Bank of Montreal (NYSE:BMO) Q4 2023 Earnings Call Transcript

Bank of Montreal (NYSE:BMO) Q4 2023 Earnings Call Transcript December 1, 2023

Bank of Montreal reports earnings inline with expectations. Reported EPS is $2.07 EPS, expectations were $2.07.

Operator: Good morning, and welcome to BMO Financial Group’s Q4 2023 Earnings Release and Conference Call for December 1, 2023. Your host for today is Christine Viau. Please go ahead.

Christine Viau: Thank you, and good morning. We will begin the call with remarks from Darryl White, BMO’s CEO, followed by Tayfun Tuzun, our Chief Financial Officer, and Piyush Agrawal, our Chief Risk Officer. Also present to take questions today are Ernie Johannson, Head of BMO North American Personal and Business Banking; Nadim Hirji, Head of BMO Commercial Banking; Alan Tannenbaum, and Dan Barclay are representing BMO Capital Markets; Deland Kamanga from BMO Wealth Management; and Darrel Hackett, BMO US CEO. 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. I will now turn the call over to Darryl.

Darryl White: Thank you, Christine, and good morning, everyone. Our results this year reflect the fundamental strength and diversification of our businesses, driven by record revenue and ongoing momentum in Canadian personal and commercial banking and the contribution of the Bank of the West, we delivered good performance in a challenging economic backdrop with net income of $8.7 billion in fiscal 2023. Adjusted earnings per share were $2.81 for the fourth quarter and $11.73 for the year. Pre-provisioned pre-tax earnings grew 5% for the year, driven by 16% growth in revenue, reflecting both organic growth across our businesses and the benefit of acquisitions. Revenue was up 10% in Canadian P&C, 43% in US P&C, and 5% in each of wealth management and capital markets.

We continue to have a strong capital position with a CET1 ratio of 12.5%. For the year, return on equity was 12.3% and return on tangible common equity was 15.8%. And this morning, we announced a dividend increase of $0.04 to $1.51 per share, a 6% increase over last year. This year, we made significant progress against our consistent strategic priorities to continue to grow and strengthen our bank, and enhance customer service and invest in communities. We closed and integrated strategic acquisitions, advanced our digital-first capabilities, and increased our focus on delivering inter-connected one-client experiences. With the successful conversion of Bank of the West, which I’ll expand upon in a moment, BMO is the most integrated North-South bank on the continent.

For our customers joining from the Bank of the West, this means an upgrade to the strength and breadth of their bank, with access to new capabilities, products, and services to help them make financial progress. When we enter a new market, we commit to making progress for our clients and communities. Our BMO EMpower 2.0 plan is set to deliver more than $40 billion to support under-represented communities and organizations across our US footprint, including loans to minority-owned small businesses, community reinvestment in real estate, affordable housing, and neighborhood revitalization. We also completed the acquisition of AIR MILES with nearly 10 million active collectors who will benefit from the stability and rejuvenation of the most recognized loyalty program in Canada.

Since we closed in June, we’ve added already 50 new partners and introduced robust new features, including an updated travel booking platform and a mobile app leading to four consecutive months of new collector growth and increased engagement. Our relentless focus on putting customers first and supporting their financial goals with innovative digital experiences and expert guidance continues to be recognized, including being ranked first by J.D. Power in both its 2023 Canada Retail Banking and Online Banking Customer Satisfaction studies with the highest scores among Canada’s largest banks. This type of recognition, combined with the continued strong customer loyalty reinforces the trust our customers place in us, and it’s translating into results with strong customer acquisition and deeper relationships.

We’ve had consistent performance in our flagship Canadian P&C business with PPPT growth of 10% this year, reflecting peer-leading revenue growth in our retail bank, strong market share in our premier commercial bank, and an ongoing focus on efficiency improvement. In addition, our One Client strategy has momentum, and we’ve set a strong foundation to grow and deepen relationships between personal, wealth, commercial and capital markets clients through our integrated approach and product offering. The conversion of the Bank of the West in September was highly successful. We welcomed 2 million new customers, converted 2.7 million accounts and over 300 systems, and re-enrolled over 90% of active digital users within the first week. We completed the rebranding of over 500 branches now serving all customers with one unified BMO brand.

