a little bit instead at the $60 level for some time allowing folks to hedge somewhat and also feel better, also gave them a little bit of relief in terms of timing. So there are not entirely a surprise and as I mentioned in the prior comment, these things don’t happen suddenly. So we never expected that anything would happen in oil either in a quarter two.
So to answer your question another surprise, time will tell, at the time we did the $35 scenario it seem something that we couldn’t help possibly gotten down to, it seems unreasonable and we’ll have to wait and see what happens to oil prices and how long we think that will stay compressed before we look it again. I hope that answers your question.
Meny Grauman
Yes sure, maybe just a follow-up quickly, just in terms of your assumptions and your experience, what kind of lag is reasonable to expect to see a more pronounced impact? I guess you are saying that you expect to see something more significant, what kind of lag is reasonable to expect?
William Downe
It’s hard to tell, every - this is a cyclical business, you've got to recognize it and we’ve seen cycles before. This particular cycle started with a supply issue, there was too much supply in the marketplace.
Compounding that now there may be a demand issue and so it’s hard to predict the timing of these things, but certainly what we do is, we start watching for those areas which will give us the first sign of any patterns. And typically what happens in the industry is you see the service sector and on the consumer side, you see consumer delinquencies rise, consumer delinquencies in Alberta are not showing any break and on the service sector we have just a portfolio, our portfolio is essentially Canadian. We haven’t seen much of it either because when oil and gas companies are stressed, particularly the E&P companies they try to bring down their costs and the sector that they go after is they try to reduce the cost and the cost has to be – that has got to be borne by the service sector.
We haven’t seen that and the good news is our portfolios have a good quality where we deal with large service providers and not at the wellhead. So we are not engaged in those that are very close to the wellheads, I suspect those that are at the wellheads will be impacted first. So we don’t have many of those. But I can’t really give you any specificity in terms of how lagged it is going to be. We are watching closely and we wouldn’t be surprised if we saw something, but we haven’t seen anything yet.
Meny Grauman
Thank you very much.
Operator
Thank you. The following question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.
Steve Theriault
Thanks. If I could just ask Surjit a quick followup thinking again about the oil and gas portfolio, the impact in the stress case that you went through there in some good detail, it sounds pretty manageable if you think could we see a rise in the collective in advance or anytime sooner or in a base case or stress case, so you are just more likely to take the losses as they come given that they’re not substantially large in nature I guess?
William Downe
Yes, it’s hard to tell whether we would take losses and be able to write them down rightly or carry a collective against them, certainly with the migration the collective allowance will change as they migrate and not in the impaired state that it will have an impact on the collective allowance. But let me remind you again, this is a very small part of our portfolio and we do have a fairly large size collective allowance overall.
And then we also expect certain parts of our portfolio to move in just the opposite direction, where we’re seeing migration towards the positive consumer portfolios for example this quarter both in the U.S. and Canada have shown positive migration. So I think there will be some offsetting effects that I referred to as well.
Steve Theriault
Okay. And then I wanted to come to Cam, last quarter we saw some good improvement in operating leverage this quarter, but still a bit negative. Last quarter, you indicated we should start to see positive operating leverage beginning in Q4. The Canadian macro backdrop clearly weakened over the last three months, Cam so I’m wondering if you can give us a bit of an update in terms of your outlook on expenses picking up the next a little bit?
Cameron Fowler
Sure. Thanks for the question. I think the quarter has come in very nearly in line with where I obviously got to where I thought it would. So that’s good. On the [indiscernible], we are happy with obviously because of the strength of the quarter that we’re building upon last time.
The expenses have come in about where I think I got it to last time where I thought and it is a more difficult environment perhaps but I still would like to see this business getting very near neutral or positive leverage towards the end of Q4 with the focus to getting and staying in the positive zone in 2016.
Steve Theriault
Thank you.
Operator
Thank you. The next question is from Robert Sedran from CIBC. Please go ahead.
Robert Sedran
Hi good afternoon. Just a quick numbers question to start, if I’m not mistaken there were some recoveries and gain on sale charge off accounts in the Canadian segment, can you quantify that in terms of how big the impact was on this quarter?
