Q4 2012 CONFERENCE CALL
CORPORATE Caution Regarding Forward-Looking Statements PARTICIPANTS Sharon Haward-Laird Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or Head, Investor Relations the U.S. Securities and Exchange Commission, or in other communications. All such statements are made BMO Financial Group pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Bill Downe President & CEO Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and BMO Financial Group priorities for 2013 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies. By their Tom Flynn nature, forward-looking statements require us to make assumptions and are subject to inherent risks and EVP & CFO uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such BMO Financial Group predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or Surjit Rajpal events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking Chief Risk Officer statements. BMO Financial Group The future outcomes that relate to forward-looking statements may be influenced by many factors, including but Mark Furlong not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or President & CEO, illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in BMO Harris Bank, N.A laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and Frank Techar guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with President & CEO, respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates and the effect of changes to accounting standards, rules and P&C Canada interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; general Gilles Ouellette political conditions; global capital markets activities; the possible effects on our business of war or terrorist President & CEO, activities; disease or illness that affects local, national or international economies; natural disasters and disruptions Private Client Group to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to anticipate and effectively manage risks associated with all of the foregoing factors. Tom Milroy CEO, We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our BMO Capital Markets results. For more information, please see the discussion on pages 28 and 29 of BMO’s 2012 annual MD&A, which outlines in detail certain key factors that may affect Bank of Montreal’s future results. When relying on forward- looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward- CONFERENCE CALL looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether PARTICIPANTS written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our Gabriel Dechaine shareholders in understanding our financial position as at and for the periods ended on the dates presented, as Analyst, Credit Suisse well as our strategic priorities and objectives, and may not be appropriate for other purposes.
Sumit Malhotra In calculating the pro-forma impact of Basel III on our regulatory capital, risk-weighted assets (including Analyst, Macquarie Capital Markets Counterparty Credit Risk and Market Risk) and regulatory capital ratios, we have assumed that our interpretation of the proposed rules and amendments announced by the Basel Committee on Banking Supervision (BCBS) as of Steve Theriault this date, and our models used to assess those requirements, are consistent with the final requirements that will be Analyst, BofA Merrill Lynch promulgated by the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted assets, the regulatory capital treatment for Peter Routledge non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital Analyst, National Bank Financial ratios will be adopted by OSFI as proposed by BCBS, unless OSFI has expressly advised otherwise. We have also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be Michael Goldberg fully included in the October 31, 2012, pro-forma calculations. The full impact of the Basel III proposals has been Analyst, Desjardins Securities quantified based on our financial and risk positions at year end or as close to year end as was practical. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when Andre Hardy necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so. Analyst, RBC Capital Markets Charles Nabhan Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic Associate, Stifel Nicolaus priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Robert Sedran Canadian and U.S. governments and their agencies. See the Economic Developments section on page 30 of Analyst, CIBC World Markets BMO’s 2012 annual MD&A. Among the material factors that we considered when establishing our expectation of net interest margin changes in 2013 in the P&C Canada business, were assumptions about growth in and mix of Brad Smith loans and deposits, stable competitive pressures and an interest rate and economic environment as described on Analyst, Stonecap Securities Inc. page 48 of BMO’s 2012 annual MD&A.
Mario Mendonca Regulatory Filings Analyst, Canaccord Genuity Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial John Reucassel statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular are Analyst, BMO Capital Markets available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov. Cheryl Pate Analyst, Morgan Stanley
DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
PRESENTATION
Sharon Haward-Laird - BMO Financial Group - Head, IR
Good afternoon, everyone, and thanks 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 requeue. Also with us this afternoon to take questions are BMO's business unit heads, Tom Milroy from BMO Capital Markets; Gilles Ouellette from the Private Client Group; Frank Techar, Head of P&C Canada; and Mark Furlong, Head of P&C US.
At this time, I caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call. They are subject to risks and uncertainties. Actual results could differ materially from forecasts, projections, or conclusions in the forward-looking statements. Information about material factors that could cause results to differ, and the material factors and assumptions underlying these forward-looking statements, can be found in our annual MD&A and our fourth quarter earnings release.
With that said, I will hand things over to Bill.
Bill Downe - BMO Financial Group - President & CEO
Thank you, Sharon, and good afternoon, everyone.
Today, BMO reported a strong finish to a pivotal year for the bank. In the fourth quarter, we successfully completed the conversion of the core banking platform in the US and turned the page on the purchase of M&I, announced 24 months ago.
With our stronger expanded North American platform, BMO is now the second largest Canadian bank, measured by the number of retail branches in Canada and the US. And adjusted earnings1 from BMO's US segment tripled from 2011 to over $1 billion, benefiting from growth in our business and strong credit performance.
I'll comment further on a number of milestones achieved later in my remarks.
The Bank had record results in 2012. Reported net income was $4.2 billion, or $6.15 per share. On an adjusted basis, net income was $4.1 billion, up 25% from last year. Revenues1 increased 10% to $15 billion, ROE1 was 15.5%, and return on tangible common equity1 was 19.6%.
We also increased the dividend, grew loans by 7.4% and deposits by 7.1%.
With the majority of M&I conversion work complete and initiatives to improve productivity taking hold, the adjusted efficiency ratio improved in the quarter, and we reduced headcount by 700 during the year.
BMO continued to build its strong capital position, finishing the year with a pro forma Basel III common equity ratio of 8.7%, assuming full implementation of Basel III reforms and the full impact of IFRS. Concurrent with our earnings release today, we announced our intention to establish a Normal Course Issuer Bid, subject to regulatory approvals. This will give us additional flexibility in managing capital.
Turning briefly to the operating groups, P&C Canada's reported net income for the year was $1.8 billion, up 3% on an actual loss basis1. We had good loan growth across most products, an increase of $11 billion, or 7.3%, supported by two strong quarters of sequential growth to end the year with momentum.
1 - Reported earnings from BMO's US segment quadrupled from 2011 to US$969MM; Reported Revenues increased 16% to $16.1B; 3 2 ROE was 15.9%; Return on tangible common equity 20.1%; P&C CAD reported net income up 1% DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Importantly, in the last two years, we have significantly shortened the average term to maturity of our mortgage book, reducing the risk to our customers from home ownership.
Our net interest margin remains above the peer average, despite margin compression. And we have continued to invest in this flagship business to generate consistent, quality long-term growth, and we remain very confident in the success of our customer-focused strategy.
