Bank of Montreal 2004 Annual Report Download - page 28

BMO Financial Group Annual Report 200424
MD&A
Management’s Discussion and Analysis
The year-over-year percentage change in earnings per share
(EPS) is our key measure for analyzing earnings growth. All
references to EPS are to diluted EPS, unless indicated otherwise.
EPS was a record $4.42, up 29% from a then-record $3.44 in
2003. Cash EPS was $4.57, up 27% from $3.59 a year ago. EPS
growth exceeded our annual target of 10% to 15%. Excluding a
$170 million reduction of the general allowance for credit losses
in 2004, EPS rose 22% to $4.21. In 2005, we are targeting EPS
growth of 3% to 8% from this base of $4.21, excluding any change
in the general allowance. Our EPS growth target for 2005 is
lower than both our 2004 growth target and 2004 performance
because we expect provisions for credit losses to increase in
2005 from unusually low levels in 2004 as new provisions,
recoveries and reversals are anticipated to return to more nor-
mal levels. Our targets for 2005 have also been established in
the context of our expectations for the economy, as set out
in our economic outlook for 2005, which is outlined on page 22.
Our five-year compound average annual EPS growth rate
was 13.6%, above our medium-term financial objective of 10%,
as EPS increased to $4.42 in 2004 from $2.34 in 1999. Improved
credit performance in 2003 and 2004 were significant con-
tributors to high average annual EPS growth.
Net income was $2,351 million, up 29% from $1,825 million
a year ago. The $526 million increase in net income was largely
attributable to a $558 million ($363 million after tax) improve-
ment in credit performance, which represented approximately
two-thirds of the 29% increase in net income, and to strong
operating group results. All three client operating groups
improved their productivity and earned record net income in
2004. Personal and Commercial Client Group net income rose
$66 million or 7% from a year ago, as strong volume growth
more than offset the impact of reduced card fees and lower net
interest margin in the competitive low interest rate environ-
ment. Private Client Group net income was up $87 million or
60%, and Investment Banking Group net income rose $135 mil-
lion or 19%. Both groups benefited from the more favourable
capital markets environment, particularly in the first half of the
year. Earnings in Corporate Support rose $238 million, as the
benefits of BMO’s improved credit performance are largely
reflected in results of Corporate Support under our expected
loss provisioning methodology, which is explained in the
Corporate Support section on page 49.
Revenue on a taxable equivalent basis, which is explained
on pages 26 and 28, increased $341 million or 4% to $9,612 mil-
lion. Revenue grew in each of our three client operating groups,
with Personal and Commercial Client Group growing 2%,
and Investment Banking Group and Private Client Group both
growing 7%. Personal and Commercial Client Group revenue
rose on higher volumes and the inclusion of businesses
acquired in the United States, partially offset by the impact of
lower net interest margins and lower card fees. Private Client
Group revenue growth was due to higher commission and
fee-based revenues, driven by successful revenue-generating
initiatives and improved market fundamentals. Investment
Banking Group revenue growth was attributable to higher
securities trading commissions, underwriting fees, net gains
on investment securities and the inclusion of revenues from
Harris Nesbitt Gerard. Corporate Support revenue decreased
largely due to lower net investment earnings in the low interest
rate environment. Revenue was reduced $243 million by the
weaker U.S. dollar. Revenue is discussed further on page 28.
There was a net recovery of credit losses of $103 million,
consisting of $67 million of specific provisions and a $170 mil-
lion reduction of the general allowance for credit losses. A year
ago, results reflected a specific provision of $455 million with
no change in the general allowance. The lower provision was
attributable to improved credit performance experienced over
the year. The provision for credit losses is discussed further
on page 31.
Non-interest expense increased $70 million or 1% to
$6,157 million, reflecting effective cost management. Expenses
were also affected by higher performance-based compensation
costs and the impact of acquired businesses, partially offset
by the impact of the weaker U.S. dollar. Non-interest expense
is discussed further on page 32.
Earnings per Share Growth
Earnings per share (EPS) is calculated by dividing net income, after
deduction of preferred dividends, by the average number of common
shares outstanding. Diluted EPS, which is our basis for measuring
performance, adjusts for possible conversions of financial instruments
into common shares if those conversions would lower EPS, and is more
fully explained in Note 22 on page 115 of the financial statements.
EPS ($)
2.66
3.25
2.68
3.44
4.42
20042003200220012000
EPS Annual Growth (%)
(18)
39
1
28 29
20042003200220012000
EPS in 2004 rose 29% from a then-
record $3.44 in 2003.
Improved credit performance and
business growth have driven two
years of strong earnings growth.