Bank of Montreal 1998 Annual Report Download - page 21

BANK OF MONTREAL GROUP OF COMPANIES
FINANCIAL GOALS AND MEASURES
Our financial goal is to maximize long-term shareholder
value by achieving consistently superior financial perfor-
mance while maintaining strong financial condition.
Our financial performance objective is to consistently
achieve higher than average earnings growth and return
on common shareholders’ equity with an appropriate divi-
dend payout and yield.
Our financial condition objective is to maintain strong
asset quality, capital base and liquidity level in comparison
to our peers, while complying with applicable regulatory
requirements.
We will achieve the above financial goals through com-
petent, dedicated people, our ongoing technology invest-
ments, application of advanced management sciences and
the diversification of our lines of business.
PERFORMANCE
AT A GLANCE
BANK OF MONTREAL – PERFORMANCE AT A GLANCE
To assess our financial performance and condition, we
continuously monitor a set of ten financial measures,
which balance profitability and prudential concerns. The
graphs and statistics on the following pages assess our
performance based on these “primary” measures in com-
parison to the average for the six largest chartered banks
in Canada (the Canadian peer group) and 22 of the largest
banks in North America (the North American peer group).
Top tier means being in the top two of the Canadian peer
group and in the top six of the North American peer group.
Definitions of the ten financial measures are provided in
the Management Analysis of Operations section of the
1998 Annual Report beginning on page 20.
BANK OF MONTREAL GROUP OF COMPANIES
Shareholder Value
■Our five-year annualized ROI was 23.3% for 1998
versus 26.1% for 1997, down 2.8%.
■Share price increased 3.7% from 1997.
■Dividends paid per share increased $0.16 in 1998
and $0.19 in 1997.
FINANCIAL PERFORMANCE
9897969594
23.3
26.1
22.2
23.1
14.3
9897969594
0.9
11.9
22.2
13.8
16.5
9897969594
15.2
17.1
17.0
15.4
14.9
9897969594
1.4
15.1
9.9
9.0
6.9
9897969594
66.5
64.4
63.4
64.3
62.0
97
280
293
542
186
157
187
238
649
229
64
98
Earnings Growth
■Our earnings per share increased 0.9% from 1997.
■
Earnings growth reflected continued business volume
growth and strong asset quality,partially offset by the
effects of unusual market conditions in the fourth
quarter.Thes e abnormal markets drove net trading
losses in the quarter and contributed to the decline
in other institutional businesses and a lower
contribution from Grupo Financiero Bancomer.
Profitability
■Our ROE for 1998 was 15.2% compared to 17.1%
in 1997.
■
ROE in 1998 exceeded the economic performance
threshold for the ninth consecutive year.
Revenue Growth
■Our revenue growth in 1998 was 1.4% compared to
15.1% in 1997.
■Revenue growth was due to strong business volume
growth, partially offset by lower contributions from
several of our institutional businesses , Bancomer,
and foregone revenue due to the sale of the U.S.credit
card business to Partners First, as well as the associ-
ated start-up losses in this venture.
Productivity
■Our expense-to-revenue ratio in 1998 was 66.5%
compared to 64.4% for 1997, with expense growth
of 4.7% compared to 16.8% in 1997.
■
Expense growth reflected strategic development
spend
ing, foreign exchange rate impact on U.S.-based
expenses and business volume growth, net of
productivity improvements and offset in part by the
impact of a 1997 fourth quarter charge of $75 million.
Operating Group Review
■Total Bank net income growth of 3.5% reflected
continued business volume growth and strong asset
quality,partially offset by the effe cts of unusual
market conditions in the fourth quarter.
■
PCFS, Harris and EFS combined net income
increased 6.4%.
■
I&CB and P&RMG combined net income
decreased 25.8%.
FIVE-YEAR RETURN ON
COMMON SHAREHOLDERS’
INVESTMENT (%)
More information can be found on
page 21.
RETURN ON COMMON
SHAREHOLDERS’ EQUITY (%)
MINIMUM ECONOMIC
THRESHOLD
(12% 1995–98;
13% IN 1994)
More information can be found on
page 25.
REVENUE GROWTH (%)
More information can be found on
page 26.
EXPENSE - TO - REVENUE
RATIO (%)
More information can be found on
page 30.
NET INCOME BY
OPERATING GROUP
($ millions)
PCFS I&CB
EFS P&RMG
HARRIS
More information can be
found on page 31.
FULLY DILUTED EARNINGS
PER SHARE GROWTH (%)
OBJECTIVE (MINIMUM OF 10%)
More information can be found on
page 23.
18
BANK OF MONTREAL GROUP OF COMPANIES
FINANCIAL CONDITION
Enterprise-wide Risk Management
■Our strong risk management culture drives a prudent
and professional approach to risk-taking.
