Bank of Montreal 2007 Annual Report Download - page 81

MD&A
2006 Financial Performance Review
BMO Financial Group 190th Annual Report 2007 77
Most of the preceding discussions in the MD&A focused on our
performance in 2007. This section provides a summary of our performance
in fiscal 2006.
Net income increased $267 million or 11% to $2,663 million in fiscal
2006 and earnings per share rose $0.52 or 11%, to a record $5.15.
The increases were driven by improved revenues from business growth,
stable lower provisions for credit losses and lower income taxes. Fiscal
2006 was BMO’s fourth consecutive year of record earnings. Return on
equity was 19.2%, up from 18.8% in 2005 due to the $267 million
increase in net income, partially offset by the effect of a $1.1 billion
increase in average common shareholders’ equity.
Revenue on a taxable equivalent basis rose $154 million or 1.5%
in 2006 to $10,112 million, driven largely by growth in Personal and
Commercial Banking with support from BMO Capital Markets. Revenues
were lower in Private Client Group due to the sale of Harrisdirect at the
end of fiscal 2005. The weaker U.S. dollar reduced revenue growth in
most of our operating groups, lowering BMO’s overall revenue growth
by $170 million or 1.7 percentage points.
The favourable credit conditions of 2005 continued throughout 2006.
Provisions for credit losses in 2006 were little changed at $176 million,
consisting of $211 million of specific provisions net of a $35 million
reduction in the general allowance for credit losses. There were $179 mil-
lion of credit losses in 2005, reflecting specific provisions of $219 million
and a $40 million reduction in the general allowance.
Non-interest expense increased $21 million or 0.3% to $6,353 mil-
lion. The impact of having sold Harrisdirect in late 2005 net of the 2006
incremental expenses of acquired businesses decreased expenses by
$214 million (–3.1%), while the weaker U.S. dollar further reduced costs
by $112 million (–1.6%). Higher performance-based compensation
costs increased overall expenses by $45 million (0.6%). Other factors,
including other business-based costs, increased overall expenses in 2006
by 4.4%. These included higher salaries and benefits costs associated
with the expansion of our sales force as well as initiatives and costs
associated with business growth.
Net income in Personal and Commercial Banking rose to $1,257 mil-
lion in 2006, up $57 million or 5% from a then-record $1,200 million
in 2005. Revenue increased $270 million or 5% to $5,486 million, while
expenses rose $138 million or 4% to $3,278 million.
Net income in P&C Canada rose $66 million or 6% from the record
results of 2005 to $1,142 million. Results in fiscal 2005 benefited from
the $8 million net impact of $34 million of recoveries of prior years’
income taxes and a $40 million ($26 million after tax) increase in
our customer loyalty card reserves. Results in fiscal 2006 reflected 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.
Adjusted for the foregoing items, net income increased $23 million or
2%. Revenue increased $261 million or 6% to $4,580 million, driven
by volume growth in a number of product areas, as well as the gain on
the MasterCard IPO and the adjustment to the loyalty card reserves.
Growth was lowered by reduced securitization revenue and a 10 basis
point reduction in net interest margin. The provision for credit losses
increased $45 million to $314 million due to higher lending volumes
and the availability of more detailed credit information as a result of
our Basel II initiative. Non-interest expense increased $116 million or 5%
to $2,597 million due to the expansion of our sales force and increased
initiative and marketing costs.
Net income in P&C U.S. decreased $9 million or 7% to $115 million.
Excluding the impact of the weaker U.S. dollar, investments in acquisi-
tions integration and branch technology in 2006 and the branch
charter consolidation in 2005, net income rose 4% from 2005. Revenue
increased $9 million or 1% to $906 million, but increased $74 million or
8% excluding the impact of the weaker U.S. dollar. The increase was
attributable to acquisitions, consumer and small business loan growth,
improved deposit spreads, new branches and higher service charge
revenue, partly offset by lower loan spreads. Expenses increased
$22 million or 3% to $681 million, but increased $70 million or 11%
excluding the effect of changes in exchange rates. Expense growth was
largely attributable to acquisitions and related integration costs, new
branches, costs associated with volume growth and the implementation
of our new branch technology platform, partially offset by costs incurred
in 2005 for our branch charter consolidation.
Net income in Private Client Group reached a record $355 million,
an increase of $41 million or 13% over 2005. Results in 2005 reflected
the $49 million ($18 million after tax) gain on the sale of Harrisdirect,
the group’s U.S. direct investing operation, and a $25 million ($16 million
after tax) gain on the sale of TSX common shares. Adjusting for the
impact of the foregoing items, net income would have increased
$75 million or 27% from the then-record results of 2005. Higher earn-
ings were achieved primarily through strong growth in operating
revenues. Revenue declined $144 million or 7% to $1,893 million.
However, after excluding the operating results of Harrisdirect and the
$74 million of gains on the foregoing asset sales, revenue increased
$134 million or 8%. There were increases in fee-based revenue in our
mutual fund businesses and higher client trading volumes in direct
investing, as well as increases in term deposit spreads with moderate
balance growth. The weaker U.S. dollar reduced revenue growth by
$22 million, largely in the private banking business. Non-interest
expense decreased $187 million or 12% to $1,342 million. However,
after excluding the operating results of Harrisdirect, expenses increased
$56 million or 4%. The increase was primarily due to higher revenue-
based costs, in line with increased revenue, combined with further
investments in our sales force and U.S. investment management busi-
ness. The weaker U.S. dollar reduced expense growth by $18 million.
Net income in BMO Capital Markets rose $10 million to a record
$860 million. Results in 2005 included $44 million ($37 million after
tax) of revenue recognized on restructuring VIEs. Adjusting for the fore-
going item, net income increased $47 million or 6% from 2005 due
to income tax initiatives and increased revenue, partially offset by higher
performance-based compensation. Revenue increased $39 million or
1% to $2,780 million. The weaker U.S. dollar reduced revenue growth
by $96 million or 3 percentage points. Improved non-interest revenues
more than offset reduced net interest income. Trading net interest
income was much lower in 2006 than in 2005 but non-interest trading
income was much higher and overall trading revenue was also much
higher. Equity, foreign exchange and commodities trading revenues
were higher, while interest rate trading revenues declined. Merger and
acquisition fees and commission revenues were also much higher than
in 2005. Net investment securities gains decreased $43 million, in part
due to the group’s $25 million share of the gain on sale of TSX common
shares recognized in 2005. The prior-year results also reflected $44 mil-
lion of revenue recognized on the restructuring of VIEs. Net interest
income declined, in large part due to higher funding costs associated
with the expansion of our commodity and equity trading businesses.
The decline was also due to lower spreads in our interest-rate-sensitive
businesses related to rising short-term interest rates and a flatter yield
curve, our strategy of reducing non-core assets and lower spreads on
corporate loans, partially offset by growth in assets. Provisions for credit
losses fell $19 million to $79 million due to lower expected losses, while
non-interest expense increased $122 million or 8% to $1,602 million,
due primarily to higher performance-based compensation related to
strong fee-based and trading revenues.
Net income in Corporate Services was $191 million, compared with
$32 million in 2005. The increase was driven by low income taxes, a
reduced provision for credit losses and lower expenses. Results in 2006
included Corporate Services’ $23 million ($15 million after tax) share of
a $27 million gain on a $1.5 billion credit card loans securitization.