Bank of Montreal 2004 Annual Report Download - page 36

BMO Financial Group Annual Report 200432
MD&A
Management’s Discussion and Analysis
Expenses ($ millions)
and Annual Growth (%)
(1) 11
8
6
5,258
6,157
5,671
6,030 6,087
20042003200220012000
Growth
Expenses
Expense-to-Revenue
Ratio by Group (teb) (%)
2002 2003 2004
55.5 51.5
68.1
63.8
91.7
65.4
86.7
65.7
50.5
62.8
81.1
64.1
PCG
Total Bank
P&C
IBG
Expense growth was modest in 2004
and 2003.
All groups improved productivity
again as BMO achieved its overall
productivity target.
Non-interest expense increased $70 million or 1.1% to $6,157 mil-
lion. In 2003, non-interest expense had risen $57 million or
0.9%. The factors affecting the low levels of expense growth
in the past two years are quite similar in nature and in their
impact. The dollar and percentage changes in expenses by
category are outlined in the Non-Interest Expense table.
The factors contributing to the 1.1% increase in 2004 are set out
in the Contribution to Non-Interest Expense Growth table.
As explained on page 27, the incremental effects of businesses
acquired in 2004 and 2003 increased expenses in 2004 relative
to 2003 by $106 million (1.7%). As further explained on page 27,
the lower Canadian/U.S. dollar exchange rate reduced costs
in 2004 by $177 million ( – 2.8%). Higher performance-based
compensation costs, associated with BMO’s 29% increase in net
income, increased expenses by $90 million (1.4%), and higher
pension costs increased expenses by $30 million (0.5%). Pension
costs are included in other employee compensation in the
Non-Interest Expense table. A change in accounting policy to
capitalize costs of certain internally-developed software in
2004 reduced expenses by $47 million. That change, and more
particularly, our focus on productivity, limited growth in other
expenses to $21 million or 0.3%.
Productivity
The expense-to-revenue ratio (productivity ratio) improved
160 basis points to 64.1% in 2004. BMO’s overall ratio in any
year is affected by the relative strength of the revenues in each
operating group. The expense-to-revenue ratio of each group
is typically quite different because of the nature of their busi-
nesses. In 2004, as in 2003, all operating groups increased
revenues more than expenses, in both absolute and percentage
terms. As a result, all operating groups again improved their
expense-to-revenue ratios.
Personal and Commercial Client Group is BMO’s largest
operating group and its productivity ratio of 62.8% improved by
100 basis points from last year, due to volume-driven revenue
growth in both Canada and the United States and controlled
expense growth. The productivity improvement was mitigated
by a $65 million adjustment to card fees, as explained on
page 29. Excluding that adjustment, the productivity ratio
improved 190 basis points.
Private Client Group’s expense-to-revenue ratio was 81.1%,
a 560 basis point improvement from a year ago. As in 2003, the
improvement was reflected in significantly higher earnings.
The group has been successful in reducing non-revenue-based
costs, while revenue-generating initiatives and an overall
improvement in market conditions led to higher revenues
even though overall expenses declined.
Investment Banking Group’s expense-to-revenue ratio
improved by 100 basis points to 50.5%. The improvement was
tempered by the inclusion of results of recently-acquired Harris
Nesbitt Gerard and higher performance-based compensation
associated with improved results.
We improved our cash productivity ratio in 2004 by
155 basis points to 63.0%, achieving the organization’s top
priority of improving this ratio by 150 to 200 basis points.
Examples of initiatives to enhance productivity are outlined
in the 2004 Review of Operating Groups Performance that
starts on page 35. We will continue to focus on improving
productivity in 2005, and we are again targeting a 150 to 200
basis point improvement in cash productivity.
Table 8 on page 73 provides further detail on expense and
expense growth.
Non-Interest Expense
The expense-to-revenue ratio (or productivity ratio) is our key
measure of productivity. It is calculated as non-interest expense divided
by total revenues (on a taxable equivalent basis), expressed as a
percentage. See page 26.
The cash productivity ratio is calculated in the same manner, after
removing the amortization of intangible assets from non-interest
expenses. See page 26.
Non-Interest Expense ($ millions) Change from 2003
For the year ended October 31 2004 2003 2002 $%
Performance-based compensation 1,148 1,058 941 90 8
Other employee compensation 2,484 2,520 2,462 (36) (1)
Total employee compensation 3,632 3,578 3,403 54 2
Premises and equipment 1,252 1,264 1,280 (12) (1)
Communications 138 162 173 (24) (15)
Other 1,031 978 1,087 53 5
Amortization of intangible assets 104 105 87 (1) (1)
Total 6,157 6,087 6,030 70 1
Contribution to Non-Interest Expense Growth (%)
For the year ended October 31 2004 2003 2002
Acquired businesses 1.7 3.0 5.5
Currency translation effect (2.8) (2.9) 0.6
Performance-based compensation 1.4 1.5 (0.3)
Pension expense 0.5 1.3 1.2
Other 0.3 (2.0) (0.7)
Total non-interest expense growth 1.1 0.9 6.3