Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Bank of Montreal (NYSE:BMO)
Q4 2017 Earnings Conference Call
Dec, 5, 2017 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the BMO Financial Group's Q4 2017 Earnings Release and Conference Call for December 5, 2017. Your host for today is Ms. Jill Homenuk, head of investor relations. Ms. Homenuk, please go ahead.

Jill Homenuk -- Head, Investor Relations

Thank you. 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 Darryl White, BMO's CEO; followed by presentations from Tom Flynn, the bank's chief financial officer; and Surjit Rajpal, our chief risk officer. Following the formal remarks our group head for each of our businesses will provide comments on the outlook for 2018.

We have with us today Cam Fowler from Canadian P&C and Dave Casper from U.S. P&C, Pat Cronin is here of BMO Capital Market, and Joanna Rotenberg is representing BMO Wealth Management. After the group's presentation, we will have a short question-and-answer period where we will take questions from prequalified analysts. To give everyone an opportunity to participate, please keep it to one or two questions.

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

Daryl and Tom will be referring to adjusted results in their remarks. Unless otherwise noted as reported, additional information on adjusting items the banks reported results and factors and assumptions related to forward-looking information can be found in our annual MD&A and our fourth-quarter earnings release. With that said, I will hand things overs to Darryl.

Darryl White -- Chief Executive Officer and Director

Well thank you, Jill, and good afternoon, everyone. Earlier today, we announced earnings for the fourth quarter of $1.3 billion, concluding a record year with net income of over $5.5 billion and earnings per share of $8.16, up a strong 10% and 9%, respectively, from last year. These results demonstrate continued benefit of our diversified and competitively advantaged business and our ability to anticipate, adapt in a rapidly changing environment. Our operating groups contributed to good revenue growth for the year of 6%, driven by continued customer, loan, and deposit growth in a generally constructive environment.

Expenses continue to be well-managed, increasing 4% from last year as we balanced improved operating efficiency with investing for future growth. Operating leverage for the year was 1.9%, in line with our medium-term target of 2% and building nicely on the 2.1% we achieved last year. The balance sheet remains strong and well-diversified. Loan growth -- loan losses have increased in line with loan growth, and the PCL ratio remains stable at 23 basis points.

We have a strong capital position, with a CET1 ratio of 11.4%, providing good flexibility to continue to grow the business and to return capital to shareholders. During the year, we repurchased 5 million shares under the NCIB and earlier today, we announced an increase to our quarterly dividend of $0.03 per common share or 6%, reflecting strong fundamentals across the bank. This will bring our annual dividend to $3.72. Each of our operating groups demonstrated good performance for the year and is well-positioned for continued growth.

In Canadian personal and commercial banking, we had good underlying earnings growth of 6%, and that's excluding the Moneris gain in the first quarter with improved efficiency, lower loan losses, and improving margins in the second half of the year. Balance growth is well-diversified and we remain committed to building a leading customer experience, delivering the innovative products and services that our customers want. For example, customers can now go paperless with the introduction of e-form and e-signature capabilities, making it easier and faster to bank with BMO. U.S.

personal and commercial banking had solid performance, with momentum in commercial lending and growth in personal deposits and in customers. We benefited from improved deposit margins and are making key investments in the business that will drive future growth. BMO Capital Markets earnings were up 5% this year despite the impact of the tax change in our Canadian equity business. This was driven by particularly strong results in the U.S., where earnings were up approximately 50% in each of the last two years.

In BMO Wealth Management, we had a very strong year in both traditional wealth and insurance, with earnings up 18% even with the impact of elevated claims in our reinsurance business this quarter. Performance reflects growth in assets under management from improved equity markets and from net new client assets as well as good loan growth and deposit growth. Initiatives to improve efficiency across the business led to strong positive operating leverage of over 5%. Our U.S.

segment overall, which now contributes to 25% of total bank earnings, has delivered compound annual income growth of 13% over the last two years, delivering strong operating leverage and improving its efficiency ratio by over 6% since the end of 2015. The bank remains committed to our medium-term objectives: EPS growth of 7% to 10%, operating leverage of 2% or more, capital that exceeds our regulatory expectations, and ROE of 15% or more based on our view that return on equity will improve over time from the actions under way and as interest rate rise from currently low levels. We also remain committed to our strategy, which is firmly rooted in the customer. It's built on a solid foundation that positions us well to accelerate growth.

And as we look forward, we have the focused agenda I'd like to highlight for specific areas we're putting a lot of energy into right now. First, we're accelerating our growth in our U.S. segment. We have a long and well-established U.S.

presence dating back to the bank's earliest roots, which accelerated in the 1980s and now has a leading position and reputation driven by our deep commitment to customer relationships and by our highly qualified bankers. We've built through strong organic growth and targeted acquisitions in commercial banking and capital markets while we reinforced our wealth business on core private banking and asset management. We expect a constructive environment going forward and continued strong performance as we drive more revenue in U.S. capital markets.

We continue to build on the strength of commercial banking, accelerate our growth in profitability in personal banking, and grow core personal wealth and asset management clients and revenue. Second, we are accelerating the transformation of our business through a pragmatic approach to technology investment and deployment. We're now leveraging our multi-year investment in foundational architecture and data integration to enrich customer experience, simplify processes, and speed up delivery, driving both revenue growth and expense savings. We've seen steadily increasing digital adoption, leading to customers who are more loyal and do more business with us.

Similarly, good momentum in digital sales is bringing new customers to BMO and expanding existing relationships. Customers are enjoying the convenience of technology-enabled Smart Branches and enhanced ABM functionality as we deliver more personalized experience at a lower cost. Third, we are maintaining our focus on efficiency improvements. As I mentioned earlier, we achieved a strong operating leverage of 1.9% this year and 2.1% last year, which combined, improved the efficiency ratio by 240 basis points since the end of 2015.

