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Bank of Montreal (BMO) Q3 2019 Earnings Call Transcript

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Bank of Montreal (NYSE: BMO)
Q3 2019 Earnings Call
Aug. 27, 2019, 7:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the BMO Financial Group's Q3 2019 Earnings Release and Conference Call for August 27th of 2019. Your host for today is Ms. Jill Homenuk, Head of Investor Relations. Ms. Homenuk, please go ahead.

Jill Homenuk -- Head of Investor Relations

Thank you. Good morning 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 Darryl White, BMO's CEO, followed by presentation from Tom Flynn, the bank's Chief Financial Officer, and Pat Cronin, our Chief Risk Officer. We have with us today Cam Fowler from Canadian P&C, and Dave Casper from U.S. P&C. Dan Barclay is here from BMO Capital Markets, and Joanna Rotenberg is here from BMO Wealth Management. After the presentation, we will have a 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. Darryl will then close the call with concluding remarks.

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, projects, 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.

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Darryl and Tom will be referring to adjusted results in their remarks unless otherwise noted as reported. Additional information on adjusting items, the bank's reported results, and factors and assumptions related to forward-looking information can be found in our 2018 Annual Report and our Third Quarter 2019 Report to Shareholders. With that said, I will hand things over to Darryl.

Darryl White -- Chief Executive Officer

Thank you, Jill, and good morning everyone. Thank you for joining us this morning. Today, we announce earnings for the third quarter of $1.6 billion and earnings per share of $2.38. We delivered another quarter of strong operating performance that reflect the diversification and resilience of our businesses. Our core North American personal and commercial banking business continues to have strong momentum with pre-provision, pre-tax earnings up 9% from last year and good operating leverage. In both Canada and the U.S., we're growing loans and deposits at above-market rates and expanding our customer base.

Balance growth is well-diversified and driving good revenue performance. Capital Markets continues to perform well, with record investment and corporate banking revenue this quarter and strong momentum in our U.S. business. Wealth results were impacted by lower insurance revenue. In Q4 of last year, we said we were reviewing ways to lower variability in our reinsurance business. In light of the environment in the reinsurance sector, performance is no longer meeting our risk-return expectations, and so we've made the strategic decision to exit the majority of this business.

We absorbed an increase of provisions for credit losses this quarter, as we continue to prudently build allowances for performing loans. At the same time, as Pat will explain, overall credit quality in our portfolio remains strong. As we guided last quarter, expense growth moderated this quarter, and we expect that to continue in Q4. Improving the bank's efficiency is a top priority. This quarter, the ratio improved to below 60%, driven by stead improvement in personal and commercial banking, and we are doing more to build on that momentum. On a year-to-date basis, earnings per share are up 5% or 7%, excluding the impact of the severance charge in Capital Markets last quarter. Our capital position remains strong, with our CET1 ratio increasing to 11.4%, supporting strong, organic growth.

Turning to slide five, our U.S. platform, which is now contributing over a third of the bank's earnings, continues to deliver strong results with good growth in each of our businesses. Year-to-date U.S. earnings were up 24%, and efficiency is improving at an accelerated rate. We're growing our Midwest footprint, where we recently took over the No. 1 position of the largest bank in Chicago by assets, a testament to the strength of our teams and differentiating BMO in a highly competitive market. At the same time, we continue to accelerate organic growth outside our corporate footprint. For example, we recently expanded our presence in Texas, opening a new commercial office in Fort Worth. We have a long and successful history serving customers in the second-largest U.S. state, including our Capital Markets office in Houston and our Transportation Finance team in Irving. We've also added Wealth Management capabilities to our rapidly growing Dallas office.

In personal and business banking, we're attracting new customers through our competitive digital capabilities. Just six months after launching our new mobile banking service, customers can open an account in minutes, and we've already gained market-leading ranking for a mobile app in the United States in line with the largest U.S. banks and our leading Canadian app. We're reaching customers across the country, having now opened accounts in all 50 states, with two-thirds of new balances coming from outside of our branch footprint.

In the U.S. Capital Markets, momentum continues to build. We had strong M&A activity this quarter that included advising on three cross-border transactions and three deals completed in close partnership with commercial banking. With strategic investments we made in our U.S. platform, together with the strength of our Canadian business, we expect continued good performance and strong operating leverage for the overall Capital Markets business going forward.

We're continuing to grow our bank by executing strategies that leverage BMO's unique strengths, including our collaborative approach to building customer relationships and loyalty, guided by our purpose to boldly grow the good in business and life in partnership with our customers. For example, this quarter we launched a holistic healthcare banking program supported by BMO professionals with a deep understanding of practitioners' needs. This integrated team provides trusted banking and wealth management advice through every stage of our customers' journey, from starting a practice to growing and innovating to succession planning and to retirement. Our integrated approach recognizes the unique and evolving needs of our small business customers across industries.

In agriculture, for example, we're proud to be the No. 1 partner for Canadian farmers, for our scale and deep understanding of the industry enables our bankers to build long-term relationships as trusted advisors helping our clients navigate trade and climate challenges, including offering relief programs where needed.

