Bank of Montreal 2012 Annual Report Download - page 99

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Quarterly Earning Trends
BMO’s results and performance measures for the past eight quarters are
outlined on page 97. Periodically, certain business lines and units within
the business lines are transferred between client operating groups to
more closely align BMO’s organizational structure with its strategic
priorities. Comparative figures have been restated to conform to the
current presentation.
We have remained focused on embracing a culture that places the
customer at the centre of everything we do. Economic conditions were
at times challenging for some of our businesses in 2011 and 2012, but
conditions have improved overall and quarterly adjusted results have
trended higher over the past two years. We are now more focused on
improving our productivity in the low growth environment.
BMO’s quarterly earnings, revenue and expense are modestly
affected by seasonal factors. Since our second fiscal quarter has 89 days
(90 in a leap year) and other quarters have 92 days, second-quarter
results are lower relative to other quarters because there are fewer
calendar days, and thus fewer business days. The months of July (third
quarter) and August (fourth quarter) are typically characterized by lower
levels of capital markets activity, which has an effect on results in Pri-
vate Client Group and BMO Capital Markets. The December holiday
season also contributes to a slowdown in some activities; however,
credit card purchases are particularly robust in that first-quarter period,
as well as in the back-to-school period that falls in our fourth quarter.
P&C Canada has continued to offer attractive products and services
to meet our customers’ needs while also providing new products across
all channels. These include BMO Mobile Banking, the Online Banking for
Business portal and BMO Business Bundles. Customer loyalty improved
in both the personal and commercial segments and we continue to
see increases in the average number of product categories used by both
personal and commercial banking customers. We have strengthened our
branch network, expanded our ABM network and added to our speci-
alized sales force. P&C Canada has maintained its good performance
over the past two years. Results have reflected growth in volumes
across most products in both the personal and commercial segments,
but growth in earnings and revenue has been muted by reduced net
interest margin as a result of the low interest rate environment and
competitive pressures.
P&C U.S. continues to build a customer-focused culture with a
superior combination of sector expertise and local knowledge centred
on helping our customers grow and achieve their financial goals. P&C
U.S. has operated in a difficult economic environment since 2007. A drop
in loan utilization in 2010 affected revenue growth and net income, but
results improved significantly in 2011 and 2012 as we began to include
the results of the acquired business late in the third quarter of 2011, as
well as improved commercial loan utilization.
Private Client Group is focused on helping clients reach their goals
by providing a broad offering of innovative, high-value products and
solutions. Operating results improved in 2012 after having also
increased in 2011. Quarterly results in PCG, excluding Insurance, have
grown on a relatively consistent basis, reflecting increases in revenues
from acquisitions and across most businesses. Quarterly results in
Insurance have been subject to variability due to unusually high charge
in respect of reinsurance claims related to earthquakes in Japan and
New Zealand in 2011 and the effects of long-term interest rate move-
ments in both 2011 and 2012. Results in the fourth quarter each year
also reflect the impact from the annual review of actuarial assumptions
and, in the fourth quarter of 2012, the benefit of changes to the invest-
ment portfolio to improve asset-liability management. In the third
quarter of 2011 PCG’s results began to reflect the acquisition of the
Lloyd George Management group of companies and the M&I wealth
management business. M&I in particular has contributed to strong
results for both years.
BMO Capital Markets continues to implement a strategy of building
a North American capital markets business by deepening core relation-
ships through a unified approach to client coverage and generating
ideas that create a better client experience. Results in the first nine
months of 2011 were very strong, but fell in the fourth quarter of that
year due to a difficult market environment. Results in the first nine
months of 2012 were generally good, but were down from the levels
recorded in 2011 due to less favourable market conditions; however,
results in the final quarter of 2012 were stronger, due to increased
revenues and a recovery of prior periods’ income taxes, and net income
for 2012 was better than in 2011.
BMO’s overall provisions for credit losses measured as a percentage
of loans and acceptances were lower in 2012 than in 2011. Adjusted
provisions, which exclude provisions on the M&I purchased loan
portfolio and changes in the collective allowance, were relatively con-
sistent throughout 2012 but were also lower than in 2011, due in part to
recoveries of provisions on the M&I purchased credit impaired loan
portfolio and an improvement in the credit environment.
Corporate Services quarterly net income can vary, in large part due
to the effects of our use of an expected loss provisioning methodology
for management reporting purposes, changes in the collective allowance
and the impact of recording revenue, expense and income taxes not
attributed to the client operating groups. Adjusted results in Corporate
Services reflect greater consistency, and on this basis, were relatively
steady in 2012 and better than in 2011. This was primarily due to a
reduction in the adjusted provision for credit losses recorded in Corpo-
rate Services in 2012, reflecting the significant recoveries of provisions
on the M&I purchased credit impaired loan portfolio. BMO’s overall
provisions on an actual loss basis in 2012 were down from the prior
year, and this resulted in an increase in net income in Corporate Services
in 2012. BMO’s actual credit losses were lower than expected losses
charged to the client operating groups in 2012, compared with a charge
in 2011 when BMO’s actual credit losses were higher than expected
losses charged to the operating groups. The application of expected
credit losses and actual credit losses is discussed in the Corporate Serv-
ices including the Technology and Operations section on page 58.
The U.S. dollar weakened in the first half of 2011 before
strengthening in the fourth quarter and reaching a level close to parity.
Movements in exchange rates in 2012 were more subdued. A weaker
U.S. dollar lowers the translated value of U.S.-dollar-denominated
revenues, expenses, provisions for credit losses, income taxes and
net income.
The effective income tax rate can vary, as it depends on the timing
of resolution of certain tax matters, recoveries of prior periods’ income
taxes and the relative proportion of earnings attributable to the different
jurisdictions in which we operate. The adjusted effective rate was lower
in 2012 than in 2011 due in large part to a 1.6 percentage point reduc-
tion in the statutory Canadian income tax rate in 2012 and higher
recoveries of prior periods’ income taxes.
Caution
This Quarterly Earnings Trends section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
96 BMO Financial Group 195th Annual Report 2012