Bank of Montreal 1997 Annual Report Download - page 26

Management
Analysis
of Operations
This section of the Annual Report provides management’s discussion and
analysis of the financial condition of Bank of Montreal and our financial perfor-
mance for the years ended October 31,1997 and 1996. The analysis focuses
on our financial strategies and results and is organized around ten primary
measures used to monitor our overall financial performance and condition.
The analysis is based on our consolidated financial statements which are
presented later in the Annual Report beginning on page 66. All dollar amounts
are in Canadian dollars unless otherwise stated.
Index
Financial Performance
Shareholder Value 21
Earnings Growth 22
Profitability 23
Revenue Growth 24
Productivity 28
Operating Group Review 30
Personal and Commercial
Financial Services 31
Global Treasury Group 33
Electronic Financial Services 35
Harris Regional Banking 37
Investment and
Corporate Banking 39
Financial Condition
Risk Management Overview 41
Asset Quality Management 45
Capital Management 48
Liquidity Management 50
Economic Outlook 51
Supplemental Information 52
Bank of Mo ntreal 180th Annual Report 1997 23
Return on Shareholders’ Equity Reaches 17.1%
Return on equity was 17.1%, slightly above the 17.0%
achieved in 1996.This is the eig hth consecutive year that
our ROE†has exceeded 14%.
To ensure that we are achieving an appropriate return
given the risk of our activities, we manage our ROE against
a minimum standard and an objective.The minimum
standard is an economic performance threshold rate,which
reflects the rate of return available for a long-term “risk-free”
i
nvestment, plus an appropriate risk premium.Currently,
this rate is set by the Board of Directors at the beginning of
each fiscal year, using as a basis the projected average yield
on 10-year Government ofCanada b onds,plus 5% for
the risk of investing in Bank of Montreal common shares.
Our performance relative to the economic performance
threshold is presented in the table below.Secondly, our
objective over the long term is to exceed a 14–15% ROE.
ROE has exceeded both our economic performance threshold and our objective each
year for the past eight years.
Cash return on shareholders’equity, which eliminates the after-tax effect of non-cash
goodwill and other valuation intangibles on ROE, is described below.Cash ROE improved
to 20.0% in 1997 from 19.8% in 1996.
Strategy:
To improve earnings performance
through responsible capital
management; diversification by
line of business, by geographic
market and by customer segment;
and a commitment to improving
profitability of those lines of
business below the econ omic
performance threshold.
Measure:
Return on common shareholders’
equity (ROE) is calculated as net
income, less preferre d dividends, as
a percentage of average common
shareholders’ equity. Common
shareholders’ equity is comprised
of common share capital and
retained earnings.
Profitability
97969 59493
14.1 15.4
14.9
17.0 17.1
Return on Common
Shareholders’ Equity
(%)
Objective (14–15%)
Actual
Using Cash Basis Reporting Would Result in Higher Earnings and ROE
Accounting principles which underpin the repo rting of financial per-
formance and financial condition are similar in Canada and the United
States. One important difference, ho wever, is that in the United States,
business acquisitions can be structured t o use the “pooling” method,
whereas in Canada the purchase method is generally requir ed. In
most cases, the pooling method r esults in higher earnings than would
be reported using the pur chase method.
Specifically, with the purchase method, acquired asse ts and liabilities
are accounted for at their fair value. The diffe rence betw een the fair
value of the net assets acquired and the pu rchase price is recorded as
goodwill and expensed o n an annual basis over the estimated life of
the assets. With the pooling metho d, acquired assets and liabilities are
accounted for at their bo ok value. Subsequent years’ earnings are not
reduced by good will amortization.
When we compare our results to t hose of our North American pe er group, it is more relevant to analyz e cash earnings per share and cash return on
equity. These cash measures are adjusted for the af ter-tax impact of non-cash goodwill and other valuation intangibles which are treated dif ferently
in Canada and the United States.
Return on Common Shareholders’ Equity
For the year ended October 31 1997 1996 1995 1994 1993
Return on common shareholders’ equity
(%) 17.1 17.0 15.4 14.9 14.1
Economic performance threshold (%) (a) 12.0 12.0 12.0 13.0 12.5
(a) Previous years have been r estated to conform with curr ent year’s methodology.
Note: For more information se e Table 3 on page 52.
