Bank of Montreal 2007 Annual Report Download - page 50

Management’s Discussion and Analysis
46 BMO Financial Group 190th Annual Report 2007
MD&A
P&C Canada Financial Results
P&C Canada net income was a record $1,250 million, up $108 million
or 9.4% from a year ago. Results in 2007 and 2006 reflected notable
items that increased earnings in both years by comparable amounts.
Net income in 2007 was increased $52 million by the net impact
of: a $107 million ($83 million after tax) gain on the sale of MasterCard
International Inc. shares, a $57 million recovery of prior years’ income
taxes, a $26 million ($23 million after tax) insurance gain and a
$14 million ($9 million after tax) gain on an investment security, less
a $185 million ($120 million after tax) adjustment to increase the
liability for future redemptions related to our customer loyalty rewards
program in our credit card business. Net income in 2006 was increased
by the $51 million impact of a $38 million ($25 million after tax)
gain on the MasterCard IPO and a $26 million recovery of prior years’
income taxes.
In order to minimize future volatility in earnings, we are exploring
options to transfer the customer loyalty rewards program liability and
to change the cost structure going forward to eliminate our exposure to
changing redemption patterns. We expect no significant change in run
rate costs as a result of the charge or change in cost structure.
Revenue increased $163 million or 3.6% to $4,743 million. The impact
of the notable items above reduced revenue growth by $76 million or
1.7 percentage points.
In our personal banking business, revenue increased $93 million
or 3.9%. The increase was driven by the insurance gain, volume growth
in personal loans and branch-originated mortgages, and increases
in securitization revenue and sales of term investment products and
mutual funds. These factors were partially offset by the impact of
increased funding costs.
In our commercial banking segment, revenue increased $78 million
or 6.1% due to volume growth and gains on securities. These factors
were also partially offset by the impact of increased funding costs.
Cards and payment services revenue decreased $8 million or 0.8%.
Revenue growth was reduced by $116 million by the net impact of the
notable items. Improved revenues were attributable to volume growth.
P&C Canada’s overall net interest margin was unchanged at
2.66%, as more favourable mortgage spreads were offset by increased
funding costs.
Non-interest expense was $2,670 million, up $73 million or 2.8%
from 2006 due to higher employee-related expenses as we expanded
front-line sales and service staff, bcpbank Canada costs and increased
promotional costs, including the AIR MILES debit card initiative. These
factors were partially offset by lower allocated costs related to a share
of capital taxes and efficiency improvements. Our cash productivity
ratio improved 41 basis points from 2006 to 56.1%, but would have
improved 132 basis points excluding the impact of the notable items.
This follows a 65 basis point improvement in 2006, as revenue
growth outpaced expense growth in both periods.
Vision
Our goal is to be the leading personal and commercial bank in
the U.S. Midwest. Our community banking business model leverages
strong community leaders focused on developing and maintaining
deep customer relationships by providing exceptional service and
offering a broad range of products and services through an expanding
distribution network. This approach underlies our successful growth
in the highly competitive and fragmented Chicago market and provides
us with a strategic advantage when entering new markets.
Strategies
•Deliver a best-in-class customer experience by emphasizing a strong
performance culture and putting our best people in key positions
with clear accountabilities.
•Align our personal, commercial and wealth management offerings
to meet all of our clients’ needs.
•Ensure that our technology and processes are efficient and support
the delivery of a best-in-class customer experience.
•Expand our distribution network through a combination of completing
acquisitions in the U.S. Midwest, increasing the size of our commercial
sales force and opening new branches in select markets.
Our Lines of Business
P&C U.S. offers a full range of consumer and business loan and deposit
products, including deposit and investment services, mortgages, consumer
credit, business lending, cash management and other banking services.
Strengths
•A rich heritage of 125 years in the Chicago area, with the established
Harris brand and a commitment to service excellence and relationship
management.
•Superior market coverage, with 232 branches conveniently located
in communities across the Chicago area and in Central and Northwest
Indiana, as well as nearly 600 ABMs, allowing our customers to
conduct transactions at any location.
•Deep relationships with local communities and businesses, and
their leaders.
•A community banking business model focused on our customers,
with competitive product offerings, a broad distribution network and
strong sales management and marketing capabilities.
•Opportunity to leverage the capabilities and scale of BMO Financial
Group while emphasizing local authority, accountability, knowledge
and commitment.
Personal and Commercial Banking U.S. (P&C U.S.) serves personal
and business customers in select markets of the U.S. Midwest with
a full range of products and services delivered through a community
banking model that emphasizes local knowledge and commitment.
An extensive distribution network of 232 convenient, attractive Harris
branches, online banking at harrisbank.com, nearly 600 automated
banking machines and an award-winning call centre support our strong
focus on customer service.