P&C US delivered adjusted net income1 for the year of $579 million in source currency, up 48% over 2011. Our fully integrated commercial banking team continues to perform very well, with strong momentum in core C&I growth, which increased 15% from one year ago. I'll comment further on our overall progress in the US in a few minutes.
Private Client Group had good growth in 2012. Adjusted net income1 increased 12%, to $546 million, with over $100 million contributed from the US. During the year, we made a number of strategic acquisitions to enhance our global presence and wealth offering for both asset management and private banking customers.
BMO Capital Markets delivered annual adjusted net income1 of $949 million, with strong ROE of 20.2%. During the fourth quarter, we were recognized as the North American M&A Investment Banker Team of the Year by the Global M&A Network.
In sum, BMO achieved three of our four medium-term financial objectives in fiscal 2012. We delivered adjusted EPS growth1 of 18%, well above our target range of 8% to 10%; ROE was within our 15% to 18% target; and we maintained strong capital ratios exceeding regulatory requirements. In regard to the operating leverage measure, we intend to meet this objective in 2013.
Our medium-term objectives remain unchanged and have been set in the context of our performance, and that's the source of our confidence looking ahead.
Now I'd like to spend a moment highlighting our accomplishments since we announced the M&I transaction 24 months ago. We have achieved what we said we would.
First, we have stronger, expanded platforms in North America in both banking and wealth management. We doubled our US footprint, adding both scale and reach. The conversion of our core banking platform was completed on schedule in October. We upgraded US online, branch, core banking, and mobile banking platforms at the same time.
Second, we have completed rebranding. Over 600 US bank branches have been refreshed, high visibility BMO signage and promotion have been put in place, and over 1,300 bank machines were raised to a new standard. We have increased our brand presence through our sponsorships and community affairs partnerships, supporting and being part of local communities, which has always been a guiding principle at the Bank.
This month, we are blanketing our US footprint with some of the strongest advertising and promotion the Bank has ever developed -- online, outdoor, broadcast, and in branch. We have launched an omnibus campaign that covers TV and radio, newspapers and magazines, billboards, branch, and digital for our brands BMO Harris Bank and BMO Private Bank.
In short, we have galvanized a valuable franchise, one with a leading position in markets we know very well. A significant increase in the value of our US business has been realized, and 100% of our efforts are now back on our first priority: being in the market with confidence, growing our customer base, and building the bank and its earnings as a consequence.
Finally, we have enriched shareholders by generating excellent financial performance and enhancing the long-term value of the Bank. We delivered consistent earnings accretion throughout 2012, well ahead of our 2013 target, exceeding our business case.
Credit performance has been better than anticipated, and recoveries on the acquired portfolio have paid for the cost of integration. Cost synergies are expected to exceed US$400 million, up from our estimate of US$250 million at announcement, and realization is progressing well.
1 - 2012 P&C US Reported net income US$516MM, up 45% over 2011; PCG 2012 reported net income increased 10% to $525MM with US$89MM contributed from the US; 3 BMO CM 2012 reported net income of $948MM, with strong ROE of 20.1%; BMO delivered reported EPS growth of 27% in 2012 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
The US contribution to total bank adjusted net income1 increased to 25% this year, up from 10% in 2011; and both our Basel II and Basel III common equity ratios have been rebuilt to above pre-transaction levels; and in the same period, our dividend payout ratio has come down.
Before I wrap up, some brief observations on the economic outlook. Negotiations between Congress and the President about taxes and spending are moving to a critical phase, and if an agreement can be reached relatively quickly, and I believe that's almost as important as the actual terms of any agreement, there will be a lift in business confidence that will accelerate investment and hiring; job growth will benefit; and consumer confidence and spending will strengthen.
Assuming lawmakers do the right thing, and I believe they will, the US economy should strengthen through next year, pulling Canada's economy along with it, even with the strong Canadian dollar, fiscal tightening, and expected moderation in consumer loan growth.
To conclude, BMO's market position has visibly changed. This gives us confidence in our ability to produce quality and sustained growth across our North American footprint. The bank is fully repositioned, and customer loyalty has become a source of strength. In 2013, we will move forward, taking advantage of the opportunities that flow from leading customer loyalty. We are running a business with a clear identity and a shared underlying infrastructure, and we will continue to capture the value of increasingly integrated North American delivery.
We have clear opportunities for organic growth across all of our businesses. Commercial Banking is a strength for BMO in both Canada and the United States. We are looking to leverage our expertise in a business-led recovery.
Capital Markets has a diversified balance portfolio of businesses. With leading expertise in relationships and strategic sectors, we are well positioned to leverage our US investments to drive better operating performance.
Wealth management has established momentum with a strengthened US market position. We see particular opportunities in BMO Global Asset Management, which has $110 billion in assets managed, and in Private Banking with our Premier Service Model.
In Personal Banking, we have a differentiated customer-focused strategy, and we will drive growth from achieving industry-leading loyalty and delivering on our brand promise to Make Money Make Sense.
I'd like to thank our customers for the trust they place in the Bank; and in particular, acknowledge the customers who were part of the conversion of the core banking platform in the US for their continuing loyalty. We recognize that critical to the Bank's success is our ability to serve customers exceptionally well and help them succeed. The Bank's employees are at the heart of our differentiation strategy. They continuously drive forward our vision to define great customer experience, and I'd like to acknowledge them for their commitment and the great improvements being made in the way work gets done more efficiently for our customers. As we look ahead to 2013, we are confident that each of our businesses is positioned to deliver quality, sustained-earnings growth against a high standard of customer experience.
With that, Tom, I'll turn it over to you.
Tom Flynn - BMO Financial Group - EVP & CFO
Thanks, Bill, and good afternoon, everyone.
I'll start on slide 9. BMO had a strong fourth quarter with good operating group momentum. Reported net income of $1.1 billion was up 41% from last year. On an adjusted basis, net income was $1.1 billion, up 35%; EPS1 was $1.65, up 38%; and ROE1 was 16.3%.
Our businesses delivered good results in the quarter. There was good loan growth in our P&C businesses in both Personal and Commercial in Canada and core C&I in the US, and the Private Client Group and Capital Markets had very strong quarters.
Adjusted provisions for credit losses were lower year over year and relatively stable quarter over quarter. Surjit will provide more color in this area in a moment.
1 - US contribution to total bank reported net income increased 24% this year, up from 8% in 2011; BMO Q4 reported EPS was $1.59, up 43%; Reported ROE was 15.6% 4 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Items removed to arrive at adjusted income were similar in character to prior quarters and totaled $43 million, or $0.06 per share. Slide 14 shows details on the adjusted items, including a restructuring charge of $53 million after tax, related to our ongoing focus on managing productivity.
