Bank of Montreal 2008 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
42 | BMO Financial Group 191st Annual Report 2008
Non-Interest Expense
Non-interest expense increased $293 million or 4.4% to $6,894 million
in 2008. The factors contributing to the increase are set out in the
Contribution to Non-Interest Expense Growth table. Notable items in
2007 included $159 million in restructuring charges and a $120 million
reduction in performance-based compensation.
As explained on page 37, the net effect of businesses acquired in
2008 and 2007 increased expenses in 2008 relative to 2007 by $74 mil-
lion (1.1%). As further explained on page 37, the weaker U.S. dollar
reduced costs in 2008 by $93 million (–1.4%). The change in restructuring
charges reduced expenses by $167 million (–2.5%).
Higher performance-based compensation costs increased expenses
by $22 million (0.3%). An increase in BMO Capital Markets was largely
offset by a reduction in Private Client Group.
The dollar and percentage changes in expenses by category are
outlined in the Non-Interest Expense table. Table 8 on page 93 provides
more detail on expenses and expense growth.
Other employee compensation expense, which includes salaries
and employee benefits, was $129 million or 5% higher than in 2007
due to increased salaries expense. Salaries expense changed little in
2006 and 2005 as staffing levels were relatively constant in those years
(see page 93). However, staffing increased in the latter part of 2007 and
in 2008 with the addition of front-line sales and service staff in P&C
Canada, growth in Private Client Group’s sales force and business acqui-
sitions in P&C U.S. Our staffing levels increased in 2008 by more than
1,200 or 3.5% to 37,073 full-time equivalent staff. In P&C U.S., cost
increases primarily reflected acquisition-related expenses. In Private
Client Group, there were increased investments in our sales force.
Premises and equipment costs increased $79 million or 6%, prima-
rily due to higher computer and equipment costs related to increased
consulting, project and service bureau costs.
Other expenses increased $234 million or 18%. Communication
costs increased due to a new fixed administration fee in BMO Mutual
Funds. Effective December 1, 2007, Private Client Group absorbed the
operating expenses of its funds in return for a fixed administration fee.
The effect was an increase in both non-interest revenue and expenses.
There were higher professional fees, primarily due to our Basel II
and Anti-Money Laundering compliance projects and other business
initiatives. Travel and business development expense increased,
primarily due to higher costs in P&C Canada related to AIR MILES
rewards associated with our debit card initiative.
Productivity
The productivity ratio (expense-to-revenue ratio) improved by
300 basis points to 67.6% in 2008. BMO’s overall ratio in any year is
affected by the relative strength of the revenues in each operating
group. The productivity ratio of each group over the years has typically
been quite different because of the nature of their businesses as well
as the external environment. There was convergence in 2008, however.
P&C Canada is BMO’s largest operating segment, and its productivity
ratio of 55.4% improved by 30 basis points from last year, after having
improved by 40 basis points in 2007. The productivity ratio for Private
Client Group in 2008 deteriorated by 110 basis points to 71.5%, almost
entirely due to the effects of the notable items that affected revenues.
The productivity ratio in P&C U.S. deteriorated by 470 basis points largely
because revenues and expenses were impacted by the difficult U.S.
credit market conditions as well as increased acquisition integration costs.
BMO Capital Markets’ productivity ratio improved substantially, moving
730 basis points. Excluding the notable items that affected results in
both 2008 and 2007, BMO’s productivity ratio deteriorated by 130 basis
points to 63.7%, reflecting the difficult capital market conditions.
BMO’s cash productivity ratio was 67.1%, a 300 basis point improve-
ment from 70.1% in 2007, largely due to the lower amount of notable
items charged to revenue in 2008.
Examples of initiatives to enhance productivity are outlined in
the 2008 Review of Operating Groups Performance, which starts on
page 44. Our medium-term goal is to achieve average annual cash
operating leverage of at least 2%, increasing revenues each year by an
average of at least two percentage points more than the rate of cash-
based expense growth. We plan to achieve this by driving revenues
through an increased customer focus and ongoing expense manage-
ment, and by working to create greater efficiency and effectiveness in
all support functions, groups and business processes that support the
front line.
The productivity ratio (or expense-to-revenue ratio) is our key
measure of productivity. It is calculated as non-interest expense
divided by total revenues (on a taxable equivalent basis in the
operating groups), expressed
as a percentage. See page 85.
The cash productivity ratio is calculated in the same manner, after
removing the amortization of intangible assets from non-interest
expenses. See page 85.
Contribution to Non-Interest Expense Growth (%)
For the year ended October 31 2008 2007 2006
Businesses acquired (sold) 1.1 0.7 (3.1)
Restructuring charge (2.5) 2.5 –
Currency translation effect (1.4) (0.9) (1.6)
Performance-based compensation 0.3 (0.7) 0.6
Other factors 6.9 2.3 4.4
Total non-interest expense growth 4.4 3.9 0.3
Non-Interest Expense ($ millions)
Change from 2007
For the year ended October 31 2008 2007 2006 $%
Performance-based compensation 1,297 1,275 1,322 22 2
Other employee compensation 2,679 2,550 2,502 129 5
Total employee compensation 3,976 3,825 3,824 151 4
Premises and equipment 1,382 1,303 1,211 79 6
Restructuring charge (8) 159 – (167) (+100)
Other 1,502 1,268 1,274 234 18
Amortization of intangible assets 42 46 44 (4) (9)
Total 6,894 6,601 6,353 293 4
20082007200620052004
1.4 2.6
0.3
3.9 4.4
6,894
6,169
6,332 6,353
6,601
Expenses and
Annual Expense Growth
Expenses ($ million)
Expense growth (%)
71.5
71.9
67.6
59.6
72.6
59.2
63.6
79.9
70.4
59.0
70.6
200820072006
Productivity Ratio by
Group (teb) (%)
PCG
Total BMO*
P&C
BMO CM
58.0
*Non-teb
Higher front-line staffing and
compliance projects drove the
expense increase.
Better productivity in P&C Canada
and BMO CM drove improved
BMO productivity.