This was a large and complex acquisition, requiring exceptional planning and integration across the BMO and Bank of the West organizations, evidence of our ongoing excellence in execution, a key competency at BMO. Our record of improved profitability and efficiency, combined with strong organic growth and successful acquisitions, set the foundation for this expansion. Now we are at the starting line to realize the full benefit of our expanded scale, leverage our position as a top 10 US bank, backed by the strength of BMO’s full $1.3 trillion balance sheet, a key differentiator relative to our US regional competitors. We’re executing against a proven playbook and we’re uniquely positioned to gain share in our new home markets. And momentum is already building with PPPT growth in our US segment of 27% this year to $4.1 billion, doubling from five years ago.

Bank of the West customer activity is accelerating as we expected. For example, we’ve seen a 3x increase in checking accounts sold digitally on our platform, and we’ve completed thousands of trades and transactions between Bank of the West clients and our capital markets businesses. With cost and revenue synergies identified and well underway, we are poised to continue to deliver strong performance. 2023 saw growing challenges in the global economy, impacted by weaker financial conditions and compounded by the escalation of geopolitical crises. While the rate of inflation has fallen from four-decade highs, further progress towards normalization could be impeded by persistent inflation and weaker global demand due to higher costs of borrowing.

The potential for an economic downturn remains both in Canada and the US with higher risks north of the border. At BMO, we have a clear plan to respond to the environmental shift, which we began to anticipate much earlier this year. We’ve remained vigilant in controlling what we can control. As Tayfun will comment on shortly, we’re exceeding our planned cost synergies at the Bank of the West and now expect run rate synergies to be over $800 million, almost 20% higher than our initial estimate of $670 million, and largely in our run rate by Q2 of 2024. On the revenue side, a high-impact marketing campaign is in place across our expanded footprint, driving strong brand-aided awareness, leading to thousands of new appointments with our customers, and supporting revenue synergies in line with our expectations.

Additionally, actions we announced and started last quarter on efficiency initiatives to optimize legacy BMO workforce, real estate, technology and procurement are expected to result in additional run rate savings of $400 million, and be largely in our run rate by the end of 2024. We continue to focus on strengthening return on capital through our disciplined dynamic capital allocation decisions, including the winding down of our indirect auto portfolio and our focus on one-client experiences to deepen customer relationships. Combining these actions with our long-term track record of superior risk management and the full run rate of our acquisitions should differentiate BMO from peers in fiscal 2024 and beyond, driving positive operating leverage and setting us up to compete from a position of strength regardless of the environment.

Our consistent performance enables us to put our purpose into action to boldly grow the good in business and life and to support a sustainable and inclusive future. We continue to advance our ambition to be our client’s lead partner in the transition to a net zero world through industry-leading sustainable finance and energy transition solutions. This year, we ranked first in the sustainability-linked loan market and launched one of the first sustainability-linked deposit offerings in North America. As I look ahead, we are focused on a consistent set of strategic priorities and are squarely focused on disciplined execution to deliver sustained performance against our medium-term financial objectives, including delivering positive operating leverage.

This year, we’ve added total — pardon me, this year, we’ve added a return on tangible common equity of over 18%, as we believe it to be an important measure of our performance across our capital structure. As the bank best positioned to serve more clients across the Canadian and US economies, we’re confident in the power of our integrated North American franchise and our strategy to help clients make real financial progress. BMO will continue to leverage opportunities to drive progress across all our home markets. I want to thank our employees, our customers and shareholders for their commitment to BMO. And I will now turn it over to Tayfun.

Tayfun Tuzun: Thank you, Darryl. Good morning and thank you for joining us. My comments will start on Slide 10. Before moving to the quarter’s results, I would like to update a few of the financial metrics on the acquisition of Bank of the West. With the benefit of almost 10 months of operating a larger-scale integrated US business and a very successful conversion now behind us, we are in a better position to assess the full strategic and financial value of the acquisition and give you a refreshed financial outlook. First, we are pleased with the core performance of Bank of the West, despite a more difficult US banking environment than we anticipated coming into this year. As a result, we are confirming our 7% net EPS accretion, reflecting our updated outlook for the performance of our underlying business and the contribution from the Bank of the West.

Second, as Darryl mentioned, with the benefit of directly assessing the resource allocations across the combined franchise, we now expect run-rate cost synergies of over $800 million by fiscal 2025, significantly higher than the previous $670 million estimate. The increase is driven primarily by a reassessment of technology and operations resource needs. We expect to achieve almost all of these run rate benefits by February 2024. We have realized $220 million of these benefits in 2023, with an additional $550 million benefit to be realized in 2024. Integration costs are expected to be approximately $1.9 billion, reflecting higher expenses associated with the later-than-originally anticipated closing date, higher contract termination costs and pre-conversion expenses, which were instrumental in executing one of the most successful integrations in the industry.

