Bank of Montreal 2004 Annual Report Download - page 34

BMO Financial Group Annual Report 200430
MD&A
Management’s Discussion and Analysis
Underwriting and advisory fees increased $75 million,
primarily due to higher equity underwriting fees. Debt under-
writing fees also rose strongly, while merger and acquisition
fees were essentially unchanged from a year ago.
Investment securities gains were $175 million, compared
with net losses of $41 million in 2003. There were $63 million
of write-downs in 2004, compared with $153 million in 2003.
The gains in 2004 were offset in part by a $58 million reduction
in net interest income related to losses on unwinding hedges
associated with investment securities that were sold. Unrealized
gains on investment securities declined $226 million to
$86 million, partially due to realized gains in 2004.
Foreign exchange, other than trading, rose due to more active
markets and insurance income again showed strong growth,
reflecting further increases in volumes.
Other revenue decreased $53 million due to lower origination
and other mortgage fees in U.S. personal and business banking
and due to other sundry net reductions.
Table 7 on page 72 provides further detail on revenue and
revenue growth.
Trading-Related Revenues
Trading-related revenues are primarily dependent on the
volume of activities undertaken for clients, who enter into
transactions with BMO to mitigate their risks or to invest.
BMO earns a spread or profit on the net sum of its client
positions by profitably neutralizing, within prescribed limits,
the overall risk of the net positions. BMO also assumes pro-
prietary positions with the goal of earning trading profits.
While proprietary positions expose the organization to profit
or loss, the positions and their risks are closely managed
and profit or loss from these activities is generally not the most
significant factor affecting the level of trading-related revenues.
Revenues from trading-related activities totalled $472 million,
compared with $508 million in 2003. Trading-related revenues
included net interest income of $272 million and non-interest
revenue of $200 million. The $36 million decrease in interest
and non-interest trading revenues from 2003 was attributable
to lower interest rate and other trading revenues. Interest rate
trading revenues were affected by low volatility and associated
declines in deal flow in 2004. Commodity derivatives trading
revenues, which are included in other trading income, included
revenue from the termination of positions with a counterparty
in 2003. Equity and foreign exchange trading revenues
increased. Equity trading was stronger as a result of improved
volatility, particularly in the first half of the year, which
improved trading opportunities. Growth in our equity trading
business also contributed to the improvement in equity trading
income. Foreign exchange revenues rose due to improved
trading opportunities. The Market Risk section on page 62
provides further information on trading-related revenues.
Trading-related revenues include net interest income and non-interest
revenue earned from on and off-balance sheet positions undertaken for
trading purposes. The management of these positions typically includes
marking them to market on a daily basis. Trading revenues include
income (expense) and gains (losses) from both on-balance sheet instru-
ments and off-balance sheet interest rate, foreign exchange (including
spot positions), equity, commodity and credit contracts.
Interest and Non-Interest Trading Revenues
($ millions) Change from 2003
For the year ended October 31 2004 2003 2002 $%
Interest rates 204 241 180 (37) (15)
Foreign exchange 85 69 69 16 23
Equities 152 86 56 66 75
Other 31 112 86 (81) (72)
Total 472 508 391 (36) (7)
Reported as:
Net interest income 272 233 182 39 17
Non-interest revenue –
trading revenues 200 275 209 (75) (27)
Total 472 508 391 (36) (7)