Bank of Montreal 1999 Annual Report Download - page 34

Profitability
28 Bank of Montreal Group of Companies 1999 Annual Report
Measure:
Return on common share-
holders’ equity (ROE) is
calculated as net income, less
preferred dividends, as a per-
centage of average common
shareholders’ equity. Common
shareholders’ equity is com-
prised of common share capital
and retained earnings.
Objective:
Our 1999 objective was to
achieve annual ROE of 15
– 17%.
Ten Years of ROE above 14%
Return on equity ( ROE† ) was 14.1%, compared to 15.2% last year. Before the one-time
charges, o
ur ROE was 15.4%.
To achieve an appropriate return in relation to the various risks associated with our
business activities, we manage ROE against our objective. At 14.1%, ROE in 1999 was
0.9% below our objective, as the increase in earnings, which was negatively impacted
by the one-time charges, was outpaced by increases in common shareholders’ equity.
Refer to page 26 for more information on earnings growth and to page 35 for details
on our capital management process.
Return on Common Shareholders’ Equity (%)
For the year ended October 31 1999 1998 1997 1996 1995
Return on common shareholders’ equity 14.1 15.2 17.1 17.0 15.4
Objective 15.0 15.0 14.0 14.0 14.0
1998 Compared to 1997
In 1998 our ROE was 15.2%, a decline from 17.1% in 1997, reflecting lower earnings
growth in 1998 compared to 1997 relative to an increased level of capital.
Cash Basis Reporting
Cash return on shareholders’ equity and earnings per share calculated on a cash basis
are described below. The after-tax effect of non-cash goodwill and other valuation
intangibles is eliminated in both measures. Cash ROE decreased to 15.9% from 17.5%
in 1998 and 20.0% in 1997. Cash EPS of $5.01 increased from $4.98 in 1998 and $4.97
in 1997.
Using Cash Basis Reporting Enhances
Comparability of Results
Accounting principles that underpin financial reporting are
similar in Canada and the United States. One important
difference that provides competitive advantage to businesses
in the United States is that acquisitions can be structured
tobeaccountedforusingthepoolingmethod.InCanada,
the purchase method is predominantly applied, generally
resulting in lower earnings than would be reported using the
pooling method.
Specifically, the purchase method requires that assets
and liabilities be reported at their fair value. In addition,
intangible assets acquired and the goodwill component of
the purchase price must be expensed on an annual basis
over their estimated life. The pooling method does not require
revaluation of assets and liabilities or expensing intangible
assets or goodwill. As a result, businesses using this method
generally report higher earnings and return on equity.
The Canadian Institute of Chartered Accountants has
recently amended its rules to permit reporting of net income
and earnings per share before the expense of goodwill.
The amended rules do not, however, result in a level
“playing
field” for Canadian businesses with their U.S. competitors.
This is due to the continued reporting in net income before
goodwill of the annual expense arising
from revaluations
of assets and liabilities and intangible
assets identified under
the purchase method.
Cash measures of earnings per share and return on
equity which adjust for both goodwill and intangible assets
enhance the comparability of our results with those of
our North American peer group.
Return on Common
Shareholders’ Equity
9998979695
15.2
17.1
17.0
15.4 14.1
Actual ROE (%)
Objective (14–15% in 1995 to 1997,
15–17% in 1998 and 1999)
($)
Cash and Basic
Earnings per Share
4.97
4.69
3.45
3.67
4.21
4.44
4.76
5.01
4.98
4.72
9998979695
Cash EPS ($)
Basic EPS as reported ($)
9998979695
17.5
20.0
19.8
18.2
15.9
Cash Return on Common
Shareholders’ Equity
(%)
†Defined in the glossary on page 104.