Bank of Montreal 2014 Annual Report Download - page 31

MD&A
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 sub-
sidiaries, as outlined in Note 25 on page 171 of the financial 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 $903 million in 2014, compared
with $1,055 million in 2013. The reported effective tax rate in 2014 was
17.2%, compared with 20.1% in 2013. The adjusted provision for
income taxes(1) was $943 million in 2014, compared with $1,037 million
in 2013. The adjusted effective tax rate in 2014 was 17.5%, compared
with 19.7% in 2013. The lower adjusted effective tax rate was mainly
attributable to higher tax-exempt income and a lower proportion of
income from higher tax-rate jurisdictions.
BMO partially hedges the foreign exchange risk arising from its for-
eign operations by funding the investments in a corresponding foreign
currency. Under this program, the gain or loss on hedging and the unreal-
ized gain or loss on translation of foreign 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 shareholders’ equity,
while the associated unrealized gain or loss on the foreign 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 foreign operations has given rise to an income tax recovery in
shareholders’ equity of $144 million for the year, compared with $146
million in 2013. Refer to the Consolidated Statement of Changes in
Equity on page 126 of the financial statements for further details.
Table 4 on page 109 details the $1,505 million of total net govern-
ment levies and income tax expense incurred by BMO in 2014. The
decrease from $1,641 million in 2013 was primarily due to lower
income tax expense.
(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 32.
2014 Operating Groups Performance Review
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 44 to 50)
Net income was $2,662 million in 2014, an increase of $269 million or
11% from 2013. Adjusted net income was $2,718 million, an increase of
$265 million or 11%. 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 51 to 53)
Net income was $785 million in 2014, a decrease of $45 million or 5%
from 2013. Adjusted net income was $848 million, a decrease of
$9 million or 1% as the prior year included a significant security gain.
BMO Capital Markets (BMO CM) (pages 54 to 56)
Net income was $1,079 million in 2014, an increase of $35 million or
3% from 2013. Adjusted net income was $1,080 million, an increase of
$34 million or 3%.
Corporate Services, including Technology and Operations (page 57)
Net loss was $193 million in 2014, compared with a net loss of
$72 million in 2013. Adjusted net loss was $193 million, compared with
an adjusted net loss of $133 million in 2013.
Allocation of Results
The basis for the allocation of results geographically and among
operating groups is outlined in Note 27 on page 173 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.
*Percentages determined excluding results in Corporate Services.
Adjusted Net Income
by Country
Adjusted Net Income
by Operating Segment*
2013 2013
2014
U.S. 21%
Canada
74%
Other
countries
5%
U.S. 25%
Canada
71%
Other
countries
4%
Results provide attractive diversification across businesses and geographies.
U.S. P&C 14%
Wealth
Management
20%
BMO CM 24%
Canadian P&C
42%
2014
U.S. P&C 15%
Wealth
Management
18%
BMO CM 23%
Canadian P&C
44%
42 BMO Financial Group 197th Annual Report 2014