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Bank of Montreal (NYSE:BMO)
Q2 2021 Earnings Call
May 26, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please be advised that this conference call is being recorded. Good morning, and welcome to the BMO Financial Group's Q2 2021 Earnings Release and Conference Call for May 26, 2021.

Your host for today is Ms. Christine Viau, Head of Investor Relations. Ms. Christine Viau, please go ahead.

Christine Viau -- Head of Investor Relations

Thank you, and good morning. Welcome to BMO second quarter 2021 results presentation. We will begin the call with remarks from Darryl White, BMO's CEO; followed by Tayfun Tuzun, our Chief Financial Officer; and Pat Cronin, our Chief Risk Officer. Also present to take questions today are Ernie Johannson from Canadian P&C Dave Casper from US P&C Dan Barclay from BMO Capital Markets; and Joanna Rotenberg from BMO Wealth Management.

As noted on Slide 2, forward-looking statements may be made during this call, which involve assumptions that have inherent risks and uncertainties, actual results could differ materially from these statements. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. Darryl and Tayfun will be referring to adjusted results in their remarks, unless otherwise noted as reported.

With that, I will turn the call over to Darryl.

Darryl White -- Chief Executive Officer

Thank you, Christine, and good morning, everyone. It has been over a year since the onset of the coronavirus pandemic, which has brought challenges unlike any we've faced before and that will have impacts for some time to come. But as we transition to recovery, there are more hopeful signs every day. We're proud to have supported our customers and communities as they navigate the disruption and uncertainty of the pandemic. And with them, we have grown stronger, underpinned by our purpose-driven strategy and the culture that will help drive a sustainable and inclusive recovery.

We continue to deliver on our commitments with sustained consistent financial performance. Today, we announced another quarter of very strong results with adjusted net income of CAD2.1 billion and earnings per share of CAD3.13, up from CAD3.06 last quarter. Each of our operating groups continues to perform very well, with continued strength in our market-sensitive businesses as well as good growth in our P&C businesses despite record low interest rates.

For the first half of the year, adjusted pre-provision, pre-tax earnings of CAD5.5 billion increased 27%. Revenue grew 11% and expenses continued to be well managed, up 1% year-to-date, with strong overall operating leverage of 9.8%. Our credit quality remains very strong with low impaired provisions again this quarter, and a modest recovery of performing loan provisions, reflecting both the resilience of our customers and our differentiated approach to risk management. Our return on equity increased again this quarter to 16.7%, above our mid-term target. While our capital position continues to strengthen with a CET1 ratio of 13%, we are on a continuous path to building a strong and even more competitive bank, digitally enabled, future ready, with leading efficiency improvement, customer loyalty and profitability, and a steadfast commitment to the communities we serve. Our progress is evident in our financial performance, which confirms the effectiveness of our strategy and ability to support millions of clients in new ways.

Compared to the first quarter of 2020, efficiency has continued to improve, down 370 basis points to 56.6%, reflecting our commitments to managing expenses, while investing for future revenue growth. We're committed to continue to improve efficiency over time even when expense growth reflects our strong revenue performance. We continue to outperform on credit. We have CAD2.8 billion of allowances against performing loans, well above our base case expectations for future losses. Over the same period, return on equity increased 320 basis points, with each of our businesses achieving higher levels of earnings and ROE.

Our capital position has never been stronger, with our CET1 ratio up 160 basis points, positioning us well for growth and the eventual relaxing of constraints on returning capital to shareholders. We're taking actions to optimize capital and resource allocation. You've seen that reflected in a range of recent decisions, such as the sale of our EMEA Asset Management business, our Private Banking business in Hong Kong and Singapore, and the wind down of our non-Canadian energy portfolio. These actions further strengthened the earnings power of the bank and together they are expected to improve efficiency by approximately 60 basis points ROE by 30 basis points, and capital by 80 basis points. And they enable reinvestment in our core businesses in North America.

We've achieved these results while adapting to the changes and challenges of the last year. And with the economic recovery set to accelerate through this year and 2022, we've never been better positioned to continue to grow with our customers. Substantial fiscal stimulus, pent-up demand and elevated household savings are expected to strengthen economic activity this year and next. Business confidence is much improved. On Monday, the U.S. National Association of Business Economists matched our forecast calling for 6.5% U.S. real GDP growth in 2021, the strongest expansion in 37 years.

And among consumers, this week the Bloomberg Nanos Canadian Confidence Index hit its highest point recorded since they started pulling in 2008 with Canadian real GDP expected to grow 6% as vaccine rollouts accelerate. Here, we're building capabilities and continuing to invest in our businesses for growth with a digital strategy first. Our bank has been driving digital transformation for more than a decade. And in the last 12 months, the pace has meaningfully accelerated.

This quarter, we launched automated digital enrollment, a solution that quickly and seamlessly enrolls customers into a commonly used mobile banking feature, a first for a major Canadian financial institution. We're accelerating our strong digital sales performance, driven by continued deployment of marketing -- market-leading capabilities and offers, while continuing to shift service transactions to digital, allowing our employees to focus on advice and sales.

In our leading Treasury Payment Solutions Business, wire payments are now processed on a single North American platform, 95%, without human intervention, resulting in improved speed, less risk for error and a better experience for our customers and our employees. In Wealth Management, we launched adviceDirect Premium, a new offering designed for our self-directed clients with more complex needs. This hybrid solution combines with the strong technology of our digital advice engine with human support and planning when it's needed. These are examples of investments driving strong and resilient performance across our operating groups.