97969 59493
2.73
3.67
3.15
4.44
4.97
2.59
3.45
3.01
4.21
4.69
Basic Earnings Per Share
($)
Basic EPS as reported
Cash EPS
97969 59493
15.7
18.2
16.4
19.8 20.0
Cash Return on Common
Shareholders’ Equity
(%)
†
Defined in the Glossary o n page 90
Bank of Mo ntreal 180th Annual Report 199750
Management Strategy
To maintain sufficient cash resources to meet customer
requirements.
Process Overview
Liquidity management is necessary to ensure that we can
generate or obtain cash at a reasonable price in order to
satisfy our broad range of customer cash needs as well as
our own operating needs. We actively measure and forecast
liquidity requirements based on historical, current and
projected cash flow trends.We also run sensitivity analyses
to determine the impact of withdrawal propensity factors
and commitment drawdown factors, as well as changing
business environments, on funding requirements. These
analyses enable us to monitor changes in liquidity and
react in a timely and appropriate manner.
We have three primary deposit sources of funds that we
use to provide liquidity: retail deposits, wholesale deposits,
and the capital markets.
Our large base of deposits by individuals provides a
strong source of funding
in both Canadian and
U.S.dollar markets. These
deposits, along with our
strong capital base, reduce
any reliance on other more
volatiles ourcesof funds.
The deposit portfolio char-
acteristics in 1997 continued
to be broadly diversified by
customer,type and cur rency.
Our wholesale funding activities are performed by
professional teams situated in several key financial markets
worldwide, and are subject to stringent liability diversi-
fication policies, the objectives of which are to:
•maintain a funding capability in all major markets;
•maintain a diversified deposit base so as to avoid depen-
dency on any one type or group of depositors;
•ensure that our long-term funding and stability needs are
a priority over short-term profit opportunities; and
•satisfy shareholders’and regul ators’requirements for
prudent financial management.
To complement day-to-day cash management activities,
we access capital markets for medium- to long-term funds
as required and when market opportunities permit. This
activity generally involves funds which are two to ten years
in term.
We continue to play an active role in the capital markets
not only to enhance diversification but to take advantage of
opportunities for the most cost-efficient source of funding.
Demand
Notice
Term
Deposits by Type (%)
Balances as at October 31, 1997
21.1
68.5
10.4
International
Domestic
Deposits by Currency (%)
Balances as at October 31, 1997
49.6
50.4
Businesses/Governments
Banks
Individuals
Deposits by Customer (%)
Balances as at October 31, 1997
40.2
21.7
38.1
Liquidity Management
Results
Total liquid assets as at October 31, 1997 increased by
$13.2 billion or 21.8% from 1996.The liquidity ratio, as
defined above, decreased from 35.8% in 1996 to 35.6% in
1997. The increase in total assets was attributable to
growth in most loan categories, with the exception of credit
cards due to the credit card securitization discussed on
page 48. The decrease in the
liquidity ratio was partly
the result of opportunities
for high-quality non-liquid
assets which were taken
throughout the year.
Total liquid assets in 1996 increased by $7.5 billion or
14% from 1995. Most ofthe increas e was in securities.
Measure:
The liquidity ratio is our primary
measure for liquidity coverage
and represents the ratio of cash,
securities and deposits wi th
other banks (liquid assets) to
total assets.
Liquidity ($ millions except as noted)
As at October 31 1997 1996 1995 1994 1993
Cash resources 2,189 2,742 897 840 1,843
Securities 41,789 36,609 33,019 26,535 23,328
Deposits with other banks 30,056 21,445 19,420 13,819 10,238
Total liquid assets 74,034 60,796 53,336 41,194 35,409
Total liquid assets-
to-total assets
(%) 35.6 35.8 35.1 29.8 30.3
Total deposits 144,212 119,262 109,605 98,241 87,859
Note: For more information se e Tables 17 and 18 on page 63.
35,409
30.3
53,336
35.1
41,194
29.8
60,796
35.8
74,034
35.6
Securities
Cash Resources & Deposits with Other Banks
Liquid Assets-to-Total Assets
($ millions)
9796959493
Cash and Securities-to-Total Assets
(%)
Strategy
Measure – identification and
definition of primary measures
Discussion of results
Supporting measures
or other data
Strategy
Process overview
Supporting
information
or data
Results and
accomplishments
Primary measure
definition
Financial Performance
Financial Condition