Bank of Montreal 2010 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
20102009200820072006
19.2
14.4 13.0
ROE (%)
9.9
14.9
Improved ROE was attributable
to strong earnings growth,
net of the effects of higher
common shareholders’ equity.
Net Economic Profit ($ millions, except as noted)
For the year ended October 31 2010 2009 2008 2007 2006
Net income available to common shareholders 2,674 1,667 1,905 2,088 2,633
After-tax impact of the amortization of acquisition-related intangible assets 32 35 35 38 36
Cash net income available to common shareholders 2,706 1,702 1,940 2,126 2,669
Charge for capital* (1,888) (1,770) (1,535) (1,523) (1,439)
Net economic profit 818 (68) 405 603 1,230
Net economic profit growth (%) +100 (+100) (33) (51) 10
*Charge for capital
Average common shareholders’ equity 17,980 16,865 14,612 14,506 13,703
Cost of capital (%) 10.5 10.5 10.5 10.5 10.5
Charge for capital (1,888) (1,770) (1,535) (1,523) (1,439)
20102009200820072006
1,230
603
405
NEP ($ millions)
(68)
818
NEP improved significantly as
earnings available to common
shareholders rose by more than
$1 billion.
Return on Equity
Return on equity (ROE) is another key value measure. ROE was 14.9%
in 2010, compared with 9.9% in 2009. The improvement was primarily
attributable to an increase of more than $1 billion in earnings available
to common shareholders. Average common shareholders’ equity increased
$1 billion from 2009. In 2009 and 2010, we decided to strengthen
equity and associated capital ratios to support investors’ and depositors’
confidence and provide greater operational and strategic flexibility.
The increase in equity has contributed to our ROE falling short of our
historic returns and medium-term objectives. BMO has achieved an
ROE of 13% or better in 20 of the past 21 years, one of only two banks
in our North American peer group to have done so. We fell short of
that standard in the difficult economic environment in 2009. As in 2009,
our ROE in 2010 compared favourably with our global peers. Our medium-
term objective is to achieve an average annual ROE of 17% to 20%, over
time. Table 3 on page 97 includes ROE statistics for the past 10 years.
Net Economic Profit Growth
The last of our four key value measures is net economic profit (NEP)(1)
growth. NEP was $818 million, up from a loss of $68 million in the prior
year. The improvement was attributable to a significant increase in
earnings, net of a higher charge for capital as a result of the increase
in shareholders’ equity. Earnings available to common shareholders
rose by more than $1 billion in 2010.
Return on common
shareholders’ equity (ROE)
is calculated as net income,
less preferred dividends,
as a percentage of average
common shareholders’ equity.
Common share holders’ equity
is comprised of common
share capital, contributed
surplus, accumulated other
comprehensive income
(loss) and retained earnings.
Net economic profit (NEP)
represents cash net income
available to common share-
holders, less a charge for
capital. NEP is an effective
measure of economic value
added. NEP is a non-GAAP
measure. See page 91.
(1) Non-GAAP measure. See page 91.
34 BMO Financial Group 193rd Annual Report 2010