Bank of Montreal 2013 Annual Report Download - page 27

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Foreign Exchange
The U.S. dollar was stronger compared to the Canadian dollar at
October 31, 2013 than at October 31, 2012. BMO’s U.S.-dollar-
denominated assets and liabilities are translated at year-end rates. The
average exchange rate over the course of 2013, which is used in the
translation of BMO’s U.S.-dollar-denominated revenues and expenses,
was higher in 2013 than in 2012. Consequently, the Canadian dollar
equivalents of BMO’s U.S.-dollar-denominated net income, revenues,
expenses, recoveries of credit losses and income taxes in 2013 were
increased relative to the preceding year. The table below indicates
average Canadian/U.S. dollar exchange rates in 2013, 2012 and 2011
and the impact of changes in the average rates. At October 31, 2013,
the Canadian dollar traded at $1.043 per U.S. dollar. It traded at $0.999
per U.S. dollar at October 31, 2012.
Changes in the exchange rate will affect future results measured in
Canadian dollars and the impact on those results is a function of the
periods in which revenues, expenses and provisions for (recoveries of)
credit losses arise. If future results are consistent with results in 2013,
each one cent increase (decrease) in the Canadian/U.S. dollar exchange
rate, expressed in terms of how many Canadian dollars one U.S. dollar
buys, would be expected to increase (decrease) the Canadian dollar
equivalent of U.S.-dollar-denominated adjusted net income before
income taxes for the year by $15 million in the absence of hedging
transactions.
BMO may execute transactions to mitigate the impact of foreign
exchange rate movements on net income.
Effects of Changes in Exchange Rates on BMO’s Reported
and Adjusted Results
2013 vs. 2012 vs.
($ millions, except as noted) 2012 2011
Canadian/U.S. dollar exchange rate (average)
2013 1.024
2012 1.003 1.003
2011 0.985
Effects on reported results
Increased net interest income 66 70
Increased non-interest revenue 42 30
Increased revenues 108 100
Increased expenses (74) (63)
Decreased (increased) provisions for credit losses 1 (4)
Increased income taxes (5) (3)
Increased reported net income before impact of
hedges 30 30
Hedging losses (14) (1)
Income taxes thereon 4 –
Increased reported net income 20 29
Effects on adjusted results
Increased net interest income 53 56
Increased non-interest revenue 42 30
Increased revenues 95 86
Increased expenses (66) (56)
Decreased provisions for credit losses 4 3
Increased income taxes (4) (3)
Increased adjusted net income before impact of
hedges 29 30
Hedging losses (14) (1)
Income taxes thereon 4 –
Increased adjusted net income 19 29
Revenue
Revenue increased $133 million in 2013 to $16,263 million.
Amounts in the rest of this Revenue section are stated on an
adjusted basis.
Adjusted revenue increased $505 million or 3% to $15,572 million
due to growth in Wealth Management, BMO Capital Markets and Cana-
dian P&C. The stronger U.S. dollar added $81 million or 1% to adjusted
revenue growth, net of hedging impacts. BMO analyzes revenue at the
consolidated level based on GAAP revenues as reported in the financial
statements, and on an adjusted basis. Consistent with our Canadian peer
group, we analyze revenue on a taxable equivalent basis (teb) at the
operating group level. The teb adjustments for 2013 totalled
$344 million, up from $266 million in 2012.
Adjusted revenue excludes the portion of the credit mark recorded
in net interest income on the M&I purchased performing loan portfolio
and income or losses from run-off structured credit activities for 2013,
2012 and 2011; and the hedge of foreign exchange risk on the M&I
purchase in 2011, all of which are recorded in Corporate Services, as
discussed in the Non-GAAP Measures section on page 34.
Canadian P&C revenue increased $129 million or 2% as the growth
in balances and fees across most products was partially offset by lower
net interest margin. Revenue improved, growing by more than 4% in
the second half of the year. Wealth Management revenue increased
$549 million or 19%. Revenue in wealth businesses increased 16%,
reflecting strong performance driven by growth in client assets, a secu-
rity gain and the benefit of recent acquisitions. Insurance revenue
increased 49%, as the prior year was impacted by unfavourable
movements in long-term interest rates, and there was continued growth
in both the underlying creditor and life insurance businesses. BMO
Capital Markets revenue increased $152 million or 5% to $3,428 million,
driven by increases in trading revenues and investment banking fees,
particularly from our U.S. platform. U.S. P&C revenue decreased US$144
million or 5% as the benefits of strong core commercial and industrial
loan and deposit growth and higher commercial lending fees were more
than offset by the effects of lower net interest margin, reductions in
certain portfolios and lower deposit and debit card fees. Corporate Serv-
ices adjusted revenues decreased by $238 million or 69%, primarily due
to an increase in the group teb offset and a decline in treasury-related
items.
Revenue and Adjusted Revenue ($ millions, except as noted)
For the year ended October 31 2013 2012 2011* 2010 2009
Net interest income
Year-over-year growth (%)
Non-interest revenue
Year-over-year growth (%)
8,545
(3)
7,718
5
8,808
18
7,322
13
7,474
20
6,469
8
6,235
12
6,004
9
5,570
10
5,494
7
Total revenue
Year-over-year growth (%)
16,263
1
16,130
16
13,943
14
12,239
11
11,064
8
Adjusted net interest income
Year-over-year growth (%)
Adjusted non-interest revenue
Year-over-year growth (%)
7,888
(2)
7,684
9
8,029
11
7,038
8
7,248
16
6,494
8
6,235
12
6,004
–
5,570
10
6,015
9
Total adjusted revenue
Year-over-year growth (%)
15,572
3
15,067
10
13,742
12
12,239
6
11,585
9
* Growth rates for 2011 reflect growth based on CGAAP in 2010 and IFRS in 2011.
Taxable equivalent basis (teb) Revenues of operating groups are
presented in our MD&A on a taxable equivalent basis (teb). The teb
adjustment increases GAAP revenues and the provision for income
taxes by an amount that would increase revenues on certain tax-
exempt items to a level that would incur tax at the statutory rate, to
facilitate comparisons. This adjustment is offset in Corporate Services.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 34.
38 BMO Financial Group 196th Annual Report 2013