We have made good progress and I expect it to continue. Fourth, I'd like to highlight with pride that we believe that our employees, our culture, and our values are a competitive advantage. We have consistently high industry-leading employee engagement. Across the organization, employees are empowered to create and embrace change, allowing us to adapt more quickly in an evolving environment.

A diverse workforce and inclusive workplace and a commitment to gender equality helps ensure employees and customers feel valued, respected, and heard, which in turn leads to stronger business performance. We're honored to have earned external recognition for this commitment. Just last week, BMO was named one of the 2017 most admired corporate cultures in Canada by Waterstone Human Capital and earlier this year, we were recognized as one of the best workplaces in Canada by the Great Places To Work Institute. Earlier this year, we achieved best-in-class ranking of 19th out of 6,000 public companies in the 2017 Thomson Reuters Diversity and Inclusion Index, and we are one of only nine organizations in the world to receive the Catalyst Award twice.

Later in the call, you will hear from each of the leaders on our outlook for the year ahead. From my perspective, we entered the year from a position of strength and we have all the elements in place to take advantage of the opportunities in the current environment and over the long term. With that, I'll turn it over to Tom to talk about the fourth quarter.

Tom Flynn -- Chief Financial Officer

OK. Thank you, Darryl. I'll start my comments on Slide 9 and will focus on the Q4 results. Q4 reported EPS with $1.81 and net income was $1.2 billion.

Adjusted EPS was $1.94 and adjusted net income was $1.3 billion. Reported and adjusted results this quarter include elevated reinsurance claims of $112 million, which reduced net income growth by approximately 8% and reduced EPS by $0.17. The high level of claims reflect the extraordinary circumstances of having the three major hurricanes and earthquakes in the quarter. Adjusting items in the quarter include a restructuring charge of $59 million pre-tax or $41 million after-tax.

The charge reflects our work to accelerate the use of technology to enhance customer experience and to drive operational efficiency. Adjusting items for the quarter are shown on Slide 25. Adjusted net revenue of $5.1 billion was down 2% from last year. Revenue was flat, excluding the impact of that weaker U.S.

dollar. Elevated reinsurance claims and the gain on the sale of an equity investment in the prior year together had a 3% impact on revenue growth. Net interest income increased 2% year over year. Net non-interest revenue was down 6%, mainly due to the items mentioned a minute ago.

Expenses were well-managed as we continue to focus on improving efficiency while investing in our business and technology. Adjusted expenses were essentially unchanged from last year or up 2% excluding the impact of the weaker U.S. dollar. Adjusted operating leverage was negative for the quarter and flat excluding the impact of the reinsurance claims.

The adjusted effective tax rate was 19.3% compared with 21% a year ago, primarily due to higher tax-exempt income from securities. The adjusted effective tax rate on a basis was 27.2%, up 1 point from a year ago. Moving to Slide 10. The common equity Tier 1 ratio was strong at 11.4%, up 20 basis points from last quarter.

As shown on the slide, the ratio benefited from capital growth from retained earnings and pension impacts net of higher source currency risk-weighted assets and the impact of share buybacks. Moving now to our operating groups and starting on Slide 11. Canadian P&C showed continued positive trends, with adjusted net income of $625 million, up 6% from a year ago. Results continue to benefit from our advantaged commercial business and good deposit growth.

Revenue growth was also 5%, driven by higher balances across most products, higher net interest margin, and increased non-interest revenue. Total loans were up 4%. Personal loans including mortgages were up 3%. Mortgage growth of 3% reflects our decision to scale back participation in third-party mortgages given their return profile.

We continue to focus on growing in our own channels where mortgages were up 5% from last year. Commercial loans were up 7%. Total deposit growth was 6%, with personal deposits up 5%, including 11% growth in checking account balances and 7% commercial deposit growth. NIM increased 5 basis points from last quarter, primarily due to higher deposit spreads and also some benefit from interest recoveries.

Expenses were well-managed, up 3%, and operating leverage at 1.7% was the best in the year and the efficiency ratio was 48.4%. Provision for credit losses were higher compared to last year due to higher commercial provisions. Moving to U.S. P&C on Slide 12.

Adjusted net income was $291 million. The comment that follows speaks to the U.S. dollar performance. Adjusted net income of $231 million was up 2% from last year.

Revenue was up 3%, driven by deposit revenue and commercial loan volumes. Average loan balances increased 1%, excluding the indirect auto loan portfolio during the year. Average loans were up 5% from the prior year. Commercial loan growth was 8%.

Net interest margin decreased 3 basis points from Q2 -- Q3 due to loans growing faster than deposits, partially offset by improved deposit spreads. Expenses were up 3% year over year. Credit provisions were modestly higher compared to last year and down from the third quarter. Turning to Slide 13.

BMO Capital Markets adjusted net income was $326 million, down from a record quarter a year ago. Our Capital Markets U.S. business continued to perform very well, with net income up 5% from the prior year and 34% from the prior quarter in U.S. dollar.

As Jill mentioned, U.S. growth has been excellent and is up approximately 50% in each of the last two years in the Capital Markets. Revenue of $1.1 billion was down 4%. Investment and corporate banking revenue was lower from a strong quarter of last year and trading revenue was largely unchanged.

Expenses were up 3% from last year. Provisions for credit losses were higher due to net recoveries in the prior year. Moving out to Slide 14. Wealth management adjusted net income was $186 million.

As mentioned, the results this quarter include elevated reinsurance claims of $112 million. Our reinsurance business is well-diversified and treaties are written with a high attachment point, which means losses from uninsured event must retrace significant levels before we have meaningful claims. This is clearly an unusually high claims quarter given we had three large hurricanes during the quarter and earthquakes. We expect claims of this type of magnitude to occur infrequently with our last significant claims year being 2011.

Earnings in traditional wealth were lower versus last year. Its business growth was more than offset by gain on sale of the equity investment last year. The issuance business had a net loss in the quarter as reinsurance claims more than offset benefits from favorable market movements and the impact of investment portfolio-related changes. Adjusted expenses increased 2%, reflecting continued very good expense management.