Looking ahead, our diversification and earning strength positions us well for uncertainties in the environment. The core of our bank, our flagship personal and commercial businesses on both sides of the border, account for two-thirds of the bank's income and continue to demonstrate good earning power. We're gaining share, and we're not wavering from our disciplined risk and underwriting principles. We have a strong foundation, and we're executing on agile and sustainable business strategies designed to deliver good performance even in a more challenging revenue environment.

Operating leverage improved from last quarter, and we expect that to continue. Our management team remains firmly committed to achieving our efficiency target of 58% by 2021. We're making strategic choices in each business to drive the profitability and the operating strength of the bank over the long term, such as the actions we take in Capital Markets and Wealth to align resources with the market dynamics and revenue environment.

Holding true to our purpose, we shape our success and that of our customers, employees, and communities. For now, I'll turn it over to Tom to talk about the third-quarter financial results.

Tom Flynn -- Chief Financial Officer

Thank you, Darryl, and good morning everyone. My comments will start on slide eight. Q3 reported EPS was $2.34, and net income was $1.6 billion. Adjusted EPS was $2.38, and adjusted net income was $1.6 billion, both up 1%. Operating results this quarter reflect good performance in our P&C and Capital Market businesses and positive operating leverage. Adjusted items are similar in character to past quarters and are shown on slide 24.

Net revenue of $5.8 billion was up 5%, or 4% excluding impact of the stronger U.S. dollar, reflecting good performance in our P&C businesses and the BMO Capital Markets, partially offset by a lower contribution from the insurance business. Expenses increased 4%, or 3% excluding impact of the stronger U.S. dollar, largely reflecting higher employee-related expenses and technology costs. Operating leverage for the quarter was positive 0.5% at the all-bank level.

Looking forward, we're on track to deliver positive operating leverage again in the fourth quarter. As we said on our Second Quarter Earnings Call, we expect expense growth for the second half of the year to be half the rate of the first half of the year, and we're on track to deliver that.

Moving to slide nine for capital, the Common Equity Tier 1 Ratio was 11.4%. The ratio was up 10 basis points from the prior quarter, driven by retained earnings growth and lower deductions, partially offset by higher risk-weighted assets. The higher risk-weighted assets were driven by commercial and corporate loan growth across our businesses, net of lower market risk RWA.

Moving now to our operating groups and starting on slide 10, Canadian P&C net income was $649 million, up 1% from last year, with strong pre-provision, pre-tax earnings growth of 8%. Revenue growth of 6%, driven by higher balances, increased non-interest revenue at high margins. Total loans were up 6%, with commercial loans up a strong 16%. Mortgage growth through proprietary channels, including amortizing HELOCs, was 4%. Deposit growth continued to be very good, with personal balances up 12% and commercial up 9%. NIM was up 4 basis points from last quarter, reflecting improved lending spreads, including the benefit of a widening primed BA and favorable product mixed changes.

Expense growth was 4%, reflecting investment in the business. Operating leverage was good at 1.9%, and efficiency improved to 47.3%. The provision for credit losses was $204 million and includes a provision on performing loans of $30 million.

Moving to U.S. P&C on slide 11, and my comments here will speak to the U.S. dollar performance. Net income for the third quarter was $285 million, down 1% from last year, and pre-provision, pre-tax earnings growth was strong at 9%. Revenue growth was good at 5%, reflecting higher loan and deposit balances, net of lower net interest margins. Average loan growth was 13%, with commercial loans up 16% and higher personal loans. Deposit growth continues to be good, up 14%, marking the fourth consecutive quarter of double-digit growth in both personal and commercial deposits. Net interest margin was down 15 basis points from last quarter due to higher deposit costs, including changes in mix, loan spread compression, and the impact of loans growing faster than deposits.

Expenses were well-managed and up just 2%. Operating leverage was strong at 2.8%, and the efficiency ratio improved to 57.9%. Provision for credit losses were $73 million and included a $28 million provision for credit losses on performing loans.

Moving now to slide 12, BMO Capital Markets net income was good at $318 million, up 5% from last year. The U.S. business continued to perform very well, delivering net income of U.S. $83 million, and contributing 34% of Capital Markets earnings. Revenue growth was strong at 9%, with investment and corporate banking revenue up 15% and trading products up 4%. Expenses increased 13%, with the KGS acquisition accounting for almost half of that increase. The stronger U.S. dollar contributed approximately 1% to each of revenue and expense growth. Provisions for credit losses were $10 million, compared to $7 million in the prior year.

Moving to slide 13, Wealth Management net income was $257 million. Traditional Wealth net income of $233 million was up 10% from last year, with higher revenue primarily due to the impact of the legal provision in the prior year and higher deposit and loan revenue. Average loan growth was strong at 16%, and deposits grew 5% as we continued to diversify our product mix. Insurance net income was $24 million, down from $89 million in the prior year, and below the level of a difficult quarter, largely due to lower reinsurance results and the impact of lower interest rates. On reinsurance, as Darryl mentioned, we have made the decision to wind down our property and casualty reinsurance business. This decision reflects returns in the business coming in at a level below our expectations and a higher level of variability results partially due to weather-related claims. Expenses were well-managed and up 1% from last year.