Slide 10 shows highlights of our annual results. Total Bank income and EPS were records. On an adjusted basis, revenue1 was $15.1 billion, up 10%; income1 $4.1 billion, up 25%; EPS1 was $6.00, up 18%; and ROE1 was over 15%. Our retail businesses, in aggregate, increased significantly during the year and contributed over 75% of operating group adjusted revenue1 and income1.
Moving to slide 11, adjusted revenue1 in Q4 was $3.9 billion, up 6.8% year over year and 6.7% quarter over quarter, both comparatives reflect strong performance in BMO Capital Markets and PCG. On an adjusted basis, net interest income1 was down 2% year over year and 2.7% quarter over quarter, as volume growth was offset by lower margins. Quarter over quarter, the more significant decrease was in BMO Capital Markets.
Non-interest revenue1, on an adjusted basis, was up 17% year over year and 18% quarter over quarter. As shown in the graph on the right, adjusted total bank margin1, excluding trading, was 202 basis points, down 1 basis point from last quarter. Decreases primarily in P&C businesses were offset by an increase in corporate.
Turning to slide 12, good revenue growth and our focus on productivity contributed to positive operating leverage in the quarter and a lower efficiency ratio. Adjusted expenses of $2.4 billion were up year over year and quarter over quarter, largely due to higher variable costs in line with strong revenues and increased initiative and technology investment spending, some of which reflected higher year-end related spending.
As shown on slide 13, capital ratios strengthened in the quarter. On a Basel II basis, the common equity ratio was strong at 10.5%, as is the Tier 1 ratio at 12.6%. Our pro forma Basel III common equity ratio moved up to a very good 8.7% in the quarter; and as a reminder, we calculate the number including the full impact of adopting IFRS. As you have seen, we announced today our intention, subject to regulatory approval, to establish a Normal Course Issuer Bid to repurchase up to 15 million common shares.
Moving to slide 16. In Q4, P&C Canada net income was $439 million. Results reflected higher volumes across most products and the impact of lower margins. There was very good loan growth in the quarter, with personal lending balances up 7.8% and commercial loans up 8.1% from last year. There was also good sequential loan growth for the second consecutive quarter, with total loans up 2.5% quarter over quarter. NIM was down in the quarter due to deposit spread compression in a low-rate environment and changes in mix, including growth in loans exceeding growth in deposits. Lastly, expenses continue to be well contained as we actively managed productivity while investing in the b usiness. Q4 expenses reflect some uptick in investment spending late in the year.
Moving to slide 17, P&C US adjusted net income was US$147 million, up 3% quarter over quarter, and down from strong results one year ago. Revenue of US$743 million was up 1% quarter over quarter, due to higher fee revenue on the sale of newly originated mortgages and increases in commercial lending and deposit fees, partially offset by lower spreads. NIM was down 12 basis points from Q3, mainly due to deposit spread compression and lower loan spreads due to competitive pressures. NIM increased last quarter, and so the average quarterly change over the last two quarters is a more modest 5 basis points. Expenses continue to be managed actively. We are achieving synergies, and at the same time, making some investments in areas to take advantage of growth opportunities. Core C&I loan growth continued to be strong. Balances are up 15% year over year and 4.3% quarter over quarter, and the pipeline remains strong.
Turning to slide 18. Private Client Group adjusted net income was $171 million, up 20% year over year and 48% from the prior quarter. Revenue was up 11% from one year ago and 16% quarter over quarter, driven by higher insurance results which benefited from changes to our investment portfolio and the annual review of actuarial assumptions. Assets under management and administration were up $40 billion year over year and a nice $20 billion quarter-over-quarter, due to market appreciation and new client assets.
Turning to slide 19. BMO Capital Markets delivered strong results with net income of $293 million and ROE of 25%. Earnings more than doubled from one year ago and improved quarter over quarter. The good performance reflects higher revenues as the market environment improved, our businesses executing on their strategies, and taxes.
1 - On a reported basis: revenue was $16.1B, up 16%, net income of $4.2B, up 35%, EPS was $6.15, up 27%; ROE was 15.9%; 5 During 2012 the operating groups contributed 79% to Operating Revenue and 75% to Operating Net Income; Reported revenue in Q4 was $4.2B, up 9.3% Y/Y and 7.7% Q/Q; reported net interest income was down 5.2% Y/Y and 3.6% Q/Q; Reported non-interest revenue up 30% Y/Y and 23% Q/Q; Reported NIM 183bps, down 5bps from last quarter; Reported expenses of $2.7B, up Y/Y and Q/Q; P&C US reported net income US$132, up 3% Q/Q; PCG reported net income $166MM up 21% Y/Y and 51% Q/Q DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Turning now to slide 20. Corporate had reported net income of $54 million and adjusted net income of $74 million. Year over year, adjusted net income1 was up $141 million, largely due to lower provisions for credit losses. As a reminder we record all acquired loan accounting items in the Corporate segment.
Quarter over quarter, adjusted net income1 was little changed, up $9 million. Revenues were up from the low level in Q3 due to a number of smaller items, partially offset by higher expenses as a result of higher technology investment spend in the fourth quarter.
To conclude, we are pleased with our performance in the quarter and for the year. We feel good about the performance of our businesses and how they are positioned heading into fiscal 2013. With that, I will now turn it over to Surjit.
Surjit Rajpal - BMO Financial Group - EVP & Chief Risk Officer
Thanks, Tom, and good afternoon.
I am pleased to say we had another good quarter from a risk perspective.
On slide 27, we show that the specific provisions of the legacy portfolio was $245 million, marginally up from $234 million in the prior quarter. The provision for the acquired performing portfolio was $103 million, a decrease of $10 million. The provisions this quarter included $71 million as a result of regulatory guidance related to certain performing US consumer loans. The purchase credit impaired portfolio had a recovery this quarter of $132 million, versus the $118 million in the third quarter.
Our focused management of this portfolio has resulted in $509 million of recoveries for the full year. As I have mentioned on previous calls, we have been proactively managing down this portfolio, and as the portfolio shrinks along with the associated mark, future recoveries will moderate.
Our impaired formations can be found on slide 29. Formations in the legacy and purchase performing portfolios were $787 million this quarter, compared to $791 million in the third quarter. Total gross impaired loans increased $109 million this quarter to $2.976 billion. This increase is related to previously mentioned regulatory guidance, which contributed $142 million to our formations.