Turning now to Slide 15 for corporate services. The adjusted net loss was $119 million compared to a net loss of $188 million a year ago. Results were better mainly due to lower expenses, in part due to our real estate gain from the sale of an office building and higher revenue excluding TEB, partially offset by lower credit recoveries. Lastly, I'd like to comment on the adoption of IFRS 9.

As you know, IFRS 9 becomes effective for us in Q1 of next fiscal year and introduces an expected credit loss methodology. The implementation of this standard is not expected to have a significant impact on shareholders' equity or capital. As noted in our disclosure, we expect an increase in shareholders' equity on adoption of approximately $65 million after-tax. To conclude, fourth quarter is a strong year with earnings up 10%, operating leverage in line with our 2% target, and a strong capital position.

We're confident of the continued momentum as we head into 2018. And with that, I will hand it over to Surjit.

Surjit Rajpal -- Chief Risk Officer

Thank you, Tom, and good afternoon, everyone. Starting on Slide 17. This provisions are $208 million or 22 basis points, flat to the prior quarter. For the year, specific PCL of 23 basis points were unchanged from the prior year.

Provisions in Canadian P&C were $134 million this quarter, up $9 million from the prior quarter due to an increase in commercial losses, with no industry concentration. U.S. P&C provisions decreased $13 million to $66 million. PCLs are down due to the sale of legacy consumer loans and nominal variability in commercial portfolio.

In Capital Markets, ECLs were a modest $4 million this quarter, up from a small recovery last quarter. On Slide 18, formations at $527 million are in line with the average formations over the past two years. Gross-impaired loans increased $65 million to $2.174 billion, with the majority of the increase as a result of FX. The GIL rate was 57 basis points.

Turning to the Canadian residential mortgage portfolio on Slide 19. Uninsured LTVs remained stable and delinquency levels were unchanged. On originations, LTVs are also stable as were credit scores and amortization periods. We continue to be very comfortable with this exposure.

As Tom mentioned in his remarks, the IFRS 9 expected credit loss methodology became effective on November 1. We estimate a reduction in our allowances of $100 million from the new methodology. Our allowances continue to provide robust loss coverage. In summary, we had another good quarter from a credit perspective and given the strong economic outlook, we expect losses over the coming year to remain in the low to mid-20 basis points.

I will now turn the call over to Cam.

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

Thank you, Surjit. 2017 was a very positive year for Canadian P&C. We continue to deliver strong financial performance, including positive operating leverage in seven of the last eight quarters and record net income. And we made strong progress against our strategic agenda, most notably through investments in digital initiatives and the continued evolution of our physical network and advice-based sales force.

And we're well-positioned to deliver growth in 2018. Our priorities remain the same and I'm confident this is grounded in three key areas. First, on digital, we're focused on building simple personalized experiences for our customers and we've made great progress in architecture, digital process, and customer-facing capabilities to this end, including our recent launch of a BMO Skill for Amazon Alexa. 2018 will be another important year as we drive toward our objective of greater than 70% digital adoption, greater than 30% digital of sales penetration and continued double-digit mobile transaction growth.

Secondly, we have a strong commercial business and that will continue to be an engine for growth. We're focused on diversification by sector and geography, and we're seeing positive results that we expect will continue. For example, we have double-digit growth in technology, healthcare, and transportation and in the GTA where we are undersized relative to our portfolio, we're seeing double-digit growth in key customer segment. We'll build upon this momentum in 2018 by increasing our commercial account management capacity by 10% to 15% in this market.

Lastly, we continue to focus on reducing structural costs through a pragmatic and disciplined approach to enable reinvestment back in our business, most notably in advisory-based sales, new formats, digital and marketing. In summary, I'm proud of the results we delivered in '17 and am excited about the accelerated performance in 2018. I'll pass it now to Dave.

Dave Casper -- Group Head, Commercial Banking

Thanks, Cam. U.S. P&C delivered good results in 2017. We have a clear strategy and are executing on it and this will continue into 2018 with good revenue growth and positive operating leverage.

Our well-diversified commercial business continues to build on a strong track record as we opportunistically expand our geographic footprint and grow our specialized national businesses. Our pipeline is strong and the confidence of our client base is improving, leading to what I expect will be another year of mid- to high single-digit year-over-year commercial loan growth. Our personal business is also gaining momentum. In 2017, we opened a record number of new accounts and delivered personal deposit growth of 5%.

In our mortgage business, we redefined our sales model, streamlined processes, and optimized our pricing to ensure that we remain competitive. Across all of our businesses, we're making the necessary investments to improve our customer experience with a focus on revenue growth, including investing in our online banking platform and Smart Branch technology in our retail business and making significant improvements to our already industry-leading treasury-management product offering in our commercial business. At the same time, we remain focused on expense management. The improving interest rate environment and the potential for favorable corporate tax legislation gives me additional confidence in our long-term success.

Overall, I'm very proud of the results we delivered in 2017 and our entire team is poised to build on that momentum in 2018. And with that, I'll pass it to Pat.

Tom Flynn -- Chief Financial Officer

Thank you, Dave. After strong performance for Capital Markets in 2017 with solid [ NIAC ] growth despite the impacts that Darryl mentioned in his opening comments, we feel really well-positioned in 2018 to build on our position of strength and momentum with a diversified and client-focused business model and a prudent approach to risk management. In Canada, we have dominant market share positions across all products and segments that we operate in, and we intend to competitively protect that position. As such, we expect this business to continue to perform well going forward despite the full year impact of the federal budget changes and higher funding costs.

The U.S. continues to be our largest current and future growth driver, and we expect to further leverage our strong U.S. capabilities, product breadth, and capital position to further differentiate ourselves in the marketplace with our clients. We also expect to drive more U.S.

net income through a deeper partnership with our strong U.S. commercial partners. And so for all of these reasons, we expect our U.S. platform to continue to see strong net income growth next year.

