Bank of Montreal 2007 Annual Report Download - page 52

Management’s Discussion and Analysis
48 BMO Financial Group 190th Annual Report 2007
MD&A
P&C U.S. Financial Results
P&C U.S. net income was $114 million in 2007, a $1 million or 1% decline
from 2006. On a U.S. dollar basis, net income improved $3 million or 3%.
Excluding acquisition integration costs, net income increased in each
quarter of 2007 relative to the preceding quarter.
Revenue increased $2 million to $908 million, but increased $34 mil-
lion or 4% on a U.S. dollar basis. Acquisitions contributed US$39 million
to increased revenues, while revenue increases associated with loan and
deposit volume growth and higher service charges were more than
offset by the impact of lower net interest margins.
Net interest margin fell 30 basis points due to competitive
pressures on loan pricing and a shift in customer preferences to higher-
cost deposits. The overall decline in net interest margin was mitigated
by pricing actions in certain deposit categories. Net interest margin
was stable for most of fiscal 2007.
Non-interest expense increased $15 million or 2% to $696 million,
but increased $35 million or 6% on a U.S. dollar basis. Excluding
operating costs of acquisitions and the change in acquisition integration
costs, which accounted for US$22 million of increased expense,
growth was 2.3%. The remaining increase reflected operating costs
of our new branch technology platform, increased costs associated
with branches opened during fiscal 2006 and higher business volumes.
These factors were partially offset by the impact of our expense
management initiatives.
The P&C U.S. cash productivity ratio deteriorated by 120 basis
points to 73.2%. Excluding acquisition integration costs, the cash
productivity ratio was 71.6%.
U.S. Business Environment and Outlook
Chicago’s financial services marketplace is one of the most fragmented
in the United States, encompassing more than 250 banks. Harris and
the two other largest banks have together held 25% to 30% of the
personal and commercial deposit market since 1997. Nonetheless, new
banks continue to enter this market. Competitors are also attempting
to capture market share with unique distribution strategies, acquisitions,
aggressive pricing and significantly increased brand marketing. In par-
ticular, Bank of America’s recent acquisition of LaSalle Bank will shift the
competitive dynamic by further consolidating the market. The Chicago
area remains a highly contested market because of its fragmentation
and the growth opportunities it presents.
We expect the local Chicago economy to grow at a moderate pace,
consistent with overall growth in the U.S. economy. The implementation
of tighter lending practices has prolonged the downturn in housing
markets and will likely continue to dampen demand for residential
mortgages. Consumer spending remains moderate, but it is at risk of
weakening if home prices continue to fall. Business investment slowed
late in 2007 but exports remained strong. The Federal Reserve could
reduce interest rates further if the recent stress in capital markets
persists. The U.S. Midwest economy is expected to strengthen modestly
in 2008 as manufacturers should benefit from a weak U.S. dollar and
strong global demand.
In 2008, we will continue to emphasize expansion in the U.S.
Midwest through a combination of acquisitions and organic growth.
We will strive to improve our financial performance by focusing
on revenue growth and effectively managing costs. By building our
business around enduring client relationships, we will continue to
enhance our reputation as a high-quality, client-focused bank.