Bank of Montreal 2008 Annual Report Download - page 93

MD&A
BMO Financial Group 191st Annual Report 2008 | 89
2007 Financial Performance Review
The preceding discussions in the MD&A focused on our performance in
2008. This section summarizes our performance in fiscal 2007.
Net income decreased $532 million or 20% to $2,131 million in fis-
cal 2007 and earnings per share fell $1.04 or 20% to $4.11. Results for
the year were affected by $787 million of after-tax losses in respect of
charges related to the deterioration in capital markets, losses in our
commodities business, an increase in the general allowance and restruc-
turing charges. Return on equity was 14.4%, down from 19.2% in 2006,
due to the $532 million decrease in net income and the impact of a
$0.8 billion increase in average common shareholders’ equity.
Revenue fell $636 million or 6.4% in 2007 to $9,349 million,
driven by losses of $853 million in our commodities trading business
and by charges of $318 million in the fourth quarter of 2007 related
to the deterioration in capital markets. The net effect of businesses
acquired in 2007 and 2006 increased revenues by $52 million or 0.5%.
The weaker U.S. dollar reduced revenue growth by $87 million or
0.9 percentage points.
Credit conditions in 2007 softened from the favourable credit envi-
ronment of 2006 as BMO recorded a $353 million provision for credit
losses, consisting of $303 million of specific provisions and a $50 million
increase in the general allowance for credit losses. These amounts com-
pare to a $176 million provision recorded in 2006 comprised of specific
provisions of $211 million and a $35 million reduction in the general
allowance. The 2007 increase in the general allowance was primarily
due to credit portfolio growth and risk deterioration.
Non-interest expense increased $248 million or 3.9% to $6,601 mil-
lion. The net effect of businesses acquired in 2007 and 2006 increased
expenses by $46 million (0.7%) and restructuring charges increased
costs by $159 million (2.5%). Lower performance-based compensation
costs reduced overall expenses by $47 million (–0.7%), while the
weaker U.S. dollar reduced costs by $57 million (–0.9%). Other factors,
including other business-based costs, increased overall expenses in 2007
by 2.3%. These included higher salaries and benefits costs associated
with the expansion of our sales force, as well as initiatives and costs
associated with business growth.
Net income in P&C Canada rose $107 million or 9% from the record
results of 2006 to $1,267 million. Results in fiscal 2006 reflected the
$51 million impact of a $38 million ($25 million after tax) gain on the
MasterCard IPO and a $26 million recovery of prior years’ income
taxes.
Results in fiscal 2007 were increased $52 million by the net impact
of
a $107 million ($83 million after tax) gain on sale of MasterCard shares,
a $57 million recovery of prior years’ income
taxes, a $26 million
($23 million after tax) insurance gain and a $14 mil
lion ($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 credit card customer loyalty rewards program. Revenue
increased $164 million or 4% to $4,744 million. The items above
reduced revenue growth by $76 million or 1.7%. There was volume-
based growth in personal and commercial loans, com
mercial deposits
and cards. There were also higher revenues from securitization, as well
as from increased sales of term investment products and
mutual funds.
Non-interest expense increased $75 million or 3% to $2,644
million due
to higher employee-related expenses as a result of additions to front-line
sales and service staff, bcpbank Canada costs and higher promotional
costs, including a debit card AIR MILES initiative.
Net income in P&C U.S. decreased $1 million to $116 million. On a
U.S. dollar basis, net income increased $3 million or 3%. Excluding acqui-
sition integration costs, net income increased in each quarter of 2007
relative to the preceding quarter. Revenue increased $3 million
to $908 million, but increased $34 million or 4% on a U.S. dollar basis.
Acquisitions contributed US$39 million to increased revenues, while
revenue increases associated with loan and deposit volume growth and
higher service charges were more than offset by the impact of lower
net interest margins. Non-interest expense increased $15 million or 2%
to $693 million, but increased $35 million or 6% on a U.S. dollar basis.
Excluding operating costs of acquisitions and acquisition integration
costs, which accounted for US$22 million of increased expense, expense
growth was 2.3% on a U.S. dollar basis. The remaining increase reflected
operating costs of our new branch technology platform, increased costs
associated with branches opened during fiscal 2006 and higher business
volumes. These factors were partially offset by the impact of expense
management initiatives.
Net income in Private Client Group reached a record $395 million,
an increase of $54 million or 16% over 2006. Higher earnings were
achieved primarily through solid growth in operating revenues. Revenue
increased $158 million or 8% to $2,052 million. Non-interest revenue
increased $116 million or 9%, primarily due to increases in fee-based
revenues in Full-Service Investing and the mutual fund businesses, as
well as growth in trust and investment revenues in North American
Private Banking. Strong growth in assets and transaction volumes in
BMO InvestorLine was offset by competitive pricing pressures in the
industry. Net interest income increased $42 million or 8%, primarily due
to increased deposit balances and higher spreads in the brokerage busi-
nesses and term investment products. The weaker U.S. dollar reduced
revenue by $12 million or 1%. Non-interest expense increased $83 mil-
lion or 6% to $1,446 million. The increase was primarily due to higher
revenue-based costs, in line with increased revenue,
combined with fur-
ther investments in our sales force, innovative products,
technology and
infrastructure to drive future growth. The weaker U.S. dollar increased
expense by $10 million or 1%.
Net income in BMO Capital Markets fell $435 million or 51% to
$417 million. Results in 2007 were affected by two notable items: losses
in our commodities trading business of $853 million ($440 million after
performance-based compensation adjustments and income taxes); and
charges of $318 million ($211 million after tax) for certain trading activi-
ties and valuation adjustments related to the deterioration in the credit
environment in late 2007. These included $169 million of losses related
to our structured-credit instruments and preferred shares, a $134 million
write-down related to Canadian asset-backed commercial paper hold-
ings and a $15 million write-down of capital notes issued by structured
investment vehicles. Revenue decreased $811 million or 29% to
$1,969 million due to the $1,171 million of charges. There were signifi-
cant increases in merger and acquisition fees, underwriting activity,
lending fees and commissions. Trading revenues were down due to
commodities losses and losses in interest rate trading, but equity
and foreign exchange trading revenues increased. Net interest income
increased due to higher trading net interest income and higher
revenues in our interest-rate-sensitive businesses. Higher levels of cor-
porate banking assets also contributed to the increase in net interest
income, partially offset by lower spreads on corporate loans in the
competitive environment. The weaker U.S. dollar reduced revenue
by $18 million. Non-interest expense decreased $38 million or 2% to
$1,574 million, primarily due to a decrease in performance-based com-
pensation, partially offset by higher professional fees and information
technology costs. The weaker U.S. dollar reduced non-interest expense
by $21 million.
Corporate Services net loss for the year was $64 million, compared
with net income of $193 million in 2006, primarily due to a $159 million
($103 million after tax) restructuring charge, reduced revenues and
higher provisions for credit losses, including the impact of changes in
the general allowance, partially offset by lower corporate expenses.