Bank of Montreal 2008 Annual Report Download - page 90

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
86 | BMO Financial Group 191st Annual Report 2008
Personal and Commercial Banking net income increased $36 million
or 11% from a year ago to $356 million. P&C Canada net income
increased $57 million or 19% to $344 million. There was good volume
growth in both personal and commercial banking, and especially cards
and payment services, notwithstanding the weakness in the economy.
Strong revenue growth from improved volumes was bolstered by higher
net interest margin due to interest on tax refunds. Expenses increased
due to higher employee costs, reflecting continued investment in the
business, and higher capital taxes. Results in 2007 included $6 million
of net income arising from a $107 million pre-tax gain on sale of
MasterCard shares and a recovery of prior years’ income taxes, partially
offset by a $185 million pre-tax adjustment to increase the liability
for future redemptions related to our credit card customer loyalty
rewards program.
P&C U.S. net income decreased US$22 million or 66% from the
particularly strong performance of a year ago to US$11 million, due
to higher acquisition integration costs incurred as we completed the
integration of our Wisconsin subsidiaries, an increase in a Visa litigation
reserve and the impact of difficult credit market conditions. There
are higher levels of non-performing loans and costs of managing the
loan portfolio have increased.
Private Client Group net income was $78 million, a decrease of
$25 million or 25% from last year. Results in the fourth quarter of 2008
were affected by after-tax charges of $19 million related to the deterio-
ration in the capital markets environment outlined above. Adjusted for
the charges, underlying performance was good. Deposit balances
increased year over year and loan balances rose in North American
Private Banking. There was lower commission revenue in Full-Service
Investing and lower mutual fund revenue. The effect of strong growth in
transaction volumes in BMO InvestorLine was largely offset by pricing
changes resulting from competitive pressures in the industry. The imple-
mentation of a fixed administration fee by BMO Mutual Funds in the
first quarter of 2008 contributed to growth in both revenue and non-
interest expense. Expense growth also reflected the expansion of the
sales force, partially offset by lower revenue-based costs. Assets under
management and administration and term deposits have been affected
by recent market conditions, and total amounts have decreased
$27.4 billion or 10% from a year ago, excluding the impact of foreign
exchange rates.
BMO Capital Markets net income of $285 million increased
$239 million from a year ago. Results in 2008 were affected by the
after-tax charges of $8 million related to the deterioration in the capital
markets environment outlined above. There was a corresponding charge
of $318 million ($211 million after tax) in the fourth quarter of 2007.
The capital markets environment remained challenging in the fourth
quarter; however, there was continued strong performance in our
interest-rate-sensitive businesses and higher trading revenue.
These were partially offset by net securities losses and reductions in
underwriting revenues and merger and acquisition fees. Results for
the fourth quarter of 2008 also benefited from the group’s $52 million
share of a recovery of prior-period income taxes and from higher tax-
exempt income.
Corporate Services net loss of $159 million increased $142 million
from the fourth quarter of 2007. Results were negatively affected by
a $150 million increase in the general allowance, up from a $50 million
increase in the prior year. The overall charge for credit losses increased
$291 million to $333 million, due to BMO’s provisioning for credit
losses methodology. Results in the fourth quarter included a recovery
of $21 million of prior-period income taxes.
BMO’s revenue increased $613 million or 28% from a year ago to
$2,813 million. Adjusted for the $273 million year-over-year reduction in
charges related to the capital markets environment, revenue increased
$340 million or 14%. The stronger U.S. dollar increased revenue by
$55 million or 2.5%.
Net interest income increased $217 million or 18% from a year ago
to $1,413 million. There was growth in each of the operating groups,
with a reduction in Corporate Services. Average earning assets increased
$7 billion or 2% to $329 billion. P&C Canada earning assets increased
$6 billion, with growth in all lines of business. P&C U.S. had similar
growth due to a portfolio transfer, acquisitions, organic growth and the
benefit of a stronger U.S. dollar in the fourth quarter. BMO Capital
Markets earning assets decreased $4 billion despite the stronger U.S.
dollar, due to a reduction in trading assets, partially offset by growth in
corporate loans.
BMO’s overall net interest margin on average earning assets
for the fourth quarter of 2008 was 1.71%, or 24 basis points higher than
in the fourth quarter of 2007. The year-over-year increase was mainly
due to growth in interest-rate-sensitive businesses in BMO Capital
Markets, interest on tax refunds in P&C Canada and higher margins in
Private Client Group. P&C U.S. net interest margin was significantly
lower, due in large part to a portfolio transfer, but its effect on BMO’s
margin was minimal.
Non-interest revenue increased $396 million or 39% from a year
ago to $1,400 million. There was a $273 million reduction in charges
related to the deterioration in the capital markets environment.
The remaining growth was attributable to increases in trading and secu-
ritization revenues, the latter driven by the securitization of $4.2 billion
of mortgage loans and $1.6 billion of credit card loans in the fourth
quarter. Card services fees increased $163 million from the prior year
due to the $185 million adjustment to increase the liability for future
redemptions related to our credit card customer loyalty rewards pro-
gram in the fourth quarter of 2007. The benefit of volume growth was
offset by the effects of securitizations. Underwriting and advisory fees
declined in the difficult capital markets environment.
Non-interest expense increased $163 million or 10% from a year
ago to $1,818 million. Approximately two-thirds of the increase was
attributable to employee costs, including an increase in performance-
based compensation in line with improved performance, as well as
higher severance costs. These increases reflect the addition of front-line
sales and service staff in P&C Canada and Private Client Group over
the past year, as well as the effect of acquisitions by P&C U.S. Premises,
computer and equipment costs increased as a result of writing off
deferred costs of a technology project in the fourth quarter of 2008.
The stronger U.S. dollar increased expense by $45 million or 2.7%. BMO’s
productivity ratio was 64.6% in the quarter, compared with 75.2% a
year ago. The cash productivity ratio was 64.2%, compared with 74.7%
a year ago.
Credit conditions have deteriorated significantly in 2008. The
provision for credit losses totalled $465 million in the fourth quarter of
2008, comprised of $315 million of specific provisions and a $150 million
increase in the general allowance for credit losses. The provision
for credit losses totalled $151 million in the fourth quarter of 2007,
comprised of $101 million of specific provisions and a $50 million
increase in the general allowance. Specific provisions in the fourth
quarter of 2008 represented an annualized 81 basis points of average
net loans and acceptances, including securities borrowed or purchased
under resale agreements, compared with 29 basis points a year ago and
an 18 basis point average over the past five years. The increase was
attributable to higher levels of gross impaired loans, due to weakness in
the manufacturing, financial institutions and U.S. commercial real
estate sectors.
The effective tax rate in the quarter was a recovery rate of 9.2%,
and included the benefit of $73 million of recoveries of prior-period
income taxes. Excluding the impact of the increase in the general
allowance, tax recoveries and a higher proportion of income from lower-
tax-rate jurisdictions, the effective tax rate in the fourth quarter of 2008
would be within the expected sustainable range of 16% to 20%.