Bank of Montreal 2007 Annual Report Download - page 57

MD&A
BMO Financial Group 190th Annual Report 2007 53
2007 Group Objectives and Achievements
Continue to grow BMO Capital Markets U.S. revenues by increasing
product penetration and improving cross-selling to the U.S. client
base and by expanding trading activities and enhancing client cover-
age of key segments, with a focus on growing fee-based revenues.
•Considerable growth in fee-based investment banking revenues,
exceeding targets per sector coverage officer established for 2007.
•Improvement in cross-selling performance compared to 2006 for both
issuer and investor clients.
•
Investment and Corporate Banking U.S. revenue up 24%, fuelled by
successful recruitment of sector and product talent for key roles.
•Advised on 28 U.S. mergers and acquisitions totalling US$3.3 billion.
•Launched DirectLine®Healthcare Remittance to accelerate accounts
receivable and insurance claims for U.S. healthcare service providers.
Implement a number of high-value initiatives to drive earnings
growth in our Trading Products line of business.
•Broadened ability to serve companies listed on the London Stock
Exchange and the Alternative Investment Market.
•
Successfully expanded our presence in the structured products market,
including the launch of structured GICs.
•Leveraged our Canadian market leadership to expand into the United
States and Europe.
Maintain Canadian leadership in the high-return fee businesses
of mergers and acquisitions, equity and debt underwriting
and securitization.
•Announced intent to launch Alpha, a new alternative trading system,
with six Canadian investment dealers in 2008.
•Capitalized on our leadership position in Canada to expand our global
metals and mining capability in London and reinforced our mining
sector leadership with several significant global transactions.
•Enhanced our annual BMO Capital Markets Global Resources
Conference, extending its global profile.
Other Achievements
•Ranked as the top Equity Research Group in Canada for the 27th
consecutive year in the Brendan Wood International Survey of
Institutional Investors.
•Received our first M&A mandate in China, acting as sole financial
advisor to Aluminum Corporation of China, the country’s largest
diversified metals and mining company, on its acquisition of
Canadian-listed Peru Copper Inc.
•Delivered enhanced imaging solutions that increase the efficiency
of deposits, payables and receivables management and enable faster
responses to customer inquiries.
•Expanded global treasury management capabilities, offering clients
a single point of access for global operations.
•Participated in 263 corporate and government debt transactions
that raised $194 billion. Raised $56 billion through participation in
336 equity transactions.
•Advised on 76 completed mergers and acquisitions in North America
totalling $41.5 billion.
Business Environment and Outlook
Fiscal 2007 was a mixed year for BMO Capital Markets. A major
portion of the year was characterized by favourable capital markets
conditions, moderate economic growth and strong energy, metals
and agricultural markets, resulting in robust mergers and acquisitions
and debt underwriting levels. The yield curve was relatively flat, which
proved challenging to our interest-rate-sensitive businesses, and the
weaker U.S. dollar lowered the Canadian dollar equivalent of reported
U.S. results. There were also challenges in our commodities trading busi-
ness, as we incurred large losses related to our natural gas positions
and our efforts to reduce the size and risk of our commodities portfolio.
During the year, corporate banking assets continued to grow, in terms
of both loans and undrawn commitment levels. The business environ-
ment remained very competitive and loan margins continued to be tight.
Liquidity and credit concerns arose in the latter part of the year, as
stress in the U.S subprime housing market spread to other credit markets.
Looking forward, we anticipate continued stress in credit markets,
particularly in the Canadian ABCP market, which will slow the growth
in our securitization business in 2008. The U.S. economic slowdown could
negatively impact our trading volumes. Notwithstanding the recent
Federal Reserve interest rate cuts, disruptions in money markets are
keeping credit spreads and the cost of capital higher than normal.
The higher cost of capital has reduced the attractiveness of acquisitions
and leveraged buyouts by private equity firms and may also reduce
mergers and acquisitions activity in the near to mid-term. This decrease
could potentially be offset by strategic buyers coming into the market.
An anticipated moderate steepening of the yield curve would likely
produce a more favourable interest rate environment for our interest-
rate-sensitive businesses in 2008. We expect to maintain our leadership
in Canadian high-return fee businesses. However, growth in this area
will depend on the performance of financial and commodities markets,
as well as general economic activity and business confidence.
The Trading-Related Revenues section on page 38 includes a
discussion of the $318 million of charges we recorded in the fourth
quarter related to deterioration in capital markets. The charges included
a $15 million charge for our investment in the capital notes of the
Links and Parkland SIVs, which reduced the book value of BMO’s invest-
ment in the capital notes of the SIVs to $53 million. The SIVs have
approximately $2.2 billion of capital notes outstanding. During the fourth
quarter, BMO agreed to participate in the senior notes issued by these
SIVs up to a maximum of approximately $1.3 billion, in addition to
our existing commitment for backstop liquidity facilities of $221 million,
for a total commitment of approximately $1.6 billion, representing 8%
of the SIVs’ total senior debt outstanding as of October 31, 2007.
At October 31, 2007, BMO had purchased approximately $350 million
of the SIVs’ senior notes. Subsequent to year-end, BMO purchased
an additional $904 million of senior notes.
The assets of the SIVs consist of investment-grade structured
finance and financial institution assets. They are high grade assets, as
rated by external agencies, with more than 60% rated AAA, more than
85% rated AA or above, and 99% rated A or above. Less than 0.01%
of the assets have direct exposure to U.S. subprime loans.
Given the amount of our investments in ABCP and the SIVs,
and given the uncertainty in the capital markets environment, these
investments could experience subsequent valuation gains and losses
due to changes in market value.
2008 Group Objectives
•
Continue to grow BMO Capital Markets U.S. revenues by increasing
product penetration, improving cross-selling to the U.S. client
base, expanding trading activities and enhancing client coverage
of key segments, with a focus on growing fee-based revenues.
•
Implement a number of high-value initiatives to drive earnings
growth in our Trading Products line of business.
•
Maintain Canadian leadership in the high-return fee businesses
of mergers and acquisitions, equity and debt underwriting
and securitization.