Bank of Montreal 1998 Annual Report Download - page 33

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BANK OF MONTREAL GROUP OF COMPANIES
RETURN ON EQUITY EXCEEDS 14% FOR NINTH CONSECUTIVE YEAR
Our 1998 return on equity was 15.2%, down from 17.1% achieved in 1997. 1998 was the
ninth consecutive year that our ROE†exceeded 14%.
In order to achieve an appropriate return in relation to the various risks associated with
our business activities, we manage our ROE against a minimum standard and an objective.
The minimum standard is the economic threshold, which reflects the rate of return that
can be earned on a long-term, “risk-free” investment plus an appropriate risk premium. This
threshold is set conservatively by the Board of Directors at the beginning of each fiscal
year,
based on the projected cost of equity (as described on page 22). Our performance has
exceeded this economic threshold for the past eight years, as shown in Table 3 on page 54.
Our objective for ROE is to consistently exceed the North American peer group average.
As a result our 1998 ROE objective was 15–17%.
ROE of 15.2% in 1998 reflects lower earnings growth in 1998 compared to 1997 relative to
our increased level of capital. Refer to page 23 for more information on earnings growth and
to page 49 for details concerning our capital management process.
RETURN ON COMMON SHAREHOLDERS’ EQUITY (%)
For the year ended October 31 1998 1997 199 6 1995 19 94
Return on common shareholders’ equity 15.2 17.1 17.0 15.4 14.9
Economic performance threshold 12.0 12.0 12.0 12.0 13.0
Cash return on shareholders’ equity and earnings per share calculated on a cash basis are
described below. The after-tax effect of non-cash goodwill and other valuation intangibles is
eliminated in both measures. Cash ROE decreased to 17.5% in 1998 from the 20.0% achieved
in 1997, with cash EPS of $4.98 in 1998 compared to the $4.97 reported last year.
PROFITABILITY
STRATEGY:
To improve profitability through
the focused allocation of
resources and diversification
across our lines of business,
by geographic market and
by customer segment; with a
commitment to improving
prof itability of those lines of
business that are below
the economic performance
threshold; and through respon-
sible capital management.
MEASURE:
Return on common shareholders’
equity (ROE) is calculated as
net income, less preferred divi-
dends, as a percentage of average
common shareholders’ equity.
Common shareholders’ equity
is comprised of common share
capital and retained earnings.
USING CASH BASIS REPORTING WOULD RESULT IN HIGHER EARNINGS AND ROE
Accounting principles that underpin the reporting of financial performance and financial condition
are similar in Canada and the United States. One important difference, however, is that in the United
States business acquisitions can be structured to use the “pooling” method, whereas in Canada the
purchase method is generally required. In most cases, the pooling method results in higher earnings
than would be reported using the purchase method.
Specifically, with the purchase method, acquired assets and liabilities are accounted for at their fair
value. The difference between the fair value of the net assets acquired and the purchase price is recorded
a s goodwill and expensed on an annual basis over the estimated life of the assets. With the pooling
method, acquired assets and liabilities are accounted for at their book value. Subsequent years’ earnings
are not reduced by goodwill amortization.
When we compare our results to those of our North American peer group, it is more relevant to
analyze cash earnings per share and cash return on equity. These cash measures are adjusted for the
after-tax impact of non-cash goodwill and other valuation intangibles that are treated differently in
Canada and the United States.
9897969594
CASH AND BASIC
EARNINGS PER SHARE
Cash EPS ($)
Basic EPS as reported ($)
4.98
4.97
4.44
3.67
3.15 4.724.69
4.21
3.45
3.01
9897969594
CASH RETURN ON
COMMON SHAREHOLDERS’
EQUITY (%)
17.5
20.0
19.8
18.2
16.4
9897969594
RETURN ON COMMON
SHAREHOLDERS’
EQUITY
Actual ROE (%)
Economic threshold
(12%; 13% in 1994)
15.2
17.1
17.0
15.4
14.9
†Defined in the Glossary on page 92