Bank of Montreal 2002 Annual Report Download - page 26

22 BMO FINANCIAL GROUP ANNUAL REPORT 2002
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
Expense-to-Revenue 
Ratio by Group (%) 
(excluding non-recurring items)
200220012000
IBG
P&C
PCG
Total BMO
77.1
84.7 86.7
62.8 65.1 67.4
60.1 62.7
60.0
56.1
50.8
52.5
Expenses ($ millions) 
and Annual Growth 
(excluding non-recurring items)
4,785
7
8
5,147
3
5,301 7
5,671 5,968
5
20022001200019991998
Growth (%)
Non-Interest Expense (excluding non-recurring items) ($ millions)
For the year ended October 31 2002 2001 2000 1999 1998
Employee compensation 3,397 3,212 3,065 2,820 2,574
Premises and equipment 1,259 1,153 1,071 1,123 972
Communications 171 194 259 268 266
Other expenses 1,054 1,069 883 915 949
Amortization of intangible assets 87 43 23 21 24
Total 5,968 5,671 5,301 5,147 4,785
Contribution to Non-Interest Expense Growth
(excluding non-recurring items) (%)
For the year ended October 31 2002 2001 2000
Performance-based compensation (0.3) (0.2) 4.4
Currency translation effect 0.6 1.1 (0.5)
Acquired businesses 4.4 1.2 0.6
Pension expense 1.2 0.8 (0.7)
Disposed businesses (0.1) (0.8) (0.9)
BMO Nesbitt Burns additional month –– (1.4)
Other expenses (0.6) 4.9 1.5
Total non-interest expense growth 5.2 7.0 3.0
Expense-to-Revenue Ratio
The expense-to-revenue ratio was 68.1% in 2002, up 4.1 percent-
age points from a year ago. Excluding non-recurring items, the
ratio was 67.4%, compared with 65.1% in 2001. BMO’s overall
expense ratio in any year is affected by the relative strength of
the revenues of each of the operating groups. The expense-to-
r evenue ratio of each group is typically quite different because
of the different nature of their businesses. Personal and Com-
mercial Client Group is BMO’s largest group and its efficiency
ratio improved by 252 basis points. Excluding non-recurring
gains on branch sales in 2001, the ratio improved by 269 basis
points to 60.0%.
The efficiency ratios of the other operating groups were less
favourable than a year ago. In fee-based businesses, particularly
businesses driven by equity markets, the efficiency ratio is more
volatile. Excluding non-recurring items, Private Client Group’s
expense-to-revenue ratio rose due to higher amortization of
intangible assets related to acquisitions. If acquired businesses
were excluded, the expense-to-revenue ratio of Private Client
Group would have improved modestly from a year ago. In spite of
a $91 million reduction in year-over-year expenses, the Invest-
ment Banking Group expense-to-revenue ratio rose because of
declining revenues in the difficult market environment.
Expenses were up 6% year-over-year, or 5% excluding non-
recurring items. Expenses included $250 million related to
the additive effect of acquired businesses and $50 million of
severance costs in the fourth quarter. These costs relate to
reducing staffing by approximately 500 positions, about 55%
of which relate to activities in Corporate Support, including
Technology and Solutions.
Excluding non-recurring items, severance costs and acquired
businesses, expenses were flat year-over-year. Expenses for 2002
were influenced by a $68 million increase in pension costs and
theeffectsofastrongerU.S.dollar.Theseincreaseswerepartially
offset by lower performance-based compensation costs and the
effects of continued cost containment measures. Performance-
based compensation costs were down appreciably in Investment
Banking Group but were largely offset by higher costs in Personal
and Commercial Client Group. The accompanying table indicates
increased expenses in most categories, reflecting the factors
discussed above.
The expense-to-revenue ratio is our primary measure of productivity.
It is calculated as non-interest expense divided by total revenues. The
ratio is calculated on a taxable equivalent basis. It is often referred to as
the efficiency ratio or productivity ratio.
Non-Interest Expense 
by Group 2001 
(excluding non-recurring items)
P&C 48%
PCG 22%
IBG 27%
Corp 3%
Non-Interest Expense 
by Group 2002 
(excluding non-recurring items)
P&C 46%
PCG 25%
IBG 24%
Corp 5%
due to volume growth in the Personal and Commercial Client
Group and acquired businesses in Private Client Group while
Investment Banking Group benefited from the declining interest
rate environment, higher levels of dividend income on merchant
banking securities and improved spreads.
Non-interest revenue, excluding non-recurring items, declined
1% from fiscal 2000.
Provision for Credit Losses
The provision for credit losses was $820 million. The provision
totalled $880 million in 2001, excluding a $100 million general
provision that was categorized as non-recurring for reporting
purposes. BMO’s target for 2003 is to maintain provisions for
credit losses at the same level as 2002. The provision for credit
losses is discussed on page 29 in the credit risk section.