Bank of Montreal 2010 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
Foreign Exchange
The U.S. dollar was weaker at October 31, 2010 than at October 31, 2009,
and assets and liabilities are translated at year-end rates. The average
exchange rate over the course of 2010 is used for translation of revenues
and expenses in 2010 and, while the U.S. dollar also weakened on
this basis, it strengthened in 2009 relative to 2008. The Canadian dollar
equivalents of BMO’s U.S.-dollar-denominated net income, revenues,
expenses, income taxes and provision for credit losses in 2010 were
reduced relative to the preceding year by the weakening of the U.S. dollar.
The adjacent table indicates average Canadian/U.S. dollar exchange
rates in 2010, 2009 and 2008 and the impact of changes in the average
rates. At October 31, 2010, the Canadian dollar traded at $1.020 per
U.S. dollar. It traded at $1.082 per U.S. dollar at October 31, 2009.
At the start of each quarter, BMO assesses whether to enter into
hedging transactions that are designed to partially offset the pre-tax
effects of exchange rate fluctuations in the quarter on our expected U.S.-
dollar-denominated net income for that quarter. As such, these activities
partially mitigate the impact of exchange rate fluctuations, but only
within that quarter. As a result, the sum of the hedging gains/losses for
the four quarters in a year is not directly comparable to the impact of
year-over-year exchange rate fluctuations on earnings for the year.
Hedging transactions resulted in an after-tax gain of $5 million in 2010
($1 million loss in 2009).
The gain or loss from hedging transactions in future periods will be
determined by both future exchange rate fluctuations and the amount
of the underlying future hedging transactions, since the transactions are
entered into each quarter in relation to expected U.S.-dollar-denominated
net income for the next three months. The effect of exchange rate
fluctuations on our net investment in foreign operations is discussed
in the Provision for Income Taxes section on page 42.
BMO’s U.S.-dollar-denominated results are affected, favourably
or unfavourably, by movements in the Canadian/U.S. dollar exchange
rate. Rate movements affect future results measured in Canadian
dollars and the impact on results is a function of the periods in which
revenues, expenses and provisions for credit losses arise. If future
results are con sistent with the range of results for the past three years,
each one cent decrease in the Canadian/U.S. dollar exchange rate,
expressed in terms of how many Canadian dollars one U.S. dollar buys,
would be expected to change the Canadian dollar equivalents of U.S.-
dollar-denominated net income (loss) before income taxes by between
–$6 million and $10 million. An increase of one cent would have the
opposite effect.
Effects of Changes in Exchange Rates on BMO’s Results
2010 vs. 2009 vs.
($ millions, except as noted) 2009 2008
Canadian/U.S. dollar exchange rate (average)
2010 1.043
2009 1.165 1.165
2008 1.032
Increased (reduced) net interest income (210) 246
Increased (reduced) non-interest revenue (155) 117
Increased (reduced) revenues (365) 363
Reduced (increased) expenses 213 (216)
Reduced (increased) provision for credit losses 70 (125)
Reduced income taxes and
non-controlling interest in subsidiaries
18 24
Increased (reduced) net income (64) 46
Notable Items
($ millions) 2010 2009 2008
Charges related to deterioration
in capital markets environment – 521 388
Related income taxes – 166 128
Net impact of charges related to deterioration
in capital markets environment (a) – 355 260
Increase in general allowance – 60 260
Related income taxes – 21 94
Net impact of increase in general allowance (b) – 39 166
Severance costs – 118 –
Related income taxes – 38 –
Net impact of severance costs (c) – 80 –
Total reduction in net income (a + b + c ) – 474 426
Caution
This Notable Items section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
We have designated certain charges as notable items to assist in
discussing their impact on our financial results. There were no items
designated as notable in 2010.
These items reduced net income by $474 million in 2009 and
$426 million in 2008, as set out in the adjacent table. Charges in 2009
and 2008 include amounts related to BMO’s investment in Apex Trust,
a Canadian credit protection vehicle. In the latter half of 2009, we
put in place hedges that reduced BMO’s risk exposure on Apex to levels
that are not expected to expose BMO to significant loss. In 2010, the total
mark-to-market losses on the exposure, net of hedging, were nominal,
at less than $10 million pre-tax.
In 2009, revenue was reduced by charges of $521 million related
to Apex. These charges reduced trading non-interest revenues by
$344 million and securities gains by $177 million.
In 2008, revenue was reduced by charges of $388 million in respect
of the capital markets environment, including charges of $230 million
related to Apex and $158 million in respect of exiting positions related
to the monoline insurer ACA Financial Guarantee Corporation. These
charges reduced trading non-interest revenues by $258 million and
securities gains by $130 million.
Further details on the effects of notable items in 2009 can be
found on page 33.
Notable Items
36 BMO Financial Group 193rd Annual Report 2010