Turning now to slide 14 for Corporate Services, the net loss was $21 million, $34 million better than the net loss a year ago. Results were above trend and included items that had a positive impact on revenue and expenses in the current quarter, including the gain on the sale of an office building.

To conclude, the Third Quarter Results demonstrate the benefits of our diversified business mix, good operating discipline, and a positive trend on expenses, as expected. We're focused on executing our strategy in continuing to generate positive operating leverage as we head into the fourth quarter and into next year. And with that, I'll hand it over to Pat.

Patrick Cronin -- Chief Risk Officer

Okay. Thank you, Tom, and good morning, everyone. Starting at slide 16, the total provision for credit losses was $306 million, or 28 basis points, which is up from 16 basis points last quarter. As you may recall, last quarter's PCL included a $40 million recovery on the U.S. Commercial loan. Adjusting for that significant recovery, the quarter over quarter increase was driven by three main factors. First, higher Canadian consumer losses realized almost entirely as a result of implementation issues with the new consumer collections platform. Second, a single large loss in our Canadian commercial portfolio. And third, a higher provision this quarter for performing loans. I will discuss each of these further in my subsequent comments.

Looking at the PCL for Impaired Loans, our provision this quarter was $243 million, or 22 basis points, an increase of $93 million from the prior quarter. Adjusting for the $40 million recovery I referenced earlier, the balance of increase this quarter was in Canadian P&C and came from two principal sources. First, consumer PCL increased $26 million, to $133 million. This increase was primarily due to elevated delinquencies which were driven by implementation issues associated with our new collection system. With these implementation issues largely behind us, we expect Canadian consumer losses to normalize over the next few quarters.

The second factor driving the overall increase this quarter was in the Canadian commercial business, where we had a $41 million impaired provision, an increase of $26 million from the prior quarter. This increase was mostly due to a lofty loss provision on one account. Apart from these two factors in Canadian P&C, the PCL Impaired Loan result in the other businesses were good this quarter. U.S. consumer provisions of $8 million were up from a very low-level last quarter, and still remain at the lower end of a recent historical range. U.S. commercial PCL Impaired Loans was $53 million, compared to $16 million last quarter. Adjusting for last quarter's $40 million recovery, commercial PCL was actually lower this quarter than in Q2. PCL on Impaired Loans for Capital Markets was also lower this quarter, at $7 million, compared to a $12 million provision in Q2.

Now, turning to the Performing Loan provision and the third of the three factors I referred to at the outset of my remarks, PCL for Performing Loans was $63 million, an increase of $37 million from last quarter. This increase was due to a combination of balance growth, a modestly softer economic outlook, and to a lesser extent, credit migration. We view this increase as a prudent adjustment to our Performing Loan provision, and not a reflection of concern with credit quality in any of our lending portfolios.

Turning to slide 17, formations decreased $62 million this quarter, with notable decreases in Canadian consumer, as well as in commercial loans. While there were formations in the oil and gas sector, as of last quarter we provisioned appropriately based on our expectation of relatively low ultimate losses on these formations. The ratio of Gross Impaired Loans to total loans was 55 basis points this quarter, up 2 basis points compared to the prior quarter, and well within recent historical levels.

In summary, we are not seeing any concerning systemic, thematic, or sectoral trends in any of our credit books, which remain of strong and consistent credit quality. While this quarter's loss rate is at the high end of recent guidance, based on the nature of this quarter's increases and our current economic outlook, we still expect to see losses in a low- to mid-20 basis points going forward. I will now turn the call over to the operator for the question and answer portion of today's presentation.

Questions and Answers:

Operator

Thank you. We will now take questions from the telephone line. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press *1 on your telephone keypad. If at any time you wish to cancel your question, please press #. Please press *1 at this time if you have a question.

There will be a brief pause for the participants to register for questions. Thank you for your patience. Our first question is from Meny Grauman with Cormark Securities. Please go ahead.

Meny Grauman -- Cormark Securities -- Managing Director

Hi, good morning. We hear a lot of about trade uncertainty these days, and what that's causing to the overall business environment. Given your position both in Canada and the U.S., can you comment on what you're seeing there on the ground level in terms of the impact that trade is having on your customers? And specifically, could you talk about the ag business? Are you seeing any signs of trouble there? If you could comment on that from a credit perspective in particular.

Darryl White -- Chief Executive Officer

Well, Meny, it's Darryl. Thanks for the question. Maybe I'll start and with respect to the ag business, Pat might have a comment on the credit question that you asked. In general, I would say it's hard to ignore the fact that the trade tensions are creating, first of all, volatility in the markets as you know well. But also, some suppression of growth. As we look at it across all industries, if we look at across the U.S., our estimate is that including the late developments of late last week, that we would see something in the order of 0.5% of U.S. GDP impact as a result of the trade protections measures in aggregate. That's coming off of a fairly healthy level of unemployment, as we know is still extraordinarily low by any historical standards, and we've got inflation around 2%. So, it's not a catastrophe, but it is definitely a slowing environment from the perspective of GDP growth.