Our flagship Canadian P&C business delivered year-to-date revenue growth of 5%, strong operating leverage in PPPT growth of 11%, with ROE improving to 26.8%. Performance was supported by continued strong mortgage growth and a resumption of commercial lending growth. In U.S. P&C, PPPT growth was also strong, up 22% year-to-date, with revenue growth of 6% and effectively managed expenses. Our efficiency ratio improved to 48.6% and ROE to 16.4%. We're continuing to add clients and deepen relationships with strong growth in commercial deposits and core retail checking balances, with lending expected to accelerate as the economy expands and supply chain issues.

In BMO Wealth Management, we had a strong PPPT growth of 53% year-to-date. Revenue grew 14% in Traditional Wealth with strong growth in client assets, online broker revenue and mutual fund revenue, where sales year-to-date are more than double all of fiscal 2020. These results were complemented by record client loyalty scores in Canadian and U.S. private wealth businesses.

We are refocusing the business for North American growth, investing in key areas of competitive strength in private wealth, in digital investing, and Canadian Asset Management that we expect will continue to contribute strongly to the bank's growth. BMO Capital Markets continues to be a source of diversified earnings to the overall bank and had another very strong quarter, delivering very strong year-to-date PPPT growth of 72% and ROE of 11.9%. Results reflect strong and diverse revenue performance in both global markets and investment and corporate banking and the benefit of actions we've taken over the past few years to further strengthen and reposition the business for sustained performance with new capabilities, deeper relationships, and improved efficiency and returns.

Our overall U.S. segment is a key driver of earnings growth, contributing 40% of total bank earnings year-to-date. Pre-provision, pre-tax earnings were up 46% with an efficiency ratio of 55%. Our integrated approach brings the full value and scale of BMO to our North American customers, leveraging our top-tier commercial lending market position, leading deposit share in core footprint, and a growing strategically focused capital markets and private wealth management presence. We're leveraging our strong and consistent financial performance for the benefit of our customers and to support a sustainable and inclusive recovery.

We continue to facilitate access to a number of programs for those customers that continue to be impacted by the pandemic, to bridge them to an eventual full reopening of the economy. We're addressing key barriers faced by minorities, including targeting financing for women and minority owned businesses, and supporting community reinvestment through programs such as BMO Empower and our announced a CAD10 million donation to create the new rush BMO Institute for Health Equity in Chicago.

Building on our long-standing commitment to a sustainable future and support for the Paris Climate Agreement, this quarter we declared our ambition to be our client's lead partner in the transition to a net zero world and created the BMO Climate Institute to drive insights and enhance climate resilience.

So while the impacts of the pandemic are not yet fully behind us, the North American economy is poised for a strong recovery through 2021 and into 2022, and we will continue to help our customers make real financial progress. We have operating momentum in our businesses, differentiated risk management and flexibility for capital deployment. I'm confident that we've never been better positioned for the opportunities ahead.

I'll now turn it over to Tayfun to talk about the second quarter financial results.

Tayfun Tuzun -- Chief Financial Officer

Thank you, Darryl. Good morning, and thank you for joining us. I will start my comments on Slide 12. Performance this quarter was solid with strong adjusted pre-provision, pre-tax earnings, positive operating leverage, and continued momentum across each of our businesses.

Second quarter reported EPS was CAD1.91 and net income was CAD1.3 billion. Adjusted EPS was CAD3.13 and adjusted net income was CAD2.1 billion, up from the low levels in the prior year and up 3% from a strong first quarter. Second quarter adjusted return on equity was 16.7%, up from 15.8% last quarter and the efficiency ratio was 56.6%. Adjusting items this quarter include impacts of divestitures that totaled CAD772 million after tax, comprising a CAD747 million writedown of goodwill related to the announced sale of our EMEA Asset Management business, a CAD22 million after-tax gain from the sale of our Private Banking business in Hong Kong and Singapore, and CAD47 million after-tax divestiture-related costs for both transactions. Adjusting items are shown on Slide 35.

Net revenue was CAD6.3 billion, up 16% from last year, with good growth across each of our businesses and continued strength in our capital markets and wealth businesses. Expenses were up 3% from last year and flat quarter-over-quarter. Revenue and expenses in the quarter include certain notable items that combined did not significantly impact net income. These included elevated card revenue, reflecting non-recurring items in Canadian P&C, and legal provision in wealth management and higher expenses related to real estate management. Credit results were very strong. The total provision for credit losses was CAD60 million compared with CAD156 million last quarter, and included a recovery of the provision for performing loans of CAD95 million. Pat will speak to these in his remarks.

Moving to the balance sheet on Slide 13. Average loans were down 4% year-over-year or 1% excluding the impact of the weaker U.S. dollar due to last year's elevated commercial line utilization rates and decline in the non-Canadian energy portfolio, while consumer loans increased due to strong mortgage growth in Canadian P&C. Compared to last quarter, loans were relatively stable, with commercial loans in both P&C business up 2% and continued good mortgage growth, while balances in capital markets declined.

Average customer deposits were up 15% year-over-year and up 1% on a linked quarter basis, reflecting the highly liquid corporate and consumer balance sheets. Looking ahead, we expect loan growth to steadily increase in Canada, supported by growth in both personal and commercial loans. In the U.S., we expect loan growth to ramp up past the near-term supply chain and low inventory challenges.

Moving to Slide 14 for capital. Our capital position strengthened further this quarter. The common equity Tier 1 ratio was 13%, up 60 basis points from 12.4% in the first quarter, predominantly reflecting the impact of strong internal capital generation and lower risk-weighted assets. We expect our regulatory capital ratios to continue to grow under the current constraints on capital management actions.

Turning to Slide 15. Net interest income was down 2% from last year on both a reported and ex-trading basis. Total bank net interest margin ex-trading was up 1 basis point from the prior quarter, as higher loan spreads offset lower deposit spreads. In our P&C business, both in the U.S. and Canada, margin was stable. In Canada, the benefit of higher prepayment fees was offset by lower deposit margins and changes in mix. And in the U.S., the benefit of higher loan spreads and accelerated fee income on PPP loans was offset by lower deposit margins.