We will continue to grow our corporate lending books in Canada and the U.S. with an overall growth rate roughly consistent with our experience over the past few years to drive greater depth and breadth in our client relationships. We expect to continue to invest in our control environment to ensure that it remains robust with good risk and capital control, which we think is a great foundation for the growth that we just mentioned. We continue to see upside from increasing our focus on expense management, which will lead to positive operating leverage next year.

We're proud of our strong results in 2017. We have real momentum going into 2018. We expect constructive markets given current economic forecasts and consequently, we're confident in our outlook for the year ahead. And with that, I'll now turn it over to Joanna.

Joanna Rotenberg -- Group Head, Wealth Management

Thank you, Pat. In 2017, wealth had a strong year. We had adjusted net income after-tax over $1 billion and we represented 18% year-over-year growth. We have strong and record deposit and loan revenue growth, nearly 400 points of productivity improvement, strong operating leverage, and we had improved client-experience measures across just about every business.

Going into 2018, we expect a similar or even better rate of net income growth. And our goal is to double our business over the next five years. Our personal wealth business will deliver this by positioning our model to serve clients exceptionally in high-growth segments where BMO has got competitive advantage like business owners, expanding our digital wealth capabilities and digitization to deliver a great client experience as well as productivity gains, and working across our businesses and our borders to deliver best of BMO to every client. Our Global Asset Management business has streamlined this structure and will grow by focusing on globally relevant world-class and consultant-credible products; focusing distribution in target market, segments, and channels where we have an advantage; and shaping our operating platform to profitably scale up our business.

In U.S. Wealth, we have a strong foundation for growth, having from exiting non-core businesses, streamlining our operations. and enhancing our leadership and go-to-market model. Our underlying efficiency ratio is now over 400 points better than two years prior.

So we're well-positioned for strong top- and bottom-line growth. And finally, in Insurance. Absent any significant movements in loan rates or unusual items, we would expect to deliver approximately $70 million in quarterly after-tax earnings and that would reflect continued growth in our underlying businesses. So in summary, we had a strong year in 2017 and we feel very confident going into 2018.

Back over to you, Darryl.

Darryl White -- Chief Executive Officer and Director

Thanks, Joanna. I think that we've heard a consistent theme from each of our business leaders. As a team, we are united in our confidence in the bank and in our opportunities for growth point going forward. And I would add that we intend to deliver it sustainably, creating value for shareholders and acting into the long-term interest of our customers to earn and maintain the trust that our business with them has built on.

So with that, Operator, we will move to take questions from the phone.

Questions and Answers:

Operator

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

So please press *1. At this time if you have a question there will be a brief pause while the participants register, we thank you for your patience. The first question is from Meny Grauman from Cormark Securities. Please go ahead, your line is open.

Meny Grauman -- Cormack Securities -- Analyst

Hi, good afternoon. I wanted to ask about commercial deposit growth. It's contracting so I want to know what's driving that and what's the outlook going forward. And then as a follow-on, how do you fix that trend and does it have an impact on margins?

Dave Casper -- Group Head, Commercial Banking

Meny, this is Dave. I'm assuming you are talking about the U.S. A couple of things. The growth in deposits or, in this case, the lack of growth in the commercial deposits, isn't actually just one area.

These are low value, very high-rate sensitive deposits that we have expected for at least a year that they would ultimately go. Most of those have gone already. It does not have any meaningful impact at all on our earnings and our core growth in both our retail and our commercial deposits are up. Our retail deposits are up about 5% or 6% and commercial core deposits are up close to that same amount.

So they just kind of pull back, so I want to remind you. The way we're set up in the U.S., we're -- just as we're overweight on the loans of commercial, probably 65% or 70% to 30%, we're also in a very good way very overweight on the deposit side to retail. And the retail has continued to grow. So I need to stop for a second and make sure I answered your question.

But the big point is the decline we saw in that one area was expected, it was planned, and these are low-value, high volatile deposits. Does that help?

Meny Grauman -- Cormack Securities -- Analyst

Yes. So just to clarify, you're saying going forward, you don't expect any further declines in that deposit bucket?

Dave Casper -- Group Head, Commercial Banking

The declines that we had to date were a little bit less than we expected, but if there are further declines, I would expect them to be very, very modest and offset by core deposit growth.

Meny Grauman -- Cormack Securities -- Analyst

OK. So you're not making any changes to your focus on where you're focusing on collecting deposits or how you're collecting deposits, is that correct?

Dave Casper -- Group Head, Commercial Banking

No. Our focus has always been on core deposits and these are deposits that we did from our commercial clients where we're providing all the operating services. On the retail side, we continue to grow that. As you recall, we have just under 600 branches in the United States.

We have a real strong deposit-gathering capability on the retail side and that focus remains the same and we expect to continue to grow them.

Meny Grauman -- Cormack Securities -- Analyst

OK. Thank you.

Operator

Thank you. The next question is from Stephen Theriault from Eight Capital. Please go ahead.

Stephen Theriault -- Eight Capital -- Analyst

Thanks very much. If I can start with Cam. Cam, just to expand on your outlook. Can you talk a bit, the margins have been very strong, up 10 basis points in the back half of the year.

Can you touch on your outlook there for '18? And then Tom mentioned in his comments a bit of a scale-back in third-party mortgages. I may have missed it there. Can you talk about what that means for mortgage growth next year in terms of your outlook and, you know, maybe makes sense there to fold in your expectations for growth incorporating the B20 that's coming into effect in the beginning of the year?

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

OK. Thanks, Steve. I think I said last time, I'm good at two questions, three sometimes hard. I'll do my best.

On the first one on NIM, just to remind us, there's two things driving the 5 points. One is spread. The other is an interest gain. They're really half and half.

So it's 5 points. Going forward, it's stable to up for us in next year. And to me, that means call it between 2 in 3, 2 in 4 points to the positive through the course of '18. Question No.

