Bank of Montreal 2013 Annual Report Download - page 91

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary Quarterly Earnings Trends
BMO’s results and performance measures for the past eight quarters are
outlined on page 103. 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. During the first quarter of 2013, we
commenced charging provisions for credit losses to BMO’s operating
groups based on actual credit losses incurred. Previously we had
charged the groups with credit losses based on an expected loss provi-
sioning methodology. See the 2013 Review of Operating Groups Per-
formance on page 44.
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 2012 and 2013, but
conditions have improved overall and adjusted quarterly results have
generally trended higher over the past two years.
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
Wealth Management and BMO Capital Markets. The December holiday
season also contributes to a slowdown in some activities.
Canadian P&C produced good fourth-quarter results to close out a
strong second half of 2013. Strong volume growth in both the personal
and commercial segments generated improved revenue growth in the
third and fourth quarters compared to the first half of 2013. Net interest
margin year-over-year declines have been abating. Expense growth
continues to be modest as continued investment in the business is
mitigated by strong expense management.
U.S. P&C results have benefited from the M&I acquisition, as well as
increases in commercial loan balances. U.S. P&C had strong results in the
first quarter of 2013, and results were relatively stable in the second
and third quarters due to core commercial and industrial loan growth
and lower expenses compared to the prior year’s results offsetting
lower margins and balances in certain portfolios. Results in the fourth
quarter were negatively impacted by higher provisions for credit losses.
Net interest margin has been declining, primarily due to lower deposit
spreads in the low-rate environment, as well as lower loan spreads due
to competitive pricing.
Wealth Management operating results were strong in 2013,
continuing the improving trend from 2012. Quarterly results in our
wealth businesses have grown on a relatively consistent basis, reflecting
growth in client assets and a continued focus on productivity. The fourth
quarter of the current year includes a large security gain. Quarterly
results in insurance have been subject to variability, resulting primarily
from changes in long-term interest rates.
BMO Capital Markets operating results in the first three quarters of
2012 were good, with significantly stronger results reported in the fourth
quarter, driven by a recovery of prior periods’ income taxes and an
increase in revenue due to an improved market environment. This trend
continued in 2013 with good performance in the first three quarters of
the year. Performance in the fourth quarter was impacted by market
uncertainty resulting in lower revenues.
BMO’s PCL measured as a percentage of loans and acceptances
have been trending lower in recent quarters relative to 2012, but
increased in the fourth quarter of 2013. Adjusted PCL, which excludes
provisions on the M&I purchased loan portfolio and changes in the
collective allowance, was relatively consistent throughout 2012 and into
the first half of 2013, and decreased significantly in the third quarter of
2013 mainly due to lower provisions in Canadian P&C and U.S. P&C, and
higher recoveries of credit losses on the purchased credit impaired loan
portfolio. Adjusted PCL increased in the fourth quarter of 2013, mainly
due to above trend provisions in Canadian P&C and U.S. P&C, coupled
with lower recoveries of credit losses on the purchased credit impaired
loan portfolio.
Corporate Services quarterly net income can vary, in large part due
to the inclusion of the adjusting items, which are largely recorded in
Corporate Services. Adjusted results in Corporate Services were relatively
steady in 2012, primarily due to significant recoveries of provisions on
the purchased credit impaired loan portfolio. These recoveries can vary,
and a decrease in recoveries in the first quarter of 2013, together with a
reduction in revenues and an increase in expenses, lowered Corporate
Services results that quarter. These recoveries increased in the last three
quarters of 2013, increasing net income.
Fluctuations in exchange rates in 2012 and 2013 have been sub-
dued. A stronger U.S. dollar increases 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.
Caution
This Summary Quarterly Earnings Trends section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
102 BMO Financial Group 196th Annual Report 2013