Bank of Montreal 2004 Annual Report Download - page 45

BMO Financial Group Annual Report 2004 41
MD&A
Personal and Commercial Client Group ($ millions, except as noted)
Reported Change from 2003
As at or for the year ended October 31 2004 2003 2002 $%
Net interest income (teb) 3,444 3,318 3,099 126 4
Non-interest revenue 1,470 1,506 1,463 (36) (2)
Total revenue (teb) 4,914 4,824 4,562 90 2
Provision for credit losses 302 301 280 1
–
Non-interest expense 3,084 3,075 2,984 9 –
Income before income taxes
and non-controlling interest
in subsidiaries 1,528 1,448 1,298 80 6
Income taxes (teb) 524 507 489 17 3
Non-controlling interest
in subsidiaries 142(3) (75)
Net income 1,003 937 807 66 7
Amortization of intangible
assets (after tax) 32 30 32 28
Cash net income 1,035 967 839 68 7
Net economic profit 581 515 406 66 13
Return on equity (%) 24.4 22.8 20.4 1.6
Cash return on equity (%) 25.3 23.5 21.2 1.8
Non-interest
expense-to-revenue ratio (%) 62.8 63.8 65.4 (1.0)
Cash non-interest
expense-to-revenue ratio (%) 62.0 63.1 64.7 (1.1)
Average net interest margin (%) 2.89 3.02 3.04 (0.13)
Average common equity 3,934 3,944 3,780 (10) –
Average assets 119,089 109,909 102,049 9,180 8
Total risk-weighted assets 78,122 72,188 66,791 5,934 8
Average loans and acceptances 114,318 105,855 97,426 8,463 8
Average deposits 59,125 56,473 54,168 2,652 5
Assets under administration 10,955 11,295 14,452 (340) (3)
Assets under management –– 371 ––
Full-time equivalent staff 19,555 19,490 19,254 65 –
Net interest margin declined 13 basis points, falling comparably
in both Canada and the United States as both were affected
by the competitive low interest rate environment. In Canada,
net interest margin was further reduced by a shift in customer
preferences toward lower spread products, including residen-
tial mortgages, the popularity of our premium rate savings
plans and borrowers switching to lines of credit. In the United
States, in addition to the effect of the low interest rate environ-
ment, lower net interest margin was partly attributable to the
addition of lower-yielding assets.
Non-interest expense rose $9 million to $3,084 million.
Expenses were reduced $58 million by the lower Canadian/U.S.
dollar exchange rate. In Canada, higher employee-related costs
and expenditures on certain initiatives were largely offset
by the effects of a change in policy to capitalize certain costs
of internally-developed software in 2004. In the United States,
employee-related costs and acquisition and new branch
opening costs were partially offset by the effects of the lower
exchange rate. The group’s productivity ratio improved
100 basis points to 62.8%; however, excluding the card fees
adjustment, the productivity ratio improved 190 bps.
Canadian Business Environment and Outlook
The personal and commercial banking environment was
challenging in 2004, with intense price competition, low
interest rates and the continuing growth of non-traditional
competitors. Historically-low interest rates, rising home prices
and employment growth, however, supported strong home
sales and consumer demand for mortgages throughout the
year, improving on an already impressive performance in
2003. Commercial loan growth was lower than forecast, but
commercial deposit growth was strong.
Looking to 2005, demand for personal and commercial
products and services is forecast to again grow at double the
rate of GDP growth. We anticipate that short-term interest rates
will rise over the course of the year. While this may provide
some relief from spread compression on personal and commer-
cial deposits, increased competition could offset this benefit.
Personal deposits and mutual fund balances are expected to
grow 5%, while market growth in residential mortgages and
consumer loans is anticipated to moderate from 2004 levels
but remain relatively strong at nearly 7%. Growth in com-
mercial deposits is expected to be lower than in 2004, as business
spending accelerates, but increased business investment
should produce commercial loan growth of more than 5%.
Personal and Commercial Client Group Financial Results
Personal and Commercial Client Group net income rose
$66 million to $1,003 million. The 7% increase was due to
higher revenue, cost containment and a lower effective tax rate.
Those factors were partially offset by the impact of lower
net interest margin in the competitive low interest rate envi-
ronment and by reduced card fees. Card fees were reduced by
a $65 million ($42 million after tax) increase to the recorded
liability associated with our customer loyalty rewards program
due to rising reward redemption rates. Excluding this adjust-
ment, net income rose $108 million or 12%.
Revenue increased $90 million or 2%, driven by strong vol-
ume growth in both Canadian and U.S. operations. The growth
rate was mitigated by a reduction in revenue of $82 million
resulting from the lower Canadian/U.S. dollar exchange rate,
the effect of lower net interest margin and the card fees
adjustment. U.S. acquisitions contributed $20 million of incre-
mental revenue in 2004. We continue to benefit from higher
inter-group referrals and our focus on initiatives to improve our
sales and service capabilities, thereby improving our customer
experience. Both the Canadian and U.S. markets are, however,
becoming increasingly competitive.
In Canada, the commercial banking segment posted strong
revenue gains resulting from loan growth and particularly
strong deposit growth. In 2003, the commercial segment was
affected by the SARS outbreak, the Ontario power outage,
hurricanes and forest fires, and continues to be affected by
a ban on beef exports. In the personal segment, strong volume
growth was offset by lower net interest margins and reduced
card fees. Residential mortgage revenues rose strongly, sup-
ported by Canada’s robust housing market, but strong volume
growth in consumer loans and deposits was offset by the
impact of lower net interest margins. In the United States,
revenue growth was driven by robust consumer and small
business loan growth.