Bank of Montreal 2007 Annual Report Download - page 38

Management’s Discussion and Analysis
2007 Financial Performance Review
34 BMO Financial Group 190th Annual Report 2007
MD&A
This section provides a review of our enterprise financial performance for 2007 that focuses on the Consolidated Statement of Income included in our
consolidated financial statements, which begin on page 92. A review of our operating groups’ strategies and performance follows the enterprise review.
A summary of the enterprise financial performance for 2006 is outlined on page 77.
Highlights
•Revenue decreased $583 million or 5.8% in 2007, but increased
$588 million or 5.8% excluding the impact of significant items.
•Revenue growth in P&C Canada was attributable to strong
volume growth across its three business lines, but was limited
by some notable items. P&C U.S. revenue growth was attribu-
table to loan growth and acquisitions, but was limited by lower
net interest margin and the weak U.S. dollar. Private Client
Group revenue growth was well balanced, with increases across
all its businesses. BMO Capital Markets revenues were down
significantly, but were up strongly excluding the impact of
significant items, with robust increases in a number of fee-
based businesses and in net interest income.
•The provision for credit losses increased to $353 million from
$176 million in 2006. Specific provisions were up $92 million to
$303 million and there was a $50 million increase in the general
allowance, compared with a $35 million decrease a year ago.
Credit conditions softened in 2007.
•Non-interest expense increased 3.9% in 2007, with two-thirds
of the growth due to restructuring charges related to initiatives
to improve efficiency and effectiveness across the enterprise.
•The effective income tax rate was 14.3%, compared with 23.6%
in 2006. The reduced rate was due to a relatively higher propor-
tion of income from lower-tax-rate jurisdictions and prior years’
income tax recoveries.
Non-GAAP Measures
BMO uses both GAAP and non-GAAP measures to assess performance.
Securities regulators require that companies caution readers that earn-
ings and measures adjusted to a basis other than generally accepted
accounting principles (GAAP) do not have standardized meanings and are
unlikely to be comparable to similar measures used by other companies.
Management discloses amounts on a basis that adjusts for certain
significant items. Amounts and measures stated on a basis that excludes
the significant items are considered useful as they would be expected
to be more reflective of ongoing operating results. Since such charges
tend to be irregular, adjusting for them is helpful in assessing quarterly
trends in results. These significant items included: losses in our com-
modities business in 2007 and related performance-based compensation;
charges related to deterioration in capital markets in the fourth quarter
of 2007; restructuring charges recorded in the first and fourth quarters;
and changes in the general allowance for credit losses.
Cash earnings and productivity measures may enhance compar-
isons between periods when there has been an acquisition, particularly
because the purchase decision may not consider the amortization
of intangible assets to be a relevant expense. Cash EPS measures are
also useful because analysts often focus on this measure, and cash
EPS is used by Thomson First Call to track third-party earnings estimates.
BMO, like many banks, analyzes revenue, and ratios computed
using revenue, on a taxable equivalent basis (teb). This basis includes
an adjustment that increases GAAP revenues and the GAAP provision
for income taxes by an amount that would raise revenues on certain
tax-exempt securities to a level equivalent to amounts that would incur
tax at the statutory rate. The effective income tax rate is also analyzed
on a taxable equivalent basis for consistency in approach.
Net economic profit is another non-GAAP measure. It represents
cash earnings available to common shareholders less a charge for capital,
and is considered an effective measure of added economic value.
GAAP and Related Non-GAAP Measures Used in the MD&A
($ millions, except as noted) 2007 2006 2005
Net interest income per financial statements (a) 4,843 4,744 4,787
Non-interest revenue 4,506 5,241 5,052
Revenue per financial statements (b) 9,349 9,985 9,839
Taxable equivalent basis (teb) adjustment (c) 180 127 119
Net interest income (teb) (a + c) (d) (1) 5,023 4,871 4,906
Non-interest revenue 4,506 5,241 5,052
Revenue (teb) (e) (1) 9,529 10,112 9,958
Provision for income taxes per
financial statements (f) 189 717 874
Taxable equivalent basis (teb) adjustment 180 127 119
Provision for income taxes (teb) (g) (1) 369 844 993
Non-interest expense (h) 6,442 6,353 6,332
Restructuring charge (i) 159 ––
Total non-interest expense (j) 6,601 6,353 6,332
Amortization of intangible assets (46) (44) (94)
Cash-based expense (k) (1) 6,555 6,309 6,238
Net income (l) 2,131 2,663 2,396
Amortization of intangible assets,
net of income taxes 38 36 74
Cash net income (m) (1) 2,169 2,699 2,470
Preferred share dividends (43) (30) (30)
Charge for capital (1) (1,523) (1,439) (1,324)
Net economic profit (1) 603 1,230 1,116
Productivity ratio (%) ((j/b) x 100) 70.6 63.6 64.4
Productivity ratio (teb) (1) (%) ((j/e) x 100) 69.3 62.8 63.6
Cash productivity ratio (teb) (1) (%) ((k/e) x 100) 68.8 62.4 62.6
Net interest margin annualized (%)
((a/average earning assets) x 100) 1.59 1.81 1.97
Net interest margin (teb) annualized (1) (%)
((d/average earning assets) x 100) 1.65 1.86 2.02
EPS (uses net income) ($) 4.11 5.15 4.63
Cash EPS (1) (uses cash net income) ($) 4.18 5.23 4.78
Effective tax rate (%) (f/income before income taxes) 7.9 20.7 26.3
Effective tax rate (teb) (1) (%)
(g/income before income taxes plus teb adjustment) 14.3 23.6 28.8
Significant Items
Charges related to deterioration in capital markets (n) 318
––
Commodities losses (o) 853 ––
Performance-based compensation thereon (p) (120) ––
Changes in the general allowance 50 (35) (40)
Restructuring charges (q) 159 ––
Income taxes re the above (473) 12 14
Significant items (after tax) (2) 787 (23) (26)
Measures on a basis that excludes significant items (1)
Revenue (teb) (e + n + o) (3) 10,700 10,112 9,958
Non-interest expense (j – p – q) (4) 6,562 6,353 6,332
Cash-based expense (k – p – q) (5) 6,516 6,309 6,238
Net income (l + 2) 2,918 2,640 2,370
Cash net income (m + 2) 2,956 2,676 2,444
Productivity ratio (teb) (%) ((4/3) x 100) 61.3 62.8 63.6
Cash productivity ratio (teb) (%) ((5/3) x 100) 60.9 62.4 62.6
EPS (uses net income excluding significant items) 5.66 5.11 4.58
Cash EPS (uses cash net income excluding significant items) 5.73 5.19 4.73
ROE (%) (uses net income excluding significant items) 19.8 19.2 18.6
Effective tax rate (teb) (%) (g + tax on significant items)/
(income before income tax + teb adjustment + impact
of significant items excluding tax) 22.0 23.5 28.7
(1) These are non-GAAP amounts or non-GAAP measures.