Bank of Montreal 1999 Annual Report Download - page 38

Expense-to-Revenue Ratio
32 Bank of Montreal Group of Companies 1999 Annual Report
Measure:
The expense-to-revenue ratio
is our primary measure of pro-
ductivity. It is calculated as non-
interest expense divided by total
revenues. The ratio is calculated
on a taxable equivalent basis.
Strategic development
spending:
Strategic development spending of
$380 million in 1999 was directed
to the following initiatives.
 Telebanking – expansion of
delivery channels
 mbanx Direct & Client Contact
Centres
– expansion of virtual
banking unit
 Pathways – Financial Growth
Centres
TM
– development of
educational delivery channels
 Cebra –
development of
integrated digital commerce
solutions
 Value Based Management
(VBM)
– development of the
VBM framework for executing
our governing objective of
maximizing shareholder value.
Outlook
We expect expense growth to
be lower in 2000 than in 1999
because of the restructuring
charge in 1999. Expense growth
will be driven primarily by
investment initiatives and on-
going business volume growth.
Expense-to-Revenue Ratio of 66.7%
The expense-to-revenue ratio of 66.7% increased 0.9% from 65.8% in 1998, as expense
growth of 10.5% outpaced revenue growth of 9.0%. Before the one-time charges described
on page 27, the expense-to-revenue ratio was 64.5%, and expense growth was 7.6%.
Expense Growth of 10.5%
Our secondary measure of productivity is year-over-year expense growth, which was
10.5%in1999comparedto4.8%lastyear.Beforetherestructuringchargeof$141million
($81 million after-tax), expenses grew 7.6%. The increase in expenses was a result of
growth in ongoing business operations of 3.5%, continued spending on strategic ini-
tiatives of 1.2%, higher revenue-driven compensation of 1.1% and an additional month
of Nesbitt Burns operating expenses of 1.5% due to the change in their year end.
Strategic initiative spending during the year focused on the initiatives detailed in the
sidebar below. Including the effect of goodwill, expenses would have been $5,337 mil-
lion with growth of 10.4%.
Contribution to Expense Growth (%)
For the year ended October 31 1999 1998* 1997*
Strategic development spending 1.2 2.1 4.9
Foreign exchange impact 0.3 1.5 0.2
Charge 2.9 (1.6) 1.3
Revenue-driven compensation 1.1 (0.8) 5.3
Nesbitt Burns additional month 1.5
––
Ongoing business volume growth, partially offset by productivity improvements 3.5 3.6 5.2
Total expense growth 10.5 4.8 16.7
*Restated to give effect to presentation changes.
Non-interest expense by category of cost is presented in the table below.
Salaries and employment benefits rose to $2,820 million, compared to $2,574 million
in 1998. The majority of the increase reflects a return to more normal levels of variable
compensation, which was exceptionally low in 1998 due to abnormal market conditions.
Premises and equipment expenses rose $151 million to $1,123 million, reflecting
upgrades in computer equipment due to the approach of the year 2000.
Communication expenses increased marginally to $268 million, with other expenses
decreasing from $949 million to $915 million during the year.
Non-Interest Expense ($ millions)
For the year ended October 31 1999 1998* 1997* 1996* 1995*
Salary and employment benefits 2,820 2,574 2,535 2,210 1,999
Premises and equipment 1,123 972 916 727 679
Communications 268 266 246 219 208
Other expenses 915 949 842 739 711
Amortization of intangible assets 21 24 28 18 15
Restructuring charge 141 ––––
Total non-interest expense 5,288 4,785 4,567 3,913 3,612
Note: for more information see Table 8 on page 64.
*Restated to give effect to presentation changes.
1998 Compared to 1997
The expense-to-revenue ratio in 1998 was 65.8%, with revenue growth of 1.4% offset by
expense growth of 4.8%. Expense-to-revenue ratio growth in 1998 reflected the decline
in trading revenues, which were not matched by a similar reduction in expenses.
Expense growth was driven by increased business volumes, strategic development
spending and the foreign exchange impact of the lower Canadian dollar, offset by the
impact of a 1997 charge and lower revenue-driven compensation.
Government Taxes and Levies
Total government taxes and levies of $1,362 million in 1999 represented 52.6% of our
net income before taxes and government levies, compared to 40.5% in 1998. The pro-
vision for taxes in the Income Statement as a percentage of pre-tax income was 33.7%
versus 36.3% in 1998, as shown in note 15 to the consolidated financial statements.
Government Taxes and Levies
($ millions)
For the year ended
October 31 1999 1998
Government levies
other than
income taxes 474 513
Provision for taxes
–
Income Statement 730 804
Provision for taxes
–
Retained Earnings 158 (237)
Total government
taxes and levies 1,362 1,080
Expense-to-
Revenue Ratio
63.7
63.7
62.8
66.7
65.8
9998979695
(%)
TM Pathways
– Financial Growth Centre is a trade mark of Bank of Montreal.