Bank of Montreal 1998 Annual Report Download - page 35

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BANK OF MONTREAL GROUP OF COMPANIES
Lower asset levels and decreased net interest income in
Corporate Support resulted from securitizations under-
taken by the Bank. For purposes of measuring operating
group performance, the assets, revenues, expenses and
loan losses associated with securitized assets continue to
be reflected within the group results. These balances are
then reversed in Corporate Support and the related securiti-
zation revenue recorded. Securitization revenue is included
in other income as discussed below.
Further details regarding the increase in net interest in-
come are shown in Tables 5, 6 and 7 on pages 56, 57 and 58.
Volume Growth Offset by Several Factors
Impacting Margin
The positive contribution of business volume growth to net
interest income growth was offset by several factors which
decreased net interest income, and were the primary drivers
of a 30 basis points decline in average net interest margin.
These factors included lower revenues from equities and
bonds of lesser-developed countries (6 basis points), lower
cash collections on impaired loans (4 basis points), lower
revenues from U.S. card operations (6 basis points) and
the reduced equity contribution from our investment in
Bancomer (3 basis points). The remainder of the decline
(11 basis points) was largely due to a flattening of the yield
curve caused by increases in short-term rates and a chang-
ing mix of assets in 1998.
Revenues from equities and bonds of lesser-developed
countries declined $104 million from the prior year, and cash
collections on impaired loans were lower by $84 million.
Our revenue from these sources continues to decline as a
result of our reduced exposure in these portfolios.
Revenues from U.S. card operations were lower in 1998
as a result of foregone revenues on the sale of the U.S.
card portfolio to Partners First in January 1998 and start-
up losses arising from our equity position in this venture.
The decrease in Bancomer’s contribution from $77 mil-
lion in 1997 to $24 million in 1998 was due to unsettled
global economic conditions, which negatively affected
Bancomer’s net income.
Margins declined 21 basis points from 1996 to 1997 for
a number of reasons. We benefited from increased earn-
ings from equities and bonds of lesser-developed countries
($48 million) and cash collections on impaired loans
($86 million), as well as increased equity earnings from
Bancomer ($31 million). However, these positive factors
were more than offset by high growth in lower-yielding
assets which, although increased revenue, resulted in a
lower net interest margin. Economic conditions in 1997
were such that as interest rates declined during the year,
the rates earned on loans were lowered but the costs on
deposit products did not fall to the same extent due to the
existence of price floors.
Other Income Increased 4.6%
Other income comprises all revenue other than net
interest income, such as lending fees, capital market
fees, card services fees, securitization revenues, mutual
fund fees, service charges, commission revenue and
trading revenue.
COMPONENTS OF OTHER INCOME ($ millions)
For the year ended October 31 1998 1997 1996 1995 1994
Deposits and payment service charges 558 508 473 451 437
Lending fees 290 240 194 186 180
Capital market fees 869 919 760 495 313
Card services 196 251 234 230 211
Investment management and custodial fees 407 299 221 240 197
Mutual fund revenues 199 155 87 53 56
Trading revenue 40 276 277 225 226
Securitization revenues 158 32 0 0 0
Other fees and commissions 401 301 270 222 251
Total 3,118 2,981 2,516 2,102 1,871
Other income increased $137 million to $3,118 million and
contributed 42.9% of total revenue in 1998, an increase
from the 1997 contribution of 41.6%. Growth was due to
increased investment management and custodial fees,
other fees and commissions, deposits and payment service
charges, lending fees, mutual fund revenues and securiti-
zation revenue, partially offset by a reduction in trading
revenue, capital market fees and card services.
Increased investment management and custodial fees,
as well as increased mutual fund revenues, both resulted
from an increase in assets under management and admin-
istration of 15.4% in 1998. Increased other fees and
commissions were driven by volume-related increases in
syndication fees, letters of credit and trust revenues,
and higher investment returns from insurance activities.
Increased deposits and payment service charges were
primarily the result of continued growth in activity and
product initiatives. Increased lending fees reflected growth
in corporate underwritings. Increased securitization
revenue and lower card services fees reflected the securiti-
zation of mortgages, corporate loans and additional credit
card loans this year. This increase in securitization revenue
offsets the reduction in net interest income from securi-
tization discussed above. (For further details regarding the
impact of securitizations, refer to the Capital Management
section on page 50.)