We remain confident in delivering revenue synergies of $450 million to $550 million, although timing may be one or two quarters later than initially planned, given a more muted near-term environment for US banks. Customer acquisition has remained robust even during the pre-conversion period, and we are encouraged by early wins. Similarly, we’ve maintained strong salesforce retention during this time. We are processing significantly more transactions through our existing digital platforms, and we see meaningful opportunities to improve both sales productivity and client penetration in each of our business groups, supported by stronger connectivity between businesses to serve the full needs of our customers. We are confident in achieving an incremental $2 billion in run rate pre-provision pre-tax earnings by the first half of 2026, resulting from the acquisition.

Turning to Slide 12. Fourth quarter reported EPS was $2.06 and net income was $1.6 billion. Adjusting items are shown on Slide 40 and include acquisition-related impacts for integration costs and amortization of intangibles, which decreased net income by $433 million and $88 million, respectively. The decrease in reported net income reflected these items and the gain on fair value management actions related to the Bank of the West acquisition in the prior year. The remainder of my comments will focus on adjusted results. Adjusted EPS was $2.81, down from $3.04 last year, and net income was $2.15 billion, up 1%. Revenue increased 19% with good organic growth and the benefit of acquisitions. Expenses increased 26%, primarily due to the impact from acquisitions.

PPPT of $3.2 billion was up 9%, driven by strong growth in our Canadian P&C and capital markets businesses and the addition of Bank of the West. Total PCL was $446 million, including a $38 million provision for performing loans, compared with a total provision of $226 million in the prior year. Piyush will speak to these in his remarks. Moving to the balance sheet on Slide 13. Average loan growth was 18% year-over-year, driven by Bank of the West and good growth in Canadian P&C and capital markets. Sequentially, period-end loans were up 4% or 1% on a constant currency basis. Business and government loans were up 2% with growth across all operating groups. Consumer loans were up 1%, driven by mortgage growth in both Canadian and US P&C, partially offset by declining indirect auto balances.

Average customer deposits increased 20% year-over-year due to the Bank of the West, and higher balances in Canadian P&C and capital markets. Sequentially, period-end deposits were up 4% or 2% on a constant currency basis, with growth in Canadian and US P&C and capital markets, offset by lower balances in wealth management. Turning to Slide 14. On an ex trading basis, net interest income was up 16% from the prior year, and net interest margin was up 2 basis points, driven by Bank of the West and higher margins in Canadian P&C, largely offset by higher low-yielding asset balances for liquidity purposes in corporate and continued pressure from deposit migration. Net interest margin was down 2 basis points from last quarter, driven by higher margins in US P&C, more than offset by lower net interest income in corporate services.

In Canadian P&C, NIM was unchanged from last quarter as a favorable balance sheet mix was offset by lower deposit margins due to the continued migration to term deposits. In the US P&C, NIM was up 7 basis points, of which approximately 4 basis points was due to a one-time net interest income benefit offset in corporate services, with the remaining increase reflecting favorable balance sheet mix partially offset by continued strong deposit pricing competition. On a full-year basis, our overall net interest margin was up 8 basis points from 2022, driven by the impact of the Bank of the West and the benefit of higher longer-term yields, partially offset by pressures from higher deposit costs and low-yielding asset balances for liquidity purposes.

Moving to Slide 15. Based on the decision that we made early in the year to curb incremental expenses, our year-over-year underlying expense growth has continued to come down throughout the year. We also have announced additional expense management actions last quarter that will further improve our operational efficiency. This quarter included a $51 million charge related to the consolidation of BMO real estate that will reduce expenses in future periods. As a reminder, we expect to achieve run-rate expense savings of $400 million from all these actions by early 2025 in addition to the Bank of the West cost synergies. The full-year expense growth of 24% primarily reflected the impact of acquisitions and higher business development costs, as well as the flow-through from last year’s investments in sales force and technology.

On a normalized constant currency basis, underlying expenses increased 4%, excluding the impact of acquisitions, revenue-based compensation, and upfront charges to accelerate operational efficiencies. As we look ahead to 2024, we are confident in our ability to deliver positive operating leverage starting the second quarter after we reached the first anniversary of the closing of the Bank of the West acquisition, as well as for the full fiscal year. This excludes the impact of the estimated FDIC assessment charge of approximately $300 million which we expect to recognize in the first quarter as an adjusting item. Turning to Slide 16. Our capital position continues to strengthen with a common equity ratio of 12.5%, up 20 basis points from the prior quarter.

