Bank of Montreal 2004 Annual Report Download - page 33

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BMO Financial Group Annual Report 2004 29
MD&A
BMO’s overall net interest margin declined 3 basis points to
1.88%. Net interest margin was lower in all operating groups,
as all were affected by the competitive low interest rate environ-
ment.
The overall decline was limited by changes in asset mix
related to the strong asset growth in Personal and Commercial
Client Group, which has high net interest margins relative to
Investment Banking Group. Personal and Commercial Client
Group net interest margin was also affected in Canada by a shift
in customer preferences toward our lower margin products and
in the United States by the addition of lower-yielding assets.
Private Client Group net interest income declined due prima-
rily to the lower net interest margin earned in term investment
products. The low interest rate environment has caused spread
compression and softened customer demand. The group’s net
interest margin is significantly higher than other groups, as the
net interest margin calculation represents net interest income as
a percentage of total assets. The group’s primary source of net
interest income is term investment products, which are liabilities.
Investment Banking Group net interest income fell because of
lower corporate lending volumes, as well as compressed spreads
in the group’s interest-rate-sensitive businesses associated with
rising short-term interest rates that increased funding costs.
Non-Interest Revenue
Non-interest revenue, which comprises all revenues other than
net interest income, increased $331 million or 8% from 2003.
The incremental effects of acquired businesses increased non-
interest revenue by $91 million, while the impact of the weaker
U.S. dollar reduced 2004 non-interest revenue by $123 million.
Securities commissions and fees were up 18% and contrib-
uted about half of the overall increase in non-interest revenue.
These fees consist largely of full-service and self-directed retail
brokerage commissions within Private Client Group, which
account for about three-quarters of the balance, and institutional
equity trading commissions within Investment Banking
Group.
Fees increased in both operating groups, benefiting from
higher
equity market valuations and higher client trading volumes,
particularly in the first half of 2004. The inclusion of Harris
Nesbitt Gerard’s results for a full year was a significant compo-
nent of the growth in Investment Banking Group revenue.
Deposit and payment service charges, which represent
income earned on both retail and commercial deposit accounts,
declined $10 million due to lower income earned by Investment
Banking Group.
Lending fees rose $24 million, primarily within Investment
Banking Group.
Card fees fell $29 million, having been affected by $65 mil-
lion of adjustments related to rising loyalty reward redemption
rates. Otherwise card fees would have grown as they did in
2003 on higher levels of activity, driven in part by the continued
success of our Mosaik MasterCard.
Investment management and custodial fees were relatively
unchanged, as they were affected by the weaker U.S. dollar.
Mutual fund revenues increased $57 million or 18%, reflect-
ing volume growth and improved equity market valuations.
Securitization revenues decreased $67 million or 27% due to
lower credit card loan securitizations and lower gains on sales.
Securitization revenues are detailed in Note 7 on page 95 of the
financial statements.
Non-Interest Revenue ($ millions) Change from 2003
For the year ended October 31 2004 2003 2002 $%
Securities commissions and fees 1,055 894 813 161 18
Deposit and payment
service charges 746 756 732 (10) (1)
Trading revenues 200 275 209 (75) (27)
Lending fees 317 293 306 24 8
Card fees 261 290 260 (29) (10)
Investment management
and custodial fees 307 303 314 41
Mutual fund revenues 378 321 309 57 18
Securitization revenues 177 244 329 (67) (27)
Underwriting and advisory fees 343 268 228 75 28
Investment securities gains (losses) 175 (41) (146) 216 +100
Foreign exchange, other than trading 177 160 151 17 11
Insurance income 139 124 105 15 12
Other 276 333 314 (57) (17)
Total 4,551 4,220 3,924 331 8
Average Assets
($ billions)
and Net Interest Margin (teb)
(%)
Net interest margin (teb)
Average assets
20042003200220012000
1.88
1.85 1.91
1.99
1.91
270
235
243 248
264
Net Interest Income (teb)
and Non-Interest Revenue
($ billions)
Net interest income (teb)
Non-interest revenue
20042003200220012000
5.1
4.3
4.6
4.9 5.1
4.6
4.3
4.2
3.9
4.2
Assets under Administration
($ billions)
220
230
246
253
20042003200220012000
226
Assets under Management
($ billions)
81
96 96
99
90
20042003200220012000
Assets rose in personal and commercial
banking, while net interest margins
fell in all groups.
Non-interest revenue growth has
outpaced growth in net interest
income.
Assets declined because of the
weaker U.S. dollar and the discontinu-
ance of a low-revenue-producing
sub-custodial arrangement.
Assets under management grew
in spite of the weaker U.S. dollar.