Bank of Montreal 2007 Annual Report Download - page 58

Management’s Discussion and Analysis
54 BMO Financial Group 190th Annual Report 2007
MD&A
BMO Capital Markets 2007 Financial Results
BMO Capital Markets net income declined $435 million to $425 million.
Results in 2007 were affected by two significant items: losses in
our commodities trading business of $853 million ($440 million after
performance-based compensation adjustments and income taxes);
and $318 million ($211 million after tax) of charges for certain trading
activities and valuation adjustments related to the deterioration of the
credit environment in late 2007. These included $169 million of losses
related to our structured-credit instruments and preferred shares, a
$134 million write-down related to Canadian asset-backed commercial
paper holdings and a $15 million write-down of capital notes issued
by structured investment vehicles. The foregoing losses are discussed
in more detail in Trading-Related Revenues on page 38 and in the
preceding Business Environment and Outlook section. Excluding the
impact of significant items, net income increased $216 million or 25%
to $1,076 million.
Revenue decreased $811 million or 29% to $1,969 million. Excluding
the impact of significant items, revenue increased $360 million or 13%.
The weaker U.S. dollar lowered revenue by $18 million.
Non-interest revenue decreased $1,012 million or 50% over the
previous year due to the impact of significant items. Excluding those
items, non-interest revenue increased $139 million or 7%. We continued
to focus on growing our fee-based revenues, and several of our busi-
nesses performed exceptionally well during the year. It was a record
year for mergers and acquisitions activity, with fee income up 45%
from 2006. Equity and debt underwriting fees increased 43% and 18%,
respectively, and net investment securities gains increased 17%.
Excluding the impact of significant items, trading revenue decreased
2.1% from the prior year. There were significantly higher foreign
exchange trading revenues in the current year. Interest rate trading
revenue was up appreciably in the first nine months of the year
before the downturn in capital markets. Commissions and lending
fees were also much higher than in the prior year.
Net interest income increased $201 million or 26%, in large part
due to growth in corporate banking assets. Of the aforementioned
losses related to the deterioration in the credit environment, $20 million
was reflected in net interest income. Spreads remained tight in our
corporate lending portfolio, particularly in the competitive U.S. environ-
ment, and overall net interest margin fell modestly. Trading net
interest income was higher, and there was also improved revenue in
our interest-rate-sensitive businesses as a result of a more favourable
interest rate environment for a large portion of the year. Trading
net interest income consists of interest earned on trading assets less
the costs of funding the assets.
The provision for credit losses was $77 million, compared with
$79 million in 2006. The small reduction was primarily due to the
favour able impact of the weaker U.S. dollar. BMO’s practice is to charge
loss provisions to the client operating groups each year using an
expected loss provision methodology based on each group’s share of
expected credit losses over an economic cycle. Corporate Services is
generally charged (or credited) with differences between expected
loss provisions charged to the client operating groups and provisions
required under GAAP.
Non-interest expense decreased $37 million or 2% to $1,565 million,
primarily due to an overall decline in performance-based compensation,
partially offset by higher professional fees and information technology
costs. The weaker U.S. dollar reduced expense by $21 million.
The group’s productivity ratio deteriorated from 57.6% to 79.4%
largely due to the significant items described above. Excluding these
items, the productivity ratio improved by 390 basis points to 53.7%.
Risk-weighted assets increased $19.5 billion due to growth in
corporate loans and the adoption of a more conservative translation
of certain of our trading and underwriting positions to risk-weighted
assets for regulatory capital purposes. Also contributing to the increase
was the adoption of global style backstop liquidity lines on BMO-
sponsored Canadian ABCP conduits.
There was a net loss from U.S. operations of US$56 million,
compared with net income of US$306 million in 2006. The deterioration
was due to the U.S. operations’ recording of a US$432 million share
(net of performance-based compensation adjustments and income taxes)
of commodities losses. In our other U.S. businesses, net income increased
US$70 million, largely driven by growth in corporate banking assets,
merger and acquisition activity, equity underwriting fees, commissions
and investment gains. Excluding the significant items, net income from
U.S. operations represented 42% of BMO Capital Markets net income
in 2007, compared with 37% in 2006.
BMO Capital Markets (Canadian $ in millions, except as noted)
Reported Change from 2006
As at or for the year ended October 31 2007 2006 2005 $%
Net interest income (teb) 974 773 966 201 26
Non-interest revenue 995 2,007 1,775 (1,012) (50)
Total revenue (teb) 1,969 2,780 2,741 (811) (29)
Provision for credit losses 77 79 98 (2) (3)
Non-interest expense 1,565 1,602 1,480 (37) (2)
Income before income taxes 327 1,099 1,163 (772) (70)
Income taxes (recovery) (teb) (98) 239 313 (337) (+100)
Net income 425 860 850 (435) (51)
Amortization of intangible
assets (after tax) –– 1 ––
Cash net income 425 860 851 (435) (51)
Net economic profit (133) 367 415 (500) (+100)
Return on equity (%) 7.8 18.7 21.0 (10.9)
Cash return on equity (%) 7.8 18.7 21.0 (10.9)
Productivity ratio (%) 79.4 57.6 54.0 21.8
Cash productivity ratio (%) 79.4 57.6 54.0 21.8
Net interest margin on
earning assets (%) 0.60 0.62 0.84 (0.02)
Average common equity 4,972 4,481 3,967 491 11
Average earning assets 162,309 124,782 114,866 37,527 30
Risk-weighted assets 86,413 66,908 56,745 19,505 29
Average loans and acceptances 69,645 55,042 48,347 14,603 27
Average deposits 94,019 77,027 71,883 16,992 22
Assets under administration 57,590 58,774 57,694 (1,184) (2)
Assets under management 23,233 28,044 21,871 (4,811) (17)
Full-time equivalent staff 2,365 2,213 2,156 152 7
U.S. Business Selected Financial Data (US$ in millions)
Change from 2006
As at or for the year ended October 31 2007 2006 2005 $%
Total revenue 481 1,156 1,061 (675) (58)
Non-interest expense 641 641 540 ––
Net income (56) 306 287 (362) (+100)
Average assets 74,109 54,137 43,392 19,972 37
Average loans and acceptances 29,058 21,959 17,161 7,099 32
Average deposits 24,920 16,620 14,253 8,300 50