Bank of Montreal 2003 Annual Report Download - page 42

Management’s Discussion and Analysis of Operations and Financial Condition
BMO Financial Group 186th Annual Report 200338
2004 Focus
▪Maintain our leadership in trade finance and grow our busi-
ness in those markets where we have distinctive product and
risk assessment capabilities.
▪
Continue to promote our unique Canadian and U.S. correspon -
dent banking capabilities internationally.
Merchant Banking
Description and Strategy
The Merchant Banking line of business operates through BMO
Halyard Partners and BMO Equity Partners. We source, structure
and finance private equity investments, primarily in North
America. Our strategy is to produce superior returns over time
by capitalizing on proprietary information flows to build and
manage a portfolio of private equity investments in mid-market
companies.
2003 Overview
Weakening economic conditions early in 2003 created a climate
of uncertainty in financial markets and affected overall commit-
ment levels and our performance. We strengthened our merchant
banking business by restructuring our operations to better align
our institutional priorities with the other IBG lines of business.
An example of this is the newly created Harris Nesbitt Mezzanine
Fund, which is aligned with the Harris Nesbitt mid-market strat-
egy. At year-end, the marketplace was producing attractive returns
and structures as the economy showed signs of recovery.
Increased liquidity in the high-yield market, signs of activity
in the initial public offering marketplace and a slow but steady
improvement in the economy are fueling increased deal activity
and more exit opportunities for our direct and indirect invest-
ment portfolios.
2004 Focus
▪Continue to selectively pursue investments that will achieve
superior returns as demand for private equity investing
increases.
▪
Generate more investment realizations from our direct and
indirect investment portfolios in the more favourable capital
markets environment.
Investment Banking Group Financial Results
Investment Banking Group net income rose $121 million or
20% to $722 million. The improvement was attributable to
both higher revenue and lower expenses. Notwithstanding the
improved results, difficult capital markets and uncertain North
American economic conditions persisted into 2003 and client
activity levels remained weak. Income was further affected by
the weakening of the U.S. dollar in 2003.
Revenue increased $108 million or 4% to $2,656 million. Reve-
nue in 2003 was reduced $127 million by the lower Canadian/U.S.
dollar exchange rate, while the year-over-year comparison
benefited from a $92 million reduction in net investment
securities losses in 2003. A robust income trust market drove
higher equity origination fees. Despite a challenging market
environment, trading-related revenue was up $149 million or
Securitization and Credit Investment Management
Description and Strategy
Securitization and Credit Investment Management (CIM) offer
both issuers and investors products and services that use credit
as a tool for asset management and funding alternatives. Our
strategy is to use our existing capabilities to grow our highly prof-
itable, low-capital-intensive, market-leading structured credit
business and provide stable, annuity-like fee income and material
ancillary business for other lines of business.
2003 Overview
Securitization and Credit Investment Management performed
well in 2003, increasing fee-based revenue 16%. Securitization
reaffirmed its dominant market leadership in Canada and prof-
itable mid-market focus in the United States. This was achieved
through innovation in structuring solutions and asset classes,
and a broadening of alternative revenue sources. In the United
Kingdom, CIM’s portfolio management skills continued to pro-
vide a competitive advantage as we increased our investor base
and our assets under management to US $13 billion and delivered
consistent performance.
2004 Focus
Securitization
▪
Maintain our leadership position in Canada and remain a
recognized niche player in the United States by focusing on
innovative structuring solutions in new and existing market
segments.
▪
Diversify revenue sources through accessing third-party liquid-
ity, new asset classes and selective credit enhancement.
CIM
▪
Continue to increase assets under management and third-
party capital in line with market growth.
International
Description and Strategy
The International line of business provides high-quality trade
finance, correspondent banking, financing and other bank
services to financial institutions and corporate clients. We con-
tinue to pursue a strategy of prudently supporting our North
American clients in key international markets, while providing
international financial institutions with superior North Ameri-
can service.
2003 Overview
The year 2003 was a challenging one, as uncertain economic
conditions and a weak U.S. dollar reduced the number of export
and import transactions early in the year. Stronger correspondent
banking business and improving conditions in the second half
of the year led to satisfactory results overall in the international
banking sector.