Bank of Montreal 2008 Annual Report Download - page 58

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
54 | BMO Financial Group 191st Annual Report 200854 | BMO Financial Group 191st Annual Report 2008
Business Environment and Outlook
credit conditions ease. Recent difficulties in credit markets and
weakness in the U.S. housing market will likely contribute to continued
volatility in equity markets.
Despite the current market volatility, the North American wealth
management industry remains an attractive business over the long
term, with the high net worth and aging baby boomer segments
becoming increasingly significant.
Private Client Group net income of $395 million matched the record
results of 2007. Current year results included $31 million ($19 million
after tax) of charges associated with actions taken to support U.S. clients
in the difficult capital markets environment. Adjusting for the impact
of the charges, net income increased $19 million or 5% to $414 million
in a challenging economic environment.
Revenue of $2,067 million increased $15 million or 1% and
$46 million or 2%, excluding the impact of the charges. Net interest
income increased $59 million or 9%, primarily due to higher deposit
balances in the brokerage businesses and term investment products.
Non-interest revenue decreased $44 million or 3%, and $13 million
or 1% adjusted for the charges, primarily due to lower commission
revenue in the brokerage businesses. This was partially offset by higher
trust and investment revenue in North American Private Banking.
Effective December 1, 2007, BMO Mutual Funds began absorbing the
operating expenses of its funds in return for a fixed administration
fee. This had the effect of increasing both non-interest revenue and
expenses. The weaker U.S. dollar reduced revenue growth by $19 million
or 1 percentage point.
Non-interest expense of $1,477 million increased $31 million or
2%. The increase in expenses was primarily attributable to the impact
of the fixed mutual fund administration fee, partially offset by lower
revenue-based costs in line with lower revenue. The group continues
to focus on expense management in the current market environment,
balanced with investments in the sales force and supporting technology
to drive future revenue growth. The weaker U.S. dollar reduced
expense growth by $12 million or 1 percentage point.
Adjusted for the charges, the group’s cash productivity ratio was
relatively unchanged from the prior year.
All amounts in the following paragraph are stated in U.S. dollars.
U.S. operations recorded a net loss of US$6 million in 2008.
Adjusted for the charges related to support for U.S. clients, net income
was US$9 million, an improvement of US$9 million from the prior
year. Revenue, adjusted for the charges, was relatively unchanged in a
difficult market environment. Trust and investment revenue in Harris
Private Bank grew 4% over the prior year, the impact of which was
offset by lower fee-based revenue in Harris Investment Management.
Net interest income remained relatively unchanged from the prior
year as strong growth in loans was offset by a decline in loan spreads.
Expenses declined US$13 million, primarily due to lower incentive
compensation and active expense management.
Canadian and U.S. stock markets declined through 2008 and experienced
significant volatility at the end of the year. Accordingly, the overall
investment climate was unfavourable for much of the year. This trans-
lated into a decline in client assets and an increase in cash holdings
as clients waited for markets to stabilize.
We expect the Canadian economy to recover modestly in the
latter half of 2009 and the U.S. economy to continue contracting in the
first half before improving slightly as housing markets stabilize and
Private Client Group Financial Results
Private Client Group (Canadian $ in millions, except as noted)
Reported Change from 2007
As at or for the year ended October 31 2008 2007 2006 $%
Net interest income (teb) 671 612 570 59 9
Non-interest revenue 1,396 1,440 1,324 (44) (3)
Total revenue (teb) 2,067 2,052 1,894 15 1
Provision for credit losses 433 132
Non-interest expense 1,477 1,446 1,363 31 2
Income before income taxes 586 603 528 (17) (3)
Income taxes (teb) 191 208 187 (17) (9)
Net income 395 395 341 ––
Amortization of intangible
assets (after tax) 445 ––
Cash net income 399 399 346 ––
Net economic profit 281 273 221 83
Return on equity (%) 36.4 34.0 29.4 2.4
Cash return on equity (teb) (%) 36.7 34.3 29.8 2.4
Cash operating leverage (%) (1.6) 2.2 2.0 nm
Productivity ratio (teb) (%) 71.5 70.4 71.9 1.1
Cash productivity ratio (teb) (%) 71.2 70.2 71.6 1.0
Net interest margin on
earning assets (%) 8.98 9.66 9.99 (0.68)
Average earning assets 7,474 6,352 5,703 1,122 18
Average loans and acceptances 6,726 5,637 5,114 1,089 19
Average deposits 50,440 45,304 43,323 5,136 11
Assets under administration 131,289 139,060 153,859 (7,771) (6)
Assets under management 99,428 106,174 105,425 (6,746) (6)
Full-time equivalent staff 4,535 4,362 4,202 173 4
nm –not meaningful
U.S. Business Selected Financial Data (US$ in millions)
Change from 2007
As at or for the year ended October 31 2008 2007 2006 $%
Total revenue 217 243 243 (26) (11)
Non-interest expense 230 243 242 (13) (6)
Net income (6) –1(6) (+100)
Cash net income (5) 23(7) (+100)
Average earning assets 2,142 1,945 1,932 197 10
Average loans and acceptances 2,120 1,903 1,889 217 11
Average deposits 1,155 1,128 1,314 27 2