2 on third-party, there's nothing particularly new there, just that the economics are getting tricky to rationalize from an ROE perspective given the other places we could be deploying capital. We are just as focused on the market though has been. This is, to us, a primary customer gain and we like our proprietary channels best. We made that decision eight or nine years ago when we left the broker market.

So from our proprietary channels, we expect it to be at market, which this year has been 5% or 6%, '17 I should say, and '18, I expect to be a little more modest at 4 to 5 and we'll be right in there, I would expect, with our proprietary growth. On the final question, B20 and impact. I think what I would say is change is coming January 1. We are prepared for it.

I would expect that the impact on our originations would be between 5% and 10%. That is factored into forecasts that I gave you in terms of expected growth.

Stephen Theriault -- Eight Capital -- Analyst

Thanks for that. And then if I could do one more, probably for Tom. Just going back to -- or for Joanne on the reinsurance losses this quarter. The disclosure is fairly limited and I find that whenever we go through these cycles, when there's a lot of pain in a short period of time, we think about returns through the cycle.

So the last bit of pain was in 2011 with the issues in Japan and New Zealand, I think. Can you talk about what the returns may have been since then or how you think through the cycle returns? It seemed like we had Katrina 10 years ago, we had Japan five years ago, and now we have these issues. Is this a five-year cycle in terms of how you think of this business? Anything to help us there in terms of why this business makes good sense and why it's a good return business for you guys, would be helpful.

Joanna Rotenberg -- Group Head, Wealth Management

Sure. I'm happy to answer. This is Joanna. Great question.

Let me start by saying, we do believe this is a good business and it does provide good return on capital. For your purposes, I would think about that through cycle return on capital is between 15% to 20%. I'd say it can go as high as 25% in years where we don't have claims and I would say one of the reasons we like it is because of that return. Another is because of the diversification it offers us.

We're highly diversified quite globally and I would say that includes worldwide coverage, very, very limited in Canada, very uncorrelated to bank returns as you can imagine based on the portfolio, and we have a good mix of both catastrophe-related losses, property catastrophe as well as more of a specialty book. So it's well-diversified and a good return on capital. As you point out, this is a highly unusual year and I think Tom had referenced that before. We expect based on our modeling that even a single event like an earthquake, one of the earthquakes that we had of that magnitude would be more like a one in 10-year event based on our risk model and we've put them together.

It's more approaching 1 in 80. So this is a highly unusual series of events to have them at this level of attachment point. And I would just remind you, as Tom said, we do reinsure at high attachment points. And what that practically means is you won't see any claims typically in an event like Sandy.

It's probably a great example, where it was something approaching $20 billion and we had no claims out of that. And as you point out rightly, our last major claim of consequence would've been with the New Zealand and Asian earthquake. I'd also remind you, our losses are capped, so we do have good, prudent cap and so we do have good tight oversight over the risk limits there. And because of the annual nature of this business, we do believe should conditions change, it's really an annual renewal of our treaty.

So we feel good that we have good flexibility in the business as well.

Stephen Theriault -- Eight Capital -- Analyst

And when you think about the business in terms of just insurance business and you gave us an outlook of $70 million normalized earnings per quarter. Not necessarily relative to that, but when we think of the business over the last few years, has the reinsurance business been 10% of the earnings, 20% of the earnings, could you ballpark that for us?

Joanna Rotenberg -- Group Head, Wealth Management

Sure. It is about 20% of our earnings and what I would say, as you look at underlying growth of the insurance business as well as wealth management, I would expect it to grow about in line with wealth management more broadly, so no significant swings.

Stephen Theriault -- Eight Capital -- Analyst

That's very helpful, thank you.

Operator

Thank you. The next question is from Nick Stogdill from Credit Suisse. Please go ahead.

Nick Stogdill -- Credit Suisse -- Analyst

Hi, good afternoon. If I could go back to Dave on the U.S. P&C business. I just want to get your updated outlook on the personal loan balances for 2018, still relatively flattish here sequentially.

I know last year was impacted or the year-over-year growth was impacted by the sale of the indirect auto portfolio. So maybe just some updates on the initiatives you have for the personal side of the business going forward.

Dave Casper -- Group Head, Commercial Banking

So the personal business has already started to make some pretty significant improvements in the fourth quarter, both in our mortgage business. Our indirect auto business has started to pick up again and I would expect overall in that year over year, we would have modest growth, but definitely growth, in the 2% to 3%, I would think, in that range. We have some good things going. We looked at the overall business and as you may recall, I think we mentioned it before, we have made a purchase, a onetime purchase of about $2 billion in the mortgage business that we made very early in this quarter.

So we should have some good growth and good momentum.

Nick Stogdill -- Credit Suisse -- Analyst

And for that mortgage purchase, that's just a one-off, there's nothing more strategic to it and we shouldn't really expect that to be a recurring type of activity going forward?

Dave Casper -- Group Head, Commercial Banking

I would not expect it to be recurring. I would expect, though, that our mortgage business will continue to grow as we expand, but that would not be something we would do on a recurring basis likey.

Nick Stogdill -- Credit Suisse -- Analyst

OK. Thank you.

Operator

Thank you. The next question is from Gabriel Duchenne from National Bank Financial. Please go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Good afternoon. I've got a question about the U.S. and then I've got, for Dave, and then I've got a question on the strategy, bigger picture one. First on the U.S.

though, the auto book, we've seen the sale of a part of that portfolio, but even adjusted for that, the book keeps shrinking. So what's the strategy for consumer lending in the U.S. and how important is this business to have?

Dave Casper -- Group Head, Commercial Banking

Well, let me first take the auto book. The auto book, we sold a couple billion dollars in the first quarter. But after doing that, the book has really, I think in the fourth quarter it's been pretty steady and we would expect some good -- some modest growth in the auto book. The retail lending business is an important part of the overall business for the bank.