On to a topic of broader interest -- the Canadian real estate market and consumer leverage. We remain comfortable with our exposures, as we have strong loan-to-value ratios on our mortgages and home equity loans. The quality of our new originations is high; and overall, we see a significant shift to fixed-rate products.
In closing, we have successfully integrated M&I into our credit-risk framework and culture and have reduced our impaired commercial real estate assets. We are comfortable with our risk profile; and through our strategic and capital planning processes, we continually assess our current and forecast portfolios in both expected and adverse environments. Our ongoing focus on a strong risk culture and risk management gives me confidence as we move into 2013.
Thank you, and we will now turn over to the Operator for the question-and-answer portion of today's presentation.
QUESTION AND ANSWER
Operator
Thank you. We will now take questions from the telephone lines.
(Operator Instructions)
Gabriel Dechaine, Credit Suisse.
1 - Corporate reported net income up $160MM Y/Y and $7MM Q/Q 6 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Gabriel Dechaine - Credit Suisse - Analyst
Just a big-picture question here, slide 5, I see the earnings growth by segment, and the one that jumps out at me is P&C banking 3% year over year. You are trailing your other segments, and more likely than not, your peers in Canada. I wonder what the action plan is for next year to drive earnings growth higher in P&C banking?
Also, the US margins down 12 basis points sequentially, is that an unusual decrease? What should we look for going forward?
And, the last one is on the buyback. I think I asked about that last quarter, and it got downplayed and now you're pursuing it. I think it's the right move. I'm just wondering what changed in your thinking in the span of a quarter?
Bill Downe - BMO Financial Group - President & CEO
Maybe we'll do them in reverse order, Gabriel. Thanks for the questions. I think that, as always, we pay very close attention to your questions, and when there's merit in them, it stimulates thinking.
But as well, the capital build, as I think you note, has been very significant. We have restored our B3 common ratio, which was, as I recall, as low as 6.6% immediately after closing the purchase transaction, to 8.7% in this quarter. So, we have very clear visibility around the degree of flexibility that we have now in capital to invest organically, and I think the timing around reinstituting the capability to repurchase stock, as we have done in the past, is appropriate. Obviously, it's not immediate because we are going to await regulatory approval. But, it's simply an integral part of long-term capital planning, and the timing seemed just about right.
Mark, why don't you comment on the US margin, and then we will let Frank take what I think was the larger question that you asked, Gabrielle.
Mark Furlong - BMO Financial Group - President & CEO, BMO Harris Bank, N.A.
This is Mark Furlong, on the US margin, our view this quarter is really pretty much the same as it was last quarter. That if you look at the average of the last two quarters, we're down about 5 basis points a quarter. The margin on a quarterly basis got influenced by a couple of basis points last quarter on interest recoveries, we didn't get any this quarter. Right now, we're in the period of time where the absolute low level of interest rates and deposits and some competitive pressures on the lending side have caused those declines. So, that's really the near-term range, and it's hard to predict going forward, but that's really what's going on, really nothing different from what I talked about last quarter.
Gabriel Dechaine - Credit Suisse - Analyst
That 5-point average that you talk about, that's more indicative, you think?
Mark Furlong - BMO Financial Group - President & CEO, BMO Harris Bank, N.A.
In the near term, I'd say yes. I don't see anything much bigger than that.
Gabriel Dechaine - Credit Suisse - Analyst
Refresh my memory, please…what was the interest recovery last quarter?
Mark Furlong - BMO Financial Group - President & CEO, BMO Harris Bank, N.A.
7 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
A couple basis points in the third fiscal quarter.
Gabriel Dechaine - Credit Suisse - Analyst
Okay, and Frank?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
Thanks, Gabriel. For us, it's pretty simple, we need faster balance sheet growth, and I think you can see over the last two quarters, in particular in Q4, we had a really good quarter in the areas that we have been focused on most recently. Mortgage growth was 9.4%, commercial loans 8.1%, mutual fund balances were up 10%, commercial deposits 6.2%, and all of those were significantly above Q3. So, as we have come through the second half of the year, as we focused on those areas, we are seeing much stronger momentum. There's no doubt that we have turned the corner and we are going to see stronger balance growth in 2013. I've got a lot of confidence that we are doing the right things from a balance-sheet focus perspective.
I will just point out a couple of other things, even though the 3% headline number looks a bit low, for the last three quarters of the year, our net income growth with actual losses has been over 6%. So, we have done better in the second half, and my expectation is we are going to carry that into 2013.
Gabriel Dechaine - Credit Suisse - Analyst
You mentioned the margin compression moderating. What's driving that in 2013?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
We are expecting to see the margin declines moderate in 2013 because of stronger balance-sheet growth, and we're going to continue to focus growth on certain credit products that we're comfortable with given the environmental risks that exist. We are happy with that growth and momentum, but we are turning our attention to deposit growth. The single- biggest opportunity we have to mitigate the pressure on margins at this point in time is to increase our retail deposit growth, and that's what we are going to be turning our attention to. We are not expecting interest rates to change in the near term, we are going to continue to see pressure on deposit spreads going through 2013, and our biggest opportunity is to get the deposit side of the balance sheet growing faster.
Gabriel Dechaine - Credit Suisse - Analyst
Thanks, I appreciate the clarity.
Operator
Sumit Malhotra, Macquarie Capital Markets.
Sumit Malhotra - Macquarie Capital Markets - Analyst
First one is a quick numbers question, hopefully, for Tom Flynn. Tom, you mentioned that the net interest income, or net interest margin, contribution in the segments was lower, but on an adjusted basis, you had a benefit in Corporate, The way I've gone through the adjustments, it looks like about a $50 million pick up quarter over quarter. Can you help me understand what's driving that?
8 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Tom Flynn - BMO Financial Group - EVP & CFO
There are a variety of items that go into the Corporate revenue item, and they move around quarter to quarter, they tend not to be individually large. I'd say what you're looking at is just, what I would characterize as, normal volatility or variability as we move through quarters, as opposed to anything more reflective of a fundamental shift in the level of revenue that we would expect. The Corporate revenues were low last quarter, and so to some degree, the uptick this quarter was just a normalization.
Sumit Malhotra - Macquarie Capital Markets - Analyst
I'll leave it here, I'm kind of looking at it just on the net-interest income portion, and it does look like this quarter was materially better than the first three quarters of the year. Would you expect that this is more of a reflective level of what you think it will look like going forward, or will it revert to the larger negative that we saw earlier in the year?
