Bank of Montreal 2004 Annual Report Download - page 48

BMO Financial Group Annual Report 200444
MD&A
Management’s Discussion and Analysis
Business Environment and Outlook
The investment climate was generally favourable in 2004;
however, heightened investor uncertainty in the latter half of
the year affected trading activity. As a result, the increased
client trading activity experienced in the first half of the year
was followed by a moderate decrease in the second half.
Nevertheless, trading activity overall remained higher than
in 2003. Increased managed asset balances drove strong
fee-based revenue growth for the year, but the low interest
rate environment affected both investor demand and the
net interest margin on term investments.
In 2005, GDP growth is anticipated to be 3.2% in Canada,
a modest improvement over the 2004 growth rate. U.S. GDP
is projected to grow 3.7%, a slightly slower pace than in 2004.
The Federal Reserve started raising interest rates in 2004,
but future increases should be quite gradual. It is anticipated
that equity market values and activity levels will remain
solid, which should translate into healthy client trading activity
and relatively stable managed asset balances. Long-term
demographic trends remain favourable for wealth management
services. These trends should continue to drive improvements
in the group’s results.
Private Client Group Financial Results
Private Client Group net income reached a record $231 million,
an increase of $87 million over 2003. All four lines of business
made solid contributions to earnings growth with higher
non-interest revenue and the benefits of cost reduction initia-
tives. Net interest income declined, primarily due to lower
net interest margin earned in term investment products.
Cost reduction initiatives, combined with lower acquisition-
related expenses, were significant contributors to the group’s
net income growth rates of 60% in 2004 and 82% in 2003.
Going forward, continuous business optimization is expected
to provide additional expense reductions. However, future net
income growth will depend primarily on increasing revenues.
Revenue grew $113 million or 7% to $1,850 million. Com-
mission and fee-based revenue growth across all the group’s
businesses was driven by revenue-generating initiatives and
an overall improvement in market conditions. Full-Service
Investing and the mutual fund businesses experienced strong
revenue growth. The prolonged low interest rate environment,
which affected the net interest margin earned in term invest-
ment products, resulted in a decline in net interest income.
The lower Canadian/U.S. dollar exchange rate reduced revenue
growth by $48 million, particularly in the group’s direct invest-
ing and global private banking businesses.
Non-interest expense decreased to $1,500 million. The small
expense reduction contrasted favourably with growth of 13%
in non-interest revenue, reflecting the group’s success in
reducing non-revenue-based expenses. The group’s productivity
ratio improved by 560 basis points from a year ago to 81.1%.
The lower Canadian/U.S. dollar exchange rate reduced expenses
by $53 million.
There was a net loss in U.S. operations of $15 million in
2004, an improvement of $27 million from 2003. Cash net
income was $26 million. Revenue of $560 million decreased
$15 million, but would have improved by $33 million if the
Canadian/U.S. dollar exchange rate had remained unchanged.
Successful revenue-generating initiatives, combined with
an overall improvement in market conditions, drove the increase.
Non-interest expense decreased $53 million, but would have
remained relatively unchanged if the Canadian/U.S. dollar
exchange rate had remained unchanged. Successful cost
reduction initiatives offset higher revenue-based expenses and
severance and other business optimization costs incurred in
the fourth quarter. The U.S. operations’ productivity ratio
improved by 670 basis points.
Private Client Group ($ millions, except as noted)
Reported Change from 2003
As at or for the year ended October 31 2004 2003 2002 $%
Net interest income (teb) 499 541 518 (42) (8)
Non-interest revenue 1,351 1,196 1,106 155 13
Total revenue (teb) 1,850 1,737 1,624 113 7
Provision for credit losses 221
––
Non-interest expense 1,500 1,505 1,490 (5) –
Income before income taxes
and non-controlling interest
in subsidiaries 348 230 133 118 52
Income taxes (teb) 117 86 54 31 38
Net income 231 144 79 87 60
Amortization of intangible
assets (after tax) 43 47 43 (4) (8)
Cash net income 274 191 122 83 43
Net economic profit 105 7 (23) 98 +100
Return on equity (%) 14.5 8.1 5.4 6.4
Cash return on equity (%) 17.3 10.9 8.7 6.4
Non-interest
expense-to-revenue ratio (%) 81.1 86.7 91.7 (5.6)
Cash non-interest
expense-to-revenue ratio (%) 77.7 82.3 88.2 (4.6)
Average net interest margin (%) 9.37 10.22 9.49 (0.85)
Average common equity 1,536 1,667 1,315 (131) (8)
Average assets 5,326 5,292 5,453 34 1
Total risk-weighted assets 4,280 4,557 5,182 (277) (6)
Average loans and acceptances 2,843 2,686 3,061 157 6
Average deposits 42,088 41,575 39,720 513 1
Assets under administration 156,650 170,255 160,210 (13,605) (8)
Assets under management 79,939 75,900 74,981 4,039 5
Full-time equivalent staff 5,268 5,469 5,942 (201) (4)