Bank of Montreal 2008 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
48 | BMO Financial Group 191st Annual Report 2008
P&C Canada Financial Results
of MasterCard shares and the increase in the liability for our customer
loyalty rewards program, revenue increased $101 million or 10%.
The increase was attributable to growth in credit card transactions
and accelerating balance growth, as well as higher Moneris revenues.
Moneris is our 50% owned joint venture and one of North America’s
leading processors of debit and credit payment transactions.
During the year, we entered into an agreement to transfer
the liability associated with our credit card customer loyalty rewards
program to Loyalty Management Group Canada Inc. (LMGCI), our
associate in the AIR MILES Reward Miles program. There was no signifi-
cant gain on the transfer. In addition, we have renegotiated and
extended the terms of our agreement with LMGCI for the issuance of
AIR MILES reward miles. Under the terms of the agreement, we no
longer retain a liability for future AIR MILES reward miles redemptions
and as a result no
longer have exposure to changing redemption
patterns. We have incurred
a negligible change in run-rate costs as
a result of the agreement.
P&C Canada’s overall net interest margin was 2.67%, 1 basis point
higher than in the prior year, as better volumes in more profitable
products were offset by increased funding costs.
Non-interest expense was $2,790 million, up $146 million or
6% from 2007 due to initiatives spending, including expansion and
renovation of the branch network and debit and credit card chip
technology, as well as higher operating costs and higher Moneris
expenses. Our cash productivity ratio improved by 30 basis points
from 2007 to 55.3%, as revenue growth exceeded expense growth.
P&C Canada net income was $1,320 million, up $53 million or 4%
from a year ago. Net income in 2007 was increased $52 million by the
net impact of: a $107 million ($83 million after tax) gain on the sale
of MasterCard shares, a $57 million recovery of prior-year income taxes,
a $26 million ($23 million after tax) insurance gain and a $14 million
($9 million after tax) gain on an investment security, less a $185 million
($120 million after tax) adjustment to increase the liability for future
redemptions related to our customer loyalty rewards program in our
credit card business. Excluding the impact of the above items, net
income increased $105 million or 9%.
Revenue increased $293 million or 6% to $5,037 million. Excluding
the impact of the applicable items above, revenue grew by $255 million
or 5%.
In our personal banking business, revenue increased $101 million
or 4%. Adjusted for the $26 million insurance gain in 2007, revenue
increased $127 million or 5%. The increase was driven by volume
growth in personal loans, branch-originated mortgages and personal
deposits, favourable product mix, higher securitization revenue and
one extra day in 2008, partially offset by lower mortgage refinancing
fees and lower insurance revenue.
In our commercial banking segment, revenue increased $13 million
or 1%. Adjusted for the 2007 gain on an investment security, revenue
increased $27 million or 2%. The increase was attributable to volume
growth, partially offset by net investment securities losses in 2008 and
the impact of increased funding costs.
Cards and payment services revenue increased $179 million or
19%. Adjusted for the $78 million net impact of the gain
on the sale
Weakening employment rates, unsettled financial markets and
the effects of a global economic downturn characterized the Canadian
business environment in 2008. While domestic economic activity,
on balance, has been stronger in Canada than in the United States,
growth is expected to slow. Meanwhile, residential mortgage balances
continued to grow in 2008, despite a softer housing market. Personal
deposit growth in 2008 reflected an upturn in disposable income early
in the year, a slightly higher savings rate and marked aversion to risk
among investors. In commercial banking, robust business activity early
in the year contributed to growth in business loans, while there was
easing in commercial deposit growth.
Looking forward to 2009, we anticipate weak business growth.
In personal banking, declining rates of growth in employment and
income are likely to dampen growth in personal deposits, personal
loans and credit card loans. The residential real estate market is
expected to moderate as housing starts decline and new home prices
soften. Residential mortgage growth is likely to slow as a result. In
commercial banking, non-residential mortgages and business loans will
likely fall sharply
from 2008 levels as North American economic growth
slows, while
business deposit growth is also expected to moderate.
Canadian Business Environment and Outlook