Tom Flynn - BMO Financial Group - EVP & CFO
I would look at it reverting to a number that's more reflective of the average during the year.
Sumit Malhotra - Macquarie Capital Markets - Analyst
Okay, fair enough.
Then, my actual question is probably for Surjit or maybe Tom as well. If I look at the loan loss ratio for the bank in 2012, and if I go along with what's included in the adjusted number, you have a PCL ratio of roughly 19 basis points. Surjit, you made reference last quarter to the recoveries likely starting to slow, that didn't happen this quarter, and I get the feeling you're indicating we will see that in 2013. So, relative to that 19 basis point level on the adjusted, what do you see as more reflective of the aggregate portfolio now that you've had M&I under your control for five-full quarters?
Surjit Rajpal - BMO Financial Group - EVP & Chief Risk Officer
Let me answer that question and more in terms of our legacy book as well. If you look at our legacy book in Canada, for the year, we had 35 basis points, and in the US, it's about 100 basis points. So, I think what we are expecting to see from the M&I portfolio is the same kind of performance as we are expecting in our own legacy portfolio down the road, so that's more like what we would expect. Now, this is unadjusted for any recoveries we may have.
The recoveries that you talk about, yes, I did indicate last time that it will moderate, and I said the same thing this time. One of the reasons why we don't have -- it's difficult to give you too specific guidance because we are adopting what I referred to in the past of value maximization strategy, and at the same time, we balance that with our desire to reduce our credit impaired loans. And to this point, we have had really good results, and we've got strong workout capabilities, and we are giving it focused attention, but we've never put ourselves under pressure to be able to sell for the sake of selling. And, we've had really good results, also in the commercial real estate market in the US has helped, and that has picked up.
So, I think that number that you've seen in the past, on the one hand, is a very good number; on the other hand, what you are left with is now is about $1.7 billion in impaired assets with a mark of, I think it is about $445 million, so it has to naturally slow down a little bit, but I would think the slowdown will be somewhat moderated. It will be gradual, but that doesn't mean there won't be variability. Long answer, I hope that satisfied you.
Sumit Malhotra - Macquarie Capital Markets - Analyst
9 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
I'll leave it here, so from the level that we're looking at this year, it sounds like, just because of the recovery slowing, you are going to have a gradual uptick. But, in terms of how the actual portfolio is performing, you are not expecting a significant worsening in underlying credit quality. Is that a fair assessment?
Surjit Rajpal - BMO Financial Group - EVP & Chief Risk Officer
That's a fair assumption. Over the year, we have recovered $509 million. And I would think, given where the mark is right now and the portfolio sizes, I think $200 million to $250 million would be an estimate that I would have, but I have no basis to giving you that estimate right now.
Sumit Malhotra - Macquarie Capital Markets - Analyst
Thanks for your time.
Operator
Steve Theriault, Bank of America Merrill Lynch.
Steve Theriault - BofA Merrill Lynch - Analyst
First, a follow-up question for Bill, if I could. Bill, you said you would await regulatory approval before using the buyback, so can I infer from that, that you would expect to use the buyback in the near term to do more than offset option dilution? Or, should we think of this a little further down the road once you get the B3 Core Tier 1 north of 9%?
Bill Downe - BMO Financial Group - President & CEO
Well, the nine number I don't think we've ever used. The number is now well above the public regulatory guidance. I think going into 2013, the way we think about that buyback capability is to offset dilution, as we said and as we have historically done, recognizing in the last two years we haven't. So, I guess you could entertain a little bit of catching up, if you will. But, the fact is, it's a good-sized program and depending on earnings in '13 and the continued build of capital, it's something that we would revisit, I think, later in the year.
Steve Theriault - BofA Merrill Lynch - Analyst
Okay, that's fair.
Bill Downe - BMO Financial Group - President & CEO
I think the one thing that I would say, Steve, on the topic of capital is that it now puts us in a position where we have an awful lot of flexibility around reinvestment in organic growth in the business. And with the conversion behind us, within our established footprint, I think there's a lot we can do to grow the business, and we have the flexibility to do that.
Steve Theriault - BofA Merrill Lynch - Analyst
Thanks for that. I wanted to come back to Frank, also, for a minute if I could. Frank, you talked about balance sheet growth but mostly on the asset side. I note you've lost a little bit of share on the deposit side, and I think that's a focus for next year, but I was hoping you could talk a bit about your strategy with regards to deposit taking in general for 2013. Is
10 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call there anything specific you have in mind which, hopefully, will benefit the margin after loan growth exceeding deposit growth hurting you a little bit this year?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
Steve, I'm going to start with the commercial side. I already mentioned that our commercial deposits were up 6.2% this quarter. That, given the fact that we're expecting the business environment to be a little more positive than on the retail side, is important to us. So, I'm really happy, and I'm confident about the expectations of continuing to grow our commercial deposits more rapidly in the future; and in fact, some of the retooling we have done in our business, focusing our sales force on a broader share of wallet, rather than just credit, is paying off. Just to give you a stat, our cash management sales in Q4 were up 28% over last year, and that's a big tie and link into our ability to attach ourselves to those core operating deposits of our customer, so that's number one.
Number two is, on the retail side, our share has been meandering down, primarily because of our competitiveness on the term book itself. Our growth in core checking and savings has been solid, on the back of continued investment in our distribution network, in our online capabilities, building our sales forces, and our great customer experience, and I would expect that to continue. We do have some work to do on our term strategy, and that's under way. We do have to see stronger growth in both of those segments. We are well under way on the commercial side and more to come on the retail segment.
Steve Theriault - BofA Merrill Lynch - Analyst
Has there been near-term price pressure on the term side? I noticed some pretty aggressive marketing from one of your competitors in the last couple of weeks.
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
I think the answer to that would be yes, coming from two places. One would be the non-big bank competitors are always aggressive, given their funding options. And, my big five competitors, just depending upon which quarter it is, there seems to be someone who is strongly going after one part of the term market. I don't see it as a systemic issue, but it happens, and I expect it will continue to happen going forward.
Steve Theriault - BofA Merrill Lynch - Analyst
Thanks, Frank. If I can squeak in one more, please, for Mark Furlong --?
Sharon Haward-Laird - BMO Financial Group - Head, IR
Sorry, Steve, we've got a lot of people in the queue. If I can just ask people to try to keep it to one question and then requeue, or we're not going to get to everybody.
Steve Theriault - BofA Merrill Lynch - Analyst
Okay, thanks, I'll follow up.
