Bank of Montreal 2004 Annual Report Download - page 56

BMO Financial Group Annual Report 200452
MD&A
Management’s Discussion and Analysis
Tier 1 Capital ($ millions)
2004 2003
Beginning of year 12,337 11,529
Net income 2,351 1,825
Dividends (873) (748)
Goodwill and excess intangible assets (173) 213
Issuance of common shares 242 205
Repurchase of common shares (333) (12)
Other issues net of redemptions 195 –
Translation and other (275) (675)
End of year 13,471 12,337
Risk-Weighted Assets ($ millions)
2004 2003
Beginning of year 129,163 131,078
Increases (decreases)
Personal and Commercial Client Group 5,934 5,397
Private Client Group (277) (625)
Investment Banking Group (9) (4,670)
Corporate Support 2,512 (2,017)
End of year 137,323 129,163
Capital Measures
Tier 1 Capital Ratio (%) Total Capital Ratio (%) Assets-to-Capital multiple (times)
8.83
11.97
8.15
12.12
8.80
12.23
9.81
11.31
9.55
12.09
14.8x 14.2x
15.8x 16.4x 17.0x
2000 2004200320022001
Outstanding Shares and Securities Convertible into Common Shares
Number of shares
Dividends declared per share
As of November 23, 2004 or dollar amount 2004 2003 2002
Common shares 501,309,373 $1.59 $1.34 $1.20
Class B Preferred Shares
Series 5 $200,000,000 $1.33 $1.33 $1.33
Convertible into common shares:
Class B Preferred Shares (1)
Series 4 $200,000,000 $1.20 $1.20 $1.20
Series 6 $250,000,000 $1.19 $1.19 $1.19
Series 10 $396,000,000 US$1.49 US$1.49 US$1.39
Stock options
– vested 20,743,510
– non-vested 9,347,638
(1) Convertible preferred shares may be exchanged for common shares in future years on a
pro-rata basis based on 95% of the average trading price of common shares for 20 days ending
four days prior to the exchange date.
Note 18 on page 108 of the financial statements includes details on share capital.
multiple increased to 17.0 from 16.4 in 2003, due primarily to an
increase in assets. The multiple remains below the maximum
permitted by our regulator.
As part of our efforts to optimize our capital structure, we
redeemed our $400 million issue of Class B Series 3 preferred
shares due to the relatively high dividend rate and the non-
tax-deductible nature of the dividend payment. We also issued
$600 million of Trust Capital Securities – Series D (BOaTS) –
which qualify as Tier 1 capital and pay interest that is not only
tax-deductible but is at a lower rate than the non-tax-deductible
dividend rate paid on the Series 3 shares.
Dividends declared per common share in 2004 totalled
$1.59, up from $1.34 in 2003. This represented a 35% payout
ratio, which was at the lower end of our longer-range goal of
paying out between 35% and 45% because of particularly
strong earnings in 2004 due primarily to very favourable credit
performance. BMO increased its quarterly dividend twice
during the year, as the quarterly dividend rose to $0.44 per
share in the fourth quarter, up 26% from $0.35 in the fourth
quarter of 2003. At year-end, BMO common stock provided
a 3.1% annual dividend yield based on its closing share price.
On August 5, 2003, we announced our intention to repur-
chase for cancellation up to 15 million of our common shares.
Under the program, which expired on August 6, 2004, 5,123,900
shares were repurchased at a total cost of $271 million.
On August 6, 2004, BMO announced a new normal-course issuer
bid, commencing August 10, 2004 and ending August 6, 2005,
under which BMO may repurchase for cancellation up to a
further 15 million common shares. In 2004, BMO repurchased
a total of 6,220,500 common shares under our common share
repurchase programs at a cost of $333 million.
BMO’s credit rating, as measured by Standard & Poor’s (S&P)
senior debt ratings, remained unchanged at AA–, the highest,
along with two of our competitors, of the six major Canadian
banks. Our rating, as measured by Moody’s senior debt ratings,
was unchanged at Aa3, remaining slightly below only one
of the six major Canadian banks. Both agencies maintained a
stable ratings outlook during the year. These ratings represent
a high-grade, high-quality rating.
As outlined on page 57, on November 1, 2004, BMO will be
required to consolidate certain customer securitization vehicles,
referred to as multi-seller conduits, adding approximately
$20.8 billion of assets. This will have the effect of increasing
our assets-to-capital multiple on a pro-forma basis to 18.4 from
17.0. The Office of the Superintendent of Financial Institutions
(OSFI) has agreed to provide relief from including such amounts
in risk-weighted assets for the first two quarters of fiscal 2005,
pending further consideration. If risk-weighted asset relief
is not made permanent, we may restructure these vehicles.
As explained in the Changes in Accounting Policies in 2005
section on page 57, we will be required to reclassify certain
preferred shares as debt in 2005. OSFI has agreed that the
reclassified shares may continue to be included in Tier 1 capital.
As described on page 60 in the Enterprise-Wide Risk Man-
age ment section of the MD&A, the Basel II framework has
been finalized. In parallel with the process of developing the
risk management models and systems to calculate regulatory
capital, we will review our process for assessing overall capital
adequacy in relation to our risk profile. This assessment will
be subject to review by OSFI.