Internal capital generation and shares issued under the dividend reinvestment plan were partially offset by acquisition integration costs in the current quarter. We expect the combined impact of regulatory changes in the first quarter of 2024 and the FDIC charge to be approximately 25 basis points. Moving to the operating groups and starting on Slide 17. Canadian P&C delivered a record net income of $966 million, up 5% year-over-year. PPPT of $1.6 billion increased 13%, partially offset by higher provisions for credit losses. Revenue of $2.9 billion was up 13%, driven by 10% growth in net interest income, reflecting both strong balance growth and higher margins. Non-interest revenue increased 20%, primarily due to higher card fees as well as the acquisition of AIR MILES.

Expenses were up 12%, reflecting the inclusion of AIR MILES and higher employee-related expenses. Loans were up 6% year-over-year with growth across both mortgages and commercial loans, and increased 2% from the prior quarter. Deposits were up 12% year-over-year and 3% sequentially across both retail and commercial businesses. We have strong momentum on both sides of the balance sheet, and while we expect some continued moderation in balance growth, we are well-positioned for continued market share gains in our businesses. Moving to US P&C on Slide 18. My comments here will speak to the US dollar performance. Net income was $543 million, up 11%, and PPPT was up 18%, mainly due to the contribution from Bank of the West. Sequentially, revenue was relatively stable with an increase in net interest income, mostly offset by a decrease in non-interest revenue.

Expenses declined 3% quarter-over-quarter, reflecting lower severance and technology costs. Loans were up 48% from the prior year, driven by Bank of the West, and were flat quarter-over-quarter on an average basis and up 2% on a period-end basis, reflecting increases in both mortgages and business and government loans. Deposits increased 43% year-over-year and were flat sequentially on an average basis and up 1% on a period-end basis. While the banking environment remains muted, we are well-positioned to capture growth opportunities across our expanded footprint and outperform the market as conditions improve. Moving to Slide 19. BMO Wealth Management net income was $263 million, down from $298 million last year. Wealth and asset management net income of $213 million decreased 3% from the prior year.

Contributions from the Bank of the West and growth in new client assets were more than offset by lower net interest income due to migration to term deposits and higher expenses. Insurance net income was $50 million, down from $77 million in the prior year, driven by unfavorable market movements compared with the prior year. Expenses were up 12%, mainly due to the impact of Bank of the West and higher employee-related and technology costs. Moving to Slide 20. BMO Capital Markets had a strong quarter with a net income of $492 million, up 36% year-over-year, and PPPT of $620 million, up 39%. Revenue in global markets was up 12%, with strong equities trading activity and investment in corporate banking was up 29% on higher M&A and underwriting activity.

Expenses were up 9%, driven by higher performance-based compensation, technology and transaction-based costs. Turning now to Slide 21. Corporate Services net loss was $311 million compared with $159 million in the prior quarter and $104 million in the prior year. Results reflect higher expenses, including the charge related to BMO real estate in the current quarter as well as lower revenues. Looking ahead to 2024, we are encouraged by moderating inflationary pressures, lowering the need to increase policy rates in the US and Canada. With a slower economic growth outlook, we expect loan growth in Canada to continue to moderate and US loan growth, which has lagged Canada in 2023, to gradually improve during the year. We expect the combined loan growth to be in the low to mid-single-digit range, along with similar growth rates for deposits.

Our NIM is forecasted to be relatively stable as the benefit of reinvestments at higher rates offsets continued deposit margin pressure. On the expense side, we remain confident that we will achieve positive operating leverage with low single-digit growth, reflecting the additional quarters related to the Bank of the West and AIR MILES acquisitions. In summary, in 2023, we delivered solid financial results, while we successfully closed and converted the largest bank acquisition in Canadian history. We remained proactive in addressing challenges that largely related to the cyclical nature of our business and expect the actions that we have taken this year and our continued relative strength in Canada to support strong performance in 2024 with the added benefit of a larger scale operation in the US which is a significant differentiation for BMO.

I will now turn it over to Piyush.