Sharon Haward-Laird - BMO Financial Group - Head, IR
Okay, thank you.
11 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Operator
Peter Routledge, National Bank Financial.
Peter Routledge - National Bank Financial - Analyst
Just for Frank on, I guess the underlying question is on NIM compression, but I'm looking at -- you have a great table in the Annual Report. Table 9, page 106, shows that the yield on average Canadian dollar mortgages was 3.41% this quarter -- sorry this year, 2012. It was 4.15% in 2011. So, it sure feels like that mortgage product is really squeezing your NIM more than deposit compression. Do I understand that right? And then, what would be the drivers?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
Peter, those numbers are the total bank numbers, which would include securitization activities as well. The P&C business is kept whole, that's the first point. Those are obviously customer yields, they are not spreads, and cost of funding has come down, as well, over that period of time. And, I think we've talked in previous quarters about our spread in P&C Canada, that flows into our P&L, not being under pressure. And, over the last couple of quarters, we have seen our mortgage spread on our entire portfolio move down in the order of 1 or 2 basis points.
Peter Routledge - National Bank Financial - Analyst
That excludes securitization?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
Excludes securitization.
Peter Routledge - National Bank Financial - Analyst
Fair enough, and I appreciate that with respect to looking at the P&C Canada segment. A bigger picture, people are really not paying as much for a mortgage as they were last year, and although from a capital common equity Tier 1 ratio, it's not a capital-intensive product. If you start thinking on a leverage-ratio basis it kind of is, so is the mortgage product still an attractive product? Strategically, for you and presumably for your competitors, the Canadian mortgage product?
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
We think it is. We think it is in certain circumstances through certain channels at certain prices, with a focus on a broader share of wallet.
Peter, it's interesting, it wasn't so long ago that people were questioning the fact that our mortgage balances were shrinking, and now all of a sudden, it seems that there's a problem because they're growing faster than everyone else's. We have been very focused on growing our mortgage balances in a particular way with a particular segment, and we think that we have done a great job in 2012, and we are going to continue exploiting the opportunity that we have. Our credit quality has improved, we have brought new customers into the bank, and the returns we're earning on the products that we're selling at this point in time are attractive.
Peter Routledge - National Bank Financial - Analyst
Okay. Any way that P&C -- the Treasury allocations might have exacerbated the decline in NIM?
12 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
No, we've had no change in Treasury allocations as we have over the last few years, as we've talked about our margins going the other way.
Peter Routledge - National Bank Financial - Analyst
Okay, thanks.
Operator
Michael Goldberg, Desjardins Securities.
Michael Goldberg - Desjardins Securities - Analyst
From what I understand, there were a few things impacting your insurance revenue this quarter, and I'm hoping that you can give us a little more color on it. There was your annual basis change that was positive, there was yield enhancement that was positive, and then there was the continuing impact of lower interest rates. Could you give us some idea of the impact of these components, just relating it back to the adverse impact of lower interest rates that you had in the third quarter?
Gilles Ouellette - BMO Financial Group - President & CEO, Private Client Group
Yes, thanks, Michael --
Operator
Andre Hardy, RBC Capital Markets.
Sharon Haward-Laird - BMO Financial Group - Head, IR
Sorry, Operator, we haven't answered the last question yet, so we'll just let Gilles Ouellette answer the question before we move to Andre.
Gilles Ouellette - BMO Financial Group - President & CEO, Private Client Group
Michael, as you know the results of the insurance line of business is very impacted by interest rates, and -- just going by memory, here, the previous quarter the decline was something on the order of $45 million after-tax, and this quarter there was another decline of about $7 million. We are able to -- and there was a gain, also, from a year-end kind of actuarial assumption true up, I think in the order of about $10 million. But the bigger impact came from the fact that we were able to buy longer-term, higher-yielding assets, and that allowed us to release some of the policyholders' liabilities. When you look at the number from this quarter, if you go through the previous press releases, kind of a normalized number is something on the order of about $55 million to maybe $62 million a quarter for the insurance line of business. So obviously, it is growing every quarter, but there’s also this volatility that comes from interest rate movements.
Okay with that, Michael?
13 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Operator
Andre Hardy, RBC Capital Markets.
Andre Hardy - RBC Capital Markets - Analyst
Small question, page 64 of your Annual Report, you talk about Canadian Alt-A mortgages being $5.7 billion, up from $3.9 billion in 2011, that's a 46% growth rate. Was there a change in definition, or was the growth rate really 46%? And if it was, what led to the growth rate being that rapid?
Bill Downe - BMO Financial Group - President & CEO
Hang on for one second if you would, Andre, Tom is pulling the document out and looking at the page. What he may choose to do is come back to you.
Tom Flynn - BMO Financial Group - EVP & CFO
What we will do is we will take that offline and get back to you. We've talked about the risk profile in the business, and we've been growing the mortgage business, but also growing it in a way that we think is market friendly and risk friendly, so there's been no deterioration in the underlying risk of the portfolio, but we'll get back to you on the specific question.
Andre Hardy - RBC Capital Markets - Analyst
Thank you.
Operator
Chris Mustasio, Stifel Nicolaus.
Charles Nabhan - Stifel Nicolaus - Analyst
This is Charles Nabhan for Chris Mustasio. My question is about the effective tax rate during the quarter. It was around 16%, and I realize that it's impacted by the runoff in the structured portfolio, which is somewhat of a wild card. But, looking ahead, do you see the tax rate reverting back to the 20% range, where it's been historically?
Tom Flynn - BMO Financial Group - EVP & CFO
It's Tom Flynn. A few things on that, the reported number, as you said, was about 15.7%. We do focus more on the adjusted number because some of the items that go into reported are not taxed. The adjusted effective tax rate in the quarter was 17.9%, and that was up from 16.9% in Q3. On a normalized basis, looking forward, we have had this question come up before, and we've said that we expect the tax rate to be in the 20% to low-20% range going forward.
Charles Nabhan - Stifel Nicolaus - Analyst
I appreciate the color, thank you.
Operator
14 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Robert Sedran, CIBC.
Robert Sedran - CIBC World Markets - Analyst
I apologize if I missed it in your materials, but can you just tell me where you are in terms of the $400 million in synergies so far? And, now that the core banking conversion is done, should we expect the rest of these synergies to flow pretty quickly from here? In other words, basically H1 of '13, and you're going to be fully loaded with the synergies then?
