Bank of Montreal 2008 Annual Report Download - page 61

MD&A
BMO Financial Group 191st Annual Report 2008 | 57
BMO Capital Markets net income increased $275 million to $692 million.
Results in 2008 were affected by charges of $594 million ($400 million
after tax) related to the deterioration in capital markets. Results in 2007
were affected by charges of $318 million ($211 million after tax) related
to the capital markets environment as well as charges of $853 million
($440 million net of compensation adjustments and taxes) related to
commodities losses.
During the year, we refocused our businesses with the goal of
improving our risk-return profile and concentrating on core profitable
client relationships.
Revenue increased $443 million or 23% to $2,412 million.
The weaker U.S. dollar reduced revenue by $20 million. Non-interest
revenue increased $238 million or 24% over the previous year.
Trading revenues were significantly higher, driven by improvements in
commodities trading as management successfully reduced the size
and risk profile of the commodities portfolio. However, gains in trading
were partially offset by lower investment banking revenues, particularly
lower merger and acquisition fees and equity underwriting fees.
The market environment was much more favourable in the prior
year and conditions remain challenging for our fee-based businesses.
Net securities gains declined from a year ago due to large losses
recorded in the current year, including write-downs on Apex and
our capital notes in the SIVs.
Net interest income increased $205 million or 21%. Revenues
from our interest-rate-sensitive businesses were significantly higher
and trading net interest income also increased, partially offset by lower
corporate banking net interest income and increased funding costs.
Corporate banking assets grew during the year, primarily due to clients
accessing undrawn commitments. Corporate banking revenues were
lower as a result of higher funding costs and reduced cash collections
from impaired loans, partially offset by increased revenues due to
higher asset volumes. Net interest margin was higher than a year ago
due to increased trading net interest income and higher spreads in our
interest-rate-sensitive businesses.
The provision for credit losses was $117 million, compared with
$77 million in 2007, largely due to asset growth in the loan portfolio.
BMO’s practice is to charge loss provisions to the client operating groups
each year using an expected loss provisioning methodology based
on each group’s share of expected credit losses over an economic cycle.
Corporate Services is generally charged (or credited) with differences
between expected loss provisions charged to the client operating
groups and provisions required under GAAP.
Non-interest expense increased $178 million or 11% to
$1,752 million, primarily due to increased employee costs and higher
allocated costs. Included in employee compensation costs was
severance of $28 million ($19 million after tax) in the third quarter.
The weaker U.S. dollar reduced expense by $40 million.
BMO Capital Markets Financial Results
Results for the year benefited from by the group’s recovery of
prior-period income taxes, which were up $119 million from 2007.
The group’s productivity ratio improved from 79.9% to 72.6% due
to the increase in revenue in 2008.
Net income from U.S. operations improved US$324 million to
US$279 million, as results in 2007 included the commodities losses.
BMO Capital Markets (Canadian $ in millions, except as noted)
Reported Change from 2007
As at or for the year ended October 31 2008 2007 2006 $%
Net interest income (teb) 1,179 974 773 205 21
Non-interest revenue 1,233 995 2,007 238 24
Total revenue (teb) 2,412 1,969 2,780 443 23
Provision for credit losses 117 77 79 40 52
Non-interest expense 1,752 1,574 1,612 178 11
Income before income taxes 543 318 1,089 225 71
Income taxes (recovery) (teb) (149) (99) 237 (50) (50)
Net income 692 417 852 275 66
Amortization of intangible
assets (after tax) 111 ––
Cash net income 693 418 853 275 66
Net economic profit 91 (139) 359 230 +100
Return on equity (%) 12.2 7.7 18.5 4.5
Cash return on equity (%) 12.2 7.7 18.5 4.5
Cash operating leverage (%) 11.2 (26.9) (7.5) nm
Productivity ratio (teb) (%) 72.6 79.9 58.0 (7.3)
Cash productivity ratio (teb) (%) 72.6 79.9 57.9 (7.3)
Net interest margin on
earning assets (%) 0.67 0.60 0.62 0.07
Average common equity 5,305 4,972 4,481 333 7
Average earning assets 176,080 162,309 124,782 13,771 8
Average loans and acceptances 85,009 69,645 55,042 15,364 22
Average deposits 105,984 94,019 77,027 11,965 13
Assets under administration 90,188 57,590 58,774 32,598 57
Assets under management 9,294 23,233 28,044 (13,939) (60)
Full-time equivalent staff 2,465 2,365 2,213 100 4
nm –not meaningful
U.S. Business Selected Financial Data (US$ in millions)
Change from 2007
As at or for the year ended October 31 2008 2007 2006 $%
Total revenue 1,173 490 1,156 683 +100
Non-interest expense 721 635 632 86 14
Net income 279 (45) 311 324 +100
Average earning assets 69,411 53,238 37,604 16,173 30
Average loans and acceptances 41,724 29,058 21,959 12,666 44
Average deposits 36,335 24,920 16,620 11,415 46
we continue to pursue reduction opportunities. As a result of these initia-
tives, we eliminated a number of positions within BMO Capital Markets.
Following the bankruptcy of Lehman Brothers Holdings Inc.
(Lehman Brothers), the largest bankruptcy in U.S. history, equity mar-
kets declined dramatically in October 2008, reflecting difficult credit
market conditions, massive deleveraging in hedge funds and financial
institutions, and redemptions in the mutual fund industy. The current
weakness in financial markets will slow global economic growth, and
it is uncertain how long these conditions will last.
Looking forward, we expect a recession in the United States, which
will likely spread to Canada, with only a modest recovery anticipated in
the latter half of 2009. The economic slowdown has dampened demand
for commodities, affecting the formerly thriving commodity-related
sectors of our economy and weakening the Canadian dollar. Volatility
in the currency markets should be favourable to our currency
trading businesses. Weakness in capital markets will likely extend into
the first half of 2009, which will prove challenging to our fee-based
businesses. The cost of capital remains high, reducing the attractiveness
of acquisitions and leveraged buyouts, and this will impact the level of
mergers and acquisitions activity. Our focus in 2009 will be to improve
performance by maintaining a diversified, dynamic portfolio of businesses
serving the needs of our core clients. Growth in fiscal 2009 will depend
on the performance of financial and commodity markets, as well as
general economic activity and business confidence.