Bank of Montreal 2004 Annual Report Download - page 31

BMO Financial Group Annual Report 2004 27
MD&A
The Canadian dollar equivalents of BMO’s U.S.-dollar-denomin-
ated net income, revenues, expenses, income taxes and provision
for credit losses in 2004 and 2003 were lowered relative to the
preceding year by the weakening of the U.S. dollar. The adjacent
table indicates average Canadian/U.S. dollar exchange rates
in 2004, 2003 and 2002 and the impact of lower rates.
At the start of each quarter, BMO enters into hedging trans-
actions that are expected to partially offset the pre-tax effects
of exchange rate fluctuations in the quarter on our U.S.-dollar-
denominated net income for that quarter. As such, these
activities partially mitigate the impact of rate fluctuations
within a single quarter, but the sum of the hedging gains/losses
for the four quarters in a year is not directly comparable to
the impact of year-over-year exchange rate fluctuations on
earnings for the year.
Each one-cent decrease (increase) in the Canadian/U.S. dol-
lar exchange rate, expressed in terms of how many Canadian
dollars one U.S. dollar buys, decreases (increases) BMO’s
quarterly earnings by approximately $1 million before income
taxes, in the absence of hedging activity.
The gain or loss from hedging transactions in future periods
will be determined by both future currency fluctuations and
the amount of the underlying future hedging transactions,
since the transactions are entered into each quarter in relation
to expected U.S.-dollar-denominated net income for the next
three months. The effect of currency fluctuations on our net
investment in foreign operations is discussed in the Provision
for Income Taxes section on page 33.
Effects of the Lower Canadian/U.S. Dollar Exchange Rate
on BMO’s Results
($ millions, except as noted)
2004 2003
Canadian/U.S. dollar exchange rate (average)
2004 1.313
2003 1.435 1.435
2002 1.571
Reduced revenues (243) (264)
Reduced expenses 177 181
Reduced provision for credit losses 11 27
Reduced income taxes 15 11
Reduced net income before hedging gains (40) (45)
Hedging gains 818
Income taxes thereon (3) (6)
Reduced net income (35) (33)
Foreign Exchange
BMO Financial Group has selectively acquired a number of
businesses in advancing our Canada-U.S. growth strategy.
These acquisitions have incremental effects on revenue and
expenses that affect the year-over-year comparison of operating
results. The adjacent table outlines acquisitions by operating
group that had an incremental effect on BMO’s revenue,
expenses and net income for 2004 relative to 2003, and for
2003 relative to 2002, to assist in analyzing changes in results.
For acquisitions completed in fiscal 2004, the incremental
effects are the revenues and expenses of those businesses that
are included in results in fiscal 2004. For acquisitions that were
completed in fiscal 2003, the incremental effects on results in
2004 are the revenues and expenses of those businesses
from
the beginning of fiscal 2004 until the one-year anniversary
of
their respective dates of acquisition.
For 2003 acquisitions, the incremental effects on results
for 2003 relative to 2002 are the revenues and expenses of those
businesses that are included in results in fiscal 2003, and for
acquisitions that were completed in fiscal 2002, the incremental
effects on results in 2003 are the revenues and expenses of
those businesses from the beginning of fiscal 2003 until the
one-year anniversary of their respective dates of acquisition.
Impact of Acquired Businesses on Year-over-Year Comparisons
($ millions) Increase (decrease) in:
Net Cash net
Business acquired Revenue Expense income income
Personal and Commercial Client Group
New Lenox State Bank
Acquired June 2004 for $314 million
Lakeland Community Bank
Acquired March 2004 for $49 million
Total purchases of $363 million
Incremental effects on results for: 2004 20 15 3 4
Private Client Group
Sullivan, Bruyette, Speros & Blayney Inc.
Acquired January 2003 for $20 million
Select assets of myCFO, Inc.
Acquired November 2002 for $61 million
Morgan Stanley Individual Investor
Group online accounts
Acquired May 2002 for $153 million
Northwestern Trust and
Investment Advisory Company
Acquired April 2002 for $19 million
CSFBdirect
Acquired February 2002 for $854 million
Total purchases of $1,107 million
Incremental effects on results for: 2004 2 4 (2) (2)
2003 105 154 (31) (13)
Investment Banking Group
Gerard Klauer Mattison*
Acquired July 2003 for $40 million
Incremental effects on results for: 2004 69 87 (11) (10)
2003 17 26 (5) (5)
BMO Financial Group
Purchases of $1,510 million
Incremental effects on results for: 2004 91 106 (10) (8)
2003 122 180 (36) (18)
*Renamed Harris Nesbitt Gerard
Acquired Businesses