Bank of Montreal 2012 Annual Report Download - page 57

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Private Client Group Business Environment and Outlook
Economic growth in Canada slowed in 2012 and equity markets strug-
gled to make headway, as fears of a global economic slowdown
weighed on resource company stocks. Although economic growth in the
United States was also modest, its stock markets recorded double-digit
gains, led by a sharp rebound in share values in the financial sector.
Reductions in long-term interest rates had a negative impact on our
insurance results as lower rates resulted in an increase in
policyholder liabilities.
Assuming that the current European debt and U.S. fiscal challenges
remain reasonably contained, the Canadian economy is expected to
grow modestly in 2013, held back by a strong Canadian dollar, more
restrictive fiscal policies and a moderation in housing market activity
due to tighter mortgage rules. The U.S. economy is also expected to
expand modestly in the first half of 2013, as higher taxes and cuts in
federal government spending take effect, before strengthening in the
second half of the year as household finances improve. Monetary
authorities are expected to maintain low interest rates in 2013, though
the Bank of Canada could raise rates slightly late in the year. Canada’s
10-year bond yield is expected to stay near current record low levels of
below 2% until next summer then rise modestly in the latter part of
2013. The low interest rate environment will continue to put pressure on
our net interest income and Insurance revenues. Client asset levels are
dependent on the health of equity markets and would be expected to
increase when markets improve.
We continue to expect that the market for the North American
wealth management industry will continue to grow over the longer
term, supported by changing demographics, particularly in the retire-
ment, mass affluent and high net worth sectors. With the successful
integration of the M&I wealth management businesses, we have
increased the scale and scope of our U.S. operations. Our recent acquis-
ition of CTC Consulting enhances our advisory capabilities and invest-
ment offering to ultra-high net worth clients. We also now have an
ownership interest in COFCO Trust Co., which provides us with an effec-
tive vehicle to expand our offering to high net worth and institutional
clients in China through a local partner.
Private Client Group Financial Results
Private Client Group net income was $525 million, up $49 million or
10% from a year ago. Adjusted net income, which excludes the amor-
tization of acquisition-related intangible assets, was $546 million, up
$60 million or 12% from a year ago. Adjusted net income in PCG,
excluding Insurance, was $388 million, up $33 million or 9.3%. Adjusted
net income in Insurance was $158 million, up $27 million or 20%.
Revenue of $2,899 million increased $314 million or 12%. Revenue
in PCG, excluding Insurance, increased 12%, reflecting an increase in
revenue from acquisitions, earnings from a strategic investment and
growth in revenues across most businesses. Insurance revenue
increased 9.4%. Insurance revenue was reduced in both 2012 and 2011
by the unfavourable impact of movements in long-term interest rates.
In 2011, Insurance revenue was also reduced by an unusually high
$55 million charge in respect of reinsurance claims related to the earth-
quakes in Japan and New Zealand.
Non-interest expense was $2,217 million, up $261 million or 13%.
Adjusted non-interest expense was $2,189 million, up $245 million or
13% primarily due to an increase in spending on our strategic priorities.
We continue to invest strategically in our business for future growth
while remaining focused on cost management.
Assets under management and administration grew by $40 billion
to $465 billion, due to market appreciation and new client assets.
Net income in PCG U.S. businesses was US$89 million, up
US$42 million from US$47 million a year ago. Adjusted net income in
PCG U.S. businesses was US$104 million, up US$51 million from
US$53 million a year ago, primarily due to acquisitions and the increase
in earnings from a strategic investment.
Private Client Group (Canadian $ in millions, except as noted)
Change
from 2011
As at or for the year ended October 31 2012 2011* 2010 $%
Net interest income (teb) 555 455 365 100 22
Non-interest revenue 2,344 2,130 1,891 214 10
Total revenue (teb) 2,899 2,585 2,256 314 12
Provision for credit losses 14 10 7 448
Non-interest expense 2,217 1,956 1,679 261 13
Income before income taxes 668 619 570 49 8
Provision for income taxes (teb) 143 143 139 ––
Reported net income 525 476 431 49 10
Adjusted net income 546 486 437 60 12
Adjusted return on equity (%) 25.1 33.3 34.7 (8.2)
Return on equity (%) 24.1 32.6 34.2 (8.5)
Adjusted operating leverage (%) (0.5) (1.6) 5.1 nm
Operating leverage (%) (1.2) (1.9) 5.0 nm
Adjusted efficiency ratio (%) 75.5 75.2 74.2 0.3
Efficiency ratio (teb) (%) 76.5 75.7 74.4 0.8
Net interest margin on earning
assets (teb) (%) 3.11 3.00 2.81 0.11
Average common equity 2,143 1,436 1,240 707 49
Average earning assets 17,825 15,191 12,983 2,634 17
Average loans and acceptances 10,783 9,268 7,768 1,515 16
Average deposits 20,934 18,340 16,444 2,594 14
Assets under administration 300,816 274,435 160,323 26,381 10
Assets under management 164,293 150,176 103,534 14,117 9
Full-time equivalent employees 6,347 6,527 4,788 (180) (3)
2010 based on CGAAP.
* Leverage measures for 2011 reflect growth based on CGAAP in 2010 and IFRS in 2011.
nm – not meaningful
U.S. Business Selected Financial Data (US$ in millions)
Change
from 2011
As at or for the year ended October 31 2012 2011 2010 $%
Total revenue (teb) 697 427 257 270 63
Non-interest expense 552 349 232 203 58
Reported net income 89 47 14 42 85
Adjusted net income 104 53 15 51 96
Average loans and acceptances 2,650 2,260 1,877 390 17
Average deposits 4,960 3,199 1,328 1,761 55
2010 based on CGAAP.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 98.
54 BMO Financial Group 195th Annual Report 2012