Bank of Montreal 2013 Annual Report Download - page 25

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Economic Profit Growth
Net economic profit (NEP) growth is another of our key value measures.
NEP was $1,298 million in 2013, down $141 million or 10% from 2012.
Adjusted NEP was $1,237 million, down $9 million or 1%. The decrease
in both NEP and adjusted NEP is reflective of higher earnings in the
current year being more than offset by a higher charge for capital, as
a result of an increase in average common shareholders’ equity. NEP
calculations are set out in the table that follows.
Higher earnings in 2013 were
more than offset by a higher
charge for capital given higher
capital levels.
Net economic profit (NEP)
represents net income
available to common share-
holders before deduction for
the after-tax impact of the
amortization of acquisition-
related intangible assets, less
a charge for capital. Adjusted
NEP is a comparable measure
that is instead computed with
reference to adjusted net
income. NEP is considered a
reasonable measure of added
economic value. NEP and
adjusted NEP are non-GAAP
measures. See page 34.
2011
Adjusted NEP
NEP
NEP ($ millions)
2013 2012
941 1,048
1,439
1,246 1,2981,237
Net Economic Profit and Adjusted Net Economic Profit ($ millions)
For the year ended October 31 2013 2012 2011 2010 2009
Net income available to common shareholders
After-tax impact of the amortization of acquisition-related intangible assets
4,063
89
3,979
96
2,895
54
2,674
32
1,667
35
Net income available to common shareholders after adjusting for the amortization of
acquisition-related intangible assets
Charge for capital (1)
4,152
(2,854)
4,075
(2,636)
2,949
(2,008)
2,706
(1,888)
1,702
(1,770)
Net economic profit 1,298 1,439 941 818 (68)
Add back: after-tax impact of adjusting items, excluding after-tax impact of the amortization of
acquisition-related intangible assets (61) (193) 107 – 474
Adjusted net economic profit 1,237 1,246 1,048 818 406
2010 and prior are based on CGAAP.
(1) The charge for capital is calculated by applying the cost of capital of 10.5% to average common shareholders’ equity.
NEP and adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 34.
Return on Equity
Return on equity (ROE) is the last of our four key value measures. ROE
was 14.9% in 2013 and adjusted ROE was 15.0%, compared with 15.9%
and 15.5%, respectively, in 2012. There was an increase of $84 million
in earnings ($209 million in adjusted earnings) available to common
shareholders in 2013. Average common shareholders’ equity increased
by $2.1 billion from 2012, primarily due to internally-generated capital.
Adjusted ROE of 15.0% was in line with our medium-term objective of
earning an average annual adjusted ROE of 15% to 18%. BMO has
achieved an ROE of 13% or better in 23 of the past 24 years. Table 3
on page 106 includes ROE statistics for the past 10 years.
ROE (%)
ROE has been consistently strong.
Return on common
shareholders’ equity (ROE)
is calculated as net income,
less non-controlling interest in
subsidiaries and preferred
dividends, as a percentage of
average
common shareholders’
equity. Common shareholders’
equity
is comprised of common
share capital, contributed
surplus, accumulated other
comprehensive income
(loss) and retained earnings.
Adjusted ROE is calculated
using adjusted net income
rather than net income.
Adjusted ROE
16.0 15.9 15.5
ROE
2011 2013 2012
15.1 14.9 15.0
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 34.
36 BMO Financial Group 196th Annual Report 2013