Bank of Montreal 2010 Annual Report Download - page 35

MD&A
Earnings per Share Growth
Earnings per share (EPS) is calculated by dividing net income,
after deduction of preferred dividends, by the average number
of common shares outstanding. Diluted EPS, which is our basis
for measuring performance, adjusts for possible conversions
of financial instruments into common shares if those conversions
would reduce EPS, and is more fully explained in Note 25 on
page 156 of the financial statements.
The year-over-year percentage change in earnings per share (EPS) is
our key measure for analyzing earnings growth. All references to EPS
are to diluted EPS, unless indicated otherwise.
EPS was $4.75, up $1.67 or 54% from $3.08 in 2009. Certain notable
items affected results in 2009, reducing EPS by $0.88. There were no
notable items in 2010.
Our five-year compound average annual EPS growth rate was 0.5%,
well below our current medium-term objective of growing EPS by an
average of 12% over time. Net income available to common shareholders
was 13% higher than in the 2005 base year, while the average number
of diluted common shares outstanding increased by 10% over the same
period as we chose to bolster capital levels.
The notable items that reduced net income in 2009 by $474 million
or $0.88 per share were:
• charges for certain trading activities and valuation adjustments related
to the deterioration in capital markets of $521 million ($355 million
after tax or $0.66 per share) recorded in BMO Capital Markets;
• severance costs of $118 million ($80 million after tax or $0.15 per
share) recorded in Corporate Services; and
• an increase in the general allowance for credit losses of $60 million
($39 million after tax or $0.07 per share) recorded in Corporate Services.
Notable items are discussed further on page 36.
Net income was $2,810 million in 2010, up $1,023 million or 57%
from $1,787 million a year ago. There was strong revenue growth and a
significant decrease in provisions for credit losses. There was moderate
expense growth and a higher effective income tax rate.
Revenue increased $1,146 million or 10% to $12,210 million.
The weaker U.S. dollar reduced revenue growth by $365 million,
while acquired businesses added $214 million to growth. P&C Canada
revenue increased $543 million or 10%; P&C U.S. revenue increased
US$25 million or 2%; Private Client Group revenue increased $233 million
or 12%; and BMO Capital Markets revenue increased $190 million or
6%. Corporate Services revenue was substantially higher than in 2009.
Revenue is discussed further on page 37.
Provisions for credit losses totalled $1,049 million, consisting
entirely of specific provisions. In 2009, provisions for credit losses totalled
$1,603 million, consisting of $1,543 million of specific provisions and
a $60 million increase in the general allowance. The provision for credit
losses is discussed further on page 40.
Non-interest expense increased $209 million or 3% to $7,590 million.
The weaker U.S. dollar reduced expenses by $213 million, while acquired
businesses increased expenses by $152 million. Non-interest expense
is discussed further on page 41.
Income before provisions for credit losses, income taxes and non-
controlling interest in subsidiaries(1) rose $937 million to $4,620 million.
The effective income tax rate was 19.2% in 2010, up from 10.5%
in 2009, as we earned a lower proportion of income in lower-tax-rate
jurisdictions in 2010. The provision for income taxes is discussed
further on page 42.
Personal and Commercial Banking results in 2010 continued to show
strong growth and Private Client Group net income was up sig nificantly.
Corporate Services results were also appreciably improved from 2009.
Personal and Commercial Banking (P&C) net income rose
$118 million or 7% from a year ago to $1,819 million. The P&C group
combines our two retail and business banking operating segments,
Personal and Commercial Banking Canada (P&C Canada) and Personal
and Commercial Banking U.S. (P&C U.S.). P&C Canada net income
rose by $229 million or 16% to $1,644 million. The improvement was
attributable to volume-driven revenue growth and improved net
interest margin. P&C Canada results are discussed in the operating group
review on page 45. P&C U.S. net income decreased $111 million or 39%
to $175 million, but decreased $75 million or 31% to $168 million on a
U.S. dollar basis. On a basis that adjusts for the impact of impaired loans,
changes in the Visa litigation accrual and acquisition integration costs,
net income was US$237 million, down US$50 million or 17% from a year
ago on a comparably-adjusted basis. P&C U.S. results are discussed in
the operating group review on page 48.
Private Client Group (PCG) net income increased $111 million or
31% to $470 million. The increase was largely attributable to revenue
growth in all of PCG’s businesses related to growth in client assets
under management and administration, as well as higher insurance
premiums, including the benefit of a full year’s results from the BMO Life
Assurance acquisition that occurred late in the second quarter of 2009.
PCG results are discussed in the operating group review on page 51.
BMO Capital Markets (BMO CM) net income decreased $53 million
or 6% to $820 million. There was increased revenue, largely due
to increased investment securities gains, higher provisions for credit
losses, modest expense growth and a higher effective income tax
rate. Trading revenues decreased. There were also lower revenues
from our interest-rate-sensitive businesses, which had benefited
from favourable market spreads in the prior year, and corporate banking
revenues were lower, primarily due to reduced asset levels. Mergers
and acquisitions and debt underwriting fees improved considerably.
BMO CM results are discussed in the operating group review on page 54.
Corporate Services net loss decreased $847 million to $299 million
due to improved revenues and lower provisions for credit losses
recorded in Corporate Services under BMO’s expected loss provisioning
methodology. This methodology and Corporate Services’ results are
discussed in the operating group review on page 57.
11
(20)
(9)
EPS Annual Growth (%)
2009 2010200820072006
(18)
54
20102009200820072006
5.15
4.11 3.76
EPS ($)
3.08
4.75
EPS growth was particularly
high in 2010, as net income rose
by more than $1 billion.
The increase in EPS was due
to strong revenue growth and
lower provisions for credit losses.
(1) Non-GAAP measure. See page 91.
BMO Financial Group 193rd Annual Report 2010 33