Tom Flynn - BMO Financial Group - EVP & CFO
It's Tom. On realization against the $400 million, we have said in the disclosures that we are through the two-thirds point, in terms of realizing the synergies. We did do the main core banking platform conversion in the fourth quarter. It was done late in the fourth quarter, and so the benefits of that are more likely to show up in a more pronounced way into Q2 of next year versus Q1. In Q1, there's still some clean-up activities under way; and also, there's work to do just to dismantle the effort that we had underway to complete the core conversion. We are also investing in the business, and so as you look at the segment results, you'll see the benefit of the synergies kicking in, but also investments that we're making in a couple of areas to grow the business.
Robert Sedran - CIBC World Markets - Analyst
Does that imply, Tom, that perhaps not a net decline in expenses as we look into next year? Or, is just the magnitude of the synergies still to come enough to give you a lower expense rate as you look into the second half of next year compared with what it was this year?
Tom Flynn - BMO Financial Group - EVP & CFO
We expect expenses to be down on a net basis. The synergies will outweigh the investments.
Robert Sedran - CIBC World Markets - Analyst
Okay, thank you.
Operator
Brad Smith, Stonecap Securities.
Brad Smith - Stonecap Securities Inc. - Analyst
This will be a question for Bill Downe. Bill, looking at the P&C segment for the Bank, I note the return on equity that you're presenting in your supplementary has fallen from about 29% in the fourth quarter of 2010 to around 18%. And, I was wondering, in view of the sharp correction in that return, if you don't think it would be helpful to provide us with a breakdown between the Canadian and the US return in that regard so that we could see how it's moving, and perhaps, provide a little bit of guidance as to where you think that's going to recover to as we go forward?
Bill Downe - BMO Financial Group - President & CEO
15 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Thanks for the suggestion, Brad, we will take that under advisement. I think one of the challenges in that return on equity calculation is the US business has, as I'm sure you appreciate, significant goodwill and customer intangibles, so doing a direct ROE comparison between the mature Canadian business and the acquired business is a little bit problematic, but we will look at return on tangible common equity as a way of evaluating -- return on tangible common equity as a way of expressing progress. But I think, clearly, it's our expectation that the much larger business, with the synergies out of it, over time is going to move to a return that looks a lot more like Canada, at least on a tangible-return basis.
Brad Smith - Stonecap Securities Inc. - Analyst
Right, and I would simply make the comment that shareholders are earning a return on the entire investment as opposed to just the tangible component. One last question on the ROE, if I look through this segment report, 29% to 18% in the total P&C, it's down also from 39% to 30% in the Personal Client Group. The only place where it's up at all from Q4 2010 to where we are today is up 5% in the Capital Markets, and yet the consolidated ROE hasn't moved at all, it's around 15% to 15.5%. I think that leaves me with the conclusion that the bulk of that maintenance of the consolidated ROE is coming from the Corporate segment. Would that be correct?
Tom Flynn - BMO Financial Group - EVP & CFO
It's Tom, Brad. I think the biggest contributor across the groups to the ROE trends that you're looking at relate to us moving to allocating more capital to the operating groups in response to the Basel III changes. And, it's clear that the banking sector needs to operate, will need to operate, with higher capital levels, going forward, than it did before the downturn. And in response to that, we've increased allocations of capital to our businesses, and that has had some downward impact on the segment ROEs.
Operator
Mario Mendonca, Canaccord Genuity.
Mario Mendonca - Canaccord Genuity - Analyst
A question, perhaps, for Surjit and for Bill. Surjit, you're helpful in offering us that $200 million to $250 million guesstimate, and I appreciate that that's all it was for the recoveries in the impaired book. It's about half of what the bank had this quarter, sorry this year. If you tax effect that, that takes out a good amount of growth, looking out to 2013. It takes out roughly $0.25 from EPS in 2013, relative to what it was in 2012.
Bill, this is where it would be helpful if you could offer some comments. Your growth objective is 8% to 10%, and I appreciate it's medium term, but if you've given up as much as $0.25 from one year to the next, or about 4% of EPS, are you really offering us a growth objective that's well above 8% to 10%, or should we just interpret this as a medium-term objective and not get too fixated on year to year?
Bill Downe - BMO Financial Group - President & CEO
Tom is looking at me like he understood your question (laughter). I'd have to ask you to repeat it, but I'll let him answer, and then if I need to provide a supplemental, I will.
Mario Mendonca - Canaccord Genuity - Analyst
Sure.
Tom Flynn - BMO Financial Group - EVP & CFO
16 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
I'll take a shot at it. The adjusted earnings for the year were $61, as you know. They did benefit from a very strong credit performance, and a good part of that related to the recoveries on the M&I impaired loans. As we think about earnings going forward and our earnings target, a couple of points, the first would be that we do issue mid-term targets, so we do not view the targets as being one-year targets. They are defined as mid-term targets, and they are targets that we would expect to achieve over the mid term, on average.
Looking back at this year, we had 18% EPS growth1, so growth significantly in excess of the mid-term target. And, as we look forward to next year, we are focused on growing on the base of adjusted earnings that we had this year, recognizing we've got a headwind from potentially lower recoveries on the M&I portfolio, as Surjit talked about, but we are focused on generating growth off of that base.
Mario Mendonca - Canaccord Genuity - Analyst
Again, so the main point to take away from this is that the 8% to 10% is medium term, not annual?
Tom Flynn - BMO Financial Group - EVP & CFO
That's correct.
Mario Mendonca - Canaccord Genuity - Analyst
Thank you.
Tom Flynn - BMO Financial Group - EVP & CFO
We said the same thing one year ago, as well.
Bill Downe - BMO Financial Group - President & CEO
We said the same thing one year ago, and you saw the results for the year. I think that it is a medium-term target, you have to bear that in mind, but you also have to bear in mind that in 2012, we had heavy integration costs. There's no question in my mind that overhead numbers are probably higher because of the amount of work that was going on in connection with integration, and we have some fairly significant costs that related to workforce adjustment. And if you take all of that into effect, as I said in my opening comments, we have a great deal of confidence in the ability of the businesses to grow in 2013.
Mario Mendonca - Canaccord Genuity - Analyst
Thank you.
Operator
John Reucassel, BMO Capital Markets.
John Reucassel - BMO Capital Markets - Analyst
1 - 2012 Reported EPS $6.15; 2012 Reported EPS growth 27% 17 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Just a couple numbers questions, could Tom Milroy, or someone, help me with trading? Was there a CVA adjustment in the quarter, and if there was, how much? And, if I missed it, I apologize. Then, for Frank, could you give us your LTVs on your HELOCs, and what's happening in the HELOC portfolio?
