Bank of Montreal 2013 Annual Report Download - page 19

MANAGEMENT’S DISCUSSION AND ANALYSIS
Factors That May Affect Future Results
MD&A
As noted in the preceding Caution Regarding Forward-Looking State-
ments, all forward-looking statements and information, by their nature,
are subject to inherent risks and uncertainties, both general and specific,
which may cause actual results to differ materially from the expectations
expressed in any forward-looking statement. The Enterprise-Wide Risk
Management section starting on page 77 describes a number of risks,
including credit and counterparty, market, liquidity and funding, opera-
tional, insurance, legal and regulatory, business, model, strategic, reputa-
tion, and environmental and social. That section also highlights top and
emerging risks, including challenges linked to the slow-growth economy,
heightened regulatory requirements, Canadian household debt, Eurozone
challenges, U.S. political gridlock and information and cyber security risk.
Should our risk management framework prove ineffective, there could be
a material adverse impact on our financial position. The sections that
follow outline some additional risks and uncertainties.
General Economic and Market Conditions in the Countries
in which We Conduct Business
We conduct business in Canada, the United States and other countries.
Factors such as the general health of capital and/or credit markets,
including liquidity, level of activity, volatility and stability, could have
a material impact on our business. As well, interest rates, foreign
exchange rates, consumer saving and spending, housing prices,
consumer borrowing and repayment, business investment, government
spending and the rate of inflation affect the business and economic
environments in which we operate. Therefore, the amount of business
we conduct in a specific geographic region and its local economic and
business conditions may have an effect on our revenues and earnings.
For example, a regional economic decline may result in an increase in
credit losses, a decrease in loan growth and reduced capital markets
activity. In addition, the financial services industry is characterized by
interrelations among financial services companies. As a result, defaults
by other financial services companies in Canada, the United States or
other countries could adversely affect our earnings. Given the inter-
connectedness of global financial markets and the importance of trade
flows, deterioration of the still-unresolved European sovereign debt
situation could affect the supply and cost of credit and constrain the
pace of economic growth in North America.
Fiscal, Monetary and Interest Rate Policies
Our earnings are affected by fiscal, monetary, interest rate and economic
policies that are adopted by Canadian, U.S. and other regulatory author-
ities. Such policies can have the effect of increasing or reducing competi-
tion and uncertainty in the markets. Such policies may also adversely
affect our customers and counterparties in the countries in which we
operate, causing a greater risk of default by these customers and
counterparties. As well, expectations in the bond and money markets
about inflation and central bank monetary policy have an impact on the
level of interest rates. Changes in market expectations and monetary
policy are difficult to anticipate and predict. Fluctuations in interest rates
that result from these changes can have an impact on our earnings. The
current prolonged low interest rate policies have had a negative impact
on results and a continuation of such policies would likely continue to
pressure earnings. Refer to the Market Risk section on page 87 for a
more complete discussion of our interest rate risk exposures. As dis-
cussed in our Critical Accounting Estimates section, a reduction in income
tax rates could lower the value of our deferred tax asset.
Changes in Laws, Regulations and Approach to Supervision
Regulators in Canada, the United States and elsewhere are very active
on a number of fronts, including consumer protection, capital markets
activities, anti-money laundering, and the oversight and strengthening
of risk management.
Regulations are in place to protect our customers, investors and the
public interest. Considerable changes in laws and regulations that relate
to the financial services industry have been proposed and enacted,
including changes related to capital and liquidity requirements. Changes
in laws and regulations, including their interpretation and application,
and changes in approaches to supervision could adversely affect our
earnings. For example, such changes could limit the products or services
we can provide and the manner in which we provide them and, poten-
tially, lower our ability to compete, while also increasing the costs of
compliance. As such, they could have a negative impact on earnings and
return on equity. These changes could also affect the levels of capital
and liquidity we choose to maintain. In particular, the Basel III global
standards for capital and liquidity, which are discussed in the Enterprise-
Wide Capital Management and the Liquidity and Funding Risk sections
that start on pages 61 and 92, respectively, and implementation of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which is
discussed in the U.S. Regulatory Developments section on page 69, will
have an impact on our results and activities. Other regulatory develop-
ments are discussed in the Market Risk section on page 87 and liquidity
and funding risk is discussed starting on page 61. In addition to the
factors outlined here, our failure to comply with laws and regulations
could result in sanctions and financial penalties that could adversely
affect our strategic flexibility, reputation and earnings.
Execution of Strategy
Our financial performance is influenced by our ability to execute
strategic plans developed by management. If these strategic plans do
not meet with success or if there is a change in these strategic plans,
our earnings could grow at a slower pace or decline. In addition, our
ability to execute our strategic plans is dependent to a large extent on
our ability to attract, develop and retain key executives, and there is no
assurance we will continue to do so successfully.
Acquisitions
We conduct thorough due diligence before completing an acquisition.
However, it is possible that we might make an acquisition that sub-
sequently does not perform in line with our financial or strategic
objectives. Our ability to successfully complete an acquisition may be
subject to regulatory and shareholder approvals and we may not be able
to determine when or if, or on what terms, the necessary approvals will
be granted. Changes in the competitive and economic environment as
well as other factors may lower revenues, while higher than anticipated
integration costs and failure to realize expected cost savings could also
adversely affect our earnings after an acquisition. Integration costs may
increase as a result of increased regulatory costs related to an acquis-
ition, unanticipated costs that were not identified in the due diligence
process or more significant demands on management time than antici-
pated, as well as unexpected delays in implementing certain plans that
in turn lead to delays in achieving full integration. Our post-acquisition
performance is also contingent on retaining the clients and key
employees of acquired companies, and there can be no assurance that
we will always succeed in doing so.
30 BMO Financial Group 196th Annual Report 2013