Bank of Montreal 2014 Annual Report Download - page 30

MD&A
Non-Interest Expense
Non-interest expense increased $695 million or 7% to $10,921 million
in 2014.
Amounts in the rest of this Non-Interest Expense section are stated
on an adjusted basis, unless otherwise noted.
Adjusted non-interest expense excludes acquisition integration
costs for certain significant acquisitions and amortization of acquisition-
related intangible assets in 2014, 2013 and 2012, and restructuring costs
in 2013 and 2012 to align our cost structure with the environment.
Adjusted non-interest expense increased $1,006 million or 10% to
$10,761 million. Excluding the impact of the stronger U.S. dollar,
adjusted non-interest expense increased by 8%.
The dollar and percentage changes in expense by category are
outlined in the adjacent Adjusted Non-Interest Expense and Non-Interest
Expense table. Table 4 on page 109 provides more detail on expenses
and expense growth.
Performance-based compensation increased 13%, excluding the
impact of the stronger U.S. dollar, in part due to acquisitions, with the
remainder mainly driven by improved revenue in Wealth Management
and BMO Capital Markets. Other employee compensation, which
includes salaries, benefits and severance, increased 4%, excluding the
impact of the stronger U.S. dollar, due to continued investment in the
business and higher severance.
Premises and equipment costs increased $165 million or 9%, due to
higher costs related to technology investments.
Other adjusted expenses increased $316 million or 14%, reflecting
increases in legal and regulatory costs, professional fees and marketing
costs.
BMO’s reported efficiency ratio increased by 160 basis points to
65.3% in 2014. The adjusted efficiency ratio increased by 90 basis points
to 64.4%. The adjusted efficiency ratio excluding PBCAE(1) was 59.1% in
2014 compared to 60.4% in 2013.
Canadian P&C is BMO’s largest operating segment, and its reported
efficiency ratio of 50.2% improved by 100 basis points mainly due to
good revenue growth and disciplined cost management.
The adjusted efficiency ratio in Wealth Management increased by
480 basis points to 71.8%, mainly due to a security gain in the prior year
and the settlement of a legal matter in 2014.
BMO Capital Markets reported efficiency ratio increased by
180 basis points to 63.2% as the rate of growth in revenue across both
Investment and Corporate Banking and Trading Products was more than
offset by the pace of growth on employee-related costs and increased
support costs, both driven by a changing business and regulatory envi-
ronment, as well as by stronger performance.
The adjusted efficiency ratio in U.S. P&C increased by 170 basis
points to 63.4% primarily due to lower revenue.
Reported operating leverage was negative 2.7% in 2014 and
adjusted operating leverage was negative 1.6%. We aim to improve
efficiency and generate operating leverage by driving revenue growth
through a strong customer focus and by maintaining disciplined cost
management while making selective investments.
Examples of initiatives to enhance productivity are outlined in the
2014 Operating Groups Performance Review, which starts on page 42.
(1) This ratio is calculated excluding insurance policyholder benefits, claims and acquisition
expenses (PBCAE).
The efficiency ratio (or expense-to-revenue ratio)isakey
measure of productivity. It is calculated as non-interest expense
divided by total revenues (on a taxable equivalent basis in the
operating groups), expressed as a percentage. The adjusted
efficiency ratio is another key measure of productivity and is
calculated in the same manner, utilizing adjusted revenue and
expense.
Contribution to Growth in Adjusted Non-Interest Expense
and Non-Interest Expense (%)
For the year ended October 31 2014 2013 2012
Significant businesses acquired 1.5 0.4 10.2
Canadian/U.S. dollar translation effect,
excluding acquisitions 2.5 0.8 0.7
Other 6.3 2.5 0.4
Total adjusted non-interest expense growth 10.3 3.7 11.3
Impact of adjusting items (3.5) (2.8) 4.6
Total non-interest expense growth 6.8 0.9 15.9
Adjusted Non-Interest Expense and Non-Interest Expense
(Canadian $ in millions, except as noted)
Change
from 2013
For the year ended October 31 2014 2013 2012 (%)
Performance-based compensation 1,939 1,682 1,641 15
Other employee compensation 4,294 4,026 3,710 7
Total employee compensation 6,233 5,708 5,351 9
Premises and equipment 1,908 1,743 1,719 9
Other 2,378 2,083 2,143 14
Amortization of intangible assets 242 221 197 10
Total adjusted non-interest expense 10,761 9,755 9,410 10
Adjusting items 160 471 725 (66)
Total non-interest expense 10,921 10,226 10,135 7
Adjusted non-interest expense
growth (%) 10.3 3.7 11.3 na
Non-interest expense growth (%) 6.8 0.9 15.9 na
na – not applicable
Efficiency Ratio by Group (teb) (%)
For the year ended October 31 2014 2013 2012
Efficiency Ratio
Canadian P&C 50.2 51.2 50.8
U.S. P&C 65.6 64.3 64.0
Wealth Management 73.9 68.1 76.4
BMO Capital Markets 63.2 61.4 61.1
Total BMO 65.3 63.7 63.6
Adjusted Efficiency Ratio
Canadian P&C 50.1 51.0 50.7
U.S. P&C 63.4 61.7 60.8
Wealth Management 71.8 67.0 75.4
BMO Capital Markets 63.1 61.4 61.1
Total BMO 64.4 63.5 63.3
Caution
This Non-Interest Expense section contains forward-looking statements. Please see the Caution
Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 32.
BMO Financial Group 197th Annual Report 2014 41