We want to be able to support our customers, whether they're in the loan, whether it's mortgage or home equity loans. It's an important business. The deposit-gathering business is even more important for us because we have such a good market, particularly in the Midwest. So we're seeing some growth, some momentum and I would expect that that will continue into 2018.

Tom Flynn -- Chief Financial Officer

It's Tom. I just want to add one thing. We do have the mortgage purchase in Q1 that Dave talked about and in some ways that's a one-time thing. In other ways, it's not really.

And as we've looked at the U.S. marketplace, we've spent a little bit of time looking at where consumer credit is originated, and the share of consumer credit originated outside of the traditional banking system has grown somewhat over time. And we do think it makes sense for us to increase our participation in that part of the market. And so the transaction in the first quarter is a larger than average example of that, but wouldn't be surprising or unreasonable to expect some other similar arrangements as we go through next year either in the form of loan-type arrangements or discrete portfolio transactions.

And those types of things won't take away from the focus on growing the core business, but they reflect our desire to participate in consumer credit broadly. A bit of a share shift that is occurring and also the strong balance sheet that we've got.

Gabriel Dechaine -- National Bank Financial -- Analyst

Sorry, what was the transaction? I was distracted earlier in the comments.

Tom Flynn -- Chief Financial Officer

It is about a $2 billion U.S. prime mortgage purchase.

Gabriel Dechaine -- National Bank Financial -- Analyst

Coming in the current quarter.

Tom FLynn -- Chief Financial Officer

Correct. Current quarter being Q1 '18.

Gabriel Dechaine -- National Bank Financial -- Analyst

And what you were talking about, I guess, outside of the National Bank, my employer's had a, through [Inaudible], had a relationship with LendingClub. Is it something along those lines?

Tom Flynn -- Chief Financial Officer

I wouldn't say necessarily exactly like that, but partnerships with organizations that are originating consumer credit that fits in our risk-return bucket.

Gabriel Dechaine -- National Bank Financial -- Analyst

OK. And then big-picture strategy question for Darryl. So the priority you listed out for the strategy No. 3, I think it was, was on the focus on efficiency.

BMO has got the highest efficiency ratio in the sector. So where do you want to be five years from now and what are you going to do to get there?

Darryl White -- Chief Executive Officer and Director

Well, thanks for the question, Gabriel. If you look forward, the first thing I do is very quickly look back and I look at the fact over the last two years, we have chipped away at that efficiency ratio by 230 basis points, we had positive operating leverage averaging over the course of those two years of 2% in each case. And when I look at the environment, I look at the opportunity to grow on the revenue side, I'd point out that the capital position we're starting from as we sit here today is also in a class of its own. And then on the flip side, I also look at the initiatives that we're undertaking with respect to cost.

So I think that what you can expect is we're going to continue the trend that you've seen over the last two years for the next five years. And by the way, can I say something else, I'm glad that you asked the question. We focused very intently here on maintaining the balance. In the past year, while we have improved our operating leverage by 2%, we've at the same time increased our spend in the technology portfolio by 13%.

So to do both of those things at the same time as we continue to reinvest in the technology, in the client businesses, grow our capital at the same time increasing our dividend at the same time and reduce our efficiency, that's been the trend and I would expect that to continue to be the trend.

Gabriel Dechaine -- National Bank Financial -- Analyst

Well the other trend is every -- you have a strong capital position and every two or three years, you kind of cycle, where you have a lot of capital, do a deal, attractively valued one, usually, and kind of roll with that as well. Is that -- I think that is the root of my question, are we in internal focus or external focus on the strategy?

Darryl White -- Chief Executive Officer and Director

Are you asking me if we're going to do another M&A deal soon?

Gabriel Dechaine -- National Bank Financial -- Analyst

Might as well, yes.

Darryl White -- Chief Executive Officer and Director

Look, the condition -- thank you for the question. The condition when you think through the factors that I just [Inaudible] a moment ago suggests that we're in a reasonably good position to continue to consolidate. We think we've become pretty good at it. We've got reasonable bit of practice at it.

We've got some execution on the core architecture side that's been improving each of the steps along the way. If you go back to the Harris Bank in the 1980s, you look at the M&I deal in 2010, you look at the GE Transportation Finance. Each time you do one of these, you get a little bit better and a little bit more efficient at it. And at the same time, we've got a pretty good muscle memory at this point in time on regulatory and risk and compliance.

So all those things suggest, combined with the capital ratio, that we would be in a position to continue to trend that you've seen in the past. But I've been pretty consistent on this question with most investors that that does not necessarily drive a compulsion to transact. First and foremost, those opportunities are organic. We see lots of opportunities to grow organically and opportunistically, if we see something that is attractive on the M&A side, we'll move forward but we're going to be pretty picky.

Gabriel Dechaine -- National Bank Financial -- Analyst

I appreciate the thoroughness of your response. Thank you.

Operator

Thank you. The next question is from Summit Malhotra from Scotia Capital

Summit Malhotra -- Scotia Capital -- Analyst

Let me pick it up on the efficiency front as well. I'll start with Tom. The restructuring charge that you announced in the quarter, $59 million pre-tax, it's a lot lower than what you enacted in 2015 and 2016, which I think was in and around $340 million. So this one being at this level, was it very targeted in terms of what the bank was accomplishing here and can I direct that to the sequential or quarter-over-quarter change I saw in the headcount or FTE level?

Darryl White -- Chief Executive Officer and Director

So a couple of things. Thanks for the question. The charge is smaller for sure than others we've had over the last few years. More than anything, it just reflects us identifying opportunities to accelerate our agenda and improve our financial performance and not wanting to wait on capitalizing on those for some potential future larger activity and wanting to move forward.

And so we thought the plans that we had as contemplated through the charge, made sense and we wanted to execute on them. The FTE in the quarter is down pretty meaningfully, as you've alluded to. And a little bit of that would tie into the charge, but some of the benefits or most of the benefits will roll in over the first two quarters of next year. So the majority would be future- versus past-oriented.

