Bank of Montreal 2008 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
40 | BMO Financial Group 191st Annual Report 2008
Securitization revenues increased $217 million or 73% to $513 mil-
lion. The increase was attributable to $107 million from securitizing
credit card loans and $115 million from securitizing residential mortgages,
net of a $5 million decline from securitizing other loans. Revenues
included gains of $136 million on the sale of loans for new securitizations ,
up $125 million from 2007, and gains of $284 million on sales of
loans to revolving securitization vehicles, up $93 million from 2007.
The securitization of assets results in the recognition of less interest
income ($234 million less in 2008), reduced credit card fees ($211 million
less in 2008) and lower provisions for credit losses ($52 million less in
2008). As such, securitizations increased pre-tax income by approximately
$120 million in 2008. We securitize loans for capital management
purposes and to obtain alternate sources of funding. In 2008, we securi-
tized $8.5 billion ($3.4 billion in 2007) of residential mortgage loans and
$3.2 billion ($nil in 2007) of credit card loans. Securitization revenues
are detailed in Note 8 on page 118 of the financial statements.
Underwriting and advisory fees decreased $175 million or 33%
from the record levels of 2007, after having increased 30% in 2007
and 14% in 2006. Merger and acquisition fees and equity underwriting
fees were particularly low. Debt underwriting fees decreased but
more modestly. Lower levels of investment banking activity became
apparent in the fourth quarter of fiscal 2007.
Securities gains decreased $561 million to a net loss of $315 million
in 2008. The notable items discussed on page 36 included charges of
$347 million related to the deterioration in the capital markets environ-
ment that were recorded in securities gains (losses). They included
certain charges related to Apex, other-than-temporary impairments and
investments in capital notes of the structured investment vehicles
(SIVs). Securities gains in 2007 included a $107 million gain on the sale
of MasterCard shares.
Income from foreign exchange, other than trading, decreased
$52 million or 39% due to unusually high gains in 2007 and the effects
of high volatility in the fourth quarter of 2008.
Insurance income decreased $8 million or 3% after having
increased in recent years. The decrease was attributable to a one-time
gain of $26 million in 2007. Volumes and premiums increased in 2008.
Other revenue includes various sundry amounts and fell $67 million
or 24%.
Table 7 on page 92 provides further details on revenue and
revenue growth.
Trading-Related Revenues
Trading-related revenues are dependent on, among other things,
the volume of activities undertaken for clients, who enter into
transactions with BMO to mitigate their risks or to invest. BMO earns
a spread or profit on the net sum of its client positions by profitably
neutralizing, within prescribed limits, the overall risk of the net
positions. BMO also assumes proprietary positions with the goal
of earning trading profits.
The capital markets environment was extremely unsettled in
2008, having been affected by significantly diminished business and
investor confidence that reduced liquidity in the marketplace, widened
credit spreads and resulted in significant reductions in both fixed
income and equity valuations. The Notable Items section on page 36
outlines charges related to difficulties in the capital markets environ-
ment that reduced trading revenue by $212 million and total revenue
by $625 million in 2008. The section also outlines similar charges
totalling $318 million recorded in the fourth quarter of 2007 that were
largely applied to non-interest revenue. The section also refers readers
to Financial Instruments in the Difficult Credit Environment, which starts
on page 62 and provides detailed information on a number of the
instruments on which losses were recorded in the year.
Trading-related revenues include net interest income and non-
interest revenue earned from on and off-balance sheet positions
undertaken for trading purposes. The management of these posi-
tions typically includes marking them to market on a daily basis.
Trading revenues include income (expense) and gains (losses)
from both on-balance sheet instruments and off-balance sheet
interest rate, foreign exchange (including spot positions), equity,
commodity and credit contracts.
Interest and Non-Interest Trading-Related Revenues ($ millions)
Change from 2007
For the year ended October 31 2008 2007 2006 $%
Interest rates 176 15 227 161 +100
Foreign exchange 379 273 204 106 39
Equities 110 189 173 (79) (42)
Commodities (18) (852) 124 834 98
Other 18 42 22 (24) (57)
Total 665 (333) 750 998 +100
Reported as:
Net interest income 119 154 32 (35) (23)
Non-interest revenue –
trading revenues 546 (487) 718 1,033 +100
Total 665 (333) 750 998 +100
As explained in Note 3 to the financial statements, during the
fourth quarter of 2008 the CICA amended accounting and reporting rules
applicable to financial instruments. As a result of the amendments, we
elected to transfer certain securities from our trading portfolio to our
available-for-sale portfolio. We subsequently recorded mark-to-market
charges on these securities totalling $212 million ($143 million after
tax), of which $29 million ($20 million after tax) was charged to earn-
ings as part of the other-than-temporary impairments outlined in the
Notable Items section on page 36, and $183 million ($123 million after
tax) was charged to other comprehensive income rather than to trading
revenues (losses) in the statement of income.
Losses in the commodities trading business totalled $18 million
in 2008, reflecting risk reduction in the portfolio. In 2007, we recorded
$853 million of losses in our commodities trading business. On
November 18, 2008, a number of proceedings were commenced by
securities, commodities, banking and law enforcement authorities against
certain parties that were involved in activities related to the 2007
commodities trading losses. BMO is not a party to these proceedings.
Trading-related revenues increased $998 million from the
particularly weak results in 2007, largely due to the commodities losses
in the prior year.
Excluding the $212 million impact of notable items in the
current year and the $1,156 million impact of notable items in the prior
year included in trading revenues, trading-related revenues increased
$54 million. Fixed income trading revenues were very volatile during
the year,
with strong revenues in the first and third quarters. Foreign
exchange
trading revenues were strong throughout the year, with par-
ticularly robust growth in the fourth quarter. Equities trading revenues
began the year very weak but improved appreciably in the second
and third quarters, before falling significantly in the fourth quarter with
the substantial decreases in valuations in global equity markets.
The Market Risk section on page 77 provides more information
on trading-related revenues.