■We manage risk with a view to balancing the risk-
reward relationship.
Credit Risk Management
■Our asset quality remained high.
■The provision for credit losses as a percentage of
average loans and acceptances for 1998 was 0.09%
compared to 0.23% for 1997.
■Loan portfolios continued to be well diversified.
■Gross impaired loans and acceptances as a percentage
of equity and allowance for credit losses was 6.7%
compared to 7.6% at the end of1997.
■
The decrease in 1998 was due to reversals and
recoveries as well as a low incidence of problem loans.
Liquidity Risk Management
■Our liquidity ratio decreased to 28.4% as at
October 31,1998.
■Deposits were well-diversified by customer,type,
currency and geography.
■Liquid assets included $41.4 billion of pledged assets
at October 31,1998.
Capital Management
■
Our Tier 1 Ratio was 7.26% at October 31,1998 com-
pared to 6.80% at October 31,1997.
■The increase was due to retained earnings growth
and preferred shares issued during the year,as well as
securitizations and other balance sheet initiatives.
Credit Rating
■Credit rating composite remained unchanged.
9897969594
0.09
0.23
0.23
0.30
0.63
9897969594
6.7
7.6
15.7
20.5
29.9
9897969594
63,195
74,034
60,796
53,336
41,194
28.4
35.6
35.8
35.1
29.8
9897969594
7.26
6.80
6.71
7.02
7.20
PROVISION FOR CREDIT
LOSSES AS A % OF AVERAGE
LOANS AND ACCEPTANCES
GROSS IMPAIRED LOANS AND
ACCEPTANCES AS A % OF
EQUITY AND ALLOWANCE FOR
CREDIT LOSSES
More information can be found on
page 44.
CASH RESOURCES
($ millions)
SECURITIES
CASH AND SECURITIES-TO-
TOTAL ASSETS (%)
More information can be found on
page 47.
TIER 1 RATIO (%)
TIER 1 REGULATORY
REQUIREMENT (4%)
More information can be found on
page 49.
FOUR PRINCIPAL RISKS
More information can be found on
page 43.
COMPOSITE CREDIT RATING
The credit rating represents a composite
of Moody’s and Standard & Poor’s
debt ratings.
AA-
■Credit Risk
■Market Risk
■Liquidity Risk
■Operational Risk
19
RELATIVE
FINANCIAL PERFORMANCE
FIVE-YEAR RETURN ON COMMON
SHAREHOLDERS’ INVESTMENT
(%)
■
Our performance was top tier relative to the
Canadian peer group average of 21.8%,
and above the North American peer group
average of 20.7%.
Canadian Peer Group: Top Tier
North American Peer Group: Above Average
FULLY DILUTED EARNINGS
PER SHARE GROWTH
(%)
■
Our EPS growth of 0.9% in 1998 was
above the Canadian and North American
peer group averages of negative 10.6%
and 0.8% respectively.
Canadian Peer Group: Above Average
North American Peer Group: Above Average
RETURN ON COMMON
SHAREHOLDERS’ EQUITY
(%)
■
Our ROE in 1998 was above the Canadian
peer group average of 14.2% and equal to
the North American peer group average
of 15.2%.
Canadian Peer Group: Above Average
North American Peer Group: Average
REVENUE GROWTH
(%)
■
Our performance in 1998 was below
the Canadian and North American peer
group averages of 7.9% and 21.5%
respectively.
Canadian Peer Group: Below Average
North American Peer Group: Below Average
EXPENSE
-
TO
-
REVENUE RATIO
(%)
■
Our performance in 1998 was equal to the
Canadian peer group average of 66.5%
and below the North American peer group
average of 63.1%.
Canadian Peer Group: Average
North American Peer Group: Below Average
Bank of Montreal
Canadian Peer Group Average
North American Peer Group Average
Top tier means being in the top two of the
Canadian peer group, and in the top six of the
North American peer group.
