Bank of Montreal 2003 Annual Report Download - page 29

Non-interest expense increased $57 million or 0.9% to
$6,087 million. The components of the dollar increase and per-
centage increase are outlined in the adjacent tables. As explained
on page 21, the incremental effects of businesses acquired in
2002 and 2003 increased expenses in 2003, relative to 2002, by
$180 million (3.0%). As further explained on page 21, the lower
Canadian/U.S. dollar exchange rate reduced costs in 2003 by
$181 million (–2.9%); as such, these two factors offset each other.
Higher performance-based compensation costs, associated
with BMO’s 29% increase in net income, increased expenses by
$93 million (1.5%), and higher pension costs increased expenses
by $78 million (1.3%). Both performance-based compensation
costs and pension costs are included in employee compensation
in the summary expense table. The higher pension costs were
primarily due to lower than expected returns on plan assets in
2002. There was a net reduction in all other expenses of $113 mil-
lion (–2.0%), $72 million of which related to reduced professional
fees and travel costs. There were $62 million of acquisition-related
costs in 2002. Severance costs reflected in results were compa-
rable in both years.
The expense-to-revenue ratio improved 240 basis points to
65.7% in 2003. BMO’s overall ratio in any year is affected by
the relative strength of the revenues in each operating group.
The expense-to-revenue ratio of each group is typically quite
different because of the nature of their businesses. In 2003, all
operating groups increased revenues more than expenses, in
from $884 million in 2002. Specific allowances for credit losses
totalled $611 million at the end of 2003, down from $769 million
in 2002. The decline in specific allowances related to improved
credit quality, the lower level of impaired loans and acceptances
and the lower Canadian/U.S. dollar exchange rate. The general
allowance for credit losses remained unchanged from a year ago
at $1,180 million. It represents 91 basis points of risk-weighted
assets at year end, up from 90 basis points a year ago.
Impaired loans and acceptances, after deduction of specific
allowances for credit losses, totalled $1,313 million, compared
with $1,568 million at the end of last year. Impaired loans and
acceptances, after deduction of specific allowances and the gen-
eral allowance for credit losses, totalled $133 million, compared
with $388 million at the end of last year. The reduction was
largely attributable to lower net impaired loans to companies in
the telecom and cable sectors. Both gross and net impaired loans
and acceptances to the electric power generation sector were
up from a year ago, as credit quality in this industry worsened
in 2003. BMO’s impaired loans and acceptances formations rose
in the fourth quarter because of the deterioration of a number
of U.S.-based corporate accounts in this sector.
The net loans and acceptances exposure to Canadian cattle
farming and related sectors was approximately $1.4 billion, or
1.0% of total net loans and acceptances. We have recorded spe-
cific allowances for credit losses of $3 million on the $18 million
of loans to Canadian cattle farming and related sectors classified
as impaired.
Non-Interest Expense ($ millions)
For the year ended October 31 2003 2002 2001 2000 1999
Employee compensation 3,578 3,403 3,212 3,065 2,820
Premises and equipment 1,264 1,280 1,153 1,071 1,123
Communications 162 173 194 259 268
Other expenses 978 1,087 1,069 840 1,056
Amortization of intangible assets 105 87 43 23 21
Total 6,087 6,030 5,671 5,258 5,288
Contribution to Non-Interest Expense Growth (%)
For the year ended October 31 2003 2002 2001
Performance-based compensation 1.5 (0.3) 4.1
Currency translation effect (2.9) 0.6 1.1
Acquired businesses 3.0 5.5 1.2
Pension expense 1.3 1.2 0.8
Disposed businesses (0.2) (0.1) (0.9)
Other expenses (1.8) (0.6) 1.5
Total non-interest expense growth 0.9 6.3 7.8
BMO Financial Group 186th Annual Report 2003 25
20032002200120001999
8.53
10.51
14.17
15.16
12.15
Gross Impaired Loans and 
Acceptances as a % of Equity 
and Allowances for Credit Losses 

20032002200120001999
0.22 0.25
0.66
0.56
0.30
Provision for Credit Losses 
as a % of Average Net Loans 
and Acceptances 

Non-Interest Expense and Expense-to-Revenue Ratio
The expense-to-revenue ratio (or productivity ratio) is our primary
measure of productivity. It is calculated as non-interest expense divided by
total revenues (on a taxable equivalent basis), expressed as a percentage.
See page 20.
The cash productivity ratio is calculated in the same manner, after
reducing non-interest expenses for amortization of intangible assets.
See page 20.
The net loans and acceptances exposure to cable and telecom
companies was approximately $1.2 billion, or 0.8% of total net
loans and acceptances at the end of the year. We have recorded
specific allowances for credit losses of $85 million on the $273 mil-
lion of cable and telecom industry loans classified as impaired.
The net loans and acceptances exposure to electric power
generation companies was approximately $0.7 billion, or 0.5%
of total net loans and acceptances. We have recorded specific
allowances for credit losses of $141 million on the $391 million of
electric power generation industry loans classified as impaired.