Piyush Agrawal: Thank you, Tayfun, and good morning, everyone. We had good risk performance this fiscal year, despite a challenging year marked by economic and geopolitical headwind, supported by the strong risk management discipline across the bank. Starting on Slide 23. For the fiscal year, the total provision for credit losses was $2.2 billion, or 35 basis points, including the initial provision for Bank of the West in the second quarter. Adjusting for this one-time charge, total provisions for credit losses were $1.5 billion, or 24 basis points. During the year, we added close to $1 billion to the performing allowance, which included the $705 million initial allowance for Bank of the West and a performing build driven by portfolio credit migration and reflecting a forward view of the changing risk environment.

Impaired provisions for the year were $1.2 billion, or 19 basis points, compared with 10 basis points in 2022, consistent with the expected trend to more normal loss rates. Turning now to the current quarter on Slide 24. Total provision for credit losses was $446 million, or 27 basis points, compared with the provision of $492 million last quarter. Impaired provisions for the quarter were $408 million, or 25 basis points, up 4 basis points from the prior quarter, reflecting the lagged transmission of monetary policy tightening into the economy. Moving to Slide 25. The provision for credit losses on performing loans was $38 million, primarily reflecting portfolio credit migration, largely offset by an improvement in the forward view of our macroeconomic outlook as well as a lower probability of a hard landing scenario.

Given the credit profile of our current portfolio and our forecast for impaired losses, we are comfortable that our performing loan allowances provide adequate provisioning against loan losses with about 3 times coverage on trailing four quarters impaired losses. Turning to Slide 26. Impaired formations were $1.8 billion and gross impaired loans increased to $4 billion with the largest increase coming from the business services, manufacturing and commercial real estate sectors. While gross impaired loans increased from very low levels in recent quarters, the GIL ratio of 59 basis points has returned as expected to pre-pandemic levels. Despite the increase in formations in business and government lending in this quarter, we did not see large losses coming from them, about 12% rate of losses on formations reflecting either a collateralized position or the strong underlying credit structures.

Given investor interest, we have included additional information on the Canadian mortgage portfolio on Slide 28. Portfolio credit quality remains strong with low delinquency rates of 15 basis points, average FICO scores of 789, and average LTV of 55%, all of which provide significant risk mitigation. With that said, we do expect that higher interest rates will impact borrowers when they refinance or renew. We continue to actively manage and stress test this portfolio, and given that the majority of our customers have multiproduct relationships, our analytical insights indicate customers have the capacity to absorb higher payments. In fact, about $16.3 billion of mortgages renewed in 2023 at higher interest rates, and these customers are demonstrating strong payment performance despite payment increases of just over 20% on average.

A larger portion of our portfolio renews in 2026, by which time we expect interest rates will have moderated and customers will have had time to prepare. We are proactively reaching out to customers, particularly our variable rate customers. We’ve had a positive customer response to the outreach, resulting in a reduction in mortgages in negative amortization from prior quarter. As we look to the upcoming fiscal year, we have experienced the credit normalization that we were expecting. Given our current outlook for higher for longer rates and the lagged impact from these interest rate increases, we expect impaired loss rates to trend somewhat higher from Q4 levels in the range of low 30 basis points, still below our long-term average and then improve as the rate start to come down and the economy begins to strengthen further.

Given our strong risk management capabilities, the quality of our portfolio and prudent allowance coverage, we remain well-positioned to manage current and emerging risks. With that, I will now turn the call back to the operator for the Q&A portion of this call.

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Q&A Session

Operator: Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman: Hi. Good morning. Piyush, I just wanted to follow up with something that you concluded with in terms of talking about the guidance on, I believe, impaired PCL ratios, and you highlighted that you still think that you will be able to be below historic averages. I’m just wondering what gives you confidence in that ability to be below the historic average even next year or this year actually?

Piyush Agrawal: Sure. Thanks, Meny. So gross impaired loans obviously, were up this quarter, up from a historically low level of impairment from the last few, just coming out of the benign cycle in the pandemic. I think what we’ve done is we’ve gone ahead and looked at all of our portfolios and seen where there is particular stress and already accounted for those in the impaired book. So as I look at that pace of impairment, while there might be an increased formations and that’s why you see this increased formation, we think that the amount of impairment coming from those as evidenced this quarter and our history over the last 30 years, we think that we are well adequately provisioned to be in that range of low 30s. Again, there is an implicit assumption that the economy is improving as you’re seeing and interest rates will continue at the end of ’24 to take — we start seeing cuts in interest rates by the end of ’24.

So the economy has been holding up very well. You’re seeing positive revisions to economic forecasts, and I think these will play out to our benefit as we go into ’24.

