Bank of Montreal 2003 Annual Report Download - page 28

Underwriting and advisory fees increased $40 million, primar -
ily due to higher equity underwriting fees associated with the
active income trust market. Merger and acquisition fees were
essentially unchanged from a year ago.
Investment securities losses were $41 million, compared with
$146 million in 2002. Net losses in 2002 reflected write-downs
in Investment Banking Group’s own collateralized bond obliga-
tions and in certain merchant banking positions. The net losses
in 2003 occurred in the first half of the year, as net gains in
the latter half reflected the strengthening economy and higher
equity valuations.
Foreign exchange, other than trading, increased $9 million and
insurance income grew $19 million, reflecting higher volumes.
Trading-Related Revenues
Revenues from trading-related activities totalled $508 million,
compared with $391 million in 2002. Trading-related revenues
included net interest income of $233 million and non-interest
revenue of $275 million. Trading-related revenues are primarily
dependent on the volume of activities undertaken for clients,
who enter into transactions with BMO to mitigate their risks or to
invest. BMO earns a spread or profit on the net sum of its client
positions by profitably neutralizing, within prescribed limits,
the overall risk of the net positions. BMO also assumes propri-
etary positions with the goal of earning trading profits. While
proprietary positions expose the organization to profit or loss,
the positions and their risks are closely managed and profit or
loss from these activities is generally not the most significant
factor affecting the level of trading-related revenues.
The $117 million increase from 2002 was attributable to higher
revenue in most product areas. Prior-year revenue was affected
by low volatility that limited trading opportunities. Performance
in 2003 was encouraging relative to the trading environment.
The provision for credit losses for 2003 declined $365 million
to $455 million. The provision represents 0.30% of average net
loans and acceptances, including securities purchased under
resale agreements, down from 0.56% a year ago. The lower pro-
vision is attributable to the improved credit performance expe-
rienced over the year. BMO’s target for 2004 is a provision for
credit losses of $500 million or less.
Our disciplined approach to portfolio management and diversi-
fication continues to ensure there are no undue sector orindustry
concentrations. BMO’s regular, comprehensive quarterly review
of credit portfolios ensures consistency and adequacy in our
provisioning. Credit risk management is discussed on page 47.
Table 17 on page 63 details specific provisions for credit losses
by product and industry sector. The provision for credit losses
on consumer loans and acceptances of $141 million was relatively
unchanged from a year ago. The provision for credit losses on
commercial and corporate loans and acceptances was $314 mil-
lion, compared with $676 million in 2002. Provisions on loans
to the manufacturing, utilities (particularly electric power gen-
eration), service industries, forest products and transportation
Interest rate trading-related revenues benefited from strong credit
derivatives performance, while revenue in 2002 was affected by
a write-down of positions in Teleglobe
®
7
. Equities trading-related
revenues included $70 million of taxable equivalent basis rev-
enue in 2003, as explained on page 22. Other trading-related
revenues grew because of higher commodity derivatives trading-
related revenue, including revenue on termination of positions
with a counterparty that is the subject of legal action, as explained
in Note 25 on page 97 of the financial statements. The Market
Risk section on page 48 provides further information ontrading-
related revenues.
Interest and Non-Interest Trading-Related Revenues ($ millions)
For the year ended October 31 2003 2002 2001 2000 1999
Interest rates 241 180 241 178 154
Foreign exchange 69 69 126 112 118
Equities 86 56 118 165 50
Other 112 86 120 (2) 90
Total 508 391 605 453 412
Reported as:
Net interest income 233 182 115 65 117
Non-interest revenue –
trading revenues 275 209 490 388 295
Total 508 391 605 453 412
sectors accounted for most of the provisions in 2003. Provision
levels in 2002 were particularly affected by the $399 million
provision on loans and acceptances to companies in the troubled
communications sector, particularly those in the telecom and
cable sub-sectors. Provisions on loans and acceptances to com -
munications companies declined to $7 million in 2003 due to a
significant decline in new problem loans emerging in the sec tor
in 2003, proactive management that reduced our exposure to the
sector and the appropriateness of our provisioning in 2002.
Table 14 on page 61 and Table 15 on page 62 detail the changes
in gross impaired loans and acceptances and in allowances
for credit losses. Gross impaired loans and acceptances totalled
$1,918 million in 2003, down from $2,337 million a year ago.
Gross impaired loans and acceptances as a percentage of equity
and allowances for credit losses improved to 12.15% from 15.16%
a year ago. Gross impaired loans and acceptances formations
totalled $1,303 million, down from $1,945 million in 2002.
BMO sold $288 million of non-performing loans, having a
net book value of $226 million, for proceeds of $249 million
during the year, while write-offs totalled $566 million, down
Management’s Discussion and Analysis of Operations and Financial Condition
BMO Financial Group 186th Annual Report 200324
Trading-related revenues include net interest income and non-interest
revenue earned from on and off-balance sheet positions undertaken for
trading purposes. The management of these positions typically includes
marking them to market on a daily basis. Trading revenues include income
(expense) and gains (losses) from both on-balance sheet instruments and
off-balance sheet interest rate, foreign exchange (including spot positions),
equity, commodity and credit contracts.
Provision for Credit Losses