Bank of Montreal 2008 Annual Report Download - page 91

MD&A
BMO Financial Group 191st Annual Report 2008 | 87
BMO’s results and performance measures for the past eight quarters are
outlined on page 88.
Over 2008, we have remained focused on our objectives and
priorities and made good progress in developing a culture that places
the customer at the focus of everything we do. We maintained this
focus in the face of very difficult capital and credit market conditions as
well as a slowing economy. At the end of 2008, many of our businesses
had delivered solid results but most anticipate facing some headwind
in the coming quarters.
BMO’s quarterly earnings, revenue and expense are modestly
affected by seasonal factors. Since our second fiscal quarter has 89 days
(90 days in 2008) and other quarters have 92 days, second-quarter
results are lower relative to other quarters because there are three
fewer calendar days (two in 2008), and thus fewer business days.
The months of July (third quarter) and August (fourth quarter) are
typically characterized by lower levels of capital markets activity, which
has an effect on results in Private Client Group and BMO Capital
Markets. The December holiday season also contributes to a slowdown
in some activities; however, credit card purchases are particularly robust
in that first-quarter period, as well as in the back-to-school period that
falls in our fourth quarter.
Notable items have affected revenues in BMO Capital Markets.
There were commodities losses of $509 million, $171 million and
$149 million in the first through third quarters of 2007, with more mod-
est losses in subsequent quarters and a modest gain in the most recent
quarter, as the size and risk profile of the portfolio were reduced.
Associated performance-based compensation was reduced appreciably
in the first and second quarters of 2007. In addition, the fourth quarter
of 2007 through the fourth quarter of 2008 reflected charges related
to the deterioration in the capital markets environment of $318 million,
$488 million, ($42) million, $134 million and $45 million. The latter
charge included $31 million related to Private Client Group. Although the
net charges were modest in certain quarters, they have included both
favourable and unfavourable items and, as such, the modest net
charges in some quarters should not be considered a reliable indicator
that charges will continue to be modest.
Personal and Commercial Banking earnings have trended slightly
higher over 2007 and 2008.
P&C Canada has developed a more customer-focused culture
over the course of 2008, increasing market share in its priority markets
and growing net income while continuing to invest for future growth.
P&C Canada’s net interest margin was relatively stable over 2007 and
2008, but there were higher funding costs in the latter half of the year
and margin in the fourth quarter would have decreased in the absence
of the receipt of interest on tax refunds. P&C Canada’s revenues have
grown steadily, benefiting from volume growth. Revenues were reduced
in the fourth quarter of 2007 by the net impact of the $185 million
reduction in card fees associated with the adjustment to increase our
liability for future redemptions related to our customer loyalty rewards
program and the $107 million gain on sale of common shares of
MasterCard, as well as reduced securitization revenue. Results in that
quarter included a $43 million income tax recovery, which largely offset
the after-tax impact of the card fees adjustment and the gain on sale.
P&C U.S. net income held relatively steady over the course of
2007 and 2008, until the most recent quarter. Its results that period
were affected by higher levels of costs associated with completing
the integration of the Wisconsin acquisitions, an increase to a litigation
reserve and the effects of higher non-performing loans and costs of
managing credit assets in the difficult credit environment. Net interest
margin was lower over 2008, due primarily to a portfolio transfer at
the start of the year.
Private Client Group’s results have grown steadily over 2007 and
2008, but were reduced in the fourth quarter of 2008 by $19 million of
after-tax charges related to support for certain U.S. clients in the difficult
capital markets environment. Deposits increased in the latter half of
2008, but revenue growth slowed as difficult market conditions have
lowered managed and administered asset levels.
BMO Capital Markets earnings in 2008 reflected stronger
performances in our interest-rate-sensitive businesses, higher trading
revenues and, in the last half of 2008, higher tax recoveries. There
were significant commodities losses in the first half of 2007 and charges
related to the deterioration in the capital markets environment in
the last quarter of 2007, as well as in each quarter of 2008. Underwriting
and merger and acquisition fees were lower in 2008 in the difficult
capital markets environment. Over the course of 2008, BMO Capital
Markets refocused its business with the goal of improving its risk-return
profile and concentrating on core profitable client relationships.
Corporate Services quarterly net income varies in large part
because of our expected loss provisioning methodology and the impact
from revenue, expenses and income taxes not attributed to the operat-
ing groups. The third and fourth quarters of 2008 in particular were
affected by high provisions for credit losses, including increases in the
general allowance. Results in the first and fourth quarters of 2007
included restructuring charges related to improving the efficiency and
effectiveness of our organization. These charges reflected the costs
of eliminating 1,400 positions, primarily in non-customer facing areas
across all support functions and business groups.
Over the past few years, the U.S. dollar has generally weakened
relative to the Canadian dollar. In 2008, this trend was broken and there
was a period of relative stability, which ended in the fourth quarter
with a sudden sharp appreciation of the U.S. dollar. A strong U.S. dollar
increases the translated values of BMO’s U.S.-dollar-denominated results.
The effect of movements in exchange rates is muted somewhat by our
practice of hedging the impact of exchange movements within a single
quarter, which is explained on page 37.
BMO’s provision for credit losses measured as a percentage of
loans and acceptances deteriorated in 2008, and particularly in the last
two quarters, as a result of the difficult credit market conditions and a
slowdown in the economy.
The effective income tax rate can vary, as it depends on the timing
of resolution of certain tax matters, recoveries of prior-period income
taxes and the relative proportion of earnings attributable to the differ-
ent jurisdictions in which we operate.
Quarterly Earnings Trends