Bank of Montreal 1997 Annual Report Download - page 29

Bank of Montreal 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 eighth 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 of Canada bonds, 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 economic
performance threshold.
Measure:
Return on common shareholders’
equity (ROE) is calculated as net
income, less preferred dividends, as
a percentage of average common
shareholders’ equity. Common
shareholders’ equity is comprised
of common share capital and
retained earnings.
Profitability
9796959493
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 reporting of financial per-
formance and financial condition are similar in Canada and the United
States. One important difference, however, is that in the United States,
business acquisitions can be structured to use the “pooling” method,
whereas in Canada the purchase method is generally required. In
most cases, the pooling method results in higher earnings than would
be reported using the purchase method.
Specifically, with the purchase method, acquired assets and liabilities
are accounted for at their fair value. The difference between the fair
value of the net assets acquired and the purchase price is recorded as
goodwill and expensed on an annual basis over the estimated life of
the assets. With the pooling method, acquired assets and liabilities are
accounted for at their book value. Subsequent years’ earnings are not
reduced by goodwill amortization.
When we compare our results to those of our North American peer group, it is more relevant to analyze cash earnings per share and cash return on
equity. These cash measures are adjusted for the after-tax impact of non-cash goodwill and other valuation intangibles which are treated differently
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 restated to conform with current year’s methodology.
Note: For more information see Table 3 on page 52.
9796959493
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
9796959493
15.7
18.2
16.4
19.8 20.0
Cash Return on Common
Shareholders’ Equity
(%)
†
Defined in the Glossary on page 90