We expect our consolidated NIM to be relatively stable during the remainder of the year, and net interest income to remain roughly flat year-over-year. P&C NIMs are expected to decline due to the impact of lower long-term rates rolling in and the expectation for loan growth exceeding deposit growth. Lower prepayment fee is expected to put pressure on Canadian P&C NIM, while U.S. P&C NIM is expected to still be supported by PPP fees next quarter, offsetting some pressure from deposit spreads and mix through the remainder of the year.

Moving on to Slide 16. We provided additional information on our interest rate sensitivity. As shown on the slide, a 100 basis point rate shock is expected to benefit net interest income by approximately CAD300 million over the next 12 months, two-third driven by short rate impacts. The impact will be higher if we retain the excess deposits that are currently on our balance sheet. The impact of a 25 basis point increase in short-term rates would add approximately CAD100 million to revenue over the next 12 months. The higher second year benefit to rising rates would be primarily driven by reinvestment of capital and deposits at higher yields.

Turning to Slide 17. Non-interest revenue, net of CCPB was up 3% from the prior quarter, primarily driven by strong underwriting and advisory fees as well as higher card revenue, partially due to non-recurring items and mutual fund revenue. Year-over-year comparison in non-interest revenue benefited from last year's challenging market conditions. Although market conditions may cause some period-to-period volatility, overall items that benefit from reopening economies are well -- very well positioned to see more growth.

Moving to slide 18. Expenses were flat quarter-over-quarter as lower employee-related costs, including the impact of fewer days in the current quarter were offset by higher marketing and technology related costs. Expenses were up year-over-year, reflecting higher performance based compensation and technology related costs, offset by lower salaries and travel and business development spend. Efficiency was 56.6% and operating leverage was strong at 13.1%. Full year expenses should remain well managed. Any incremental increase over last year predominantly will be driven by performance based compensation due to significant revenue growth.

Moving to the operating groups and starting on Slide 19. Canadian P&C net income was CAD765 million, up from CAD363 million last year, reflecting pre-provision, pre-tax earnings growth of 19%. Revenue was up 9% from the prior year and up 2% from last quarter. Expenses were flat to last year and up 2% from last quarter. Operating leverage was strong and efficiency was 45.4%. Average loans were up 3% from last year and up 2% quarter-over-quarter. Deposit growth continued to be strong, up 13% year-over-year. The provision for credit losses was CAD141 million.

Moving to U.S. P&C on Slide 20. My comments here will speak to the U.S. dollar performance. Net income of CAD439 million compared to CAD253 million in the prior year. The strong results this quarter reflect 19% pre-provision, pre-tax growth and strong operating leverage. Revenue was up 4% from last year, reflecting growth in both net interest income and non-interest revenue, down 1% from last quarter due to fewer days. Net interest margin was flat sequentially. Expenses were down 8% from last year, driven by lower technology and employee-related costs, and up from last quarter, including the impact of technology costs. Operating leverage was strong at 12% and efficiency ratio was 49.2%. On the balance sheet, average commercial loans were stable year-over-year and up 2% quarter-over-quarter. Personal lending balances declined year-over-year. Average deposit growth continued to be strong, up 18%. There was a net recovery of CAD19 million in the provision for credit losses.

Moving to Slide 21. Wealth Management had very good results with net income of CAD353 million. Traditional wealth net income was strong at CAD303 million, reflecting higher revenue due to growth in client assets and stronger global markets. Insurance net income was CAD50 million compared to a loss of CAD16 million a year ago. Expenses were up 6% from last year due to higher revenue-based costs. Assets under management and assets under administration, both increased 13%.

Turning to Slide 22. BMO Capital Markets had another strong quarter with net income of CAD570 million. Global markets revenue increased, driven by higher trading and new debt and equity issuances. Higher revenue and investment in corporate banking was driven by strong underwriting activity and net securities gains in the quarter. Expenses were up 10%, reflecting mostly higher performance based costs, partially offset by lower operating costs and down 5% sequentially. There was a recovery in the provision for credit losses of CAD55 million.

Turning now to Slide 23 for corporate services. The net loss was CAD140 million compared to a net loss of CAD82 million last year. To conclude, performance this quarter demonstrates the benefits of our diversified business model. Our continued focus on efficiency and strategic investments position us well for further growth and profitability.

And with that, I will turn it over to Pat.

Pat Cronin -- Chief Risk Officer

Thank you, Tayfun, and good morning, everyone. As Daryl indicated, we were pleased with our risk performance this quarter, where we saw continued improvement in most of our key risk metrics from our strong first quarter results. In terms of credit performance, both impaired and performing loan loss provisions showed a third consecutive quarter of improvement, underscoring our cautious optimism that we are turning the corner on the financial stress from the pandemic.

Starting on Slide 25, the total provision for credit losses was CAD60 million or 5 basis points, down from CAD156 million or 14 basis points last quarter. Impaired provisions for the quarter were CAD155 million or 13 basis points, down from CAD215 million and 19 basis points in the first quarter and well below pre-COVID levels. The strong impaired loan loss performance is due to the low rate of new impaired formations, while recoveries were consistent with prior quarters. We are pleased with the results, but do expect impaired provisions to return to more normal levels over time.

We recognized a release on performing loans of CAD95 million this quarter, which was the result of positive credit migration and an improving economic outlook. We now have approximately CAD2.8 billion of performing loan allowances and based on our expectation of loan impairment and provisions, we continue to remain comfortable that our allowance provides adequate provisioning against loan losses in the coming year.