Cameron Fowler
Sure. It is Cam Fowler speaking. I will take that one. The improvements in this PCLs quarter-on- quarter is $34 million of which $27 million is on the consumer side of which two thirds is just better performance across most product areas and the other third, so $9 million is that sale.
Robert Sedran
Okay. Thank you. And I want to ask about the buyback, management teams often talk about being opportunistic with the buyback. The 10.4% CET 1 ratio, the share price has not had a good summer, should we expect you to become more active or to quicken the pace in the next while or concerns about payer risk [indiscernible] market, I mean does that make you want to go to sleep on a big pile of capital?
William Downe
I thought Tom was going to answer that, but the last part of your question Rob, brought me to life. You know, we’re not going to go to sleep on a big pile of capital. If you look at year-to-date, we’ve returned about $2.2 billion to shareholders between the dividend and buybacks and we’re in exactly the same position that we stated in the last many quarters and that is a balance between the application of capital to growing the business and as you said opportunism in buying back shares.
We really weren’t in a position, I don’t think where we would have been permitted to buy back shares in the first hour of the day yesterday that would have been a very good time to do that, but in answer to your question specifically we look at acquisition and investment opportunities in the context of the amount of capital we have, the flexibility that having strong capital allows us going forward and the relative accretion that buying stock at any level implies and we’re more inclined to buy stock at lower prices than we are at higher prices.
Robert Sedran
Just things that roused you, I mean the environment.
William Downe
I wasn’t too deep by the way.
Robert Sedran
But the environment you find yourself in today then is just more or less nothing has changed, you don’t view that the tail risks in the market to be any more significant, you’re comfortable with your stress test and so you don’t feel the need to build capital like the numbers we’ve talked about in the past at roughly 10% CET 1 is still a level that you feel comfortable as an operating level in this environment?
William Downe
Yes, I think we’re in the comfortable range. I mean, there is no question that we’re as vigilant as any participant in the market is around developments that will come from lower commodity prices, lower oil prices. And we do have a lot of experience in these sectors, we have very deep sector experience in natural resources going through many cycles and the losses tend to be spread over some period of time.
So we’re not – we’re not unaware of what the consequences of lower commodity prices are for some period of time. But when we look at in aggregate the North American economy and there is a reason why we have diversified North American business and great part of it is, that is how our customers see the market as well.
Then on balance the benefits of that mix are going to I think are going to balance the areas of concern quite rightly we’ve been exploring. So our capital is being maintained at level that ensures we have the flexibility to take advantage of opportunities as they present themselves and we use the buyback in order to keep it in balance.
Robert Sedran
Thank you.
William Downe
You're welcome.
Operator
Thank you. The following question is from John Aiken from Barclays. Please go ahead.
John Aiken
Good afternoon. Cam, can you give us a little bit more color on the reduction you experienced in your auto loan exposures and I mean fairly certain that we all know the answer to this, but where you have been reducing and have you seen growth in other segments either by credit risk or term et cetera?
Cameron Fowler
Thanks for the question. The reductions which have been probably filling down over five quarters now I think John. Three areas that we've focused on length of amortization score would be the two primary ones and I think what we’re seeing now is we haven’t changed our view that we like to participate in this market and be selective about how we do so. I think we still feel that way.
What I think we’ve seen over the last several months is an increase in originations in the spaces that we want to participate, mostly because we worked on our own distribution alignment and making life a little easier for our sales force and our potential client. So I expect this business to come along a little bit over the next, over the next quarter and through ’16 along the lines that I have described it in terms of our appetite, but I do think it will start to see positive growth in Q4 and Q1.
John Aiken
Great, thanks Cam and if you'll allow me to completely beat a dead horse, but a final question for Surjit. Surjit, I understand the stress testing or so I believe I understand the stress testing which you have undergone and the premise you have real not, but I think that you alluded to one of the – in one of your previous answers the fact that, we really don’t know what’s going to happen with oil prices.
And I know that you’re the bank if the glass is half full and we on the sell side our glass is half empty, but what, have you done any degree of sensitivities around your stress testing if we have a low funton your stress testing if you have lower oil for a longer period of time called it as some $40 for two years in terms of what impact that would have have on your stress testing?
