Bank of Montreal 2008 Annual Report Download - page 39

Return on common
shareholders’ equity (ROE)
is calculated as net income,
less preferred dividends, as a
percentage of average com-
mon shareholders’ equity.
Common shareholders’ equity
is comprised of common share
capital, contributed surplus,
accumulated other compre-
hensive income (loss) and
retained earnings.
Return on Equity
Return on equity (ROE) is another key value measure. BMO has
generated an ROE of 13% or better in each of the past 19 years, the only
bank in its North American peer group to have done so. The value
of such earnings consistency is readily apparent in the context of the
large losses reported by our peers and other large financial institutions
in North America and globally. We achieved an ROE of 13.0% in 2008,
down from 14.4% in 2007. This reduction in the return was attributable
to the $153 million decrease in net income. We achieved this 13.0%
return in spite of higher credit losses and weakness in credit and capital
markets. The 13.0% return was below our annual target of 18% to
20%. Our medium-term objective commencing in 2009 is to achieve
an average annual ROE of 17% to 20%, over time. Table 3 on page 91
includes ROE statistics for the past 10 years. Page 26 provides further
comment on ROE and includes peer group comparisons.
Net Economic Profit Growth
The last of our four key value measures is net economic profit (NEP)
growth. NEP was $405 million, down from $603 million in the prior
year. The decrease was primarily the result of reduced earnings due
in large part to higher credit losses, as well as a modest increase in
shareholders’ equity. NEP remained positive even in the difficult credit
and capital markets conditions as we earned more than our cost of
capital. Page 26 provides further comment on NEP growth and includes
peer group comparisons.
Net Economic Profit ($ millions, except as noted)
For the year ended October 31 2008 2007 2006 2005 2004
Net income available to common shareholders 1,905 2,088 2,633 2,366 2,264
After-tax impact of the amortization of intangible assets 35 38 36 74 78
Cash net income available to common shareholders 1,940 2,126 2,669 2,440 2,342
Charge for capital*(1,535) (1,523) (1,439) (1,325) (1,230)
Net economic profit 405 603 1,230 1,115 1,112
Net economic profit growth (%) (33) (51) 10 – 58
*Charge for capital
Average common shareholders’ equity 14,612 14,506 13,703 12,577 11,696
Cost of capital (%) 10.5 10.5 10.5 10.5 10.5
Charge for capital (1,535) (1,523) (1,439) (1,325) (1,230)
20082007200620052004
19.4 18.8 19.2
14.4 13.0
ROE (%)
ROE was 13% in 2008 despite
charges related to the capital
markets environment and higher
provisions for credit losses.
Net economic profit (NEP)
represents cash net income
available to common share-
holders, less a charge for
capital. NEP is an effective
measure of economic value
added. NEP is a non-GAAP
measure. See page 85.
Revenue increased $856 million or 9% to $10,205 million; as noted
above, approximately one-third of the increase related to business
growth and the remainder to a reduction in the impact of notable items.
Business acquisitions added $76 million to revenue growth, while the
weaker U.S. dollar reduced revenue growth by $63 million, as explained
on page 37. P&C Canada revenue increased 6% largely due to volume
growth. Excluding the impact of certain unusual items in 2007, discussed
on page 48, revenue grew 5%. P&C U.S. revenue grew 15% on a
U.S. dollar basis, largely due to acquisitions, loan growth and a gain
on Visa Inc.’s initial public offering, partially offset by reductions in net
interest margins.
PCG revenue increased $15 million or 1%, as growth was
lowered 1 percentage point by the charges outlined above. BMO CM
revenue increased $443 million or 23%, rising $577 million because
of lower charges. There was growth in revenues from interest-rate-
sensitive businesses and trading activities. BMO’s total revenue growth
is discussed further on page 38.
Provisions for credit losses totalled $1,330 million, consisting
of $1,070 million of specific provisions and a $260 million increase
in the general allowance for credit losses. In 2007, provisions for
credit losses totalled $353 million, consisting of $303 million of specific
provisions and a $50 million increase in the general allowance.
The provision for credit losses is discussed further on page 41.
Non-interest expense increased $293 million or 4% to $6,894 million.
Non-interest expense is discussed further on page 42.
NEP remained positive but
decreased due to lower earnings.
20082007200620052004
1,112 1,115
1,230
603
405
NEP ($ millions)
MD&A
BMO Financial Group 191st Annual Report 2008 | 35