Bank of Montreal 2010 Annual Report Download - page 43

MD&A
Contribution to Non-Interest Expense Growth (%)
For the year ended October 31 2010 2009 2008
Businesses acquired 2.1 1.8 1.1
Restructuring charge – – (2.5)
Currency translation effect (2.9) 3.1 (1.4)
Performance-based compensation 1.6 0.6 0.3
Other factors 2.0 1.6 6.9
Total non-interest expense growth 2.8 7.1 4.4
Non-Interest Expense ($ millions)
Change from 2009
For the year ended October 31 2010 2009 2008 $ %
Performance-based
compensation 1,455 1,338 1,297 117 9
Other employee compensation 2,909 3,047 2,679 (138) (5)
Total employee compensation 4,364 4,385 3,976 (21) –
Premises and equipment 1,343 1,281 1,241 62 5
Restructuring charge – (10) (8) 10 100
Other 1,680 1,522 1,502 158 10
Amortization of intangible assets 203 203 183 – –
Total 7,590 7,381 6,894 209 3
Expense growth was moderate
in 2010, due in part to the
weaker U.S. dollar.
BMO’s productivity ratio
improved as most of our
groups increased revenues
relative to expenses.
59.5
67.6
73.1
75.1
2009 20102008
78.0
56.6
66.7
56.5
71.8
55.3
62.2
55.5
Productivity Ratio by
Group (teb) (%)
PCG
Total BMO*
P&C
BMO CM
*Non-teb
20102009200820072006
0.3
3.9 4.4
6,894
6,353
6,601
7, 3 81
7.1
7,590
2.8
Expenses and
Annual Expense Growth
Expenses ($ millions)
Expense growth (%)
Non-Interest Expense
Non-interest expense increased $209 million or 2.8% to $7,590 million in
2010. The factors contributing to the increase are set out in the adjacent
Contribution to Non-Interest Expense Growth table. There were no notable
items in 2010, but notable items in 2009 included severance costs that
increased non-interest expense by $118 million.
As explained on page 35, the net effect of businesses acquired in
2010 and 2009 increased expenses in 2010 relative to 2009 by $152 mil-
lion (2.1%). As further explained on page 36, the weaker U.S. dollar
reduced costs in 2010 by $213 million (2.9%). Higher performance-based
compensation costs increased expenses by $117 million (1.6%), in line
with improved performance.
The dollar and percentage changes in expenses by category are
outlined in the adjacent Non-Interest Expense table. Table 8 on page 99
provides more detail on expenses and expense growth.
Other employee compensation expense, which includes salaries
and employee benefits, decreased $138 million or 4.5% from 2009, in
part due to last year’s severance charges and the weaker U.S. dollar.
Adjusting for these items, other compensation expense increased. There
were
business acquisitions and higher initiative spending. We continued
to invest in our businesses and employment levels increased over the
course of 2010.
Premises and equipment costs increased $62 million or 4.8%, pri-
marily related to software development in support of our business growth.
Other expenses rose $158 million or 10%, mainly in respect of a
large number of small increases for initiative-related expenses such as
professional fees and travel costs, primarily related to activities in
support of our business growth.
On July 1, 2010, the harmonized sales tax was implemented in
both Ontario and British Columbia. This has increased the sales tax paid
in these two jurisdictions, contributing to higher expenses in a number
of expense categories relative to a year ago.
Productivity
The productivity ratio (expense-to-revenue ratio) improved by 450 basis
points to 62.2% in 2010. Excluding the notable items that affected results
in 2009, BMO’s productivity ratio improved by 54 basis points.
P&C’s productivity ratio improved to 55.3% from 56.6%. P&C Canada
is BMO’s largest operating segment, and its productivity ratio of 51.1%
improved by 260 basis points from last year with revenue growth sub-
stantially outpacing expense growth. The productivity ratio in P&C U.S.
deteriorated by 600 basis points as the continuing difficult market condi-
tions affected revenue growth and costs increased on a U.S. dollar basis,
primarily due to the Rockford, Illinois-based bank transaction, including
acquisition integration costs. Adjusting costs in both years for the impact
of impaired loan costs, changes in the Visa litigation accrual and acquisi-
tion integration costs, productivity deteriorated by 280 basis points to
65.7%. The productivity ratio for Private Client Group in 2010 improved
markedly by 620 basis points to 71.8%, reflecting increased revenue and
effective expense control. BMO Capital Markets productivity ratio
improved 100 basis points, driven by good revenue growth.
BMO’s cash productivity ratio(1) was 61.9%, a 440 basis point improve -
ment from 66.3% in 2009. Excluding the notable items that affected
results in 2009, BMO’s cash productivity ratio improved by 46 basis points.
Examples of initiatives to enhance productivity are outlined in the
2010 Review of Operating Groups Performance, which starts on page 42.
Operating leverage was 7.6% and cash operating leverage was 7.5%.
Our medium-term goal, over time, is to achieve average annual cash
operating leverage of at least 1.5%, increasing revenues by an average of
at least 1.5 percentage points more than the rate of cash-based expense
growth. We aim to achieve operating leverage by driving revenues
through an increased customer focus and ongoing expense management,
working to create greater efficiency and effectiveness in all support
functions, groups and business processes that support the front line.
The productivity ratio (or expense-to-revenue ratio) is our key
measure of productivity. It is calculated as non-interest expense
divided by total revenues (on a taxable equivalent basis in
the operating groups), expressed as a percentage. The cash
productivity ratio is calculated in the same manner, after
removing the amortization of intangible assets from non-interest
expenses. See page 91.
(1) Cash-based measures are non-GAAP measures. See page 91.
BMO Financial Group 193rd Annual Report 2010 41