Bank of Montreal 2004 Annual Report Download - page 51

BMO Financial Group Annual Report 2004 47
MD&A
Business Environment and Outlook
Investment Banking Group operated in a robust investment
climate in the first half of 2004. This resulted in strong equity
and debt origination activity and improved commission
revenues. An improving credit cycle also had a positive impact
on results for the year. The markets softened somewhat in the
second half of the year in response to rising interest rates, lower
volatility, the strengthening Canadian dollar and record crude
oil prices. Commercial and industrial loan demand continued
to lag 2003 levels, particularly in the United States. In Canada,
loan volume improved as business investment increased.
Looking forward, further customer consolidation and new
trading technologies are expected to continue to put downward
pressure on Canadian equity trading commissions. Rising
interest rates and a flatter yield curve are making it more
difficult to maintain previous revenue levels in our interest-
rate-sensitive businesses. The low interest rate environment
of the past few years has prompted many companies to provide
for many of their future borrowing requirements in advance,
which is expected to cause a decrease in debt origination
activities. Therefore a shift in revenue from fixed income to
advisory and equity lines of business is expected.
Investment Banking Group Financial Results
Investment Banking Group net income rose $135 million to a
record $856 million. The 19% improvement was attributable to
higher revenue and a lower provision for credit losses.
Revenue increased $176 million or 7%. There was a $189 mil-
lion improvement in net investment securities gains, which
was partially offset by $58 million of interest expense related
to unwinding hedges associated with certain of the securities
that were sold. The inclusion of Harris Nesbitt Gerard (HNG)
results for the full year added $69 million of revenue relative
to a year ago. The lower Canadian/U.S dollar exchange rate
reduced revenue by $124 million.
Equity and debt underwriting fees rose strongly, while
securities commissions and fees increased in line with the
added revenue from HNG and stronger equity markets. Interest
income was affected by lower corporate loan balances, due to
weak demand and our strategy of exiting certain non-core rela-
tionships, and by compressed spreads in interest-rate-sensitive
businesses, due to rising short-term interest rates. There was
lower trading revenue, as commodity and interest rate trading
revenue declined, while equity trading revenue increased.
In 2003, commodity trading income included a gain on termi-
nation of a relationship with a counterparty.
The provision for credit losses was reduced by $93 million
due to an improved credit environment and a $39 million
recovery on a loan that was previously written off. BMO’s
practice is to charge loss provisions to the client operating
groups each year using an expected loss provision methodology
based on each group’s share of expected credit losses over
an economic cycle. Corporate Support is generally charged (or
credited) with differences between expected loss provisions
charged to the client operating groups and provisions required
under GAAP. However, IBG was credited with this recovery in
2004 because the loss on the loan in 2001 was not subject to our
expected loss provisioning methodology at the time.
Investment Banking Group ($ millions, except as noted)
Reported Change from 2003
As at or for the year ended October 31 2004 2003 2002 $%
Net interest income (teb) 1,305 1,393 1,478 (88) (6)
Non-interest revenue 1,527 1,263 1,068 264 21
Total revenue (teb) 2,832 2,656 2,546 176 7
Provision for credit losses 138 231 227 (93) (40)
Non-interest expense 1,430 1,369 1,413 61 4
Income before income taxes
and non-controlling interest
in subsidiaries 1,264 1,056 906 208 20
Income taxes (teb) 408 335 305 73 21
Net income 856 721 601 135 19
Amortization of intangible
assets (after tax) 3(1) 1 4 +100
Cash net income 859 720 602 139 19
Net economic profit 347 178 5 169 95
Return on equity (%) 18.4 14.3 10.6 4.1
Cash return on equity (%) 18.4 14.3 10.6 4.1
Non-interest
expense-to-revenue ratio (%) 50.5 51.5 55.5 (1.0)
Cash non-interest
expense-to-revenue ratio (%) 50.4 51.5 55.5 (1.1)
Average net interest margin (%) 0.92 0.96 1.08 (0.04)
Average common equity 4,382 4,637 5,112 (255) (5)
Average assets 141,691 144,418 136,451 (2,727) (2)
Total risk-weighted assets 50,814 50,823 55,493 (9) –
Average loans and acceptances 43,485 48,225 55,372 (4,740) (10)
Average deposits 67,369 59,136 57,719 8,233 14
Assets under administration 58,026 71,098 71,833 (13,072) (18)
Assets under management 18,761 20,013 20,283 (1,252) (6)
Full-time equivalent staff 2,129 2,141 2,071 (12) (1)
Non-interest expense increased $61 million or 4%. The increase
was attributable to the $87 million incremental impact of
the inclusion of HNG expenses and an increase in performance-
based compensation associated with improved results. These
factors were partially offset by the $58 million impact of the
lower Canadian/U.S. dollar exchange rate.
The group’s productivity ratio improved by 100 basis points
to 50.5%, as revenue growth exceeded expense growth.
Net income from U.S. operations represented 40% of IBG’s
net income in 2004, consistent with a year ago. Our U.S. invest-
ment banking operations are primarily directed at mid-market
corporations with revenues that range from US$50 million
to US$1 billion. Such activities are often included in personal
and commercial banking units by our North American peers.
Pro-forma results, reflecting our U.S.-based mid-market
business as part of Personal and Commercial Client Group,
are included on page 40.