Surjit Rajpal
We haven’t done any formal ones, but we have done a fair number of back of the envelope based on much of the about detailed stress test that we’ve done at 35 and 50. And as I said you've got to look at it in the context of the overall portfolio. The 2% exposure more than half of which is investment grade where some of it is pipelines and midstream and its and it’s the result don’t alarm us to the extent I think the glass half empty folks would want us to see them, to see alarmed.
Clearly this is the sector of Canadian banks and particularly have been assumedly comfortable with over time. So and I have been engaged in this gone through cycles before. We know this can happen, we know it could be prolonged for long as well but we also believe that there will be benefits that come from up to, from this low oil price scenario. So, yes we have run some sensitivities, but not formal stress tests with lower prices.
John Aiken
Great, thanks Surjit. Hopeful we'll put this to bed at that time. I'm not that confident, but I connect to more questions. Thank again.
Operator
Thank you. The following question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.
Gabriel Dechaine
Apologies to Surjit [ph] and I'll ask another oil really question, between Canada and the U.S I'm not an oil and gas expert, but I hear that the borrowers tend to be lower risk in Canada, lower balance sheet leverage in Canada better debt the, lower debt to cash flow ratio it is things like that. Is that a characteristic that’s applicable to being more oil and gas book between Canada and the U.S. book which is proportionally higher in the U.S. than it is Canada?
Surjit Rajpal
The U.S. book, to your last point our U.S. book is about 35% of our total book, 65% of it is in Canada.
Gabriel Dechaine
Right, but within U.S. and that sort of ambit.
Surjit Rajpal
Yes this is U.S. - that we do have, we have more a borrowing based bias then we have in Canada and in the E&P sector. So in some ways they are well secured and don’t forget in a borrowing based or a reserve based loan you do lend only two thirds based on the present value of your price tag. And it's only under very changed price tag that you will be putting a new price tag for this the redetermination of borrowing bases and that will happen in September, October and November, so they will have some strain.
In terms of more leverage, the U.S. companies have had a lot more access to markets other than the banking market and the second lean and the high yield market is open to them and that market is, long as readily available given than I think roughly from what we read about quarter of the high yield loans that were on the energy sector right now in this test territory. So these are again the stress pieces. So structurally the markets are slightly different. Does that give you some?
Gabriel Dechaine
Well, may be just more simply is the average credit risk higher in your U.S. oil and gas portfolio than it is in Canada? And also if we see another quarter like this one in terms of the level of formation could we see be more take sector [ph] provision next quarter if that would occur.
Surjit Rajpal
No, our average risk profile is not very different between the geographies and if you’re asking me to tell you about our sector provisions we actually have a collective allowance that is done in a manner in which we look at all our sectors including the oil and gas sectors and in the current environment we don’t, I don’t see a sector provision only because I think we know what’s happening in our portfolio and where they are migrating and we put collectives in if we have to as we see things change. But as I said, we are also hoping that there will be offsetting migration elsewhere.
Gabriel Dechaine
Okay, and now if I should see the specific coverage ratio it is around $2 million of allowances on the oil and gas book and against the $105 million or $100 and something million impaired loans you’ve got additional buffers in the collective so I shouldn’t be worried?
Surjit Rajpal
No, yeah see the point of the $2 million against $105 million or so in the impaired loans that number changes depending on what you write off. So in the last quarter we’ve written down some and so that coverage looks a lot lower, but in fact the good news in this particular quarter was that the new provisions that we put on we don’t see any losses associated with them at least not now and depending on the oil price scenario, oh sorry, oil price actual experience things may change, but right now I think we adequately provided.
Gabriel Dechaine
Okay, I just want to shift gears to the U.S. that we have had three straight quarters now, our margins have been flat, is that surprising to you or alternatively are you looking at more stable NIM going forward, because if that’s the case they could move a pretty big revenue growth tailwind into 2016. So your revenue growth could turn positive more consistently next year is that how you’re looking at it?