Turning to the impaired loan credit performance in the operating groups, we saw unusually low loss provisions in several of our business segments. In Canadian P&C, consumer loan losses were CAD100 million, up 2 basis points from low levels from the prior quarter. In U.S. P&C, consumer losses were CAD3 million, down significantly from last quarter. In addition, delinquency rates improved in both Canada and the United States. In our commercial and corporate businesses, we have seen similarly encouraging credit performance, driven largely by our U.S. segment, where we posted a third quarter of low impaired provisions.

In U.S. commercial, we reported impaired loan provisions of CAD3 million. The decline in provisions was driven by very low formations this quarter, very little new reservations and modest recoveries. Canadian commercial also had good credit performance this quarter with CAD54 million of impaired loan losses, down from CAD58 million in the prior quarter. Our capital markets business had excellent credit performance this quarter with a net recovery of CAD6 million, down significantly from the Q1 provision of CAD45 million. The decline was driven by zero impaired formations this quarter in our capital markets business.

On Slide 27, impaired formations at CAD425 million declined 36% from last quarter and are at the lowest levels in recent years. We saw significant improvements in some sectors that have been particularly stressed over the past year, such as oil and gas, where we recorded zero formations this quarter, and in our sectors highly impacted by COVID where formations were quite modest. Gross impaired loans declined by CAD442 million to 65 basis points, continuing the trend toward pre-COVID levels that we've seen over the past few quarters.

On Slide 29, we provide an overview of those sectors where we have seen COVID-related impacts on credit quality. These segments make up less than 5% of our portfolio. And notwithstanding the stress, our impaired loan losses across these segments have been quite modest relative to formations to date, reflecting strong origination practices and loan structures. We continue to closely monitor these segments, particularly given the prolonged lockdowns in Canada.

And finally, as you see on Slide 30, there were no trading loss days this quarter. In terms of the outlook, we remain cautiously optimistic given the solid credit performance we've seen in the last three quarters and we expect credit losses through fiscal 2021 to remain manageable. In terms of the performing provision, while uncertainty remains in terms of the future path of the pandemic, assuming vaccination progresses in our key markets and we continue to see a reduction in COVID cases, we would expect further releases from our performing provision in the coming quarters.

In terms of impaired loan losses, given the strength of current credit conditions and the near-term economic outlook, we may see the next few quarters continue with low credit losses. Looking into fiscal 2022, our expectation is that impaired loan losses will normalize and average in the range of low 20s in terms of basis points.

I will now turn the call back to the operator for the question-and-answer portion of this call.

Questions and Answers:

Operator

Thank you. We'll now take questions from the telephone lines. [Operator Instructions] Our first question is from Ebrahim Poonawala from the Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America -- Analyst

Good morning. I guess just the first question around commercial loan growth rate. I heard you, I think both Darryl and Tayfun talked about expectations for pick up. You did actually have commercial loan growth up quarter-over-quarter both in Canada and the U.S. Just talk to us in terms of what we are hearing from the U.S. banks is a lot of liquidity impact also weighing on borrower demand. So give us a sense of timing in both regions when you see commercial loan growth picking up? And do you expect Canada to be stronger than the U.S. as we see a pickup in loan demand.

David R. Casper -- U.S. Chief Executive Officer

So, Ebrahim, it's Dave Casper. Let me try to give you a sense. So when we talk to our clients, and this would be pretty similar on both sides of the border. Demand for their products is really quite strong, and we're seeing that really across all of our industries, regions. Our pipelines are up across the board. They're back to pre-pandemic levels. We continue on both sides of the border to add a lot of new clients, but it's part of your point. Many of those clients, while we give them authorizations for credit, they're really not borrowing today, so they they come over, we get their operating business. But they're not -- they're not borrowing today. So the M&A activity continues to be high, and I'd say enthusiasm on both sides of the border for growth continues to be high.

The headwinds which Darryl and Tayfun have both covered our real, and those are the inventory pipelines are basically clogged across the borders now. Labor issues are real. They really are real. And there are very few of our clients that aren't having issues there. And there is product delays and there is price increases. So all of that is kind of the backdrop to, here is the answer I think to your questions.

Loan growth as you pointed out was actually sequentially up both in Canada and the U.S. this quarter. And I expect that will continue to grow during the quarters, but at the modest pace. I think by the fourth quarter, we'll will start to be back to loan growth as starting to see what we've seen in the past with modest increase year-over-year. I think where my enthusiasm -- last year, we were pretty optimistic that we'd have loan growth by the end of this year, and I continue to believe that. I'm more optimistic now than I ever was in terms of over the next two years, including the next few quarters. So it's going to get better. The economy is coming back. I don't think Canada is going to be necessarily any faster than the U.S., but they're both growing. And I'm just reflecting the optimism of our clients. And I've already outlined some of the headwinds, but those will go away. So let me stop there and see if I have answered your question appropriately.

Ebrahim Poonawala -- Bank of America -- Analyst

That was helpful, David. Just one thing to add on to that, like pre-pandemic we did see BMO in the U.S. You've talked a lot about white space and market share opportunities. Should we expect you to outperform if and when commercial loan growth for the industry rebounds given the market share opportunities you had maybe over the last five to seven years?

David R. Casper -- U.S. Chief Executive Officer

I think we will continue in the U.S. to take advantage of the white space we have, the industries we cover, the geographies that we cover that we continue to grow and I would expect that just as we have in the past, we will be peer-leading in our loan growth over the next couple of years. And really more important the loan growth, client acquisition growth.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. And what was the PPP balance, if you have that at the end of the quarter?

David R. Casper -- U.S. Chief Executive Officer

In the U.S., around CAD4 billion I think. Average were about CAD4 billion.

Ebrahim Poonawala -- Bank of America -- Analyst

And the remaining fees tied to that, that you expect to accrue as they get forgiven?

David R. Casper -- U.S. Chief Executive Officer

I think we've basically accrued about half of the fees that we've received, that we've accrued about half and though the rest will come in through the next couple of quarters and into next year. I think it's around, in $100 million. Tayfun can correct me if that's not false.

