Bank of Montreal 2013 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS
Provision for Income Taxes
The provision for income taxes reflected in the Consolidated Statement
of Income is based upon transactions recorded in income, regardless of
when such transactions are subject to taxation by tax authorities, with
the exception of the repatriation of retained earnings from foreign
subsidiaries, as outlined in Note 24 on page 171 of the finan-
cial statements.
Management assesses BMO’s consolidated results and associated
provisions for income taxes on a GAAP basis. We assess the perform-
ance of the operating groups and associated income taxes on a taxable
equivalent basis and report accordingly.
The provision for income taxes was $1,129 million in 2013, com-
pared with $938 million in 2012. The reported effective tax rate in 2013
was 21.0%, compared with 18.3% in 2012. The adjusted provision for
income taxes(1) in 2013 was $1,111 million, compared with $991 million
in 2012. The adjusted effective tax rate in 2013 was 20.6%, compared
with 19.5% in 2012. The higher adjusted effective tax rate was mainly
attributable to lower recoveries of prior periods’ income taxes.
BMO partially hedges the foreign exchange risk arising from
its investments in U.S. operations by funding the investments in U.S.
dollars. Under this program, the gain or loss on hedging and the unreal-
ized gain or loss on translation of investments in U.S. operations are
charged or credited to shareholders’ equity. For income tax purposes,
the gain or loss on the hedging activities results in an income tax charge
or credit in the current period, which is charged or credited to share-
holders’ equity, while the associated unrealized gain or loss on the
investments in U.S. operations does not incur income taxes until the
investments are liquidated. The income tax charge/benefit arising from
a hedging gain/loss is a function of the fluctuations in exchange rates
from period to period. Hedging of the investments in U.S. operations has
given rise to an income tax recovery in shareholders’ equity of $146
million for the year, compared with $13 million in 2012. Refer to the
Consolidated Statement of Changes in Equity on page 128 of the finan-
cial statements for further details.
Table 8 on page 109 details the $1,716 million of total net govern-
ment levies and income tax expense incurred by BMO in 2013. The
increase from $1,521 million in 2012 was primarily due to higher
income tax expense, as well as higher harmonized sales tax, GST and
other sales taxes.
(1) The adjusted rate is computed using adjusted net income rather than net income in the
determination of income subject to tax.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 34.
MD&A
2013 Review of Operating Groups Performance
This section includes an analysis of the financial results of our operating
groups and descriptions of their businesses, strategies, strengths, chal-
lenges, key value drivers, achievements and outlooks.
Personal and Commercial Banking (P&C) (pages 46 to 52)
Net income was $2,450 million in 2013, an increase of $95 million or
4% from 2012. Adjusted net income was $2,510 million, an increase of
$81 million or 3%. Personal and Commercial Banking is comprised of
two operating segments: Canadian Personal and Commercial Banking
(Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C).
Wealth Management (pages 53 to 55)
Net income was $834 million in 2013, an increase of $310 million or
59% from 2012. Adjusted net income was $861 million, an increase of
$316 million or 58%.
BMO Capital Markets (BMO CM) (pages 56 to 58)
Net income was $1,094 million in 2013, an increase of $73 million or
7% from 2012. Adjusted net income was $1,096 million, an increase of
$74 million or 7%.
Corporate Services, including Technology and Operations (page 59)
Net loss was $130 million in 2013, compared with net income of
$289 million in 2012. Adjusted net loss was $191 million compared with
net income of $96 million in 2012.
Allocation of Results
The basis for the allocation of results geographically and among
*Percentages determined excluding results in Corporate Services.
Earnings by country were consistent
with the previous year.
Adjusted Net Income
by Country
Adjusted Net Income
by Operating Segment*
2012 2012
2013
U.S. 25%
Canada
71%
Other
countries
4%
U.S. 27%
Canada
69%
Other
countries
4%
Results reflect the significant
adjusted net income growth in
Wealth Management in 2013.
U.S. P&C 16%
Wealth
Management
14%
BMO CM 25%
Canadian P&C
45%
2013
U.S. P&C 14%
Wealth
Management
19%
BMO CM 25%
Canadian P&C
42%
operating groups is outlined in Note 26 on page 174 of the financial
statements. Certain prior year data has been restated, as explained on
the following page, which also provides further information on the
allocation of results.
44 BMO Financial Group 196th Annual Report 2013