Our customer base in Canada and the U.S. continues to spend and continues to expand, I would say a little bit more prudently than perhaps they might have 6 or 12 months ago. So, a strong environment as a result of the trade measures for sure. As far as credit is concerned, we do feel it in some portfolios more than others. The good news is -- you referenced ag in particular -- the ag portfolio, in the U.S. in particular, is under some stress partly related to trade. It's well covered by land values, so you don't see provisions necessarily, but there is some stress in that small portfolio for us. Would you add much to that, Pat?

Patrick Cronin -- Chief Risk Officer

No. We're certainly seeing the signs of stress in the U.S. ag portfolio that has persisted actually for the better part of the last couple of years. So, exacerbated probably mildly by some of the recent tariff issues. But it's been going on for a while. I would contrast that quite strongly, though, with Canada, where we're seeing very little impact from issues and in fact, which is the bulk of our portfolio. Roughly about 83% of the ag books is in Canada, and at the moment anyway, the level of impairment in that portfolio is virtually nil. Of course, you've got Dave or Cam, if you want to make a broader comment on other sectors?

Darryl White -- Chief Executive Officer

I think you've covered it well.

Meny Grauman -- Cormark Securities -- Managing Director

Just as a follow-up there, just in terms of your expectations for loan growth specifically, or commercial loan growth, on both sides of the border it doesn't look like there is any impact, given the kind of numbers you're putting up. Would you expect that growth to slow materially over the next few quarters?

David Casper -- U.S. Chief Executive Officer and Group Head, North American Commercial Banking

This is Dave. I would say I would expect it to moderate to some extent. Not necessarily due to any of the factors that we've discussed as far as trade. It's just we've experienced good, strong loan growth, and I think over time it would moderate. That would be the general view.

Cameron Fowler -- President, North American Personal & Business Banking

This is Cam. I'll follow up on Dave's as well. In Canada, we're in the 16% zone on the commercial book as you can see. The pipeline is more or less where it has been the last three or four quarters. I've talked about diversification of that growth on this call. It's five industries that are at or around that number, and it's five regions of the country that are double digits. So, I do agree with Dave. There will be some moderation, but I wouldn't expect there to be too much in the near term

Meny Grauman -- Cormark Securities -- Managing Director

Thank you.

Operator

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

Gabriel Dechaine -- National Bank Financial -- Managing Director

Good morning. Just a question for Pat, and to clarify the issue with the Canadian consumer PCL, you implemented a new system, there were some delays in tracking or taking action on collections and that maybe created a backlog in your system, and therefore a spike in PCL? So, is that correct, and walk me through how this normalization trend is expected to develop?

Patrick Cronin -- Chief Risk Officer

Sure. So, your description is accurate. Yeah, there were just some implementation issues with the platform that we've largely sorted our way through. I think your best indication of any future impact really comes from early stage delinquency. So, you don't see it. The last quarter, we had a fairly large spike in early stage as you would expect as we fell behind on collections. That flowed through this quarter into the higher PCLs that you're seeing. When I look at early stage delinquencies now across all of the consumer portfolio, we're seeing early stage delinquencies now in every single product category. And actually, in terms of delinquency rates, pretty much back down to where they have been historically. And so, on that basis, that's why we're making a statement that we expect it to normalize. We're not seeing any of the same issues in those early stage delinquency numbers that we saw last quarter. So, I think the issue is largely behind us. So, for here on in, it'll really depend on how the economy changes, more than anything else.

Gabriel Dechaine -- National Bank Financial -- Managing Director

Okay. And then, just another one on the margin for the U.S. business, a big drop there sequentially. Is there any timing issue there? It won't go down immediately in any of the reprices over time. And then, is there any need or appetite to take some other action? I know you've done it in the past, where disposed of some low-margin loan books because they just weren't making enough spread for you. Is there anything of that nature brewing?

David Casper -- U.S. Chief Executive Officer and Group Head, North American Commercial Banking

So, let me take this first. It's Dave. The quarter drop this quarter was probably three things in all. He touched on them, and all had a pretty similar impact. We did have this quarter stronger loan growth than deposit growth. So, that's in the quarter that did make some of the difference. We also have rising deposit costs. As we continue to grow our customer base, more and more of our deposits aren't coming from our interest-bearing deposits, so that has an impact as well. And in loan spreads, to some extent -- this will maybe get to your last question -- have come down a little bit. But I would say that is not due to any particular real strong definition. It's more we do have a higher credit quality today. Most of our growth is coming from businesses where we have lower loss-giving default. So, that's had some impact, but I would not say there's any drastic action at all. We intend to grow our loans through good customers and also deposits. So, that's probably the summary.

Gabriel Dechaine -- National Bank Financial -- Managing Director

So, it's the trajectory, then.

Tom Flynn -- Chief Financial Officer

It's Tom. Maybe I'll jump in on the trajectory at the total-bank perspective. So, on the U.S. P&C business with the cuts that we've seen from the Fed, and the potential for ongoing, very strong commercial loan growth, although a little moderated, there's likely to be some pressure in Q4 on the margin. The cut itself would be in the zone of 5 bps, and there could be another 2-3 depending on the loan growth level and how strong it is in relation to deposits. So, that's U.S. P&C for Q4.