Tayfun Tuzun -- Chief Financial Officer

Yes.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. Thanks for taking my questions.

Operator

Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.

Paul Holden -- CIBC -- Analyst

Thank you. Good morning. So first I just want to ask a quick question of clarification. Tayfun, you mentioned you expect NII to be roughly flat year-over-year. Just want to clarify if that's sort of full year 2021 or the back half of the year?

Tayfun Tuzun -- Chief Financial Officer

Full year '21 compared to full year '20.

Paul Holden -- CIBC -- Analyst

Thank you. Thank you for that clarification. Okay. So my next question is just regarding the NIM sensitivity table you provided in the slide deck there which is very helpful and really highlights the upside you have in the U.S. business. Just wondering, to your knowledge, is there anything different about BMO's Canadian business that would perhaps make it any more or less rate sensitive than peers domestically?

Tayfun Tuzun -- Chief Financial Officer

I don't think so. I think it's really, I mean the contracts that you see between the U.S. and the Canadian side is more related to the deposit sensitivities. In the U.S., the picture is a bit different. But I don't think that necessarily to my knowledge that there are significant differences in Canada between us and the peers. And some of the, obviously, we continue to also invest and roll both our deposits and equity on a periodic basis. And you may see some quarter-over-quarter changes in that number, it more relates to how we invest those balances.

Paul Holden -- CIBC -- Analyst

Got it, OK. Thank you.

Operator

Thank you. Our following question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman -- Scotiabank -- Analyst

Hi, good morning. Also on the subject of rate sensitivity, Tayfun. You talked about how the rate sensitivity can go higher if you're able to retain the excess deposits that you've built over the pandemic. I'm just wondering how much upside is there? What's your expectation there as you look at it now?

Tayfun Tuzun -- Chief Financial Officer

So, Meny, if we assume that we retain all of the balances, it's a modeling exercise basically, then the sensitivity could be 70% to 80% higher than what we are showing up here. But we don't want to do that as we expect those balances to eventually leave the banking system. So, that's sort of is the range that I can give you. It is a number that is quite sensitive to the assumptions around retention of those deposits.

Meny Grauman -- Scotiabank -- Analyst

That's helpful. And then maybe as a follow-up just on the business side. If you could kind of try to highlight -- what are you doing on the business side to try and retain those deposits? Is that particularly just in Canada versus the U.S.? Just trying to get a sense of how you can make those deposits stickier? How realistic that is to expect that some of those deposits will stay?

David R. Casper -- U.S. Chief Executive Officer

It's Dave. I'll talk a little bit about the commercial side. I think the reality is, we are viewed as a pretty safe place to put excess deposits, combined with a very good place to actually have your operating accounts. So during this pandemic, we benefited on both sides. We will retain more than probably what the model suggests at least compared to what we've done in the past. We always seem to retain more.

As clients need to use them for borrowing, obviously, that'll come down. But we have a lot of clients that just don't borrow. And we'll keep a fair amount of money in short-term and we will retain those. We will continue -- what we're really doing is we're always competitive, but today we don't have to be that competitive to keep these rates and keep these balances. And it's basically the same on both sides of the border. The would be the -- in essence the commercial strategy. Ernie may -- Ernie has done great job on the retail side as well.

Ernie Johannson -- Group Head, North American Personal and Business Banking

Great, thanks, Dave. I'll take over Meny on the retail side. I'll start with the U.S. first and then do Canada. On the U.S. side as you know, we've been acquiring deposits across 50 states in the U.S. and are committed to continuing to maintain good relationships in those growth engines for deposit. We've shifted our focus away. This is a North American state and away from the broker, terms, CD, market, and we're really focusing on our customer base and on checking and savings growth. On both sides of the border, we have been accelerating our initiative to digitize that process, acquire more new customers for those key relationships that start with a checking and a savings account. You'll see that that growth happening in Canada in our retail deposit share movement and as well as our continued investment in marketing campaigns for growth.

So, we're really pleased with those relationships and find that those deposits as you can imagine are sticky. And as we see the economy open, there may be a little bit of softening as consumers start spending. On both sides of the border, we'll see a decrease in those deposits. But as I've said, as we acquired more new customers and we anticipate that the surge deposit that we've acquired will be slower running off than one had imagined a few months ago. That's initially what we're seeing as the economies are slower to ramp up the consumer spending. So, really a good news story on both sides of the border on the retail side.

Meny Grauman -- Scotiabank -- Analyst

Thank you.

Operator

Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young -- Desjardins Capital -- Analyst

Hi. Good morning. I guess this question is for Pat. I'm just trying to think of credit here. And I mean, if I go preach -- well your average coverage ratio for performing loans was I think around 32 basis points in fiscal '18 and fiscal '19. And what I'm trying to get at is there any reason why you can't revert back to this level, call it over the next few years? Is there some structural changes or are you just going to be more conservative? Or what would be a reasonable timeframe? If you're confident in your book what would be a reasonable timeframe for getting back to that level?

Pat Cronin -- Chief Risk Officer

Well great. Thanks for the question, Doug. I would say first of all in terms of the timing for getting down or timing of releases, it's really going to depend on primarily how we see lockdowns easing, particularly in Canada and then a commensurate reduction in stress for those borrowers that are uniquely impacted by the lockdowns. And then we'd like to see an easing of some of the health issues that are percolating, and certainly in countries like India that may have a larger impact on the global economy. And then some stability in Canadian housing prices would probably be another trigger for us to start to release.

