Bank of Montreal (BMO) Earnings

Management highlights

### Overall Core Financial Performance - Delivered adjusted EPS of $3.96, up 22% year-over-year, and pre-provisioned pre-tax earnings (PPPT) of $4.5 billion, up 13% year-over-year. Adjusted ROE reached 14%, up 200 basis points year-over-year, with 1.6% positive operating leverage and an improved efficiency ratio of 54.9%. - Total provisions for credit losses (PCL) fell to $722 million, the lowest impaired provision level in 10 quarters, reflecting proactive portfolio risk management. The CET1 capital ratio remains strong at 13%, with expected 50 basis point of additional CET1 accretion from closing three announced portfolio divestitures. ### Strategic Operational Progress - **Portfolio Optimization**: Completed balance sheet optimization in the U.S., exiting low-return non-core businesses including 138 non-core U.S. branches, the transportation and vendor finance businesses, and Moneris Canada. All three exited businesses failed to meet long-term ROE targets. - **AI and Productivity Innovation**: Launched new AI-powered tools: *Smart Decision* for BMO Insurance delivers underwriting decisions in 10 seconds (vs. the industry average 28+ business days), and the Lumi frontline chatbot increased new employee productivity by 17% (currently being scaled to support client mortgage renewal conversations). - **Client and Growth Momentum**: All four operating segments delivered record PPPT this quarter. Canadian P&C saw 33% YoY mutual fund sales growth, a 65% increase in weekly enrollments for the newly launched BMO Blue Rewards, and 20% YoY higher new commercial client acquisition. U.S. banking saw 2% YoY core customer deposit growth (3% in California) and 17% YoY higher mass affluence investment flows. Capital markets announced an agreement to acquire the capital markets business of Australia's Euros Hartley's Group to expand global integrated metals and mining capabilities. ### Capital Management - Announced a new normal course issuer bid for up to 25 million additional shares (≈3.6% of outstanding shares) starting September 2026, pending regulatory approval.

Guidance

- Management reaffirmed confidence in achieving its medium-term target of a sustainable 15% adjusted ROE by the end of fiscal 2027, driven by consistent execution of investor day strategic priorities. - Full-year 2026 guidance for mid-single-digit core expense growth and positive full-year operating leverage remains on track. - Management expects Q3 2026 level of impaired provisions for credit losses to hold steady in Q4 2026, with no change to full-year 2026 PCL guidance. - Core net interest margin (NIM) for Canadian P&C and U.S. banking is expected to remain resilient; modest quarterly NIM fluctuation is possible from prudent liquidity management and divestiture-related balance sheet mix changes, supported by ongoing deposit mix improvement and disciplined pricing. - The excess drag on NIM from higher-than-normal low-yielding liquid assets held in the corporate segment is expected to largely normalize after Q4 2026, once portfolio divestitures are completed. - 2027 credit guidance will be updated at the end of Q4 2026, per standard annual guidance practice.

Segment performance

1. Canadian Personal and Business Banking (Canadian P&C): Net income increased 15% year-over-year, with pre-provisioned pre-tax earnings (PPPT) up 7% year-over-year. Total revenue grew 6%, driven by net interest income (NII) growth from margin expansion, 7% year-over-year operating deposit growth, and loan growth. Non-interest revenue (NIR) rose 13% on higher mutual fund distribution, transaction payment services (TPS), and card revenue. Expenses grew 4%, with an improved efficiency ratio of 42.8% and 1.6% positive operating leverage. It contributes ~38% of total adjusted net income. 2. U.S. Banking: Net income increased 9% year-over-year, with ROE of 9.8% (up 90 basis points YoY) and ROTCE of 17.3%. PPPT reached $972 million, up 7% year-over-year. Total revenue grew 5% on higher NII from margin expansion and 4% sequential commercial loan growth (first positive YoY annual growth post-optimization). NIR grew 4%, led by record 15% YoY TPS fee growth and higher investment management fees. Expenses grew 3%, with positive operating leverage of 1.7%. It contributes ~33% of total adjusted net income. 3. Wealth Management: Net income increased 22% year-over-year, driven by 24% YoY record wealth and asset management revenue from stronger markets and 19% YoY growth in both long-term mutual fund sales and ETF flows. Insurance revenue declined due to a large non-strategic insurance portfolio gain in the prior year. Expenses grew 22% on higher employee and revenue-related costs. It contributes ~15% of total adjusted net income. 4. BMO Capital Markets: Net income increased 45% year-over-year, with record PPPT of $903 million (up 39% YoY) and a 16%+ ROE this quarter. Total revenue grew 20%: global markets revenue rose 27% on strong equity trading activity, while investment and corporate banking revenue increased 10% on strong debt underwriting activity. Expenses grew 9% on higher employee and technology investments. It contributes ~14% of total adjusted net income. 5. Corporate Services: Reported a net loss of $178 million, wider than the prior year's $123 million loss, driven by lower revenues (from holding excess low-yielding liquidity for pending dispositions) and higher targeted growth investments.