The Canadian story is different. In Canada, we had a nice increase in margins in the current quarter. We think that will sustain for the fourth quarter, so Canadian margins should be flat-ish in the fourth quarter. And looking over the next year for the Canadian business, we think the margin will be, again, flat-ish. If the Bank of Canada moves, there's maybe a little bit of pressure, but nothing significant from what we're seeing here today. And on the U.S. side, if the Fed moves, again, there's a potential for some incremental pressure. And so, the total bank level, if you roll that up, Q4 with a little bit of pressure in the U.S., NIM is likely down X-trading in the zone of 1-3 bps. And out to next year, with Canada stable, a bit of pressure in the U.S., there's the potential for another 1-2 bps. So, big picture, Canada's pretty stable, U.S with a strong loan growth, and the Fed cutting a bit a pressure, but not a really significant impact at the all-bank level.

Gabriel Dechaine -- National Bank Financial -- Managing Director

Thank you.

Operator

Thank you. Our next question is from John Aiken with Barclays. Please go ahead.

John Aiken -- Barclays -- Financial Services Analyst

Good morning. Tom, could I get you to give a little bit more information on the reinsurance? What was the recurring level of earnings if you're going to go over a longer period of time, 3-5 years? And with exiting the business, do you expect to see a material release of capital?

Joanna Rotenberg -- Group Head, BMO Wealth Management

Hi, this is Joanna. Thanks for your question. So, as you described and we saw, we did take a step to exit our business. Part of it was because of the consistency of earnings, and I would say over time, it did move around by a few million dollars. I would say overall, one of the reasons we've exited is because over the last two years in particular, because of the larger scale of events we've seen both in 2017 and 2018, it did get a lot more volatile in the business. And so, we have seen pricing improve, but not at the level we expected. And we are expecting and have continued concerns that with the climate change, we're just going to see more frequent and higher claims. And so, we didn't feel like there was a good symmetry between risk and reward. What I would describe is going forward, it won't have a material impact on our insurance earnings partly because of the volatility we've seen in the business. What I would say, though, is I do expect it to lower the volatility of our business, and even more importantly, improve the ROE for Wealth.

John Aiken -- Barclays -- Financial Services Analyst

Great. Thanks for the comment.

Operator

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

Doug Young -- Desjardins Capital Markets -- Investment Banking Analyst

Good morning. Just maybe going to Pat, the $63 million PCL build on Performing Loans, I was hoping you could maybe just flesh that out a little bit. And I know it's bounced around the last few quarters; just trying to get an idea of for a normal quarter, if there is such a thing, what is a normal Performing Loan PCL build? Is it 2 basis points, 3 basis points? And then, just lastly on credit, you talked about one large Canadian account that you provisioned for. Was this something that was impaired in the quarter? Or is this something that was previously impaired, and the provision was just updated? Thank you.

Patrick Cronin -- Chief Risk Officer

Sure. I'll start with your second question first. It was something that was impaired in the quarter where we took a provision on, and it was in the services sector in the healthcare subsector, so I think you could see that in the disclosure.

In terms of the performing provision, unfortunately, I don't think there is such a thing really as a normal quarter, and I think you've seen that from all the banks over the course of the quarters. I can tell you typically in any given quarter, it's going to be driven first by loan growth, as you would imagine. And we had some of that this quarter. I would say that accounted for maybe something like a third of that number that you're seeing. Then, it's going to depend on your forecasted view of economic conditions over the next 12-24 months. And for us, when we looked at the current data that we saw during the quarter, and particularly some softening in variables like corporate profit growth rates and some modest adjustments to GDP, that added about another third to a half of increase in the total provision.

And then, you're going to get credit migration in the portfolio, as well. And that credit migration can go up and down. It is somewhat asymmetric, though, because positive credit migration within Stage I gives you a little bit of a benefit to PCL, but negative migration from Stage I to Stage II, when you interpret over from 12 months of lifetime, gives you quite a bit of an incremental bump to PCL. So, even a negative credit migration doesn't necessarily mean there's a lot of weakness in the portfolio. Sometimes it just results from that asymmetry and how things are moving around. And for us, that migration this quarter was about a quarter above that $63 million.

And so, I can tell you going forward as Dave said, and Cam would agree with me, we do expect to see continued loan growth, so to the extent that continues, you should expect to see a provision for that. And then, I can tell you that our best guess for the outlook for the economic condition in the next 24 months is our current forecast, and so unless that changes on the basis of new data that's coming in over the course of the subsequent quarters, that likely won't change. But again, to the extent that things get better or worse, we will move our economic forecast in light of the updated data.

Doug Young -- Desjardins Capital Markets -- Investment Banking Analyst

Okay. Thanks for the perspective.

Operator

Thank you. Our next question is from Sumit Malhotra with Scotia Capital. Please go ahead.

Sumit Malhotra -- Scotia Capital Markets -- Analyst

And just to pick up on that, when you mentioned at the end of your prepared remarks that 20-25 basis points is still a reasonable level for the PCL ratio for the bank, is that inclusive of 2020? And are you looking only at the impaired portfolio? Or is that the total provision rate?

