Bank of Montreal 2004 Annual Report Download - page 38

BMO Financial Group Annual Report 200434
MD&A
Management’s Discussion and Analysis
2003 Financial Performance Review
Operating Groups Results
Personal and Commercial Client Group net income rose
$130 million or 16% to $937 million in 2003. Revenue rose
$262 million or 6% to $4,824 million, driven by strong volume
growth in both Canadian and U.S. operations. Revenue was
substantially unchanged in the United States as the effect of
strong deposit and loan growth was offset by the impact of the
lower Canadian/U.S. dollar exchange rate. Non-interest expenses
increased $91 million or 3% to $3,075 million. In Canada,
expenses increased as higher performance-based compensa-
tion, higher employee benefit costs and spending on initiatives
to improve customer service more than offset the effects of
initiatives to contain costs. Costs declined in the United States.
Private Client Group net income increased $65 million
or 82% to $144 million in 2003. Earnings growth was achieved
primarily through effective cost containment initiatives
implemented in response to challenging market conditions,
along with moderate revenue growth. Revenue increased
$113 million or 7% to $1,737 million, driven by acquired busi-
nesses and strategic initiatives. Excluding acquisitions, revenue
on a comparable basis was up $8 million from 2002. Revenue
growth was reduced 3 percentage points by the impact of
the lower Canadian/U.S. dollar exchange rate. Non-interest
expenses increased $15 million or 1% to $1,505 million due
primarily to the incremental effects of acquired businesses.
Excluding acquired businesses, non-interest expenses on a
comparable basis were reduced $78 million or 5% due to cost
management initiatives and the weaker U.S. dollar.
Investment Banking Group net income increased $120 mil-
lion or 20% to $721 million in 2003, driven by higher revenues
as well as lower expenses. Revenue increased $110 million or 4%
to $2,656 million. Revenue in 2003 was reduced $127 million
by the weaker U.S. dollar; however, year-over-year revenue
growth benefited from a $92 million reduction in net invest-
ment securities losses in 2003. Trading-related revenue was up
$149 million, driven in part by higher commodities derivatives
trading revenue from a gain on termination of certain positions
with a counterparty. The change in determining taxable
equivalent basis amounts contributed to revenue growth, while
equity origination fees were also higher. The increases were
partially offset by lower interest income due to the narrowing
of spreads earned as higher-yielding assets matured, reflecting
a flatter yield curve environment, and lower corporate lending
volumes. Non-interest expenses of $1,369 million were
$44 million or 3% lower than in 2002, despite the inclusion
of expenses related to Harris Nesbitt Gerard. The weaker
U.S. dollar reduced expenses by $51 million. Employee costs
were down from the prior year because of reductions in
performance-based compensation and staffing levels. Premises
costs and other expenses were also lower.
Corporate Support net income was $23 million, compared
with a net loss of $70 million in 2002. The improvement was
attributable to a $391 million decline in the provision for
credit losses, partially offset by a $73 million decline in revenue
and higher income taxes. There was lower revenue from our
securitizations and investment portfolios. Expenses were sub-
stantially unchanged.
Earnings
Earnings per share rose $0.76 to a then-record $3.44 in
fiscal 2003 and net income increased $408 million or 29% to
$1,825 million. Growth was driven by a lower provision for
credit losses, business growth in all operating groups and lower
net losses on investment securities.
Return on equity was 16.4%, compared with 13.4% in 2002.
The increase was due to higher net income in 2003.
Revenue
Revenue increased $412 million or 5% to $9,271 million in
2003, driven by a $116 million or 2% increase in net interest
income and a $296 million or 8% increase in non-interest
revenue. Revenue growth was increased 1.4 percentage points
by the incremental effects of acquired businesses, but was
lowered 3 percentage points by the impact of the weaker U.S.
dollar. Our three client operating groups each had revenue
growth of more than 4%. Personal and Commercial Client Group
revenue rose on continued strong volume growth in both
Canada and the United States, although the impact of U.S.
growth was offset by the lower exchange rate. Canadian growth
was primarily in the personal banking segment, where retail
deposits, card services and residential mortgages were partic-
ularly strong. Private Client Group revenue rose on improving
market fundamentals and stronger performance in direct and
full-service investing and in investment products. Investment
Banking Group revenue benefited from stronger income
trust origination activity and higher trading revenue. There was
a $71 million increase related to including taxable equivalent
basis adjustments for dividend revenue in taxable equivalent
basis revenue, while a $105 million reduction in net investment
securities losses also contributed to BMO’s revenue increase.
Provision for Credit Losses
The provision for credit losses was $455 million in 2003,
a decline of $365 million from $820 million in 2002, due to
improved credit performance experienced in 2003. Provisions
for credit losses in the then-troubled communications sector
alone were $399 million in 2002, but declined to $7 million in
2003 due to the development of significantly fewer new problem
loans and to proactive reductions in exposure to the sector.
Non-Interest Expense
Non-interest expense rose $57 million or 1% to $6,087 million
in 2003. The expense-to-revenue ratio of 65.7% improved
240 basis points from 2002, as all operating groups improved
their productivity ratios by increasing revenues more than
expenses. The net increase in expenses was primarily attribut-
able to higher employee compensation costs, due to higher
performance-based compensation and higher pension costs,
partially offset by reduced professional fees and travel costs.
The incremental effects of businesses acquired in 2002
and 2003 increased expenses in 2003 by $180 million; however,
the weaker U.S. dollar reduced costs in 2003 by $181 million;
as such, these two factors offset each other.