Bank of Montreal 2008 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
38 | BMO Financial Group 191st Annual Report 2008
Revenue
Revenue increased $856 million or 9% in 2008 to a record $10,205 mil-
lion. Revenue was reduced by charges of $625 million related to
the impact of the capital markets environment in 2008. In 2007, revenue
was reduced by $1,171 million of notable items, consisting of charges
of $853 million related to our commodities trading business and charges
of $318 million for certain trading activities and valuation adjustments
related to the deterioration in capital markets. The lower charges in 2008
accounted for $546 million of the revenue increase. There was solid
revenue growth in each of the operating groups. The weaker U.S. dollar
reduced overall revenue growth by $63 million or 0.7 percentage
points, while the net impact of acquired businesses increased growth
by $76 million or 0.8 percentage points.
Effective in 2008, BMO analyzes revenue at the consolidated level
based on GAAP revenues reflected in the financial statements rather
than on a taxable equivalent basis (teb), consistent with our Canadian
peer group. Like many banks, we continue to analyze revenue on a
teb basis at the operating group level. The teb adjustments for fiscal
2008 totalled $195 million, up from $180 million in 2007.
P&C Canada revenue increased $293 million or 6%. The segment’s
revenue growth was increased by $38 million or 0.8 percentage points
by certain items that reduced its revenues in 2007. These included a
$185 million adjustment to increase our liability for future redemptions
related to our customer loyalty rewards program net of a $107 million
gain on sale of MasterCard International Inc. (MasterCard) shares and
$40 million of other items. There was good volume growth in the three
lines of business. P&C U.S. revenue increased US$126 million or 15% as
a result of acquisitions, a gain recognized on Visa’s initial public offering
and core performance improvement. Private Client Group revenue
increased $15 million or 1%, its growth having been reduced $31 million
or 1% by notable items recorded in the fourth quarter of 2008. Growth
was attributable to improved net interest income. BMO Capital Markets
revenue increased $443 million or 23%, as charges for notable
items fell $577 million from 2007. There was considerable growth in
net interest income due to strong returns from interest-rate-sensitive
businesses and trading revenues.
Net Interest Income
Net interest income for the year was $5,087 million, an increase of
$244 million or 5% from 2007. The net effect of businesses acquired
increased net interest income by $48 million, while the impact of the
weaker U.S. dollar reduced net interest income by $47 million. All the
operating groups achieved strong volume growth, and average earning
assets increased $22 billion. The resulting growth in net interest
income was partly offset by a reduction in Corporate Services due to
higher net funding costs. BMO’s overall net interest margin was slightly
lower in 2008 due to reduced earnings in Corporate Services. P&C
Canada’s margin was relatively unchanged. The two main drivers of
BMO’s overall net interest margin are the individual group margins and
changes in the magnitude of each operating group’s assets.
Taxable equivalent basis (teb)
Revenues of operating groups reflected in our MD&A are pre-
sented on a taxable equivalent basis (teb). The teb adjustment
increases GAAP revenues and the provision for income taxes by
an amount that would increase revenues on certain tax-exempt
securities to a level that would incur tax at the statutory rate,
to facilitate comparisons.
Net interest income is comprised of earnings on assets, such as
loans and securities, including interest and dividend income and
BMO’s share of income from investments accounted for using
the equity method of accounting, less interest expense paid on
liabilities, such as deposits.
Net interest margin is the ratio of net interest income to earning
assets, expressed as a percentage or in basis points.
Revenue ($ millions)
For the year ended October 31 2008 2007 2006 2005 2004
Net interest income 5,087 4,843 4,744 4,787 4,798
Year-over-year growth (%) 5.0 2.1 (0.9) (0.2) 0.4
Non-interest revenue 5,118 4,506 5,241 5,052 4,551
Year-over-year growth (%) 13.6 (14.0) 3.8 11.0 7.8
Total revenue 10,205 9,349 9,985 9,839 9,349
Year-over-year growth (%) 9.2 (6.4) 1.5 5.3 3.9
Change in Net Interest Income, Average Earning Assets and Net Interest Margin
Net interest income (teb) Average earning assets Net interest margin
($ millions) Change ($ millions) Change (in basis points)
For the year ended October 31 2008 2007 $ % 2008 2007 $ % 2008 2007 Change
P&C Canada 3,236 3,066 170 6 121,381 115,147 6,234 5 267 266 1
P&C U.S. 748 730 18 3 24,913 21,658 3,255 15 300 337 (37)
Personal and Commercial Banking (P&C) 3,984 3,796 188 5 146,294 136,805 9,489 7 272 277 (5)
Private Client Group (PCG) 671 612 59 9 7,474 6,352 1,122 18 898 966 (68)
BMO Capital Markets (BMO CM) 1,179 974 205 21 176,080 162,309 13,771 8 67 60 7
Corporate Services, including Technology and Operations (747) (539) (208) (39) (3,045) (995) (2,050) (+100) nm nm nm
Total BMO (1) 5,087 4,843 244 5 326,803 304,471 22,332 7 156 159 (3)
nm –not meaningful
(1) Total BMO net interest margin is stated on a GAAP basis. The operating groups net interest margins are stated on a teb basis.
BMO earned record revenue
despite difficult capital
markets conditions.
U.S. revenues rebounded from
commodities losses recorded
in 2007.
5.3
1.5
(6.4)
3.9
9,349
9,839 9,985
9,349
10,205
9.2
Revenue and Annual Growth
20082007200620052004
Revenue ($ millions)
Growth (%)
3
75
22
3
73
24
4
80
16
200820072006
Revenue by Country (%)
Canada
United States
Other countries