Patrick Cronin -- Chief Risk Officer

No, that would be the total provision rate. And I think we've been guiding to that number for a while now, so I can give you a sense of why I'm thinking that way. If you look at the consumer portfolio, like I said, when we look at early stage delinquencies, both overall and regionally, we're seeing things returning pretty much to normal. And so, that was the origin of my earlier comment about why we think consumer PCLs will normalize over the course of the next couple of quarters. Because we're just not seeing it in the early stage delinquency numbers.

On the wholesale side, we're seeing formation rates pretty much normally. You'll see them at 15 bps this quarter. That's pretty much exactly where they've been on average over the last few years. Our Gross Impaired Loan rate of 55, it's a little bit higher than what you saw last quarter and a year ago by a couple of basis points, but still, again, well within the normal range. The weighted average probability to fall to the book is essentially flat the last quarter, and almost flat to last year, and when I look across the diversification of the book, all of that tells me that we're not seeing signs of stress that would cause that PCL rate to rise dramatically, other than the general upward trend from what we had highlighted as particularly low levels of loss rates in the last couple of years. And so, that general trend I think will take us into the mid-20s but based on what we're seeing in the credit quality of the book for consumer and wholesale, we're not seeing anything that would dramatically cause us to deviate from that number.

Sumit Malhotra -- Scotia Capital Markets -- Analyst

And then generally, you touched a bit on this in some of the remarks earlier, when you think about PCL ratios for the bank going forward to where they are now, it's fair to say that one of the larger swing factors is I would think you're not expecting as much in the way of recoveries. And just to be clear, when you talk about where provisions are going, do you embed any changes in the Stage I and II provision? Or do you assume that to be 0 unless moderate refinements are already being forecast?

Patrick Cronin -- Chief Risk Officer

Yeah, the provision that we have right now reflects our best estimate of how the future is going to look for the Performing provision. And then, as you said, we don't really bake in recoveries into our forward look on PCLs. They do happen from time to time, it's not wildly unusual. Like I said, last quarter we worked recoveries pretty hard and pretty consistently, so they're going to come in the future. I don't know when and how much, but we certainly would bake them into our forward-looking.

Sumit Malhotra -- Scotia Capital Markets -- Analyst

Last question is for Tom on capital. Just wanted to have the numbers right here, Tom, because some of your counterparts had mentioned some adjustments that are coming in to start 2020 with IFRS 16 and then some of the other parameter updates. Do you have an estimate for the impact of BMO? And was there any pension liability for capital this quarter? It didn't look like it based on your earlier number.

Tom Flynn -- Chief Financial Officer

Quick answer. So, the Q1 impact from the IFRS 16 change and the change in some of the parameters is 15-20 basis points, and on the pension side, there was no meaningful impact in the current quarter. Our approach to managing the pension risk looks to match the assets to the liability. That's not perfect, but it's a pretty good match. And we also have a pension asset. And so, in the current quarter, that asset reduced, and that's a reduction from capital, so that's actually a positive. And with that, the net impact from pension was diminished in the quarter.

Sumit Malhotra -- Scotia Capital Markets -- Analyst

At this level of capital, do you anticipate once again becoming active on your NCIB?

Tom Flynn -- Chief Financial Officer

Well, I'll stick to our normal story on that. We have felt very good with the loan growth that we've had in the business and the customer growth that comes with that. The commercial growth in particular in Canada and the U.S. has been above market, and we feel good about how the business is going. So, that's our first and best use of capital. And if the ratio builds from the current level, and moves above 11.50%, we would expect to be active. So, our normal guidance is for the ratio to grow by 10-15 basis points. We said last quarter that we'd be around the lower end of that range with strong growth. That's what played out this quarter. We've got the Q1 change coming, as you asked about in your question. So, a bit of a long answer, but I'd expect activity with the ratio moving up from the current level and we need to get through the Q1 adjustments that we've got coming.

Sumit Malhotra -- Scotia Capital Markets -- Analyst

Thanks for your time.

Operator

Thank you. Our next question is from Robert Sedran with CIBC Capital Markets. Please go ahead.

Robert Sedran -- CIBC Capital Markets -- Managing Director

Hi, good morning. I'd like to try to combine, Tom, your outlook on the margin with some of Dave's discussion on loan growth to get a sense for revenues. It sounds like you're still expecting a fairly robust top line. As much as we try to forecast what the margins are going to do, I guess we're really trying to get at revenue. So, the pre-provision earnings that we saw, I believe it was around 9% in the U.S. Is that a reasonable assumption even in this margin world? Or should we expect that to slow?

David Casper -- U.S. Chief Executive Officer and Group Head, North American Commercial Banking

So, let me start. It's a tough question to answer. Here's what I know. We will continue to grow our customer base probably faster than the market. It's still very good opportunities for us that will lead to higher revenue and higher loan growth, and higher deposit growth. The tougher part is just what happens with rates. So, it's really hard for me to predict, and what I can predict over the long term, we'll continue to grow our U.S. business on both the personal and commercial side. We've got some really strong momentum, and despite the lots of noise in the U.S. economy, our clients are generally still pretty positive, and I'm pretty positive about the long-term aspects of this business.

Robert Sedran -- CIBC Capital Markets -- Managing Director

So, just to try to push it a little bit further. So, you're still expecting reasonable growth rates and with the margin contraction you had this quarter, you still put up some pretty strong top line, even with the rate moves. So, a pretty robust top line would still be the working assumption? I understand it's not guidance, but that's still what you're looking for?