Meny Grauman: And just a follow-up. In terms of sort of a higher for longer rate scenario, I mean you talked about the new disclosure, which is helpful in terms of the capacity of customers of borrowers to absorb higher payments. But I’m curious how you think about the knock-on effects of that so they can absorb higher payments, but certainly, there must be sort of a cost there to the economy and maybe to other parts of the credit book, especially on the unsecured side. So I’m just curious how you think about the knock-on effects of higher for longer if the mortgage book can hold on, but what are the implications beyond that?

Piyush Agrawal: Sure, Meny. So we are beginning to see that, in fact, in the unsecured book, which is why you’re seeing delinquencies go up. But I think it’s also important that customers are also adjusting to the new reality, and that’s evident across behavior patterns. Credit card spend has come down by about 4% faster in the discretionary spend areas. And — but yet, balances are still high. So we’ve talked about higher balances of about 30% coming out of the pandemic. Those balances are getting used up but haven’t gone down to zero. There’s still about 12% higher than pre-pandemic. You saw the statistic on savings still very rich at about 5% savings rate. And there’s also an increased amount going into investments. So there are buffer mechanisms as customers are adjusting and this higher increased rate of delinquencies really is around what we expect for pre-pandemic as well as what we would want for our risk appetite.

So we are getting compensated for the underwriting we are doing on the revenue line to compensate for some of the increases. So it’s evident there are weaknesses, but that weaknesses is compared to what you’ve seen as benign quarters of the last 7 or 8 coming out of the pandemic.

Meny Grauman: Thank you.

Operator: Thank you. Our following question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Good morning. Maybe, I guess, sticking on credit. Just Piyush listening to you around the trajectory of the economy over the next year, it sounds like you’re baking in some version of a soft landing where things get a bit worse and start getting better by the end of the year. And so if you give sensitivity around like what happens, the level of visibility around that guidance when you look at sort of cash flow within your commercial customer base, both in Canada and the US, like what gives you confidence and insights into that, if you can? And maybe if Nadim can chime in on the health of the commercial customer base. And maybe tied to that, you talked about that you’ve reserved for areas of stress. In my view, we should see areas of stress widen beyond like office CRE or lower income FICO consumer into other categories as businesses go bankrupt, et cetera, One, do you share that view?

And if so, what are the other areas of stress that you’re watching right now?

Piyush Agrawal: Sure. So there’s a couple of questions, Ebrahim. Let me try and take one of those at a time. Your first one is just around provisioning and how what we think about going forward. So look, we’ve built about $1 billion of provision in performing allowance for the year. And as you know, IFRS 9, it can be counterintuitive, but it’s countercyclical. So over the year, we thought about what the forward forecast was going to be, including a higher weighting of a hard landing or a severe recession, which, as you’ve seen over the last few quarters, the world has adapted and macroeconomic consensus has gotten better. If you don’t think it’s better at least, it’s less negative. And so both of those are helpful. And so as we go into ’24, we’ve built those provisions to give us a coverage of about 54 basis points, which at this point of time is 50% higher than pre-pandemic.

And a second metric just to put that in perspective is, from a trailing four-quarter losses, even at 25 basis points that I just talked about, we are at about three times coverage that would tell you it’s very prudent or conservative depending on how you take it. So we’ve thought about that going into ’24. The last one I’ll make and then I pass it on to Nadim is, by now, we have reviewed every customer once or twice by the impact of that interest rates on the behavior pattern. And so you’re seeing that in the risk rating migration, you’re seeing that in the flow to our impaired loans and we’ve factored all of those in even through our deep dives. In fact, previous quarter when we took the big build, it was around sectors of stress like commercial real estate, that the models did not pick up that’s already factored in, and you can see that in our performance in Q4.

So Nadim, I don’t know what you would add on commercial lending, what you’re seeing.

Nadim Hirji: Okay. Thank you. What I would say is very similar to what we talked about in last quarter. We are seeing stress, of course, in the portfolio. US, the stress was earlier than in Canada. We are seeing Canada having more stress than we did a couple of quarters ago. But everything is absolutely in line with what we had expected. And when you talk to customers, they’re looking at their P&L, they’re managing their expenses, they are looking at labor rates, which have stabilized, in some cases have come down, shipping rates have come down, logistics is down. So they’re seeing some margin relief there. So overall, when I look at the portfolio, we feel very comfortable that our customer base is solid. We do think there is going to be some more formations, which we have forecasted already, but the momentum is good.