David R. Casper
So, it's Dave. We had been guided you probably to the 2 to 3 over the last period of time. We are actually very, very happy with where it's been. I think there is probably going to continue to be some NIM pressure, not as much as it has been in the past. I’d say may be two basis points per quarter that would be my hope and could be, if we had some rate improvement we’d actually better than that.
Gabriel Dechaine
Okay, so why is it getting better than that?
David R. Casper
Well, couple of reasons, one of the big drivers of that is the commercial loan spreads on those loans and those have over time, they’ve come down a lot. They have - but it starting to narrow. We're getting I think to point a where that will slow and may be moved back the other way at some point. It’s still very competitive in the U.S., but that’s’ the big driver. Also the level of loan growth in any quarter can have an impact as well. Does that help answer the question?
Gabriel Dechaine
That’s very helpful. Thank you.
David R. Casper
Okay.
Operator
Thank you. The next question is from Peter Routledge from National Bank Financial. Please go ahead.
Peter Routledge
Hi, Surjit just a quick follow on the Gabe's questions. One, you have $6.6 billion drawn oil and gas loans and $7.9 undrawn, what’s your assumptions around exposure default?
Surjit Rajpal
The exposure default typically does go up and you will see that in our subtract. We’ve got our exposure of the default which includes oil and gas. So we don’t show them separately, but you will see our exposures of the default for the overall portfolio that have been better than that.
Peter Routledge
So when you assume your borrowers go bankrupt in your stress test, you are assuming a pretty high exposure default is that fair to say?
Surjit Rajpal
So, let me explain, when you have a borrowing base facility the amount that you authorize something you can’t draw because you don’t have the borrowing base available for it, so the authorizations can be a little misleading.
Peter Routledge
Right.
Surjit Rajpal
Because you are not allowed to take the money.
Peter Routledge
Okay, so it's not pronounced and other there might in other sectors.
Surjit Rajpal
That’s right.
Peter Routledge
Okay, thanks. And then what percent your portfolio is investment grade versus below investment grade?
Surjit Rajpal
Our investment grade portfolio overall is little over 55%.
Peter Routledge
Okay, thanks. Change topics, there has been some news around mortgage underwriting in Canada, specifically about the veracity of certain underwriting information income verification for example and I know Bank of Montreal doesn’t do third-party mortgages very much. But I – the question I have for you is, for the mortgages originated outside your branch network, whether it is mobile mortgage specialists or purchase mortgages from third parties, what sort of tactics do you employ to prevent misrepresentation of key mortgage underwriting data and obviously income would be one key data point, but also appraisals and beacon [ph] scores, can you give us a sense of outside the branch network, what do you to ensure that data you’re using in your underwriting is precise and accurate?
William Downe
So, let me look at any mortgage that we take from third-party sources, we are actually, firstly let me start off by telling you, when we originate all of the mortgages, we have a pretty stringent and rigorous way of making sure that all the verifications from income and elsewhere are in order. When we look at third-party mortgages, I think that process is even more stringent and we look at all the information that they provide us and we do we have a quality assurance associated with that part of the portfolio that we buy from folks and what has happened in the marketplace when there is an element of what I would call fraud or fraudulent representation, we look we tighten it up even further to see whether we noticed anything and we haven’t.
So we are quite comfortable with the suppliers of third-party mortgages to us and the processes that we have in place to make sure that nothing goes – and nothing surprises us, Cam do you want to add to that?
Cameron Fowler
I would just confirm are stringent or more, we do audit it and we always make sure they are CMHC and NHA approved partners.
Peter Routledge
So, for a subsection maybe third-party mortgages or your mobile mortgage specialists, originated mortgages for income verification do you make calls to employers, not for I’m presuming that is impossible to do for every mortgage, but do you sort of a random check?
William Downe
I am sure we do, but I can’t tell you for certain because I have not asked that question very specifically in terms of how many people we call in when we call them, but the quality assurance program and the audit checks that we do, I’m sure encompass some calling, but I can’t tell you for sure right now. I can come back to you and tell you what we do.
Peter Routledge
Okay. That will be great. Thank you for your answers.
