Bank of Montreal 2008 Annual Report Download - page 40

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
36 | BMO Financial Group 191st Annual Report 2008
2008 Financial Performance Review
This section provides a review of our enterprise financial performance for 2008 that focuses on the Consolidated Statement of Income included in our
consolidated financial statements, which begin on page 104. A review of our operating groups’ strategies and performance follows the enterprise review.
A summary of the enterprise financial performance for 2007 is outlined on page 89.
Highlights
•Revenue increased $856 million or 9.2% in 2008 to a record
$10.2 billion despite difficult capital markets conditions.
•Revenue growth in P&C Canada was primarily attributable to
volume growth across its three lines of business. P&C U.S. revenue
growth was attributable to acquisitions, a gain on Visa’s initial
public offering and improved core revenues. Private Client Group
revenues increased despite difficult market conditions, certain
charges and the weaker U.S. dollar. BMO Capital Markets revenues
were up significantly due to strength in interest-rate-sensitive
businesses in 2008 and commodities losses in 2007.
•The provision for credit losses increased to $1,330 million from
$353 million in 2007. Specific provisions were up $767 million to
$1,070 million and there was a $260 million increase in the general
allowance, compared with a $50 million increase a year ago.
Credit market conditions were much weaker in 2008.
•Non-interest expense increased 4.4% in 2008, growing at slightly
less than half the rate of revenue growth. Expenses reflected
the addition of front-line staff and business initiatives.
•The effective income tax rate was a recovery of 3.6%, compared
with 7.9% in 2007. The reduced rate was due to a relatively
higher proportion of income from lower-tax-rate jurisdictions
and recoveries of prior-year income taxes.
Notable Items
We have designated certain charges as notable items to assist in
discussing their impact on our financial results. These items reduced net
income by $585 million in 2008 and $787 million in 2007, as set out in
the adjacent table.
In 2008, revenue was reduced by charges of $625 million
related to difficulties in the capital markets environment. These charges
reduced trading non-interest revenues by $212 million, securities gains
by $347 million and other income by $66 million. In 2007, revenue was
reduced by $318 million of such charges and by losses of $853 million
recorded in our commodities trading business. The charges in 2007
reduced trading revenue by $1,156 million and securities gains by
$15 million.
Charges in 2008 included: $230 million ($80 million in 2007) in
respect of BMO’s investment in notes issued by Apex Trust, a Canadian
credit protection vehicle, and a related total return swap (see page 65);
$158 million ($nil in 2007) in respect of exiting positions related to
monoline insurer ACA Financial Guarantee Corporation in the first quarter
of 2008; $70 million ($54 million in 2007) related to third-party
Canadian asset-backed commercial paper (see page 64); $57 million
($15 million in 2007) for capital notes in the Links Finance Corporation
and Parkland Finance Corporation structured investment vehicles
(see page 65); and $110 million ($169 million in 2007) in respect of
certain other trading activities and valuation adjustments, including
$29 million for other-than-temporary impairment in respect of securities
transferred from the trading to the available-for-sale portfolio. This
transfer is explained more fully in the Trading-Related Revenues section
on page 40. Further details on the effects of notable items can be
found on page 34.
Notable Items
($ millions) 2008 2007 2006
Charges related to deterioration
in capital markets environment 625 318 –
Related income taxes 206 107 –
Net impact of charges related to deterioration
in capital markets environment (a) 419 211 –
Commodities losses (1) –853 –
Performance-based compensation –(120) –
Related income taxes –293 –
Net impact of commodities losses (b) –440 –
Increase (decrease) in general allowance 260 50 (35)
Related income taxes 94 17 (12)
Net impact of increase (decrease)
in general allowance (c) 166 33 (23)
Restructuring charge (1) –159 –
Related income taxes –56 –
Net impact of restructuring (d) –103 –
Total reduction (increase) in net income (a+b+c+d) 585 787 (23)
(1) Further charges were recorded for commodities losses in 2008 but those losses were
more modest at $18 million and as such have been excluded from notable items in 2008.
For the same reason, a modest recovery of restructuring charges of $8 million in 2008
has also been excluded.