David Casper -- U.S. Chief Executive Officer and Group Head, North American Commercial Banking

Well, I think I pretty much said what I would say. Again, I think the rates will have some impact, I just don't know what they'll be. But we're going to continue to grow customers, and we're going to continue to grow deposits, loans, and we'll see what happens. The 9% this quarter of PPPT was strong, and that's a good number for us. I don't know what it's going to be this quarter.

Darryl White -- Chief Executive Officer

Rob, this is Darryl. Let me see if I can come in on this. I think you've raised an important question, and I thought you framed it well in the sense that we think about the revenue growth in the business and we think about the overall returns of the business. The NIM is part of that equation. Of course, it's part of that equation. But when we look at our U.S. businesses -- plural -- I talked about them earlier, up 24% on our earnings year-to-date, 14% in the quarter, the P&C business that you're quizzing David about just now, when we look at a compressing margin against an expanding customer base and top line growth, we also look at the fact that it does now end up with a double-digit ROE and an efficiency ratio that is a credo to the rest of the bank's efficiency ratio. So, when I put all that together, that's an attractive package for the growth of the bank overall.

And Tom talked earlier about the total bank NIM. And when you look at total bank NIM, and we don't get completely myopic into the margin in one of our business segments, at 167 basis points, we think it's quite competitive with respect to other investment opportunities. So, when we put that into the mix, we like the trajectory. We can't control the rate environment, as Dave said, but our strategy is unchanged, and we keep pumping with our customer base.

Robert Sedran -- CIBC Capital Markets -- Managing Director

Okay. That may have been an unanswerable question, so I appreciate the attempt. Thanks, guys.

Operator

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

Mario Mendonca -- TD Securities -- Managing Director and Research Analyst

Good morning. Darryl, you've emphasized the importance of continuing to manage expenses lower in this environment, and I'm just observing a sort of different approach to this across banks in Canada and the U.S., some taking a very pressured approach with big restructuring charges and others sort of doing it at the margin. When you think about BMO in 2020 and 2021, how do you think BMO behaves? A little more aggressively with perhaps some restructuring initiatives? Medium flow restructuring initiatives? Or just perhaps just let attrition take care of expenses? How do envision BMO playing?

Darryl White -- Chief Executive Officer

Yeah, it's a good question. So, in order to answer that question, I'll take it back a bit. We talked a couple of years ago about working our efficiency ratio down and delivering it through operating leverage. The most important outcome is the forecast that we've given, holding ourselves accountable to 58% in 2021. And if you see the trajectory, we're on our way there. We're below 60% for the first time in a very long time this quarter. And we're getting there by moderating our expense growth. Tom told you last quarter that we would start to moderate our expense growth in this quarter. We've done that. We're telling you today, we're going to moderate that even further in the fourth quarter, and you're going to see us do that considerably.

And then, as we go on beyond that, we're working on our business plans. We're thinking about how we're going to manage through the course of 2020 and 2021. I think it would be very prudent to assume that we and others are going to have a reasonable but lower revenue growth environment to work within. And in that context, we'll make our decisions with how aggressive we'll be with respect to restructuring, I would say, as we launch into the first couple of quarters of 2020. So, stay tuned on that. Decisions aren't yet made, but it'll be in the context of our assessment of the overall revenue environment and our ability to reach the commitment that we made of 58%.

Mario Mendonca -- TD Securities -- Managing Director and Research Analyst

So, at this point it would not be appropriate to rule it out, like a meaningful restructuring charge?

Darryl White -- Chief Executive Officer

Yeah, I've said before, I think, in a couple of your competitors' conferences, in fact, that you shouldn't necessarily rule it out. But there will be a day that will come where we'll say that story is behind us.

Mario Mendonca -- TD Securities -- Managing Director and Research Analyst

I understand. And then, maybe for Pat, looking back at other credit cycle -- and I'm not suggesting that what we're seeing today is a credit cycle. In fact, there appears to be normalization. But looking back at other cycles, PCLs got as high as 80, 90, 100 basis points plus. As I start to model out a credit cycle today, or what it might look like today, would it be your view that a credit cycle today could in fact be a lot less meaningful in terms of how high the PCL's ratio gets than it has been in the past, because of things like mix or perhaps just underwriting standards. Is that conceivable, or is that wishful thinking on my part?

Patrick Cronin -- Chief Risk Officer

I don't think that's wishful thinking at all. I do think the mix issue is an important one. I look at some of the more particularly volatile sectors like CRE, and I think about what our mix looks like in the CRE sector now relative to what it looked like when we hit the last cycle and we start to decompose sectors like that, we actually feel much better about where we are now versus, say, the last cycle. And the diversification of the book has only gotten better since the last cycle. If you think about how we diversified into the U.S., how we diversified into multiple other sectors that weren't there in 2008, and I think the diversification is a pretty powerful benefit when it comes to a change in the cycle. But I think I'm kind of with you, where with respect to the cycle, I'm not calling for a recession either, or are we institutionally. I look at forecasts for GDP rates, for unemployment, for housing starts, for interest rates. All of that to us, for 2020, looks pretty stable relative to 2019. So, while I think things will be softer relative to some really strong performance in '17 and '18, it doesn't feel recessionary. But if we do end up in that cycle, I think you're right. I think the mix of our business and the diversification profile is much better than what it was in 2008 and I think that will serve us well.

