Bank of Montreal 1998 Annual Report Download - page 30

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22
BANK OF MONTREAL GROUP OF COMPANIES
MANAGING TO MAXIMIZE SHAREHOLDER VALUE
Last year we discussed our adoption of Net Economic Profit (NEP) as a new measure to focus
business units on the objective of enhancing overall shareholder value.
NEP is net income available to common shareholders adjusted for a number of items to
more accurately reflect the economic or cash contribution by a business unit on an ongoing
basis.
Adjustments include those related to accounting for business acquisitions (goodwill),
loan losses on an “expected” loss basis, and the exclusion of any non-recurring and unusual
items. A charge for the cost of common equity capital is then deducted to arrive at NEP.
The rate applied to capital to determine the charge is calculated as the average yield on 10-year
Government of Canada Bonds, plus a 5% premium for the risk of investing in Bank of
Montreal
common shares. This charge is labelled cost of equity in the table on this page.
The benefit of this measure is that it focuses not only on cash income contribution but
also on the equity resources used to produce that income.
NET ECONOMIC PROFIT ($ millions)
For the year ended October 31 1998 1997 1996 1995 1994
Cash net income 1,307 1,293 1,159 975 790
Less:
After-tax impact of non-recurring items –– (14) (34) (46)
Charge for capital 843 806 802 799 659
Net economic profit 464 487 371 210 177
For the above, expected losses are assumed to equal the reported loan loss provision each year.
CHARGE FOR CAPITAL
For the year ended October 31 1998 1997 1996 1995 1994
Average common shareholders’ equity ($ millions) 8,128 7,165 6,457 5,937 5,088
Cost of equity (%) 10.4 11.3 12.4 13.5 13.0
843 806 802 799 659
Net economic profit decreased by $23 million in 1998 because the rate of growth in our
common shareholders’ equity exceeded the net income growth rate in 1998. The impact of
the increase in equity was partially offset by the reduced cost of equity from 11.3% to 10.4%
in 1998.
SHAREHOLDER VALUE
9897969594
NET ECONOMIC PROFIT
($ millions)
464
487
371
210
177