Bank of Montreal 2008 Annual Report Download - page 41

Foreign Exchange
The Canadian dollar equivalents of BMO’s U.S.-dollar-denominated net
income, revenues, expenses, income taxes and provision for credit
losses in 2008 and 2007 were lowered relative to the preceding year by
the weakening of the U.S. dollar. The adjacent table indicates average
Canadian/U.S. dollar exchange rates in 2008, 2007 and 2006 and the
impact of lower average rates. At October 31, 2008, the Canadian dollar
traded at $1.2045 per U.S. dollar, as the U.S. dollar strengthened appre-
ciably in the fourth quarter, particularly in October.
At the start of each quarter, BMO enters into hedging transactions
that are designed to partially offset the pre-tax effects of exchange rate
fluctuations in the quarter on our expected U.S.-dollar-denominated net
income for that quarter. As such, these activities partially mitigate the
impact of exchange rate fluctuations, but only within that quarter. As a
result, the sum of the hedging gains/losses for the four quarters in a
year is not directly comparable to the impact of year-over-year exchange
rate fluctuations on earnings for the year. Hedging transactions resulted
in an after-tax loss of $11 million in 2008 ($14 million gain in 2007).
The gain or loss from hedging transactions in future periods will
be determined by both future exchange rate fluctuations and the amount
of the underlying future hedging transactions, since the transactions
are entered into each quarter in relation to expected U.S.-dollar-
denominated net income for the next three months. The effect of
exchange rate fluctuations on our net investment in foreign operations
is discussed in the Provision for Income Taxes section on page 43.
BMO’s U.S.-dollar-denominated results are affected, favourably or
unfavourably, by movements in the Canadian/U.S. dollar exchange rate.
Rate movements affect future results measured in Canadian dollars
and the impact on results is a function of the periods in which revenues,
expenses and provisions for credit losses arise. If future results are con-
sistent with the range of the past three years, U.S.-dollar-denominated
income before income taxes would range from a loss of US$900 million
to income of US$700 million. On that basis, each one cent decrease
in the Canadian/U.S. dollar exchange rate, expressed in terms of how
many Canadian dollars one U.S. dollar buys, would be expected to
change net income before income taxes by between $9 million at the
lower end of the range and –$7 million at the higher end. An increase
of one cent would have the opposite effect.
Effects of the Weaker U.S. Dollar
on BMO’s Results 2008 vs. 2007 vs.
($ millions, except as noted) 2007 2006
Canadian/U.S. dollar exchange rate (average)
2008 1.032
2007 1.093 1.093
2006 1.132
Reduced net interest income (48) (39)
Reduced non-interest revenue (15) (48)
Reduced revenues (63) (87)
Reduced expenses 93 57
Reduced provision for credit losses 28 9
Reduced (increased) income taxes (6) 5
Increased (reduced) net income 52 (16)
Impact of Business Acquisitions and Sales
BMO Financial Group has selectively acquired a number of businesses
in advancing our North American growth strategy. These acquisitions
increase revenues and expenses, affecting year-over-year comparisons
of operating results. The adjacent table outlines acquisitions by
operating group and their impact on BMO’s revenues, expenses and
net income for 2008 relative to 2007 and 2007 relative to 2006, to
assist in analyzing changes in results.
In respect of fiscal 2008 results relative to fiscal 2007, for the
acquisitions completed in fiscal 2008, the incremental effects are
the revenues and expenses of those businesses that are included
in results for fiscal 2008. For the acquisition completed in fiscal 2007,
the incremental effects on results for 2008 relate to the inclusion of
12 months of results in 2008 and a lesser number of months in 2007.
In respect of fiscal 2007 results relative to fiscal 2006, for the
a
cquisition completed in fiscal 2007, the incremental effects are
the revenues and expenses of that business that are included in
results for fiscal 2007. For the acquisitions completed in fiscal 2006,
the incremental effects on results for 2007 relate to the inclusion
of 12 months of results in 2007 and a lesser number of months in 2006.
Impact of Business Acquisitions on Year-over-Year Comparisons*
($ millions) Increase (decrease) in:
Net Cash net
Business acquired/sold Revenue Expense income income
Personal and Commercial Banking
Incremental effects on results for: 2008 51 46 (1) 3
2007 52 46 2 5
Merchants and Manufacturers Bancorporation, Inc.
Acquired February 2008 for $135 million
Ozaukee Bank
Acquired February 2008 for $180 million
First National Bank & Trust
Acquired January 2007 for $345 million
bcpbank Canada
Acquired December 2006 for $41 million
Villa Park Trust and Savings Bank
Acquired December 2005 for $76 million
Private Client Group
Incremental effects on results for: 2008 11 12 (1) –
Pyrford International plc
Acquired December 2007 for $41 million
BMO Capital Markets
Incremental effects on results for: 2008 14 16 (1) (1)
Griffin, Kubik, Stephens & Thompson, Inc.
Acquired May 2008 for $31 million
BMO Financial Group
Incremental effects on results for: 2008 76 74 (3) 2
2007 52 46 2 5
Purchases of businesses in 2008
for $387 million
*The impact excludes integration costs.
MD&A
BMO Financial Group 191st Annual Report 2008 | 37