Bank of Montreal 1998 Annual Report Download - page 38

BANK OF MONTREAL GROUP OF COMPANIES
EXPENSE-TO-REVENUE RATIO OF 66.5%
Our expense-to-revenue ratio increased 210 basis points in 1998 to 66.5% as revenue growth
of 1.4% was more than offset by expense growth of 4.7%. Our internal target is to improve
productivity by reducing the expense-to-revenue ratio by 2% per annum. The reduction was
not achieved in 1998 as a number of the drivers of reduced revenues had a relatively low level
of associated expenses which resulted in a deterioration in the expense-to-revenue ratio. These
included revenues from impaired loans and equities and bonds of lesser-developed countries
,
U.S. card revenues and the lower contribution from Bancomer. In addition, the decline in
trading revenues was not matched by a similar decline in expenses. The reasons for the lower
revenue growth are outlined on page 26, with expense growth discussed in more detail below.
Expense Growth at Lowest Level in Nine Years
Our secondary measure of productivity is year-over-year expense growth. Expense growth in
1998 was 4.7% compared to 16.8% last year. Contributing to expense growth this year were
increased business volumes resulting from a strong North American economy, increased
spending on strategic development and the foreign exchange impact of a lower Canadian dollar.
Strategic development spending in the year was directed to the initiatives highlighted on the
left of this page. The increase in the Canadian/U.S. dollar exchange rate impacted U.S.-based
expenses reported in 1998 resulting in additional expenses of $69 million. Expense growth
was offset by the impact of a $75 million charge recorded in the fourth quarter of 1997 for
accelerated depreciation related to technology changes and costs to improve the efficiency of
our credit process, as well as a decline in revenue-driven compensation.
CONTRIBUTION TO EXPENSE GROWTH (%)
For the year ended October 31 1998 1997
Strategic development spending 2.1 4.9
Foreign exchange impact 1.5 0.2
Charge (1.6) 1.3
Revenue-driven compensation (0.8) 5.3
Ongoing business volume growth, partially offset by productivity improvements 3.5 5.1
Total expense growth 4.7 16.8
If we examine expense growth in traditional non-interest expense categories (see table below),
expense growth was lower in 1998 than 1997 in all categories. Salaries and employee benefits
increased 1.6% in 1998, compared to 14.7% in 1997, due largely to reduced variable compen-
sation in 1998. Premises and equipment expenses increased 6.2%, reflecting additional costs
arising from our various expansion efforts, including mbanx and call centres. Communications
expense increased 7.8% in 1998, reflecting the continued push into alternate delivery channels
such as telebanking. The increase in other expenses of 11.3%, compared to 15.6% in 1997,
was largely related to business development spending.
NON-INTEREST EXPENSE (year-over-year % increase)
For the year ended October 31 1998 1997 1996 1995 1994
Salary and employee benefits 1.6 14.7 10.6 11.3 7.9
Premises and equipment 6.2 26.0 6.9 13.3 3.4
Communications 7.8 12.4 5.6 15.5 9.1
Other expenses 11.3 15.6 4.4 17.3 27.7
Total non-interest expense 4.7 16.8 8.3 13.1 10.5
Note: For more information see Table 8 on page 59.
The expense-to-revenue ratio in 1997 was 64.4%, with revenue growth of 15.1% offset by
expense growth of 16.8%. Expense growth in 1997 reflected the benefits of productivity improve-
ments which were more than offset by strategic development spending and the $75 million charge.
PRODUCTIVITY
STRATEGY:
To achieve operational efficiency
through a combination of effec-
tive cost management and strong
revenue growth.
MEASURE:
Expense-to-revenue ratio, calcu-
lated as non-interest expense
divided by total revenues, is our
primary measure of productivity.
The ratio is calculated on a
taxable equivalent basis.
STRATEGIC DEVELOPMENT
SPENDING
Strategic development spend-
ing of $300 million in 1998
was directed to the following
initiatives.
mbanx – expansion of virtual
banking unit
Telephone banking – expansion
of delivery channel services
Cebra – development of inte-
grated digital commerce solutions
Pathways-Financial Growth
CentresTM – development of
educational delivery channels
See operating group sections
for additional detail regarding
these initiatives.
9897969594
EXPENSE-TO-
REVENUE RATIO (%)
66.5
64.4
63.4
64.3
62.0
9897969594
NON-INTEREST EXPENSE
AND ANNUAL GROWTH
4.7
16.8
8.3
13.1
10.5
4,833
4,613
3,949
3,646
3,223
Non-interest expense ($ millions)
Annual expense growth (%)
OUTLOOK
Expense growth in 1998 of 4.7% was lower than in 1997 because of reduced spending on strategic
development and lower business volume expense growth. Management expects to manage expense
growth in relation to revenue growth in order to achieve productivity improvements.
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TM Pathways-Financial Growth Centre is a trade mark of Bank of Montreal.