Risks & headwinds

- Elevated geopolitical uncertainty and evolving Canada-U.S. trade policy, including recently announced new tariffs, creates downside risk for Canadian economic growth, employment, and business investment. Direct exposure to trade-disrupted sectors remains less than 1% of the total loan book, with most exposure to investment-grade borrowers, so it is not expected to create a broad-based credit event at this time. - Canadian labor markets remain softer than historical norms, and energy-driven inflation creates ongoing near-term macroeconomic volatility. - Intense deposit competition and faster loan growth relative to deposit growth creates ongoing modest headwinds for NIM, offset by ongoing efforts to grow lower-cost core operating deposits. - Capital markets revenue is inherently volatile across market cycles, though increased business diversification has improved the sustainability of earnings.

Analyst Q&A

• Q: What are the ranked key drivers for U.S. banking to increase ROE from 9.8% to 12%, and has the ranking changed since Investor Day? /

  A: Management reaffirms the original 1/3, 1/3, 1/3 framework: 1/3 from client balance growth, 1/3 from fee income growth, and 1/3 from efficiencies and PCL normalization. All three drivers are showing positive momentum so far, with 4% sequential commercial loan growth, 15% YoY TPS fee growth, and 90 basis points of YoY efficiency improvement. The ranking remains unchanged, and management continues to invest in talent and technology to support long-term growth while hitting ROE targets.

• Q: How will the excess capital freed up by the lowered Domestic Stability Buffer (DSB) be deployed, and will it shift BMO into higher margin, higher risk lending? /

  A: There is no change to BMO's strategy or risk appetite. BMO will continue to operate with a CET1 ratio between 12.5% and 13%, unchanged from prior targets. Strong organic capital generation first supports targeted, high-quality client loan growth in both Canada and the U.S., then funds ongoing growth investments, with remaining capital returned to shareholders via dividends and share buybacks. Management will not chase higher risk on the yield curve.

• Q: Is BMO Capital Markets' current >16% ROE sustainable, and is long-term earnings capacity higher than historical levels? /

  A: Yes, long-term earnings capacity is higher than historical levels. The strong quarterly results reflect both constructive current market conditions and multi-year investments in talent, technology, and broader product diversification across equity derivatives, commodities, metals and mining M&A, and debt underwriting. This diversification makes strong earnings more sustainable through market cycles, and BMO's core expertise aligns with upcoming infrastructure and AI investment trends.

• Q: Have valuation dynamics for U.S. regional bank M&A changed BMO's outlook on U.S. acquisitions? /

  A: BMO's M&A posture is unchanged. Organic growth is BMO's number one priority, and any U.S. M&A will only be pursued if it meets two strict conditions: it advances BMO's strategy of increasing U.S. regional density and scale, and it does not delay BMO's 15% ROE target timeline. This creates a narrow set of acceptable opportunities, so material U.S. M&A is not a near-term priority.

• Q: How does BMO plan to manage U.S. NIM amid accelerating loan growth that outpaces deposit growth? /

  A: BMO's primary focus remains hitting ROE targets rather than holding NIM flat at all costs. BMO has already delivered 20 basis points of YoY NIM improvement via prior deposit optimization work. Current efforts to grow core low-cost operating deposits across three strategic priority areas (mass affluent, bank-at-work consumer commercial partnerships, and financial center productivity) are expected to offset NIM headwinds from faster loan growth.