And I'd point out in the FTE quarter over quarter, there's a little bit of dynamic related to the timing of summer student hirings. So $250 million or $300 million of the lower FTE count in the quarter relates to that dynamic.

Summit Malhotra -- Scotia Capital -- Analyst

But as you said there, in part of your answer, we will see some of the benefit of the charge reflected in efficiency in the near term?

Tom FLynn -- Chief Financial Officer

You will. You'll see some benefit reflected in the near term. And probably more importantly, given the size of the charge, as Darryl talked about off the top and in response to questions, we are very much focused on continuing to invest in the business, including in technology to drive customer benefits and efficiency benefits, and we're focused on continuing to improve the operating leverage. And we've moved the operating leverage by 2 basis -- or 2% in each of the last two years.

We're focused on doing that again next year while investing in technology and that really does mean, given the level of investment, that you need to be reengineering parts of the operations in order to produce those outcomes. I should correct myself. I think in reference to the FTE, I said 250 million summer students and that would be somewhat larger than our summer student budget and approximately 250 FTE or 300 summer student dynamic.

Darryl White -- Chief Executive Officer and Director

Our summer students are very good. They're not that expensive

Summit Malhotra -- Scotia Capital -- Analyst

So you guys are really doing your part to put the millennial generation to work. So kudos to you on that front. But let me wrap up with Darryl and obviously, I think a lot of us look at the numbers here and the prospect of ROE expansion and we come back to that efficiency number. You talked about some of the plans you have in place.

I wanted to ask you this, your efficiency has gone better in the last two years, the industry has as well. When we look at BMO's peer efficiency being at the high end of the group, do you think there are structural reasons that that is going to remain the case or have there been investment decisions? For example, the U.S. Capital Markets build-out that you're quite familiar with, I don't want to answer too much for this year, but obviously you've been at the forefront of things like ETFs and that helped drive operating leverage in a big way in wealth. So in aggregate efficiency, are there structural reasons that this bank has to be at the high end or do you feel that's not necessarily the case?

Darryl White -- Chief Executive Officer and Director

I think that's a good question and thank you for it. We've said before and I would maintain the view that part of the gap is related to structural differences. If you look at the business mix, we skew bigger, as you know, on capital markets and on wealth and, in particular, some of the areas in wealth that you just pointed to, which attract the higher efficiency ratio. We like those businesses and we think that over time, they'll deliver disproportionately high growth rates.

And if you also -- you continue down the path of thinking about mix, we also skew having a larger U.S. business overall than some of our peers, which is a jurisdiction that in general has a higher efficiency ratio than Canada is. So I would say that about half of the gap, if you think about a gap, half of the gap is explained structurally and half of the gap is one that we think about a lot in places where we have work to do and that's where we're applying a lot of our energy. Does that help?

Summit Malhotra -- Scotia Capital -- Analyst

It does. And I'll wrap up just by asking, when you were answering the last question, you mentioned, I think you said best-in-class capital position. Does some of that capital need to be allocated to a larger level of restructuring to drive efficiency or do you feel that some of these charges you've taken, enough has been done on the restructuring front?

Tom Flynn -- Chief Financial Officer

I think about restructuring, assume it is continuous improvement. So we're in the process right now of thinking about how, as Tom said, how we engineer the organization. Through that work, we saw some things that we could do in the near term to accelerate some of the performance. And that's what we've done in terms of the restructuring.

I don't so much I think about the capital position as it relates to our ability to affect change. We've got capital to put into grow our client-servicing tools as well as the assets that we put forth to our clients as we go forward. So we're going to continue to work on efficiency in various ways. I think the capital provision we've got is an advantage because we've got degrees of freedom and we've got flexibility.

But I would offer that we'll be continuing to focus on efficiency whether or not the capital was at that level.

Summit Malhotra -- Scotia Capital -- Analyst

That's helpful, I appreciate it. Thank you for your time.

Operator

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

Mario Mendonca -- TD Securities -- Analyst

Afternoon. If we go back to the U.S. for a moment. Dave, you said the loss of those commercial deposits would not be meaningful to the banks from an earnings perspective.

So it does sort of lead to the next question. What was their purpose, why were they there if they weren't making much of a contribution to the bank?

Dave Casper -- Group Head, Commercial Banking

So the deposits I was talking about and the ones you're referencing are deposits largely from some of our financial institutions. It really became prevalent in 2008 and 2009 as the rate environment in the U.S. was so low, large clients kept their money with the bank. And it was there.

We've seen it. The issue with it and the reason why I say it really wasn't a value to us, it could go at any time. Rates could go up, but it can move and they're there. They're not non-interest-bearing deposits.

We really couldn't invest them in anything long-term just given the nature. So that's why as the rates move up, we expect them to go. They moved slower than they thought but that's the issue. Does that help clarify?

Mario Mendonca -- TD Securities -- Analyst

Just one sort of follow-up. So I guess sort of begs the question why did you keep them is didn't contributing to the bank's profitability? Was there some relationship that maybe they were improving or ...

Dave Casper -- Group Head, Commercial Banking

Well, these are clients with the bank and it's not that we weren't paying interest on them. They were there, they were supporting, I guess, just very short-term loan growth, but we're not in the business of really asking our clients to move their money. Some did during that period of time. We thought even though it wasn't really that advantageous to us, this is not the right thing to do.

We were trying to attract deposits from non-customers, but our customers we kept. It's encouraged, but we didn't kick them out.

Mario Mendonca -- TD Securities -- Analyst

Is there any risk of losing some of these, you called them operating services, or is there any revenue attached to these services you provide these clients?

Dave Casper -- Group Head, Commercial Banking

First of all, they didn't pull out their money in total. They pulled out deposits, they moved the deposits to institutions that would pay interest on them, that we wouldn't. The core operating services that we provide on the deposit side -- so check-clearing, payment services for our commercial business -- those services we continue to grow and those are paid for either through fees or oftentimes through deposits.

