Bank of Montreal Earnings Call NUGGETS: Payout Target Range, The DRIP

On Tuesday, Bank of Montreal (NYSE:BMO) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Payout Target Range

Peter Routledge – National Bank Financial: Bill I guess question for you maybe you could just go into a little bit about the Board’s thinking behind lowering the target payout range that means the cost of organic growth in terms of retained earnings as going up?

William Downe – President and CEO, BMO Financial Group: Well I’ll comment on where our thought process was I am not sure I followed what you just said. But I am sure we’ll have a chance to catch up later on that one. The thinking was really very straight forward around the payout target range. The businesses have very clear opportunities for reinvestment organic investment in the businesses and we were outside — our range was outside the norm within the industry and as we see growth opportunities, particularly, as we’ve gotten through the integration process in the U.S. with a large acquisition we made 18 months ago, and we felt this was a more appropriate range for the future. I also think as I said in my comments, it’s a reflection of capital management in the post Basel III environment.

Peter Routledge – National Bank Financial: I guess that’s what I was getting at with my — the way I framed the question, which is with likely rising minimum Basel III common equity ratio over time, as obviously rolls in the domestic system the important buffer and that leverage ratio is due to come in I guess two years now. Does that mean you just for every dollar of earnings you just have to hold back a little more to manage through that that headwind?

William Downe – President and CEO, BMO Financial Group: No, I don’t think so necessarily. If you reflect on where we were in at the end of the fourth quarter of 2010, we had a very clear line of sight on the B3 ratio on a pro forma basis and we acknowledge that it was going to be significantly reduced when we closed M&I. It was in the mid eight plus range prior to the announcement of the transaction went down below 7%. The capital generation capacity of the bank has really been demonstrated by the fact that we’ve rebuilt it and we’re able to report a number of 8.3% this quarter. So I think we have a lot of confidence in the earnings generation ability and support of capital at this point and I think relative to all of the guidance we have given around capital, we brought the ratio back to a level that we had indicated was our intent. I think that above and beyond that though it is important to maintain strong capital. It’s also at a time like this that there really are opportunities to build the client base across the businesses and we’ve made a number of really good acquisitions in wealth management, as well as the acquisitions we’ve made in personal banking and commercial banking. We have an opportunity to invest in those businesses now and we think return to shareholders of that investment strategy is going to be viewed very positively. So we just wanted that have that in the balance. The earnings to support the maintenance of capital and then building of the investment plan.

Peter Routledge – National Bank Financial: So property came into play, property in your footprint you certainly not have to pass on due to capital you have ample capital to consider, that’s fair?

William Downe – President and CEO, BMO Financial Group: I think that’s right.

The DRIP

Gabriel Dechaine – Credit Suisse: Another capital question here. The DRIP it was responsible for 3.7 million shares or so issued this quarter. Given your capital position I just don’t see the point of maintaining the DRIP, what’s your view on that and maybe given some of your comments about the capital of find growth hoping for a buyback is a little bit far-fetched at this stage? I have got a follow-up on the mortgage business for Frank.

Thomas E. Flynn – EVP and CFO, BMO Financial Group: I’ll take the first part of the question. On the DRIP, I think the answer is, we agree with you and we do plan on discontinuing the DRIP. We have a statement to that effect in the capital section of the body of the press release. So, the discount on the DRIP is discontinued and that drives the majority of the capital that is issued under the DRIP. We think it’s appropriate to maintain the DRIP for shareholders without the discount because some shareholders like to have the ability to continue to invest in the stock in an easy way. So, as a mechanic we think it’s appropriate to keep that open. On the buyback side, again I think our thinking is aligned with yours and we would consider that at this point to be premature. We are very comfortable with the capital position and it clearly strengthened nicely in the quarter, so we feel good with where we sit. With that, I will hand it over to Frank for response on the mortgage part of the question.

Gabriel Dechaine – Credit Suisse: I haven’t asked it yet, so I’ll go ahead. Just very healthy mortgage growth and it looks positive, but given all the headlines we are hearing about consumer indebtedness, I just want to know what your thinking is about pushing for mortgage growth? Is this something that you’re just able to take advantage of some peers that are pulling back in the marketplace or should we expect that your market share numbers will be going up over the next few quarters? Just in terms of the origination mix, how much of it’s insured versus uninsured and of the uninsured portion what would be the average LTV, I don’t know if you can have that at the top of your head, but I would like a follow-up at some point?

Frank Techar – President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: Okay Gabriel. Thanks, maybe we’d follow-up on the nature of the business, but we’re really pleased with the mortgage growth. I think it’s pretty simple. I mean we had a great spring campaign and we saw those mortgages booked in Q3. We saw some growth in Q2 and the way the market typically works is, Q3 is the strongest quarter overall and we did really well on the back of our 5 year fixed rate, 25 year AM product promotion in the marketplace that Bill already mentioned, and our objective was to promote a product that was in our customers best interest, pay less interest, payout the mortgage faster. We benefited because we now have customers who are going to be with us for a while and we saw a significant increase in new customers coming to BMO through the campaign as well. So, putting a fine point on it, our market share went up 21 basis points in Q3, so we did more business than some of our competitors. It’s obviously an important product to us, as it is to others and we just think we had a really strong quarter. Our expectation is, we’ll see a little softening in Q4. Q4 is not typically a strong mortgage quarter, but we’re going to compete really strongly going forward.

Gabriel Dechaine – Credit Suisse: But you haven’t really, it’s more what you are doing, not an instance of competitors pulling back?

Frank Techar – President and CEO, Personal and Commercial Banking Canada, BMO Bank of Montreal: That’s what I think I mean I think there is a question about has there been a little bit of an acceleration of activity in the marketplace. That wouldn’t be our view. Our view would be, we haven’t seen any of that, and we think our strong growth is as a result of the tactics that we have employed.