Operator
Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Darko Mihelic
Great, thank you. Just wanted to circle back a little bit on the sale of delinquent loans, I’m just trying to marry this with the loan loss provisions for the credit cards in the quarter, is that were to had an impact because they see provisions were down significantly quarter-over-quarter, year-over-year very low level of 2.6% sort of loss rate is that what’s happening with the credit card portfolio or is there something else that I’m missing?
William Downe
Yes, I think the sale is having an impact and having said that, there is also quality improvement, so it’s not just a sale, but certainly it’s having an impact on the basis points that you’re looking at.
Darko Mihelic
So, 260 basis points is what I sort of calculate for credit cards in the quarter. The four-quarter average prior was something like 360, so it’s 100 basis points improvement versus the four-quarter average might have think that 260 is the right number or?
William Downe
I don’t think it’s 100 basis points, I don’t know how you’re getting to that, but $9 million in a quarter does not make that big a difference to the basis point calculation on credit cards.
Darko Mihelic
Right, so what I am specifically looking at sort of is the $52 million that you guys put in your sub pack for credit card losses and that will compare to $73 million last quarter and the balance is we can just take from the balance sheet. So maybe we can take this offline, but it just seems like a very big improvement.
William Downe
We can take that offline, yes.
Darko Mihelic
So maybe we can take this offline but it just seems like a very big improvement. And similarly I think one of the things you guys disclosed is your commercial losses in Canada P&C and they are too seeing a very big improvement in very low levels and this gets back to you are showing $23 million for the quarter about 17 basis points of losses, If I only had to go back to 2014 and 2013 where those are high as 41 and 45 basis points?
So it’s just begs a question was there anything there in that portfolio that's showing it just seemingly is hard to understand how commercial continues to get better and better in Canada?
William Downe
Yes, commercial Canada has actually not been, it is better than in the past, but isn’t that different from 14 or I would say even from, a little bit better than 13 but this hasn’t changed too much. So, I don’t know what numbers you are looking at, but I don’t see very much of a change between 14 and 15 here today, on commercial Canada.
Darko Mihelic
Okay, we can take that one offline. I have the numbers from your disclosures, I mean it just looks like it is a big improvement. I guess lastly then just the M&A environment in the U.S. is definitely picking up. Marshall & Ilsley are largely integrated. You have good capital ratios. I guess the question for Bill is, getting back to the excess capital question and I suppose you could buy back stock, but from a strategic point of view it seems like now would be a good time to sort of get involved and think about furthering your prospects. Is there is something holding you back there or no? I mean there is a concern that we've always had is the regulatory environment is difficult in the U.S. You have a lot of capital there. So maybe you could just speak briefly to what you are seeing on the M&A front, if you're seeing anything at all that would be different today versus and you're stance, would your stance be different today versus what would have been just a year or two ago?
William Downe
No, our stance isn’t different. And I think that a year a two we have capacity. You recall we did an asset management transaction in the UK and that absorbed that capacity in one year. I think the environment is changing in the sense that potential sellers are now I think more interested in having conversations. We have a constant corporate development process we are in conversations with banks that we think and have been for as long as I can remember, banks would be good additions.
So I think the environment is fun from the sellers' perspective and that's why you've seen a couple of transactions done. You haven’t seen very many done yet. But I think in 2016 and 2017 a consolidation process in the U.S. market will probably pick up and at the same time many of the things that we have been investing in from a systems perspective will give us the confidence in our ability to capture the benefits of scale.
So it's I think that's really the tradeoff is an increasing visibility around potential transactions over the next 24 months and a higher degree of confident that that we can use the gains that came from heavy investment around the M&A to profitably increase the size of the business. It would also be nice to see just a little pickup in both new-home sales and interest rates on the retail side to accompany that.
Darko Mihelic
Okay, that's helpful though, thank you.
William Downe
And I think based on what I understand we've reached the end. I think the operator should say something.
Operator
Thank you. There are no further questions registered at this time. I will now like to turn the meeting back over to Ms. Haward-Laird.
Sharon Haward Laird
Great, thanks everyone for joining us on the call today. We hope that you enjoy the rest of your day. Thank you.
Operator
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.
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