Bank of Montreal 2008 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
34 | BMO Financial Group 191st Annual Report 2008
Earnings per Share Growth
The year-over-year percentage change in earnings per share (EPS) is
our key measure for analyzing earnings growth. All references to EPS
are to diluted EPS, unless indicated otherwise.
EPS was $3.76, down $0.35 or 9% from $4.11 in 2007. Certain
notable items affected results in 2008 and 2007, reducing EPS by $1.16 in
2008 and $1.55 in 2007. Our annual target for 2008 was to grow EPS by
10% to 15% from a base of $5.24, a base that excluded the impact in
2007 of changes in the general allowance for credit losses, restructuring
charges and charges related to the deterioration in the capital markets
environment. When our target was established in 2007, we did
not anticipate the magnitude of the difficulties that have emerged in
credit and capital markets, the extent and duration of the weakness
in U.S. housing markets and the weakness in North American and global
economies. We recorded elevated provisions for credit losses in 2008
as well as charges for the notable items, and fell short of our target as
a result. As explained in the Our Financial Objectives section on page 28,
the difficult credit and capital markets conditions create added uncer-
tainty in the estimation of future financial performance and, as a result,
we have chosen not to provide annual financial targets for 2009.
Our five-year compound average annual EPS growth rate was
1.8%, below our medium-term objective of 10% because of low earnings
in 2008 related to the impact of the difficult credit and capital
markets conditions.
The notable items that reduced net income by $585 million or
$1.16 per share in 2008 were:
• charges for certain trading activities and valuation adjustments
related to the deterioration in capital markets of $625 million
($419 million after tax and $0.83 per share) recorded primarily
in BMO Capital Markets; and
•an increase in the general allowance for credit losses of $260 million
($166 million after tax and $0.33 per share) recorded in
Corporate Services.
In 2007, the four notable items that reduced net income by $787 million
or $1.55 per share were:
•losses in our commodities trading business of $853 million ($440 mil-
lion after tax and associated performance-based compensation,
and $0.86 per share) recorded in BMO Capital Markets;
•charges for certain trading activities and valuation adjustments
related to the deterioration in capital markets of $318 million
($211 million after tax and $0.42 per share), also recorded in
BMO Capital Markets;
•restructuring charges of $159 million ($103 million after tax and
$0.20 per share) recorded in Corporate Services; and
•an increase in the general allowance for credit losses of
$50 million ($33 million after tax and $0.07 per share) recorded
in Corporate Services.
Notable items are detailed on page 36.
Net income was $1,978 million in 2008, down $153 million or
7% from $2,131 million a year ago. As explained above, net income was
reduced in both 2008 and 2007 by certain notable items and in 2008
by higher provisions for credit losses. BMO earned record net income
in each of the four years leading up to 2006. Specific provisions for
credit losses increased $767 million ($516 million after tax) and were
the primary factor in the reduction of net income relative to a year
ago. The impact of the notable items on net income in 2008 totalled
$202 million after tax less than in 2007. Revenues in 2008 increased
$856 million or 9% to a record $10,205 million, notwithstanding
the capital markets charges and the weaker business environment.
A reduction in the impact of
notable items accounted for $546 million
or 6 percentage points
of revenue growth. The remaining increase
was primarily attributable to business growth. Non-interest expense
increased $293 million or 4%.
In Personal and Commercial Banking, results in 2008 marked a
fourth consecutive year of solid net income. Earnings in Private Client
Group matched those of 2007, which marked three consecutive years of
record results. BMO Capital Markets net income was sharply higher than
in 2007 in large part due to reduced charges in the year, but remained
well below the levels of 2006, which marked a second consecutive year
of record net income. Corporate Services net income was significantly
lower than in 2007 due to higher provisions for credit losses charged to
the group under BMO’s expected loss provisioning methodology.
Personal and Commercial Banking (P&C) net income rose $33 mil-
lion or 2% from a year ago to $1,416 million. The P&C group combines
our two retail and business banking operating segments, Personal and
Commercial Banking Canada (P&C Canada) and Personal and Commercial
Banking U.S. (P&C U.S.). P&C Canada net income rose by $53 million
or 4% to $1,320 million. The improvement was attributable to volume-
driven revenue growth, as revenues and expenses increased at
comparable rates. P&C Canada results are discussed in the operating
group review on page 46. P&C U.S. net income decreased $20 million
or 17% to $96 million, and $12 million or 11% to $95 million on a
U.S. dollar basis. Volumes and revenues were up appreciably but costs
increased at a higher rate due to increased integration and other costs,
including the impact of managing in the difficult credit environment.
P&C U.S. results are discussed in the operating group review on page 49.
Private Client Group (PCG) net income was unchanged from
$395 million a year ago, having been affected by a $19 million after-tax
charge for supporting U.S. clients in the difficult capital markets environ-
ment. Otherwise, results were up from last year’s record performance
largely due to higher deposit balances. PCG results are discussed in the
operating group review on page 54. BMO Capital Markets (BMO CM) net
income increased $275 million or 66% to $692 million. The improvement
was attributable to lower charges in 2008, recoveries of prior-year
income taxes and improved income from interest-rate-sensitive
businesses and trading businesses. Merger and acquisition fees and
underwriting activities decreased. BMO CM results are discussed in
the operating group review on page 57.
Corporate Services net loss increased $461 million to $525 million
due to higher provisions for credit losses, largely recorded in Corporate
Services under BMO’s expected loss provisioning methodology, which
is explained in the operating group review on page 58.
Earnings per share (EPS) is calculated by dividing net income,
after deduction of preferred dividends, by the average number of
common shares outstanding. Diluted EPS, which is our basis for
measuring performance, adjusts for possible conversions of financial
instruments into common shares if those conversions would
reduce EPS, and is more fully explained in Note 26 on page 143
of the financial statements.
20082007200620052004
4.40 4.63 5.15
4.11 3.76
EPS ($)
28
5
11
(20)
(9)
EPS Annual Growth (%)
20082007200620052004
EPS declined due to higher
credit losses.
EPS was down 9% in a more
difficult market environment.