Mario Mendonca -- TD Securities -- Managing Director and Research Analyst

Thank you.

Operator

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

Scott Chan -- Canaccord Genuity -- Wall Street Analyst

Good morning. Maybe going back onto the U.S. NIM question, I think you commented that the initial Fed cut impacted U.S. NIM by 5 bps, and if that kind of continues three or four times, say, up until fiscal 2020, is that kind of a nice barometer to use on potential future impacts just on that isolated item?

Tom Flynn -- Chief Financial Officer

So, I guess two things. You heard correctly on the approximate impact of the first cut. And then, I would say the answer to the second question about thinking about the impact of future cuts would be no. So, typically, as rates move down, we'd expect less sensitivity in the margin to cuts. And we saw that same dynamic playing out as rates moved up. Initially, our deposit spread widened significantly as rates started to move, and that impact diminished in the last couple of cuts. And so, we expect higher sensitivity in the first couple of cuts than in the cuts that would follow. So, direction would be similar, but the impact would become muted as the Fed moves added up.

Scott Chan -- Canaccord Genuity -- Wall Street Analyst

Okay. Thank you very much.

Operator

Thank you. For timing purposes, our last question is from Darko Mihelic with RBC Capital Markets. Please go ahead.

Darko Mihelic -- RBC Capital Markets -- Research Analyst

Hi, thank you. Just a quick question on the corporate. It looks like you had office building sale and some higher securities gains. Just to help with the modeling, I wonder if you could give us an idea of the size of that or maybe what corporate should really be losing every quarter.

Tom Flynn -- Chief Financial Officer

Yeah, so it's Tom. So, corporate had better than average performance in the quarter for the reasons I mentioned in my remarks and you played back. The way I always look at corporate is our average loss over the last six quarters is about $60 million, and that's as good a number as any to work with. And the numbers move around quarter to quarter, and we saw the benefit of that in the current quarter. But for modeling purposes, we think taking the last four quarters, the last six quarters, is a reasonable approach. And again, the number is $62 million for the last six quarters.

Darko Mihelic -- RBC Capital Markets -- Research Analyst

That's helpful. Thanks very much.

Operator

Thank you. There are no further questions registered at this time> I would like to turn the meeting back over to you, Mr. White.

Darryl White -- Chief Executive Officer

Thank you, operator. As I said earlier, we continue to have strong operating performance in our businesses with good PPPT growth for the quarter and for the year-to-date. While credit losses increased from very low levels as we prudently added allowances for performing loans, as Pat explained, credit quality in the portfolio remains very high.

Going back to the beginning of fiscal 2018, we discussed with you two clear objectives. One, growing our U.S. business at a faster rate than the rest of the bank, and two, improving the overall bank's efficiency performance. Now, almost two years later, our update on each of these objectives remains very positive. We've increased the share of the bank's earnings from our U.S. operations from roughly 25% then to roughly 35% today, and as we said earlier, our U.S. segment's earnings are up 24% year-to-date. We've done this by prudently taking share in our core businesses and consistently delivering double-digit PPPT growth in the United States.

On efficiency, in fiscal 2017, our adjusted efficiency ratio was 62.7%. In the quarter that we announced today, we broke through 60% and delivered 59.9% efficiency. Going forward, as Tom said, we have a clear focus on managing expense growth, which we moderated this quarter and will further moderate in Q4. We committed at our Investor Day last fall to 58% efficiency by 2021, and we are focused on delivering that outcome for our shareholders.

So, we feel good about our momentum on both of these objectives, and we'll continue to have a sharp focus on them going forward regardless of the environment we're operating in. Overall, we're executing on our strategies and they position the bank for sustainable performance going forwards. So, thank you all for your time today, and we look forward to speaking to you again on the Q4 call in December.

Operator

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

Duration: 53 minutes

Call participants:

Jill Homenuk -- Head of Investor Relations

Darryl White -- Chief Executive Officer

Tom Flynn -- Chief Financial Officer

Patrick Cronin -- Chief Risk Officer

David Casper -- U.S. Chief Executive Officer and Group Head, North American Commercial Banking

Cameron Fowler -- President, North American Personal & Business Banking

Joanna Rotenberg -- Group Head, BMO Wealth Management

Meny Grauman -- Cormark Securities -- Managing Director

Gabriel Dechaine -- National Bank Financial -- Managing Director

John Aiken -- Barclays -- Financial Services Analyst

Doug Young -- Desjardins Capital Markets -- Investment Banking Analyst

Sumit Malhotra -- Scotia Capital Markets -- Analyst

Robert Sedran -- CIBC Capital Markets -- Managing Director

Mario Mendonca -- TD Securities -- Managing Director and Research Analyst

Scott Chan -- Canaccord Genuity -- Wall Street Analyst

Darko Mihelic -- RBC Capital Markets -- Research Analyst

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