Bank of Montreal 2012 Annual Report Download - page 51

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Business Environment and Outlook
Canada’s economy has not been immune to the headwinds that have
been affecting the global economy. Employment growth in 2012 was
moderate and exports have struggled in the face of modest U.S. demand
and the strong Canadian dollar. The residential real estate market began
showing signs of cooling in the summer with housing sales losing
momentum, although the level of construction activity remains ele-
vated. We anticipate the Canadian economy will grow by approximately
2% in 2012 and 2013.
In Canadian personal banking, the pace of credit accumulation by
households has slowed. Growth in demand for consumer credit has
fallen sharply, and growth in the mortgage market is expected to
moderate in response to more restrictive mortgage rules. Overall,
demand for personal credit is projected to grow modestly in 2013. In
commercial banking, growth in demand for business credit remains
solid, supported by rising investment in equipment and a healthy
commercial real estate sector.
Looking ahead, the global economic outlook remains uncertain with
risks ranging from slowing growth in China to fears about the U.S. fiscal
situation and European debt concerns. Given the tepid global economic
climate and the expectation that U.S. interest rates will not rise before
2015, interest rates in Canada are likely to remain low for an extended
period. Core deposits have strengthened, reflecting a growing aversion
to risk. As economic and financial market conditions improve, demand
for credit is projected to outpace core deposit growth and the demand
for wholesale funding is likely to rise during 2013 and 2014, which will
continue to put pressure on net interest margin. After falling sharply
during the economic downturn, the growth in demand for short-term
business credit has rebounded briskly to a pace that is above its longer-
term average. The growth in demand for short-term business credit is
projected to remain strong in 2013 before easing slightly in 2014.
P&C Canada Financial Results
P&C Canada net income was $1,784 million, up $11 million or 0.6% from
a year ago. Reported results reflect provisions for credit losses in BMO’s
operating groups on an expected loss basis. Net income increased
$58 million or 3.4% on a basis that adjusts reported results to reflect
provisions on an actual loss basis.
Revenue increased $20 million or 0.3% to $6,188 million, as the
effects of growth in balances and fees across most of the business were
largely offset by lower net interest margin. Net interest margin was
2.78%, down 15 basis points from the prior year, primarily due to
deposit spread compression in a low rate environment and changes
in mix, including loan growth exceeding deposit growth as well as
competitive pressures.
In our personal banking business, revenue increased $28 million or
0.7%. The increase was due to the effects of growth in balances and fees
across most of the business, partially offset by lower net interest margin.
In our commercial banking business, revenue decreased $8 million
or 0.3% as the effects of growth in balances across most of the business
were more than offset by lower net interest margin.
Non-interest expense was $3,196 million, up $48 million or 1.6%,
primarily due to investment in the business, including our distribution
network, net of strong expense management. Our efficiency ratio deter-
iorated by 70 basis points to 51.7%. Improving productivity and the
customer experience is an objective for P&C Canada in 2013. In this
regard, a number of initiatives are underway such as eStatements,
mobile banking enhancements and online booking of appointments, as
well as the redesign of processes such as the successful pilot of new
mortgage application and approval practices.
Note: The P&C Canada summary income statement appears on page 45.
48 BMO Financial Group 195th Annual Report 2012