Bank of Montreal 2007 Annual Report Download - page 41

MD&A
BMO Financial Group 190th Annual Report 2007 37
In P&C Canada, there was a solid increase in net interest income.
Volume growth remained strong for all major product categories except
mortgages, where we chose to exit third-party and mortgage broker
channels, as well as personal deposits, which declined slightly in a very
competitive market. In P&C U.S., there was solid loan growth enhanced
by acquisitions, but the contribution to total growth in net interest
income was reduced by the weaker U.S. dollar. The net interest margin
in Canada was unchanged as improved mortgage spreads were
offset by increased funding costs of other products. In P&C U.S., the
net interest margin was affected by competitive pressures on loan
pricing and by a changing product mix as customers shifted to lower-
spread deposits and fixed-rate loans.
Private Client Group net interest income increased strongly,
primarily due to increased deposit balances in our brokerage businesses
and term investment products. The group’s net interest margin
is significantly higher than other groups, as the net interest margin
calculation represents net interest income as a percentage of average
earning assets. The group’s primary source of net interest income is
term investment products, which are liabilities.
BMO Capital Markets’ net interest income increased $201 million
or 26%. Its average earning assets increased $38 billion, with growth
in both corporate loans and low-margin capital markets assets driven
largely by client demand. The group’s net interest margin declined
slightly as wider trading spreads were more than offset by the nega-
tive effect of growth in low-margin assets and by lower spreads
on corporate loans.
Corporate Services net interest income decreased due to the credit
card loan securitization in the fourth quarter of 2007, as well as lower
interest earned on tax refunds and reserves. Its net interest income
also fluctuates in response to activities related to certain balance sheet
positions and BMO’s overall asset-liability position.
Non-Interest Revenue
Non-interest revenue, which comprises all revenues other than net
interest income, decreased $735 million or 14% from 2006. Excluding the
impact of the non-interest revenue component of the two significant
items discussed previously, non-interest revenue increased $416 million
or 8%. The net impact of acquired businesses increased 2007 non-interest
revenue by $16 million, while the impact of the weaker U.S. dollar
reduced non-interest revenue by $48 million.
Securities commissions and fees increased $94 million or 9%.
These fees consist largely of full-service and self-directed retail broker-
age commissions within Private Client Group, which account for about
two-thirds of the balance, and institutional equity trading commissions
within BMO Capital Markets. The increase was split fairly evenly between
the two groups, and was attributable to higher equity market valuations
and greater client trading volumes. Growth in Private Client Group was
reduced by competitive pricing pressures in the direct investing industry.
Deposit and payment service charges were relatively unchanged
as in 2006. Approximately 60% of these revenues are earned in
P&C Canada.
Lending fees increased $69 million or 20%, largely due to growth
in corporate loans in BMO Capital Markets.
Card fees decreased $289 million or 73%. The reduction was in
large part attributable to the $185 million adjustment to P&C Canada’s
customer loyalty rewards program liability. In the fourth quarter of
2006, we securitized $1.5 billion of credit card loans. This reduced card
fees by approximately $147 million and lowered net interest income,
largely offset by an increase in securitization revenues and lower provi-
sions for credit losses. The remaining $43 million increase was primarily
due to the continued success of our Mosaik
®
MasterCard.
Investment management and custodial fees increased $24 million
or 8%, primarily due to higher investment and trust revenue in North
American Private Banking. Growth was reduced by the weaker U.S. dollar.
Non-Interest Revenue ($ millions)
Change from 2006
For the year ended October 31 2007 2006 2005 $%
Securities commissions and fees 1,145 1,051 1,092 94 9
Deposit and payment
service charges 728 729 734 (1) –
Trading revenues (487) 718 496 (1,205) (+100)
Lending fees 406 337 313 69 20
Card fees 107 396 334 (289) (73)
Investment management
and custodial fees 322 298 305 24 8
Mutual fund revenues 576 499 437 77 15
Securitization revenues 296 100 113 196 +100
Underwriting and advisory fees 528 407 357 121 30
Securities gains 246 145 165 101 70
Foreign exchange, other
than trading 132 102 97 30 29
Insurance income 230 204 162 26 13
Other 277 255 447 22 9
Total 4,506 5,241 5,052 (735) (14)
Lower non-interest revenue
reflected commodities losses
and the difficult capital
markets environment.
There was strong growth
in low-spread trading assets,
reducing BMO’s net interest
margin.
20072006200520042003
214
2.30 226
2.02
243
2.19
1.86 1.65
261
304
Average Earning Assets and
Net Interest Margin (teb)
Average earning assets ($ billions)
Net interest margin (teb) (%)
20072006200520042003
4.94.9
5.1
4.94.9
5.0
4.2 4.6
5.2
4.5
Net Interest Income (teb)
and Non-Interest Revenue
($ billions)
Non-interest revenue
Net interest income (teb)
Mutual fund revenues increased $77 million or 15%, after having
increased 14% in 2006 and 16% in 2005, reflecting growth in our
mutual fund businesses.
Securitization revenues increased $196 million, almost tripling from
a year ago. Approximately $180 million of the increase was attributable
to revenues earned from the $1.5 billion credit card loan securitization
vehicle, including gains recognized on loan sales in 2007. Securitization
revenues are detailed in Note 7 on page 104 of the financial statements.
The weaker U.S. dollar lowered
reported asset levels in all periods.
*Reflects the sale of Harrisdirect.
Asset growth was reduced by
the weaker U.S. dollar.
20072006200520042003
253
226
203*
229 230
Assets under Administration
($ billions)
20072006200520042003
96 99
109
124 121
Assets under Management
($ billions)