In terms of where we get back down to, it really depends a lot on the mix of the book and some things we might provision higher for versus others. So, it depends a lot on how some of the sectors grow as well as the product mix within the consumer business. And then I would expect us to remain slightly elevated versus our historic levels because now we obviously have a new stress event to consider when we think about what the tail of loan losses could be as we move forward. So, it will take some time to go back down. My gut is probably over the course of the next twelve 12 months to 18 months we'll see a reduction to something that's more stable, and it will probably settle slightly above where it's been pre-COVID.

Doug Young -- Desjardins Capital -- Analyst

Okay, that's helpful. And then just on card fees, I mean it was mentioned there was a non-recurring item. What I'm trying to get an idea of just the trending of card fees and so I don't know if you can quantify what the non-recurring item was that we can kind of look at card fees excluding that. And can you talk a bit about what you're seeing in the card business in general? Thank you.

Tayfun Tuzun -- Chief Financial Officer

Yeah, so let me ask the -- let me answer the fee question and I'll turn it over to Ernie about what she is seeing. Doug, as I said, there were three notable items during the quarter, altogether they didn't have any impact on net income, and one of them was in card fees.

In terms of sort of the trend expectations, what I would suggest is that in a quarter or two as consumer spend activity picks up and card swipes continue to go up, we would expect to grow into this number, away from the onetime impact this quarter. So that's how I would look into sort of modeling that line item. And in terms of what Ernie is seeing. Ernie, I will turn it over to you on that topic.

Ernie Johannson -- Group Head, North American Personal and Business Banking

Right. Thanks, Tayfun, and thanks for the questions Doug. If I look at size of card related revenue, obviously elevated this quarter as you've mentioned. That line typically has a couple of items in there that move around, timing of reward cost is one, the actual consumer spending that occurred -- that occurs through that. So as I look in the past month or so, what we're seeing is a return back to I would say pre-pandemic levels of spending, and it's just in a recent in the past month or so that we're returning back to 2019 numbers, and that's good to see overall. We're seeing it in a couple of categories.

As you can imagine historically, in the pandemic, you saw grocery, home rental, gardening kind of categories at their peak and above normal levels, and now we're starting to see is a return to travel. And we're seeing that across hotels, travel industry. And so that's really a good indication of what we're going to be facing in the next little while, which is, as consumers are more confident about the pandemic situation, get vaccinated, we're seeing that spend grow.

So I would anticipate that we are going to be seeing stronger and strengthening consumer payments spend. I'm seeing that even now on card, credit card acquisition. We're really pleased with our launch of our of our new Visa eclipse products, they're performing extremely well in terms of acquisition growth. It would appear that the payments businesses is getting back up to where it was pre-pandemic. So we're really pleased with that performance. Great, thank you.

Operator

Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine -- National Bank Financial -- Analyst

Good morning. I have a quick one on the prepayment incomes and then a follow-up. In Canada, do you have a -- can you tell if you have maybe a more strategy to encourage prepayment activity and relatedly like what is the size of these revenues been over the past couple of quarters?

Ernie Johannson -- Group Head, North American Personal and Business Banking

It's Ernie. I'll -- I think you're referring to prepayment on mortgage.

Gabriel Dechaine -- National Bank Financial -- Analyst

Yes, Yes, mortgage.

Ernie Johannson -- Group Head, North American Personal and Business Banking

Okay. Thanks for the clarification. It's an interesting question. Obviously, consumers are taking advantage of a lower interest rate environment to refinance. We're also seeing consolidation of lending. So it is really looking at how do they consolidate into home equity lines. But in terms of prepayment, this will be a phenomena that continues as we have low interest rates. Do I anticipate it to diminish? I think over the coming months you will see that just as more consumers have taken advantage of that who were interested in taking advantage of prepayments have done so. And then also as we go forward, we're going to see increased spend if I can use that terminology. And that will also be helping our overall lending growth versus the prepayment fees that you're speaking of.

Gabriel Dechaine -- National Bank Financial -- Analyst

What's the size that have been on these revenues over the past couple of quarters?

Ernie Johannson -- Group Head, North American Personal and Business Banking

I don't have that on hand. We can probably come back to you with that as a proportion of our notes [Phonetic]

Gabriel Dechaine -- National Bank Financial -- Analyst

Okay, that would be great. Then, for whoever, maybe Pat, and business heads as well, like the inflation topic is of course top of mind everywhere. How are you thinking about the numbers we've been seeing lately, both from a positive and a negative sense because it could suppress demand if people delay their decisions -- their buying decisions when prices are moving so fast and up, but it does help I guess from a credit risk standpoint on LTVs on what's on the books already. I'm mumbling here, but if you can give me a sense of how you're thinking about the inflationary story these days and how you're preparing for good or bad things?

Pat Cronin -- Chief Risk Officer

Sure, maybe I'll start, it's Pat, and then I'll turn it to others. Specifically, to the inflation that you're seeing in home prices, you're correct. With existing homeowners that has the effect of actually improving LTV, so that's a credit positive. We are looking though very carefully at existing originations. Their elevated home prices may exaggerate LTVs and so we're taking -- our risk management practices on housing is dynamic anyway. And so through the cycle as prices change, we adjust our practices.

And, we're routing more mortgages to manual adjudication, particularly where we're looking at areas where we've seen rapid house price appreciation, just to make sure that we're comfortable. But ultimately, our mortgages and loans are to the borrower's ability to pay, not the house price, and so to the extent we're satisfied with that than that we're comfortable from a risk perspective.

And then broadly, we are stress testing our loan portfolios against higher interest rates. Generally speaking, we do that anyway. As you know for sure, for consumer as well as commercial borrowers when we originate, we stress test against higher interest rates anyway to make sure that they're -- that they can sustain their level of borrowing in the event of higher interest rates. But then we stress test the portfolio broadly and this will evolve over time for sure, but what we're seeing right now is the stress that could be caused by inflation is definitely manageable within the earnings power.