Mario Mendonca -- TD Securities -- Analyst

Somewhat related question then. You made reference to loans growing faster than deposits and how that was negatively impacting the margin in the business. That throws me off a little bit, because the bank is running with a fair bit larger balance of deposits relative to loans, the deposit gap is fairly large. So when loans are growing, I would've thought that that would just substitute for the securities that were held, in which case it would benefit the markets not hurt the margin.

So where am I missing in the margin explanation?

Dave Casper -- Group Head, Commercial Banking

I think you're probably referring to our NIM.

Mario Mendonca -- TD Securities -- Analyst

I am. Yeah.

Dave Casper -- Group Head, Commercial Banking

So the way the NIM works and this quarter is a good example, we had good, good net interest income from those deposits and from the loans. Part of that was the rate increase. That grew -- what was growing in the denominator is just loans. And so if loans grow faster, then by definition you're going to have a lower NIM.

So it's a bit of a trade-off. The good news is our loans in the quarter grew almost 6% quarter over quarter, the commercial did. So that's the good news, but you don't get, you still have to add that into the denominator. So that's the issue.

We can take you through all the calculation, if you want, offline, but it's pretty standard in the business and the way we run it.

Mario Mendonca -- TD Securities -- Analyst

The only reason it throws me off is there are a number of U.S. regional banks and some money centers that, with all of their excess deposits, whenever their loans are growing quickly, it actually augments their margins. So it's a different dynamic than what I'm used to for a bank that's deposit-rich.

Tom Flynn -- Chief Financial Officer

And I think that's maybe the thing that's different, Mario. It's Tom. We, over a period of time, were deposit-rich. We have excess deposit.

With the Transportation Finance acquisition, we essentially consumed those excess deposits.

Mario Mendonca -- TD Securities -- Analyst

OK. So it's probably no longer appropriate to refer to BMO as a deposit-rich bank in the U.S.

Tom Flynn -- Chief Financial Officer

That's exactly right. We have a great deposit business and we have a great lending business and the two are pretty much in balance right now

Mario Mendonca -- TD Securities -- Analyst

That explains it. And finally, and this is something that I've always a struggle for of the banks, the balance sheet does appear to be shrinking over the last couple of years. You can see it in non-trading securities, repos, deposits with banks, just across the board, it looks like the balance sheet is shrinking, I don't mean loans here. So is this just opportunistic, like client activity? What would cause the balance sheet to shrink like that?

Dave Casper -- Group Head, Commercial Banking

Are you talking about the overall balance sheet there?

Mario Mendonca -- TD Securities -- Analyst

I am. The entire balance sheet.

Dave Casper -- Group Head, Commercial Banking

I think there is some currency there. The loan balances are growing, but the U.S. dollar is weaker at the end of this year than it was at the end of last. That's a $0.05 to $0.06 impact.

So I think most of what you're seeing is currency at the two year-ends. There's nothing from a capital perspective that we're doing that would have an impact on ...

Mario Mendonca -- TD Securities -- Analyst

No conscious effort to shrink the balance sheet then in your perspective.

David Casper Absolutely.

Mario Mendonca -- TD Securities -- Analyst

OK. Thanks again.

Operator

Thank you. The next question is from Mike Rizvanovic from Macquarie Capital. Please go ahead.

Mike Rizvanovic -- Macquarie -- Analyst

Good afternoon. And just a quick follow-up for Cam on your 5% to 10% guidance. What's your baseline? The comment you made on origination activity declining, is that relative to all of 2017?

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

Regarding B20, is that what you mean?

Mike Rizvanovic -- Macquarie -- Analyst

Yes

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

We just looked back on all of '17 and tested what we thought the origination impact would be.

Mike Rizvanovic -- Macquarie -- Analyst

So that's basically incorporating the recent trend. What confused me a little bit is that when I look at the last five months or so, Canadawide, it looks the resale dollar volume is down about close to 10% already. So I'm just wondering, is that 5% to 10% comment building in, I guess, some return to stability, maybe the Toronto market, or is it not capturing recent trends?

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

Look, I think this is a very difficult question to answer because there are a lot of moving parts in the Canadian housing market. So when we looked at it, we said, "Here's what we think, all things equal based on the past 12 months." We also gave some thought to what we have going on in the market, in the Canadian market outside of Toronto and Vancouver, and we came up with the 5% to 10% range. I think it's tricky to get sharper than that. But I did keep that decrease in origination in mind when I estimated our 4% to 5% proprietary growth.

Mike Rizvanovic -- Macquarie -- Analyst

OK. Thanks for your insight.

Operator

There are no further questions registered at this time. I will return the meeting back to Ms. Homenuk.

Darryl White -- Chief Executive Officer and Director

It's not Ms. Homenuk, it's Darryl White speaking. Operator, I'm going to close the call by thanking our 45,000 employees at BMO for their contribution to our success, to supporting our customers, to living our values, and, especially at this time of the year, to giving back to our communities. And to everyone joining the call today, we wish you the best for the holiday season and a successful 2018.

Thanks for joining today.

Operator

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

Duration: 64 minutes

Call Participants:

Jill Homenuk -- Head, Investor Relations

Darryl White -- Chief Executive Officer and Director

Tom Flynn -- Chief Financial Officer

Surjit Rajpal -- Chief Risk Officer

Cameron Fowler -- Head, Group Canadian Personal and Commercial Banking

Dave Casper -- Group Head, Commercial Banking

Joanna Rotenberg -- Group Head, Wealth Management

Meny Grauman -- Cormack Securities -- Analyst

Stephen Theriault -- Eight Capital -- Analyst

Nick Stogdill -- Credit Suisse -- Analyst

Gabriel Dechaine -- National Bank Financial -- Analyst

Summit Malhotra -- Scotia Capital -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Mike Rizvanovic -- Macquarie -- Analyst

More BMO analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.