Bank of Montreal 2010 Annual Report Download - page 41

MD&A
Interest and Non-Interest Trading-Related Revenues
(taxable equivalent basis)
($ millions) Change from 2009
For the year ended October 31 2010 2009 2008 $ %
Interest rates 562 467 176 95 20
Foreign exchange 247 362 379 (115) (32)
Equities 314 409 200 (95) (23)
Commodities 52 79 (18) (27) (34)
Other 9 (76) (3) 85 +100
Total 1,184 1,241 734 (57) (5)
Reported as:
Net interest income 680 518 188 162 31
Non-interest revenue –
trading revenues 504 723 546 (219) (30)
Total 1,184 1,241 734 (57) (5)
Trading revenues are discussed in the trading-related revenues
section that follows.
Lending fees increased $16 million or 3% due to higher volumes,
offset in part by the impact of the weaker U.S. dollar.
Card fees increased $112 million to $233 million. The increase
reflects volume growth, reduced securitization activity over the course
of 2010 and the inclusion of ten months of the results of the Diners Club
acquired business in the current year.
Investment management and custodial fees increased $11 million
or 3% due to stronger equity markets.
Mutual fund revenues improved markedly, growing by $83 million
or 18%. Asset levels continued to reflect the growth that began in the
second half of 2009, rising further over the course of the year.
Securitization revenues decreased $251 million or 27%, reflecting a
$91 million reduction from securitizing credit card loans and a $160 million
reduction from securitizing residential mortgages. Revenues included
gains of $68 million on the sales of loans for new securitizations, down
$30 million from 2009, and gains of $428 million on sales of loans to
revolving securitization vehicles, down $174 million from 2009. The
securitization of assets results in the recognition of less interest income
($507 million less in 2010), reduced credit card fees ($449 million less
in 2010) and lower provisions for credit losses ($203 million less in 2010).
As such, including securitization revenue of $678 million in 2010, the
combined impact of securitizing assets in 2010 and prior years decreased
pre-tax income by $75 million in 2010. We securitize loans primarily
to obtain alternate sources of cost-effective funding. We securitized
$4.3 billion of residential mortgage loans in 2010 and $6.8 billion in
2009. Securitization revenues are detailed in Note 8 on page 126 of the
financial statements.
Underwriting and advisory fees were $48 million or 12% higher
than in 2010. Mergers and acquisitions fees and debt underwriting
improved considerably, reflecting strong performance and improved
market conditions. Equity underwriting fees decreased.
Securities gains were $150 million, improving from a net loss
of $354 million in 2009. The notable items discussed on page 36 include
charges recorded in securities gains (losses) in 2009 of $177 million
related to the deterioration in the capital markets environment.
Income from foreign exchange, other than trading, increased
$40 million or 75%, reflecting growth in P&C Canada, Private Client Group
and Corporate Services.
Insurance income increased $26 million or 9%, due in part to higher
premiums and the inclusion of a full year’s results of BMO Life Assurance
in 2010, partially offset by the effects of unfavourable market movements
on policyholder liabilities.
Other revenue includes various sundry amounts and increased
$54 million or 32%.
Table 7 on page 98 provides further details on revenue and
revenue growth.
Trading-Related Revenues
Trading-related revenues are dependent on, among other things, 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 proprietary positions with the goal of earning trading profits.
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-related revenues also include income (expense)
and gains (losses) from both on-balance sheet instruments and
off-balance sheet interest rate, foreign exchange (including
spot positions), equity, commodity and credit contracts.
Although the North American economy improved in 2010 from the
recession that affected much of 2009, our trading-related revenues were
modestly lower than the levels of a year ago. Trading-related revenues
were strong in 2009 as we were successful in taking advantage of market
opportunities presented by high levels of market volatility. Conditions
in 2010 were less favourable, with fewer market opportunities and a more
difficult trading environment. The Notable Items section on page 36
outlines charges related to deterioration in the capital markets environ-
ment that reduced trading-related revenues by $344 million and total
revenue by $521 million in 2009. There were no similar charges in 2010.
The Select Financial Instruments section, which starts on page 63,
provides detailed information on certain instruments that markets had
come to regard as carrying higher risk, certain of which resulted in
charges that were designated as notable items in prior years.
Trading-related revenues decreased $57 million from 2009, showing
strength in the first half of the year but softening in the latter half.
Interest rate trading revenues were higher in 2010 but were weak in
the third quarter. Other trading revenues increased, largely due to the
improved impact of certain structural balance sheet and securitization-
related hedging activities. Equities trading revenue decreased from
2009 mainly due to lower volatility in the current year, which provided
fewer trading opportunities, as well as a fourth quarter 2010 reduction
for accounting adjustments. Similarly, commodities trading revenue
decreased from elevated levels in the prior year, which benefited from
higher than usual customer flows. Foreign exchange markets in 2010
experienced very thin spreads and lower volatility compared to 2009,
resulting in a decline in foreign exchange trading revenue.
The Market Risk section on page 82 provides more information
on trading-related revenues.
BMO Financial Group 193rd Annual Report 2010 39