Bank of Montreal 2010 Annual Report Download - page 58

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
BMO Capital Markets Business Environment and Outlook
BMO Capital Markets Financial Results
Fiscal 2010 saw strong results in BMO Capital Markets. The North American
economy was off to a strong recovery at the start of the year, but slowed
to a much more moderate pace in the latter half of the year. Conditions
were favourable for our investment banking business in 2010 as mergers
and acquisitions and debt underwriting fees improved, although equity
underwriting revenue decreased from high levels in the prior year when
corporate clients were seeking to strengthen their capital positions.
The U.S. economy remains weak, which has suppressed corporate loan
demand, resulting in lower corporate banking revenues. Similarly,
corporate banking revenues were also down in Canada, but the effect
was more muted due to a relatively stronger recovery. The aggressive
interest rate easing in the United States in the prior year had significantly
benefited our interest-rate-sensitive businesses. Revenues from these
businesses returned to historic levels in 2010 as rates stabilized during
the year. Our favourable overall performance in 2010 reflected the
strength, diversification and resilience of our core businesses.
BMO Capital Markets net income decreased $53 million to $820 million,
as increases in revenues were offset by higher provisions for credit losses
and increases in expenses. Prior year results were affected by charges of
$521 million ($355 million after tax) related to the difficult capital markets
environment. There were no such charges in 2010. Revenue increased
$190 million to $3,279 million. The weaker U.S. dollar reduced revenue by
$140 million. Revenue growth reflected the work we have undertaken
in focusing on our core client base.
Net interest income decreased $134 million or 8.8%, reflecting lower
revenues from our interest-rate-sensitive businesses, which benefited
from favourable market spreads in the prior year, and a decrease in
corporate banking revenues primarily due to lower asset levels. Net
interest margin increased 2 basis points due to higher trading net interest
income, partially offset by lower spreads in our interest-rate-sensitive
businesses and a decrease in corporate lending assets.
Non-interest revenue increased $324 million or 21% due to invest-
ment securities gains in 2010 compared to significant losses in the prior
year. Mergers and acquisitions and debt underwriting fees improved
considerably, while equity underwriting fees decreased from elevated
levels in the prior year. Trading revenues also decreased in a less favour-
able trading environment with fewer market opportunities.
The provision for credit losses was $264 million compared with
$146 million in 2009, as expected losses for 2010 were anticipated to be
higher a year ago.
Non-interest expense increased $78 million to $1,822 million due
to increased employee costs, as we made strategic hires across our
operations to position our business for future growth, and higher other
costs, including a litigation settlement. The weaker U.S. dollar decreased
expenses by $73 million. The group’s productivity ratio improved from
56.5% to 55.5%, driven by the growth in revenue. Income taxes increased
from 2009 primarily due to the higher proportion of income in lower-
tax-rate jurisdictions in the prior year.
Net income from U.S. operations decreased US$238 million to
US$67 million, reflecting significantly lower trading revenue and decreased
revenues from our interest-rate-sensitive businesses, partially offset by
increases in investment securities gains and investment banking revenue.
Non-interest expense increased as we continued to invest in strategic
hiring.
To position our commercial business for growth as the United States
emerges from recession, we identified U.S. mid-market clients that would
be better served by a commercial banking model and transferred these
accounts to P&C U.S. from BMO Capital Markets in the second quarter of
2010. As a result, P&C U.S. assumed US$5.4 billion in loans and US$3.2 billion
in deposits, with results for prior periods restated to reflect the transfer.
Transferring accounts that are primarily lending-based to P&C U.S. allows
Looking forward, we expect the economic recovery to continue in
Canada and the United States, although GDP has slowed and will likely
grow only moderately in the first half of fiscal 2011 as the effects of
previous stimulus measures abate. With unemployment still high and
inflation pressures low, the Federal Reserve is expected to maintain
its policy of very low interest rates in the United States through 2011.
The Bank of Canada, after a period of rate tightening this year, is
now holding steady and is not expected to resume raising rates until
the spring of 2011. Capital market conditions should continue to improve,
which will benefit our fee-based businesses. Our focus in 2011 will
be to continue to deliver a strong return on equity with stable, high-
quality earnings. Growth in fiscal 2011 will depend on the performance
of financial and commodity markets, as well as general economic
activity and business confidence.
BMO Capital Markets to direct its attention to sectors and clients where
it has a differentiated competitive advantage while maintaining a clear
focus on winning investment banking mandates.
BMO Capital Markets (Canadian $ in millions, except as noted)
Change from 2009
As at or for the year ended October 31 2010 2009 2008 $ %
Net interest income (teb) 1,394 1,528 1,048 (134) (9)
Non-interest revenue 1,885 1,561 1,130 324 21
Total revenue (teb) 3,279 3,089 2,178 190 6
Provision for credit losses 264 146 97 118 81
Non-interest expense 1,822 1,744 1,636 78 4
Income before income taxes 1,193 1,199 445 (6) –
Income taxes (recovery) (teb) 373 326 (123) 47 15
Net income 820 873 568 (53) (6)
Amortization of acquisition-related
intangible assets (after tax) – – 1 – –
Cash net income 820 873 569 (53) (6)
Net economic profit 347 272 (7) 75 28
Return on equity (%) 18.8 15.7 10.4 3.1
Cash return on equity (teb) (%) 18.8 15.7 10.4 3.1
Cash operating leverage (%) 1.7 35.3 12.9 nm
Productivity ratio (teb) (%) 55.5 56.5 75.1 (1.0)
Cash productivity ratio (teb) (%) 55.5 56.4 75.1 (0.9)
Net interest margin on
earning assets
(%) 0.92 0.90 0.63 0.02
Average common equity 4,154 5,255 5,120 (1,101) (21)
Average earning assets 152,116 169,033 166,504 (16,917) (10)
Average loans and acceptances 25,437 34,873 30,825 (9,436) (27)
Average deposits 80,401 85,458 102,951 (5,057) (6)
Assets under administration 21,870 27,418 38,781 (5,548) (20)
Assets under management 5,196 6,969 9,294 (1,773) (25)
Full-time equivalent employees 2,305 2,103 2,204 202 10
nm – not meaningful
U.S. Business Selected Financial Data (US$ in millions)
Change from 2009
As at or for the year ended October 31 2010 2009 2008 $ %
Total revenue (teb) 992 1,136 824 (144) (13)
Non-interest expense 725 622 611 103 17
Net income 67 305 133 (238) (78)
Average earning assets 48,231 56,151 60,195 (7,920) (14)
Average loans and acceptances 5,359 7,424 9,097 (2,065) (28)
Average deposits 25,136 30,061 33,401 (4,925) (16)
56 BMO Financial Group 193rd Annual Report 2010