Bank of Montreal 2010 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
Provision for Income Taxes
The provision for income taxes reflected in the Consolidated Statement
of Income is based upon transactions recorded in income, regardless
of when such transactions are subject to taxation by tax authorities, with
the exception of the repatriation of retained earnings from foreign sub-
sidiaries, as outlined in Note 24 on page 155 of the financial statements.
Management assesses BMO’s consolidated results and associated
provisions for income taxes on a GAAP basis. We assess the performance
of the operating groups and associated income taxes on a taxable
equivalent basis and report accordingly.
The provision for income taxes was $687 million in 2010, compared
with $217 million in 2009. The effective tax rate in 2010 was 19.2%,
compared with 10.5% in 2009. The higher effective tax rate in 2010 was
mainly attributable to proportionately lower income from lower-tax-rate
jurisdictions. There were also proportionately lower levels of recoveries
of prior years’ income taxes and tax-exempt income.
BMO hedges the foreign exchange risk arising from its investments
in U.S. operations by funding the investments in U.S. dollars. Under this
program, the gain or loss on hedging and the unrealized gain or loss
on translation of investments in U.S. operations are charged or credited
to shareholders’ equity. For income tax purposes, the gain or loss on
the hedging activities results in an income tax charge or credit in the
current period, which is charged or credited to shareholders’ equity,
while the associated unrealized gain or loss on the investments in
U.S. operations does not incur income taxes until the investments are
liquidated. The income tax charge/benefit arising from a hedging gain/
loss is a function of the fluctuations in exchange rates from period
to period. Hedging of the investments in U.S. operations has given rise
to income tax expense in shareholders’ equity of $206 million for
the year, compared with $382 million in 2009. Refer to the Consolidated
Statement of Changes in Shareholders’ Equity on page 112 of the
financial statements for further details.
Table 8 on page 99 details the $1,089 million of total net
government levies and income tax expense incurred by BMO in 2010.
The increase from $581 million in 2009 was primarily due to higher
income tax expense.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to
our directors and executives and their affiliated entities, joint ventures
and equity-accounted investees on the same terms that we offer to
our customers for those services. A select suite of customer loan and
mortgage products is offered to our employees at rates normally
made available to our preferred customers. We also offer employees
a fee-based subsidy on annual credit card fees.
Stock options and deferred share units granted to directors, and
preferred rate loan agreements for executives relating to transfers we
initiate, are discussed in Note 27 on page 159 of the financial statements.
2010 Review of Operating Groups Performance
This section includes an analysis of the financial results of our operating
groups and descriptions of their businesses, strategies, strengths,
challenges, key value drivers, achievements and outlooks.
Personal and Commercial Banking (P&C) (pages 44 to 50)
Net income was $1,819 million in 2010, an increase of $118 million
or 7% from 2009.
Private Client Group (PCG) (pages 51 to 53)
Net income was $470 million in 2010, an increase of $111 million or 31%
from 2009.
BMO Capital Markets (BMO CM) (pages 54 to 56)
Net income was $820 million in 2010, a decrease of $53 million or 6%
from 2009.
Corporate Services, including Technology and Operations (page 57)
The net loss was $299 million in 2010, compared with a net loss of
$1,146 million in 2009.
Allocation of Results
The basis for the allocation of results geographically and among operating
groups is outlined in Note 26 on page 157 of the financial statements.
Certain prior-year data has been restated, as explained on the following
page, which also provides further information on the allocation of results.
The share of net income by
operating group is largely
in line with results in 2009.
* Percentages determined excluding results in Corporate Services, which in large part
reflect our expected loss provisioning methodology.
Lower provisions for credit losses
improved the U.S. contribution
to net income, while net income
from other countries decreased.
Net Income
by Country
2010
U.S. 2.1%
Canada
90.2%
Other
countries
7. 7 %
Net Income
by Operating Group*
BMO CM 26.4%
P&C 58.5%
PCG 15.1%
2010
2009
U.S. (6.2)%
Canada
87.4%
Other
countries
18.8%
BMO CM 29.8%
P&C 58.0%
PCG 12.2%
2009
42 BMO Financial Group 193rd Annual Report 2010