Gabriel Dechaine -- National Bank Financial -- Analyst

Anybody else on the business growth side? Well, actually, I was thinking that Pat the stuff like -- like are you seeing any commercial borrowers? Are their input costs are based on these -- on the commodity prices that are soaring and that might be squeezing their margins? Are you seeing any of that at all?

David R. Casper -- U.S. Chief Executive Officer

Well, definitely seeing -- we're definitely seeing some input costs across the board at this point, with -- I don't think any exceptions. Most of this is getting passed on. And it's expected, which is, clearly if this continues, we'll have some inflationary pressures. But right now, our customers need to get the inventory. They're paying for it and it will likely get passed on. I don't see big margin pressures.

Tayfun Tuzun -- Chief Financial Officer

Maybe just one follow-on to that. Certainly, from a risk perspective, we're not seeing it driving wide scale stress in the portfolio. You would normally start to see that show up in negative credit migration. And in fact, for the second quarter in a row, we've had some pretty healthy positive credit migration across the wholesale book. So, it's obviously, as Dave said, it's not immune, but we're not seeing it show up broad base in terms of negative migration.

Gabriel Dechaine -- National Bank Financial -- Analyst

All right. Thank you.

Operator

Thank you. Our following question is from Lemar Persaud from Cormark Securities. Please go ahead.

Lemar Persaud -- Cormark Securities -- Analyst

All right. My first question is on the interest rate sensitivity disclosure. First of all, thanks for providing that, I think it's useful. I'm just wondering if you could just answer this high level question. How much could these sensitivities change from quarter-to-quarter? I guess, where I'm going with this is that one of the big downfalls on the structure of interest rate sensitivity tables that all the banks provide in their annual reports and MD&A is that it changes so much from quarter-to-quarter, and it's only really relevant for a specific point in time. So the sensitivity is, if this interest rate sensitivity table is subject to similar levels of volatility, it becomes a little bit less useful for me. So I'm just wondering if you could offer some comments on that?

Darryl White -- Chief Executive Officer

Very good question. These are clearly as of the date that they are run and they are published. There will be quarter-over-quarter changes in this number depending upon the actions that we would be taking during that quarter. So that clearly will have an impact on the sensitivity. At points in time, we may decide to invest a larger portion of the liquidity that wherein, which takes away the remaining sensitivity on those balances. We may have different hedging policies depending upon our perspectives that we execute during the quarter.

The reason why we decided to give you the numbers without necessarily adding deposit liquidity, for example, that I mentioned, which would have shown higher sensitivities is partially due to that reason because we did not want to sort of create challenges in comparing quarter-over-quarter numbers. But there will be some changes depending upon our rate management actions and also movements in the yield curve that occurs. So these are natural factors and not necessarily related to any structural changes in sort of the underlying unhedged balance sheet.

Lemar Persaud -- Cormark Securities -- Analyst

All right, thank you. And then just maybe if I could squeeze another one in here. I'm just wondering if I could get some thoughts on the impact of the more stringent qualifying rates for domestic mortgages. Do you think that some of the really strong growth we saw this quarter just being pulled forward to get ahead of the higher qualifying rates, and then we could see a bit of a slowdown in coming quarters. Maybe just some thoughts on that?

Ernie Johannson -- Group Head, North American Personal and Business Banking

Yes, it's Ernie, I'll take that one. There will be some impact as a result of that increase, what we called it the stress test as you said. The impact will be probably about 5% to 10% max from the perspective of impacted borrowers. That said, there are ways in which they can obviously find a lower priced house, being able to either find more equity somewhere from parents and gifting and all those sorts of good things.

So it's very difficult to understand what the full impact will be. They may actually just end up these consumers going to a lower priced house in that case. So, overall, there will be some sort of moderation to the extent of being able to say what exactly, that's going to be difficult to say. But we can assume just given what we're seeing right now in kind of housing prices and sales, that there will be some moderation that would be our expectation over the next little while, but it will still remain a fairly robust mortgage market in Canada for sure over the next little while.

Lemar Persaud -- Cormark Securities -- Analyst

Great, thank you.

Operator

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

Mario Mendonca -- TD Securities -- Analyst

Good morning. Tayfun the typical last year guidance on net interest income for the year being flat. Given the comments and the apparent momentum in your loans, commercial, and also on the retail side, I was a little surprised by that. It was also sort of surprising in the context of the move we've seen in the U.S. five-year and the Canadian five-year in the quarter. So maybe what I'm getting at here is, assuming the loan growth remains good and perhaps even accelerates as Dave suggested, where will the margins come in? Because that's the only other explanation. Are you pointing us to lower margins in Canada and the U.S., or lower margins outside of the domestic P&C franchise?

Tayfun Tuzun -- Chief Financial Officer

Yes, again, another good question. Partially, if you go back to Slide 16, we are expecting NIM to be relatively flat. And, that's partially as a result of the right side of that slide where the reinvestment yields currently are still below those that are coming off from prior investments of either our equity roles or deposit roles. So that still is a phenomenon that continues to put some pressure on NIMs.

In terms of year-over-year comparisons, in Canada, for example, although we are benefiting from mortgage growth, which is elevating our average loans relative to past year is obviously that we are not necessarily seeing much growth in credit cards, which has higher spreads. Also that's also playing a role both in the U.S. as well as in Canada. The composition of the loan portfolio is slightly changing until personal borrowing, including credit cards picks up which has higher spreads.

So, there's nothing really unique about the guidance. And if we end up seeing stronger average loan growth in the second half of the year, then what we're anticipating, then you would see a pickup in NII. So, I think in general, the guidance is pretty much in line with both what's happening on NIM, as well as in sort of the composition of the loan portfolio.

