Bank of Montreal 1997 Annual Report Download - page 31

Bank of Montreal 180th Annual Report 1997 25
Business Volume Growth Drove Increase in Net Interest Income
Business volume growth drove the increase in net interest income. Our total average assets increased 24.3% in 1997 to
$197 billion following an increase of 9.9% in 1996 as noted in the table below. The increase in assets was achieved on a diver-
sified basis, with
growth in
most lines of business and
across all geographic regions.
The greatest volume growth
was achieved in Global
Treasury and Investment
and Corporate Banking. The
asset growth in these areas
was primarily due to an
increase in trading volumes
and reverse repos†
. The
asset growth in Personal
and Commercial Financial Services of 6.3% was principally driven by the 12.8% increase in residential mortgages.
Asset growth in Electronic Financial Services is largely the result of our growing mbanx
TM
division. The asset growth in
Harris Regional Banking reflects an increase in commercial loans, instalment loans, mortgages and agency securities.
The decrease in the Support areas is largely attributable to the $2.0 billion securitization of credit card receivables. The
transaction is described in more detail in note 16 to the financial statements on page 81. Further detail on the increase
in net interest income is shown in Tables 6 and 7 on pages 55 and 56.
Change in Net Interest Income
Average Assets ($ billions) Net Interest Income ($ millions)
For the year ended October 31 1997 1996 % increase 1997 1996 % increase
Personal and Commercial Financial Services 59 55 6.3 2,119 2,079 1.9
Global Treasury Group 69 45 54.6 747 533 40.1
Electronic Financial Services 97 25.4 583 503 16.0
Harris Regional Banking 26 23 12.3 705 624 13.0
Investment and Corporate Banking 36 26 39.2 100 52 92.9
Support (2) 2(68) (80)
Total Bank 197 158 24.3 4,186 3,711 12.8
Total Bank margin (basis points) 213 234 (21)
Note: For more information see Table 5 on page 54.
Lower Margins Resulted from an Increased Mix of Low-Margin Businesses and Lower Interest Rates
Average net interest margin is the ratio of net interest
income to average assets. Our total interest margin declined
21 basis points from 1996 to 1997, of which 8 basis points
reflect the gross-up of assets for unrealized gains on deriva-
tives in accordance with accounting requirements. 1996
data was not restated. The factors contributing to the
remaining net 13 basis point decline in interest margin
are discussed below.
Increased earnings from equities and bonds of lesser
developed countries contributed positively to our interest
margin ($48 million). In addition, cash collections on
impaired loans increased ($86 million) due to the improved
North American economy, and the contribution from our
equity investment in Bancomer increased by $32 million.
The positive effects on interest margin were more than
offset by factors which contributed to the overall decline
in net interest margin in 1997. First, we experienced high
growth in lower-yielding liquid assets, particularly in
Investment and Corporate Banking and Global Treasury, as
noted in the table above. Although this mix change reduced
average net interest margin, growth of these products in
Global Treasury and Investment and Corporate Banking
contributed positively to revenue. Second, as interest rates
declined in 1997, the rates earned on loans were lowered;
however, the costs on several deposit products did not
fall to the same extent due to the existence of price floors.
The effect of this compression was most pronounced in
our retail business.
The decline of 13 basis points from 1995 to 1996
(see Table 5 on page 54) is largely due to the same reasons
outlined above. While we benefited from earnings from
our investment in Bancomer ($50 million), we also
experienced a high rate of growth in our lower-margin
assets. Rate compression due to the declining interest rate
environment was another contributing factor to the
overall decline.
™ Trade mark of Bank of Montreal
†
Defined in the Glossary on page 90