Bank of Montreal 2012 Annual Report Download - page 46

MD&A
Provision for Income Taxes
The provision for income taxes reflected in the Consolidated Statement of
Income is based upon transactions recorded in income, regardless of
when such transactions are subject to taxation by tax authorities, with
the exception of the repatriation of retained earnings from foreign
subsidiaries, as outlined in Note 24 on page 164 of the
financial statements.
Management assesses BMO’s consolidated results and associated
provisions for income taxes on a GAAP basis. We assess the performance
of the operating groups and associated income taxes on a taxable equiv-
alent basis and report accordingly.
The provision for income taxes was $938 million in 2012, compared
with $876 million in 2011. The reported effective tax rate in 2012 was
18.3%, compared with 22.0% in 2011. The adjusted provision for income
taxes(1) in 2012 was $991 million, compared with $906 million in 2011.
The adjusted effective tax rate in 2012 was 19.5%, compared with 21.7%
in 2011. The lower adjusted effective rate was mainly attributable to a
reduction of 1.6 percentage points in the statutory Canadian income tax
rate in 2012 and higher recoveries of prior years’ income taxes.
BMO partially hedges the foreign exchange risk arising from
its investments in U.S. operations by funding the investments in U.S.
dollars. Under this program, the gain or loss on hedging and the unreal-
ized gain or loss on translation of investments in U.S. operations are
charged or credited to shareholders’ equity. For income tax purposes, the
gain or loss on the hedging activities results in an income tax charge or
credit in the current period, which is charged or credited to shareholders’
equity, while the associated unrealized gain or loss on the investments in
U.S. operations does not incur income taxes until the investments are
liquidated. The income tax charge/benefit arising from a hedging gain/
loss is a function of the fluctuations in exchange rates from period to
period. Hedging of the investments in U.S. operations has given rise to an
income tax recovery in shareholders’ equity of $13 million for the year,
compared with an income tax expense of $26 million in 2011. Refer to
the Consolidated Statement of Changes in Shareholders’ Equity on
page 122 of the financial statements for further details.
Table 8 on page 105 details the $1,521 million of total net govern-
ment levies and income tax expense incurred by BMO in 2012. The
increase from $1,396 million in 2011 was primarily due to higher
income tax expense, as well as higher payroll levies.
(1) The adjusted rate is computed using adjusted net income rather than net income in the
determination of income subject to tax.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 98.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our
directors and executives and their affiliated entities, joint ventures and
equity-accounted investees on the same terms that we offer to our
customers for those services. Details of our investments in joint ventures
and associates are disclosed in Note 27 on page 169 of the financial
statements. A select suite of customer loan and mortgage products is
offered to our employees at rates normally made available to our pre-
ferred customers. We also offer employees a subsidy on annual credit
card fees.
Stock options and deferred share units granted to directors, and
preferred rate loan agreements for executives relating to transfers we
initiate, are discussed in Note 27 on page 168 of the financial statements.
2012 Review of Operating Groups Performance
This section includes an analysis of the financial results of our operating
groups and descriptions of their businesses, strategies, strengths, chal-
lenges, key value drivers, achievements and outlooks.
Personal and Commercial Banking (P&C) (pages 45 to 51)
Net income was $2,301 million in 2012, an increase of $176 million or
8.2% from 2011. Adjusted net income was $2,375 million, an increase
of $207 million or 9.5%. Personal and Commercial Banking is comprised
of two operating segments: Personal and Commercial Banking Canada
(P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.).
Private Client Group (PCG) (pages 52 to 54)
Net income was $525 million in 2012, an increase of $49 million or
10% from 2011. Adjusted net income was $546 million, an increase of
$60 million or 12%.
BMO Capital Markets (BMO CM) (pages 55 to 57)
Net income was $948 million in 2012, an increase of $46 million or
5.1% from 2011. Adjusted net income was $949 million, an increase of
$47 million or 5.2%.
Corporate Services, including Technology and Operations (page 58)
Net income was $415 million in 2012, compared with a net loss of $389
million in 2011. Adjusted net income was $222 million, an improvement
of $503 million from 2011.
Allocation of Results
The basis for the allocation of results geographically and among operating
groups is outlined in Note 26 on page 167 of the financial statements.
Certain prior year data has been restated, as explained on the following
page, which also provides further information on the allocation of results.
* Percentages determined excluding results in Corporate Services, which in part reflect
our expected loss provisioning methodology.
The acquisition of M&I raised
U.S. earnings in 2012.
Adjusted Net Income
by Country
Adjusted Net Income
by Operating Segment*
2011 2011
2012
U.S. 26%
Canada
70%
Other
countries
4%
U.S. 10%
Canada
85%
Other
countries
5%
P&C U.S. share of adjusted net
income increased in 2012 due to
the acquisition of M&I.
P&C U.S. 11%
PCG 14%
BMO CM 25%
P&C Canada
50%
2012
P&C U.S. 15%
PCG 14%
BMO CM 25%
P&C Canada
46%
BMO Financial Group 195th Annual Report 2012 43