Mario Mendonca -- TD Securities -- Analyst

That's not [Indecipherable] Even if the domestic or sort of rather, if the total bank margin is essentially just flat going forward for the remainder of this year, I can't see how BMO doesn't grow the NII. Its just that the numbers don't, they just don't add up. NII grows year-over-year if your margin is flattening. I don't know if this is sort of like a mathematical truism [Phonetic]. So maybe this is something we could take offline because I just don't -- I don't follow your guidance very well.

Tayfun Tuzun -- Chief Financial Officer

Yeah, no it probably goes back to sort of the yield on earning assets. That is changing a little bit. But again, we can discuss. We're giving you a guidance as we see it today. But is there an upside? There may be some upside to the guidance depending upon how the second half moves.

Mario Mendonca -- TD Securities -- Analyst

Okay, maybe a different type of question then. The FX fees just was really good this quarter. Was there anything special in there? or was that -- I'm not referring to FX trading, I'm talking about the FX fees, non-trading. They were just very good this quarter. Was that just really good client activity in the quarter or was there something else going on?

Tayfun Tuzun -- Chief Financial Officer

There's nothing unique on in that line item in terms of any quarterly one-time impacts. It's just client activity.

Mario Mendonca -- TD Securities -- Analyst

Okay. Thank you.

Operator

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

Scott Chan -- Canaccord Genuity -- Analyst

Good morning. So on the capital markets, that obviously is very solid in the quarter. Could you offer us any kind of guidance that you see over the next few quarters in terms of DCM, ECM or M&A advisory activity?

Pat Cronin -- Chief Risk Officer

Its great, well, thanks for the question. Obviously, very satisfied with the quarter. Great to see the investments that we've made and the portfolio adjustments really start to pay off. I think it also is a demonstration of the diversification of our platform, both in terms of product markets and clients.

As we look forward, I think we'll continue to see the benefit of the investments we made across the platform, particularly in the U.S. We've seen the strong results we've had year-to-date. We expect those to continue on as we go. Our pipelines remain very strong. M&A in particular has been building and growing. We have very strong quarter and equities and a leveraged finance. I think as M&A activity continuing to pick up over the balance of the year, we'll continue to see strong revenue growth there.

I think we'll also benefit as we look forward to the portfolio choices we've made in terms of what we've been doing driving our cost structure down. You saw our efficiency ratio is less than 55% year-to-date, and I think we'll continue on that benefit. And then I think we'll also continue to have a benefit in the strong credit environment that we've experienced, and that's going to continue on. So all in all, strong performance we expect coming into the balance of the year.

Scott Chan -- Canaccord Genuity -- Analyst

Great, and maybe lastly for Darryl, just on the capital side. Got to ask is the set one ratio at 13% pro forma higher with the asset management sales? So assuming that RC does lift restrictions later this year. At this point today, what are your kind of capital priorities, including M&A? Thanks.

Darryl White -- Chief Executive Officer

Yeah, thanks for the question. Short story unchanged. The first use of our capital is for our clients and devoting it to their benefit and their growth. I think we've shown that in the past and expanding environments where we've been able to grow and take that white space that we talked about earlier in the call. We've been able to do that at increasingly profitable returns, so that would be priority one.

And then you're into the tree on deploying it to dividend increases versus buybacks. I'm not going to get into the speculative game of when that will be possible. That will be to the regulator's decision. But when it is, you would expect us to be active there, absent, being active on the M&A front. And on the M&A front, I'll go back to framing, I think I've given before. I talk about this in terms of tools and discipline. As far as tools are concerned, without question, we've got lots of them. We've got excess capital. We've got operating momentum. We've got a great team. And we've got good muscle, I would say in terms of the success that we've had and the acquisitions we've made. So tools are great.

But they don't come at the expense of discipline and discipline for us as strategic, it's cultural and it's financial. And I think I've said before, you have to be careful not to swing at every pitch. There are lots of pitches, but lots of them are in the dirt. So if you see us active, it will be because we landed something that meets both the discipline and the tools. And if you see us not active, it'll be because we haven't found something that goes over the discipline bar. So I'll leave it at that.

Scott Chan -- Canaccord Genuity -- Analyst

Yeah, I like that analogy. Thanks a lot.

Operator

Thank you. That concludes the question-and-answer session. I would now like to turn the meeting back over to Mr. White.

Darryl White -- Chief Executive Officer

Okay, thank you all of you for your questions. Let me wrap up quickly here with four key summary themes. Number one, our results for the first half of the year as I said earlier are clearly very strong with our ROE, our EPS growth, and our operating leverage all above our midterm targets. Number two, we're not stopping there. We are moving the bar significantly higher on our expenses and our efficiency commitments and we have strategies in place to do more. Number three, our credit quality will remain a differentiator for us, as it has for decades. And number four, our purpose driven strategy is delivering consistent performance, the strong momentum and the clear potential across all our businesses. The advantaged business mix is ready for more, especially with an accelerating economic backdrop that we're driving into. So I'm highly confident that as the economies reopen, we're going to continue to accelerate through the next year and beyond. Thank you all for participating in this morning's call. We look forward to speaking to you again in August.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Christine Viau -- Head of Investor Relations

Darryl White -- Chief Executive Officer

Tayfun Tuzun -- Chief Financial Officer

Pat Cronin -- Chief Risk Officer

David R. Casper -- U.S. Chief Executive Officer

Ernie Johannson -- Group Head, North American Personal and Business Banking

Ebrahim Poonawala -- Bank of America -- Analyst

Paul Holden -- CIBC -- Analyst

Meny Grauman -- Scotiabank -- Analyst

Doug Young -- Desjardins Capital -- Analyst

Gabriel Dechaine -- National Bank Financial -- Analyst

Lemar Persaud -- Cormark Securities -- Analyst

Mario Mendonca -- TD Securities -- Analyst

Scott Chan -- Canaccord Genuity -- Analyst

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