Bank of Montreal 2007 Annual Report Download - page 37

Return on common
shareholders’ equity (ROE)
is calculated as net income,
less preferred dividends, as a
percentage of average com-
mon shareholders’ equity.
Common shareholders’ equity
is comprised of common share
capital, contributed surplus,
accumulated other compre-
hensive income (loss) and
retained earnings.
Return on Equity
Return on equity (ROE) is another key value measure. BMO has
generated an ROE of more than 13% in each of the past 18 years, and
is the only bank in its North American peer group to meet this test
of earnings consistency. We achieved an ROE of 14.4% in 2007, down
from 19.2% in 2006. This reduction in the return was attributable to
the $532 million decrease in net income and the impact of a $0.8 billion
increase in average common shareholders’ equity. We achieved this
14.4% return in spite of the commodities losses and the fourth quarter
charges associated with the deterioration in the capital markets envi-
ronment. The 14.4% return was below our annual target of 18% to 20%.
Excluding the significant items that affected results in 2007, ROE was
19.8%. Our medium-term objective is to achieve an average annual 18%
to 20% ROE, over time. In 2008, we are targeting ROE of 18% to 20%.
Table 3 on page 79 includes ROE statistics for the past 10 years.
Page 24 provides further comment on ROE and includes peer
group comparisons.
Net Economic Profit Growth
The last of our four key value measures is net economic profit (NEP)
growth. NEP was $603 million, down from a record $1,230 million in
the prior year. The decrease was primarily due to the significant items
that affected results, as well as an increase in shareholders’ equity.
NEP increased $160 million excluding significant items. Page 24 provides
further comment on NEP growth and includes peer group comparisons.
Net Economic Profit ($ millions, except as noted)
For the year ended October 31 2007 2006 2005 2004 2003
Net income available to common shareholders 2,088 2,633 2,366 2,264 1,743
After-tax impact of the amortization of intangible assets 38 36 74 78 79
Cash net income available to common shareholders 2,126 2,669 2,440 2,342 1,822
Charge for capital* (1,523) (1,439) (1,324) (1,230) (1,119)
Net economic profit 603 1,230 1,116 1,112 703
Net economic profit growth (%) (51) 10 – 58 92
*Charge for capital
Average common shareholders’ equity 14,506 13,703 12,577 11,696 10,646
Cost of capital (%) 10.5 10.5 10.5 10.5 10.5
Charge for capital (1,523) (1,439) (1,324) (1,230) (1,119)
20072006200520042003
16.4
19.4 18.8 19.2 19.8
14.4
ROE (%)
Reported
Excluding significant items
ROE was 14.4% in 2007 despite
commodities losses and a difficult
capital markets environment late
in the year.
Net economic profit (NEP)
represents cash net income
available to common share-
holders, less a charge for
capital. NEP is an effective
measure of economic value
added. NEP is a non-GAAP
measure. See page 34.
20072006200520042003
703
1,112 1,116
1,230
1,390
603
NEP ($ millions)
Reported
Excluding significant items
Lower NEP reflected a decline in
BMO Capital Markets results.
and acquisition fees, equity underwriting activities and earnings
on corporate loans. Total revenue growth is discussed further on
page 36.
Provisions for credit losses totalled $353 million, consisting of
$303 million of specific provisions and a $50 million increase in the
general allowance for credit losses. In 2006, provisions for credit losses
totalled $176 million, consisting of $211 million of specific provisions
and a $35 million reduction in the general allowance. The provision for
credit losses is discussed further on page 39.
Non-interest expense increased $248 million or 3.9% to $6,601 mil-
lion. Expense increased $46 million as a result of acquired businesses,
but was reduced $57 million by the impact of the weaker U.S. dollar. Two-
thirds of the year-over-year expense increase was due to restructuring
charges. Non-interest expense is discussed further on page 40.
MD&A
BMO Financial Group 190th Annual Report 2007 33