Bank of Montreal 2012 Annual Report Download - page 31

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Factors That May Affect Future Results
As noted in the preceding Caution Regarding Forward-Looking State-
ments, all forward-looking statements and information, by their nature,
are subject to inherent risks and uncertainties, both general and specific,
which may cause actual results to differ materially from the expect-
ations expressed in any forward-looking statement. The Enterprise-Wide
Risk Management section starting on page 75 describes a number of
risks, including credit and counterparty, market, liquidity and funding,
operational, insurance, legal and regulatory, business, model, strategic,
reputation, and environmental and social. Should our risk management
framework prove ineffective, there could be a material adverse impact
on our financial position. The sections that follow outline some
additional risks and uncertainties.
General Economic and Market Conditions in the Countries
in which We Conduct Business
We conduct business in Canada, the United States and other countries.
Factors such as the general health of capital and/or credit markets,
including liquidity, level of activity, volatility and stability, could have
a material impact on our business. As well, interest rates, foreign
exchange rates, consumer saving and spending, consumer borrowing
and repayment, business investment, government spending and the
rate of inflation affect the business and economic environments in
which we operate. Therefore, the amount of business we conduct in a
specific geographic region and its local economic and business con-
ditions may have an effect on our revenues and earnings. For example,
a regional economic decline may result in an increase in credit losses, a
decrease in loan growth and reduced capital markets activity. In addi-
tion, the financial services industry is characterized by interrelations
among financial services companies. As a result, defaults by other finan-
cial services companies in Canada, the United States or other countries
could adversely affect our earnings. Given the interconnectedness of
global financial markets and the importance of trade flows, deterioration
of the still-unresolved European sovereign debt situation could affect the
supply and cost of credit and constrain the pace of economic growth in
North America.
Fiscal, Monetary and Interest Rate Policies
Our earnings are affected by fiscal, monetary, interest rate and economic
policies that are adopted by Canadian, U.S. and other regulatory author-
ities. Such policies can have the effect of increasing or reducing competi-
tion and uncertainty in the markets. Such policies may also adversely
affect our customers and counterparties in the countries in which we
operate, causing an increased risk of default by these customers and
counterparties. As well, expectations in the bond and money markets
about inflation and central bank monetary policy have an impact on the
level of interest rates. Changes in market expectations and monetary
policy are difficult to anticipate and predict. Fluctuations in interest rates
that result from these changes can have an impact on our earnings. The
current prolonged low interest rate policies have had a negative impact
on results and a continuation of such policies would likely continue to
pressure earnings. Refer to the Market Risk section on pages 82 to 86 for
a more complete discussion of our interest rate risk exposures. As dis-
cussed in our Critical Accounting Estimates section, a reduction in income
tax rates could lower the value of our deferred tax asset.
Changes in Laws, Regulations and Approach to Supervision
Regulations are in place to protect our customers, investors and the
public interest. Considerable changes in laws and regulations that relate
to the financial services industry have been proposed and enacted,
including changes related to capital and liquidity requirements. Changes
in laws and regulations, including their interpretation and application,
and in approaches to supervision could adversely affect our earnings. For
example, such changes could limit the products or services we can
provide and the manner in which we provide them and, potentially,
lower our ability to compete, while also increasing the costs of com-
pliance. As such, they could have a negative impact on earnings and
return on equity. These changes could also affect the levels of capital
and liquidity we choose to maintain. In particular, the Basel III global
standards for capital and liquidity, which are discussed in the Enterprise-
Wide Capital Management section that starts on page 60, and enact-
ment of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, which is discussed in the U.S. Regulatory Developments section on
page 69, will have an impact on our results and activities. Liquidity and
funding risk is discussed starting on page 86. In addition to the factors
outlined here, our failure to comply with laws and regulations could
result in sanctions and financial penalties that could adversely affect our
strategic flexibility, reputation and earnings.
Execution of Strategy
Our financial performance is influenced by our ability to execute
strategic plans developed by management. If these strategic plans do
not meet with success or if there is a change in these strategic plans,
our earnings could grow at a slower pace or decline. In addition, our
ability to execute our strategic plans is dependent to a large extent on
our ability to attract, develop and retain key executives, and there is no
assurance we will continue to do so successfully.
Acquisitions
We conduct thorough due diligence before completing an acquisition.
However, it is possible that we might make an acquisition that sub-
sequently does not perform in line with our financial or strategic
objectives. Our ability to successfully complete an acquisition may be
subject to regulatory and shareholder approvals and we may not be able
to determine when or if, or on what terms, the necessary approvals will
be granted. Changes in the competitive and economic environment as
well as other factors may lower revenues, while higher than anticipated
integration costs and failure to realize expected cost savings could also
adversely affect our earnings after an acquisition. Integration costs may
increase as a result of increased regulatory costs related to an acquis-
ition, unanticipated costs that were not identified in the due diligence
process or more significant demands on management time than antici-
pated, as well as unexpected delays in implementing certain plans that
in turn lead to delays in achieving full integration. Our post-acquisition
performance is also contingent on retaining the clients and key
employees of acquired companies, and there can be no assurance that
we will always succeed in doing so.
Level of Competition
The level of competition among financial services companies is high.
Furthermore, non-financial companies have increasingly been offering
services traditionally provided by banks. Customer loyalty and retention
can be influenced by a number of factors, including service levels, prices
for products or services, our reputation and the actions of our com-
petitors. Also, laws and regulations enacted by regulatory authorities in
the United States and other jurisdictions in which we operate may
provide benefits to our international competitors that could affect our
ability to compete. Changes in these factors or any subsequent loss of
market share could adversely affect our earnings.
Currency Rates
The Canadian dollar equivalents of our revenues, expenses, assets and
liabilities denominated in currencies other than the Canadian dollar are
subject to fluctuations in the value of the Canadian dollar relative to
those currencies. Changes in the value of the Canadian dollar relative to
the U.S. dollar may also affect the earnings of our small business, corpo-
rate and commercial clients in Canada. A strengthening of the U.S. dollar
could increase our risk-weighted assets, lowering our capital ratios.
28 BMO Financial Group 195th Annual Report 2012