Bank of Montreal 2004 Annual Report Download - page 72

Download and view the complete annual report

Please find page 72 of the 2004 Bank of Montreal annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 134

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134

BMO Financial Group Annual Report 200468
MD&A
Management’s Discussion and Analysis
Net income for the fourth quarter of 2004 was $563 million, an
increase of $50 million or 10% from the fourth quarter a year
ago. The increase was attributable to a $108 million ($70 mil-
lion after tax) improvement in the provision for credit losses.
In addition, earnings were higher in each of the operating
groups as higher volumes in our personal and commercial
business drove increased earnings, while lower revenue in our
capital markets businesses was more than offset by reduced
performance-based compensation and effective cost contain-
ment. Corporate Support net income was affected by reduced
revenue related to lower investment securities gains and lower
investment earnings in the low interest rate environment.
Revenue for the quarter decreased $99 million or 4.2% from
a year ago. Both net interest income and non-interest revenue
declined, in part due to the weaker U.S. dollar.
Net interest income fell $40 million or 3.2% from the fourth
quarter of last year to $1,239 million. Volume-driven growth in
Personal and Commercial Client Group was largely offset by
lower net interest earnings in Investment Banking Group and
Private Client Group. Investment Banking Group was affected
by lower asset levels and higher short-term interest rates that
increased funding costs. Private Client Group was affected
by low interest rates that reduced spread and lowered demand
for term investments. Net interest margin was 1.87% for
the quarter, a decrease of 4 basis points from a year ago, and
average assets fell $1.9 billion to $264 billion.
Non-interest revenue declined $59 million from the fourth
quarter of 2003 to $1,073 million, in part due to the lower
Canadian/U.S. dollar exchange rate. Higher mutual fund
revenues, lending fees and investment securities gains were
offset by lower trading and securitization revenue and lower
card fees due to higher reward redemption rates. Non-interest
revenue declined $61 million in Corporate Support, primarily
related to lower investment securities gains and lower
securitization income, the impact of which was partly offset
by higher net interest income on securitizations.
Non-interest expenses of $1,493 million in the fourth quarter
decreased $52 million or 3.4% from the fourth quarter of last
year.
The decrease was attributable to the $33 million impact of
the lower Canadian/U.S. dollar exchange rate and a $108 million
reduction in performance-based compensation. These factors
were partially offset by $20 million of severance and certain
other costs, including back-office consolidation expenses in
Private Client Group, the incremental effects of acquired
businesses and low miscellaneous expenses a year ago.
Our productivity ratio was 64.6% in the fourth quarter, com-
pared with 64.0% a year ago. Our cash productivity ratio in
the quarter increased 40 basis points from a year ago to 63.5%.
The fourth quarter 2004 provision for income taxes of
$253 million increased $11 million from the fourth quarter
a year ago.
BMO hedges the foreign exchange risk arising from its net
investment in U.S. operations by funding the net investment
in U.S. dollars. Hedging of the net investment in U.S. operations
gave rise to an income tax charge of $254 million in share-
holders’ equity for the year and a charge of $287 million in
the fourth quarter, which is explained on page 33.
In the fourth quarter of 2004, there was a net recovery of
credit losses of $13 million, consisting of $37 million of specific
provisions and a $50 million reduction of the general allowance
for credit losses. A year ago, results reflected a specific pro-
vision of $95 million with no change in the general allowance.
The fourth quarter 2004 specific provision of $37 million
represents an annualized 9 basis points of average net loans
and acceptances, compared with 25 basis points a year ago.
The fourth quarter 2004 specific provisions of $37 million
consisted of $107 million of new provisions, less $45 million of
reductions of previously established allowances and $25 mil-
lion of recoveries on loans previously written off. Specific
provisions in the comparable period in 2003 were $95 million.
The improvement in 2004 resulted from lower new provisions,
as reductions of previously established allowances were quite
high in the fourth quarter a year ago.
Review of Fourth Quarter Performance