Bank of Montreal 2003 Annual Report Download - page 36

Management’s Discussion and Analysis of Operations and Financial Condition
BMO Financial Group 186th Annual Report 200332
Net interest margin in Canada was modestly higher than in
2002, but was declining later in the year in response to low
interest rates and a competitive retail environment that drove
changes in customer product preferences. Given the interest rate
outlook and the competitive landscape, further margin pressures
are expected for the foreseeable future. In the United States, net
interest margin was down, but was improving in the fourth quar-
ter in response to volume growth, supported by pricing efforts.
Non-interest expenses rose $76 million or 3% to $3,008 million.
In Canada, expenses were up 4% as higher performance-based
compensation costs, higher employee benefit costs and spending
on initiatives to improve customer service more than offset
the effects of initiatives to contain costs. In the United States,
non-interest expenses declined 3%. The lower U.S. dollar reduced
costs by $60 million. The group’s non-interest expense-to-revenue
ratio improved 171 basis points to 63.1%, as both Canadian and
U.S. operations achieved productivity gains.
Personal and Business Banking
Market Share in Canada (%)
13.44 13.27 13.66 13.35
18.68 18.87 19.48 19.60
Business (loans under $5 million)
Personal
2000 2001 2002 2003
200320022001
Loans and Loan Growth
in the United States
6.6
8.2
10.3
18
26 25
Growth (%)
Loans (US$ billions)
P&C Canada Productivity Ratio
and Revenue Growth (%)
61.9 61.7
60.3
(2.0)
2.2
6.6
Revenue growth (%)
Productivity ratio (%)
200320022001
Total P&C Productivity Ratio
and Revenue Growth (%)
64.5 64.8
63.1
2.0
4.4
5.4
Revenue growth (%)
Productivity ratio (%)
200320022001
U.S. Operations Financial Results
Net income from U.S. operations represented 10% of total
Personal and Commercial Client Group net income for the
year, compared with 11% for fiscal 2002. The modest change
is primarily attributable to the strong growth in results
of Canadian personal and commercial banking, and to
the weakness of the U.S. dollar. BMO’s corporate banking
operations in the United States are concentrated among
mid-market corporate clients, which BMO manages and
reports in our Investment Banking Group operations because
of the enhanced opportunities to cross-sell products. BMO’s
North American peers typically include similar businesses
in their personal and commercial banking units. The table
below shows the effects of including this U.S.-based mid-
market business in Personal and Commercial Client Group
on a pro-forma basis and provides more geographic detail
on results. The table reflects the inclusion of $574 million
of corporate mid-market revenue and $215 million of net
income in U.S. results for the year.
If results of the U.S. mid-market banking unit were in-
cluded in Personal and Commercial Client Group results,
net income from U.S. operations would represent 27% of the
group’s earnings in the year, compared with 10% as currently
reported. Revenue, after including the U.S. mid-market bank-
ing unit, would be 26%, compared with 17% as currently
reported. The non-interest expense-to-revenue ratio would
be 59.6%, compared with the 63.1% currently reported.
Personal and Commercial Client Group adjusted to include
U.S.-Based Mid-Market Business (Canadian $ in millions, except as noted)
for the year ended October 31 Change
2003 2002 $ %
Canada – revenue 3,942 3,696 246 7
United States – revenue 1,402 1,418 (16) (1)
Total revenue (teb) 5,344 5,114 230 4
Canada – net income 848 726 122 17
United States – net income 313 288 25 8
Total net income 1,161 1,014 147 14
Canada – return on equity (%) 29.6 27.3 2.3
United States – return on equity (%) 13.7 11.5 2.2
Total return on equity (%) 22.6 19.7 2.9
Canada – non-interest
expense-to-revenue ratio (%) 60.3 61.7 (1.4)
United States – non-interest
expense-to-revenue ratio (%) 57.6 59.1 (1.5)
Total non-interest
expense-to-revenue ratio (%) 59.6 61.0 (1.4)