Bank of Montreal 2003 Annual Report Download - page 30

Management’s Discussion and Analysis of Operations and Financial Condition
BMO Financial Group 186th Annual Report 200326
both absolute and percentage terms. As a result, all operating
groups improved their expense-to-revenue ratios, also referred
to as productivity ratios, by more than 150 basis points.
Personal and Commercial Client Group is BMO’s largest
operating group and its productivity ratio of 63.1% improved by
171 bas is points from last year. There was volume-driven reve-
nue growth in both Canada and the United States and controlled
expense growth.
Private Client Group’s expense-to-revenue ratio was 87.8%,
a 500 basis point improvement from a year ago. The improve-
ment was reflected in its significantly higher earnings and was
driven primarily by $60 million of business expense reduction,
excluding the incremental impact of acquired businesses. The
business expense reduction represented 4% of 2002 expenses,
excluding acquisition-related costs. Cost containment initiatives
included reducing third-party and back office and technology
costs, consolidating call centre and branch sites, and reducing
staff levels by 8%.
Investment Banking Group’s expense-to-revenue ratio im-
proved by 410 basis points to 51.5%. The group lowered its
expenses by 3% year-over-year.
BMO improved its cash productivity ratio in 2003 by 260 basis
points to 64.5%. Examples of initiatives to enhance productivity
are outlined in the Operating Group Review section that starts
on page 27. BMO will continue to focus on improving produc-
tivity in 2004 and is again targeting a 150 to 200 basis point
improvement in cash productivity.
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
income taxes, with the exception of the repatriation of retained
earnings from foreign subsidiaries, as explained in Note 20 on
page 95 of the financial statements.
As explained on pages 20 and 22, BMO adjusts revenue to a
taxable equivalent basis for analysis, with an offsetting adjust-
ment to the provision for income taxes. As such, the provision
for income taxes and associated tax rates are stated on a taxable
equivalent basis in this MD&A.
On a taxable equivalent basis, the provision for income taxes
in the Consolidated Statement of Income was $840 million in
2003, compared with $530 million in 2002. The increase was
attributable to higher income and a higher effective tax rate.
On a taxable equivalent basis, the effective tax rate was 30.8%
in 2003, compared with 26.4% in 2002. The year-over-year
change related to the recognition of proportionately higher tax
benefits in 2002, a higher portion of income derived from higher
tax-rate jurisdictions in 2003 and the expanded application
of our taxable equivalent basis accounting, as explained on
page 22. The components of variances between the effective and
statutory Canadian tax rates are outlined in Note 20 on page 95
of the financial statements.
We estimate that the tax rate in 2004 will be approximately
31.5% and consider that rate to be sustainable.
BMO hedges the foreign exchange risk arising from its net
investments in foreign operations by funding the net investment
in U.S. dollars. Under this program, the gain or loss on hedging
and the unrealized gain or loss on translation of the net invest-
ments in foreign operations are charged or credited to retained
earnings, but usually are approximately equal and offsetting. For
income tax purposes, the gain or loss on hedging activities in-
curs an income tax charge or credit in the current period, which
is charged or credited to retained earnings, while the asso-
ciated unrealized gain or loss on the net investments in foreign
operations does not incur income taxes until the investment is
liquidated. The income tax charge/benefit arising from a hedging
gain/loss is a function of fluctuations in exchange rates from
period to period. The hedging gains in 2003 were subject to an
income tax charge in retained earnings of $601 million. Refer to
the Consolidated Statement of Changes in Shareholders’ Equity
on page 72 of the financial statements for further details.
Table7onpage57detailsthe$1,761millionof totalgovernment
levies and taxes incurred by BMO in 2003.
20032002200120001999
Expenses ($ millions)
and Annual Growth (%)
11
(1) 1
8
6
5,258
5,288
5,671
6,030 6,087
Growth (%)
54.9 55.6 51.5
68.1
63.1
64.0
64.5
86.0
92.8
64.8
87.8
65.7
Expense-to-Revenue
Ratio by Group (%)
2001 2002 2003
P&C
PCG
IBG
Total Bank
Non-Interest Expense
by Group 2003*
PCG 26%
IBG 23%
Corp 2%
P&C 49%
*Ratios were the same in 2002.
Provision for Income Taxes
Revenue by Group
2003*
PCG 19%
IBG 29%
Corp 1%
P&C 51%
*Ratios were the same in 2002.