Bank of Montreal 2012 Annual Report Download - page 40

MD&A
Markets revenue decreased $34 million or 1.0% to $3,265 million in a
challenging market environment for some areas in our Investment
Banking business. The reduction in that business was mitigated by a
significant increase in trading revenues. Corporate Services adjusted
revenues were essentially unchanged from 2011.
For the fifth consecutive year, there was solid growth in both net
interest income and non-interest revenue on a reported basis, with both
rising at double-digit rates in 2012.
Net Interest Income
Net interest income for the year was $8,808 million, an increase of
$1,334 million or 18% from 2011. Adjusted net interest income was
$8,029 million, up $781 million or 11% from 2011, of which $731 million
was due to the inclusion of eight additional months results of M&I
compared to 2011. Adjusted net interest income excludes the portion of
the credit mark recorded in net interest income on the acquired M&I loan
portfolio and the cost of hedging the exposure to changes in foreign
exchange rates on the M&I purchase in 2011.
Amounts in the rest of this Net Interest Income section are stated
on an adjusted basis.
The impact of the stronger U.S. dollar increased net interest income
by $33 million, excluding any amounts related to M&I. BMO’s average
earning assets increased $56.0 billion in 2012, of which $22.2 billion
was attributable to the inclusion of eight additional months of M&I’s
results. The stronger U.S. dollar increased average assets by $3.5 billion.
Asset levels increased in each of the operating groups, with particularly
strong growth in P&C U.S. BMO’s overall net interest margin was down 5
basis points in 2012. The main drivers of BMO’s overall net interest
margin are the individual group margins, changes in the magnitude of
each operating group’s assets and changes in net interest income in
Corporate Services.
P&C Canada net interest income was down slightly from a year ago.
Theeffectsofhigherloanbalancesacrossmostproductswerelargelyoffset
by the impact of lower net interest margin. Net interest margin decreased
15 basis points from the prior year, primarily due to deposit spread com-
pression in a low rate environment and changes in mix, including loan
growth exceeding deposit growth as well as competitive pressures.
In P&C U.S., net interest income grew significantly, increasing
$809 million (US$781 million or 48%), primarily due to the inclusion of
eight additional months of M&I results. Net interest margin decreased
9 basis points due to deposit spread compression in a low rate
environment as well as a decline in loan spreads due to competitive
pressures, partially offset by the positive effects of deposit growth
exceeding loan growth and the acquired business.
Private Client Group net interest income increased $100 million or
22%. Results for the group reflected the inclusion of the acquired busi-
nesses for a full year and growth in revenues from spread-based prod-
ucts. The group’s net interest margin increased 11 basis points due to
an increase in earnings from a strategic investment.
BMO Capital Markets net interest income decreased $33 million or
2.7%. The group’s average earning assets increased due to additions to
our holdings of securities purchased under resale agreements in
response to increased customer demand and to an increase in deposits
held at the Federal Reserve. Net interest margin decreased 11 basis
points due to reduced market spreads.
Corporate Services adjusted net interest income was lower, due in
part to interest received on the settlement of certain tax matters in 2011.
Table 9 on page 106 and Table 10 on page 107 provide further
details on net interest income and net interest margin.
Net interest income is comprised of earnings on assets, such as
loans and securities, including interest and dividend income and
BMO’s share of income from investments accounted for using the
equity method of accounting, less interest expense paid on liabilities,
such as deposits.
Net interest margin is the ratio of net interest income to earning
assets, expressed as a percentage or in basis points.
Earning assets increased and
adjusted net interest margin
decreased in the low rate
environment.
2010 2011 2012
Average Earning Assets and
Net Interest Margin
Average earning assets ($ billions)
Net interest margin (%)
Adjusted net interest margin (%)
Net Interest Income
and Non-Interest Revenue
($ billions)
Non-interest revenue
Net interest income
Adjusted non-interest revenue
Adjusted net interest income
Net interest income and
non-interest revenue
continued to grow.
2008
327
2009
342
2010
332
2012
460
2011
404 12.2 12.2
13.9 13.7
16.1 15.1
1.55 1.63 1.88
1.91
1.79
1.85
1.74
6.2 7.5
8.8
6.0 6.4 7.3 6.0
6.2
6.5
7.2
7.1
8.0
Revenue by Country (%)
Canada
United States
Other countries
Revenue and Revenue Growth
There was good revenue growth
in P&C U.S. and PCG.
The change in reported revenue
by country reflects the July 2011
acquisition of M&I and the continued
growth of our U.S. business.
Revenue ($ billions)
Adjusted revenue ($ billions)
Revenue growth (%)
Adjusted revenue growth (%)
75
22
32
72
26
2011
3
2012201020122010 2011*
63
34
12.2 12.2
13.9
16.1 15.1
13.7
10.6 13.9
15.7
9.7
5.7
12.3
* Growth rates for 2011 reflect growth
based on CGAAP in 2010 and IFRS in 2011.
2010 based on CGAAP.
Change in Net Interest Income, Average Earning Assets and Net Interest Margin
Net interest income (teb) Average earning assets Net interest margin
($ millions) Change ($ millions) Change (in basis points)
For the year ended October 31 2012 2011 $ % 2012 2011 $ % 2012 2011 Change
P&C Canada 4,342 4,362 (20) – 156,282 148,867 7,415 5 278 293 (15)
P&C U.S. 2,433 1,624 809 50 55,857 36,471 19,386 53 436 445 (9)
Personal and Commercial Banking (P&C) 6,775 5,986 789 13 212,139 185,338 26,801 14 319 323 (4)
Private Client Group (PCG) 555 455 100 22 17,825 15,191 2,634 17 311 300 11
BMO Capital Markets (BMO CM) 1,180 1,213 (33) (3) 193,889 167,593 26,296 16 61 72 (11)
Corporate Services, including Technology and Operations (481) (406) (75) (19) 36,352 36,073 279 1 nm nm nm
Total BMO adjusted 8,029 7,248 781 11 460,205 404,195 56,010 14 174 179 (5)
Adjusting items impacting net interest income (779) (226) (553) (+100) – ––– nm nm nm
Total BMO reported 8,808 7,474 1,334 18 460,205 404,195 56,010 14 191 185 6
nm – not meaningful
BMO Financial Group 195th Annual Report 2012 37