Tom Milroy - BMO Financial Group - CEO, BMO Capital Markets
It's Tom. Why don't I just start that, when we look first at the quarter, and then at the year, there's CVA in our business all the time. In the quarter, it would have accounted for about half of the quarter-over-quarter increase in the interest rate trading line on page 12 of the Supp Pack that you see, so that's where it was. For the year, the number was a few million dollars and not material in any fashion, so I think that when you look at the trading numbers for the year, they are pretty good and not impacted one way or the other by CVA.
With that, I will turn it over to Frank.
Frank Techar - BMO Financial Group - President & CEO, P&C Canada
I think Surjit is going to pipe in on the HELOC question, John, thanks.
Surjit Rajpal - BMO Financial Group - EVP & Chief Risk Officer
The average loan to value on the Canadian HELOC is 53.1%.
John Reucassel - BMO Capital Markets - Analyst
Okay, so not materially different from the mortgages?
Surjit Rajpal - BMO Financial Group - EVP & Chief Risk Officer
No.
John Reucassel - BMO Capital Markets - Analyst
Okay, thank you.
Operator
Cheryl Pate, Morgan Stanley.
Cheryl Pate - Morgan Stanley - Analyst
A question for Mark Furlong. Looking at the portfolio in the US, I'm wondering if you could first give us a little bit more color on the particular areas of strength in the C&I portfolio, just wondering if it's more targeted industry growth, or is there market share gains in specific MSAs, any color you can share there? Then secondly, on the consumer portfolio, outside of the indirect auto, are you where you'd like to be in terms of balances, particularly on the mortgages home equity, or should we expect further shrinkage in the consumer side?
Mark Furlong - BMO Financial Group - President & CEO, BMO Harris Bank, N.A.
18 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
I'll start with the commercial portfolio. It's really not geography driven so much as industry driven. What we see building up in pipelines and the performance for this year, the corporate finance business has done well and continues to do well, and I see the pipelines early into 2013, I suspect we'll have another good year.
The equipment finance business that joined from the acquired organization, and we had pent-up demand going elsewhere that now is coming through our organization. We have a financial institution business that's done well, a national food and consumer business that's also done well and expect that we'll continue to see growth in that, a dealer finance business that was larger in the acquired bank, but building in our bank, and that has great expectations to continue to grow.
What I'm trying to say is really is, if you look segment by segment, all of them seem to be positioned very well to grow, and the pipelines stayed strong all during the year and actually grew a little bit more in the fourth quarter, so a good sign for going into 2013 and gives us good optimism.
On the commercial side, see no reason not to have the expectations that we'll have another good year. I’d also tell you that on the commercial real estate side, after going through some shrinkage in 2012, that I think that portfolio is finding a floor. And, we will begin to see some growth in that portfolio in 2013 as well too, based on pipelines and things closing at the end of the year and early into '13, so feel very good about that.
On the consumer portfolio -- just to take a little turn here. On the mortgage portfolio, just as a reminder, you'll recall that we sell if you pick the quarter 60% to 65% of production, and that's what we did into the fourth quarter as well. And I expect, based on what we see in the pipeline, that the 30-year and 15-year fixed are still the kinds of loans that have performed well in the secondary market and with good spreads and expect that will continue to do that. And, we focus really, on the mortgage side, on growing the total servicing portfolio, so we can build relationships, and -- not that we don't want to retain the balances, but we do, we just want to make sure that the price -- the portion that we originate, that it is priced well to go into the secondary market, that that's where it goes and really don't want to keep 30-year fixed-rate mortgages, and really not 15-year fixed-rate mortgages on the books.
Home equity shrank during 2012, but when you look at the home appreciation that's occurred in the US the last four or five months, almost any service that we look at projects that to continue to improve in 2013. The mortgages under water, in total in the US, continuing to decrease month by month. That, in itself, is going to build up some purchasing power for consumers, and that will give us some wind in terms of being able to grow that portfolio as well too.
I should have mentioned, by the way, in mortgage, the pipeline in mortgage was over $1 billion at the end of the year, so hitting all-time highs for us real close. Home equity pipelines are relatively flat in the third quarter and fourth quarter, but we can see there will be some demand building.
Business banking, which you also see in there, which is the middle to smaller-end business portfolio, I think also is nearing the bottom, and you should begin to see some growth in that portfolio as well too. So, we really feel pretty good about each one of the portfolios and the sales teams that are chasing it and that are responsible for those portfolios, and expect to see as we move later into the mid part of 2013 to have caught almost all those portfolios.
In terms of growth, we really feel pretty good about where we are at. If you think about all of the change that took place in this business, during the course of the year, pretty remarkable where we're at and really the high quality of franchise we ended up with, and the high-quality customer base we ended up with, and really have an employee base as well in the P&C US business, it's really energized by where we're at. The two biggest markets we're in, we had good growth in terms of deposit share, which tells you that's building relationships. I could go over that in detail if want, if you ever look at the US numbers, but feel really good about where we're at.
Then, finally, really for the first time, we have an integrated advertising campaign that launched early in November and has really been a big push both for the employee base that went through the integration exercises in the last 18 months or so, but as well really in creating brand awareness across the entire footprint. And, that really didn't exist before. Certainly, in one of the franchises, and a lesser extent maybe in Chicago. So I would tell you that the campaign is strong. It's strong in all the markets we do business in and will be one of the tools that drives customers into us over time.
I'll just conclude by saying, we feel very good about where we're at in the portfolios, feel very good about the strength of the activity we have underway in each of the markets.
19 DECEMBER 04, 2012 - Q4 2012 Bank of Montreal Earnings Conference Call
Cheryl Pate - Morgan Stanley - Analyst
Great, thank you, I appreciate the color.
Bill Downe - BMO Financial Group - President & CEO
Cheryl, thank you for the question; and Mark, thanks for a full answer to the question as well. I think it really fits in with the whole call and the points I want to make in wrapping up around what's been accomplished in the last two years. Because, we've combined two organizations that are now operating as one with tremendous opportunity. We're expanding in a six- state area with a population and gross domestic product in excess of Canada as a whole.
Across the whole Bank, our employees are energized by the strength and capabilities of our businesses and are focused on opening new customer accounts and adding products to customer relationships; and at the same time, enhancing productivity. We delivered record financial results this year, and we are confident in the earnings momentum of the Bank.
I want to thank you all for joining us today. And, if I don't speak with you individually, I wish you all the best for the year end and the holidays.
20