9897969594
23.3
26.1
22.2
23.1
14.3
9897969594
0.9
11.9
22.2
13.8
16.5
9897969594
15.2
17.1
17.0
15.4
14.9
9897969594
1.4
15.1
9.9
9.0
6.9
9897969594
66.5
64.4
63.4
64.3
62.0
NORTH AMERICAN
PEER GROUP COMPARISON
1998 19 97 (a) Five-Year Average
Bank of 22 Bank of 22 Bank of 22
Montreal Bank Montreal Bank Montreal Bank
Performance Rank Average*Performance Rank Average*Perf ormance Rank Average*
Primary Financial Performance Measures (%)
Five-year return on
common shareholders’
investment (ROI) 23.3 420.7 26.1 130.4 23.3(e) 420.7(e)
Fully diluted EPS growth (b) 0.9 40.8(c) 11.9 114.2 13.0 110.0
Return on average
common shareholders’
equity (ROE) 15.2 415.2(c) 17.1 416.6 15.9 116.0
Revenue growth (b) 1.4 121.5 15.1 413.5 8.5 111.8
Expense-to-revenue ratio 66.5 163.1 64.4 161.2 64.1 162.4
Primary Financial Condition Measures (%)
Provision for credit
losses as a % of
average loans
and acceptances 0.09 20.81(c) 0.23 20.61 0.30 20.73
Gross impaired loans
and acceptances
as a % of equity
and allowance for
credit losses 6.66 15.73 7.65 16.79 6.66(f) 15.73(f)
Tier 1 ratio (d) 6.95 17.71 6.35 17.59 6.95(f) 17.71(f)
Cash and securities-
to-total assets 28.4 134.5 35.6 229.8 28.4(f) 134.5(f)
Credit rating AA -
2A+ AA
-
2A+ AA
- (f) 2A+(f)
*The selection of the 22 largest banks is based on the size of their 1997 common shareholders’ equity:
Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of
Canada, The Toronto-Dominion Bank, Banc One Corp., BankAmerica Corporation,Bankers Trust New
York Corporation, The Bank of New York Company, Inc., The Chase Manhattan Corporation, Citicorp
N.A., First Chicago NBD Corporation, First Union Corporation, Fleet Financial Group, J.P. Morgan
& Co. Inc., Keycorp, U.S. Bancorp, Norwest Corporation, PNC Bank Corp., SunTrust Banks, Inc.,
Wachovia Corporation, Wells Fargo & Company.
Note: Performance for the U.S. banks was based on the twelve-month period ended September 30
to approximate the Canadian bank fiscal year which ended on October 31.
(a) Reclassified to conform with 1998 presentation.
(b)
Ratios shown are the actual reported ratios with the exception of fully diluted EPS growth for
National Bank of Canada which was restated as per note (c). Non-recurring items are excluded for
ranking purposes.
(c) The reported numbers for National Bank of Canada were restated to reflect the addition to the
general allowance for credit losses as a charge to current year income instead of a direct charge to
retained earnings.
(d) U.S. basis
(e) Reflects five-year ROI for the period ending October 31, 1998.
(f) Condition ratios are as at October 31, 1998.
2Top Tie r 4Abo ve Average/Average 1Below Average
1998 COMPARISON
Our ranking in the North American peer group in 1998 was top tier in two of our ten financial
measures, down from three in 1997, due to a lower ranking in our cash and se curities-to-total
assets measure in 1998. We were above average/average in three of our measures, improved
from two in 1997, as improvements were made in five-year ROI and fully diluted EPS growth
rankings, whereas our revenue growth ranking was lower in 1998.
We were below average in five measures, namely revenue growth, expense-to-revenue ratio,
gross impaired loans and acceptances as a percentage of equity and allowance for credit losses,
Tier 1 ratio and cash and securities-to-total assets. Our below average revenue growth and
expense-to-revenue ratios in 1998 reflected the unusual market conditions in the fourth quarter
on several of our institutional businesses and Bancomer, as well as the impact on revenues
of the sale of our U.S.cre ditcard busine ss. These factors partially offset continued business
volume growth. In addition, because of the relatively low level of expenses associated with
these lower revenues, the expense-to-revenue ratio was negatively impacted. Although t hree
of our financial condition measures were below the North American peer group average we
consider that our asset quality, liquidity level and capital base remain strong.
FIVE-YEAR AVERAGE
Our ranking relative to the North American peer group on a five-year average basis was top
tier in two of our ten financial measures, unchanged from 1997, as the improved ranking of our
provision for credit losses as a percentage of average loans an d acceptances measure was
offset by the lower ranking of our cash and securities-to-tot al assets measure. We were above
average/average in respect of the five-year ROI, which is a higher ranking than in 1997.
We were below average in seven measures, namely fully diluted EPS growth, ROE, revenue
growth, expense-to-revenue ratio, gross impaired loans and acceptances as a percentage of
equity and allowance for credit losses, Tier 1 ratio and cash and securities-to-total assets. Our
lower ranking in the first two of these measures reflected stronger industry per formance in
1994 and 1995. Our lower ranking for revenue growth and the expense-to-revenue ratio was due
to stronger industry results in 1996 and 1998. Our ranking in the last three of these measures,
which all relate to financial condition, is discussed under 1998 comparison.
Financial Condition Measures
Performance
Where to find more information
Peer Group Information
Relative Performance
Financial Performance Measures
Section title – sections organized
by primary financial measure
Highlights of results