Bank of Montreal 2010 Annual Report Download - page 55

MD&A
Private Client Group Business Environment and Outlook
The U.S. economy is also expected to grow at a slow pace. Given this
backdrop, it is likely that monetary authorities in both Canada and the
United States will keep interest rates low for the foreseeable future.
This low rate environment will continue to pressure net interest income.
Our asset levels should improve as capital markets in both countries
are expected to continue to strengthen along with the economy and
business confidence.
We see the North American wealth management industry continuing
to grow over the longer term, supported by changing demographics
particularly in the retirement and high net worth sectors.
There was modest growth in the Canadian and U.S. economies in
2010. Stronger equity markets contributed to growth in our asset levels
and related fee-based revenues. Net interest income grew moderately,
constrained by historically low interest rates but benefiting from
increased cash holdings as some clients held liquid assets while waiting
for markets to stabilize. The general decline in long-term interest rates
had a negative impact on our insurance results as low rates resulted
in an increase in policyholder liabilities.
The Canadian economy is expected to grow modestly in 2011,
supported by relatively low interest rates and firmer commodity prices.
Private Client Group Financial Results
Private Client Group (Canadian $ in millions, except as noted)
Change from 2009
As at or for the year ended October 31 2010 2009 2008 $ %
Net interest income (teb) 365 353 376 12 3
Non-interest revenue 1,880 1,659 1,770 221 13
Total revenue (teb) 2,245 2,012 2,146 233 12
Provision for credit losses 7 5 4 2 39
Non-interest expense 1,611 1,569 1,569 42 3
Income before income taxes 627 438 573 189 43
Income taxes (teb) 157 79 147 78 98
Net income 470 359 426 111 31
Amortization of acquisition-related
intangible assets (after tax) 6 3 4 3 100
Cash net income 476 362 430 114 31
Net economic profit 342 232 308 110 47
Return on equity (%) 37.4 29.4 37.9 8.0
Cash return on equity (teb) (%) 37.9 29.7 38.3 8.2
Cash operating leverage (%) 9.1 (6.3) (5.5) nm
Productivity ratio (teb) (%) 71.8 78.0 73.1 (6.2)
Cash productivity ratio (teb) (%) 71.5 77.8 72.9 (6.3)
Net interest margin on
earning assets
(%) 2.81 3.34 4.78 (0.53)
Average earning assets 12,981 10,567 7,855 2,414 23
Average loans and acceptances 7,768 7,454 6,726 314 4
Average deposits 16,467 14,605 11,382 1,862 13
Assets under administration 160,323 139,446 131,289 20,877 15
Assets under management 103,534 99,128 99,428 4,406 4
Full-time equivalent
employees 4,837 4,611 4,531 226 5
nm – not meaningful
U.S. Business Selected Financial Data (US$ in millions)
Change from 2009
As at or for the year ended October 31 2010 2009 2008 $ %
Total revenue (teb) 243 208 217 35 16
Non-interest expense 213 215 230 (2) (1)
Net income 16 (4) (6) 20 +100
Average earning assets 2,077 2,251 2,142 (174) (8)
Average loans and acceptances 1,877 2,106 2,120 (229) (11)
Average deposits 1,328 1,196 1,155 132 11
Private Client Group net income of $470 million increased $111 million
or 31% in 2010 from the previous year. PCG net income, excluding the
insurance business, was $306 million, up $118 million or 62%. Results
a year ago included a charge of $17 million ($11 million after tax) related
to the decision to assist some of our U.S. clients by purchasing auction-rate
securities from their accounts in the weak capital markets environment.
Insurance net income was $164 million, down $7 million or 3.6% from
the previous year. Insurance results a year ago included a $23 million
recovery of prior periods’ income taxes.
Revenue of $2,245 million increased $233 million or 12%. The
increase reflected revenue growth across all of our businesses. Revenue
growth in PCG, excluding insurance, was driven by an 11% (13% in
source currency) improvement in client assets under management and
administration. Insurance revenue increased due to higher premiums
and the inclusion of a full year’s results of BMO Life Assurance, acquired
late in the second quarter of 2009. This was partially offset by the
effects of unfavourable market movements on policyholder liabilities.
Net interest income increased primarily due to volume growth in our
brokerage and private banking businesses, partially offset by spread
compression in our brokerage businesses. The weaker U.S. dollar reduced
revenue by $33 million or 1.6%.
Non-interest expense of $1,611 million increased $42 million or
2.6%, primarily due to higher revenue-based costs, in line with improved
performance. The inclusion of a full year’s results of BMO Life Assurance
also contributed to expense growth. The weaker U.S. dollar reduced
expenses by $25 million or 1.6%. Expense growth was significantly
lower than revenue growth, reflecting our continuing focus on expense
management. This resulted in cash operating leverage of 9.1%. The
cash productivity ratio improved by 630 basis points.
U.S. operations recorded net income of US$16 million in 2010, com-
pared with a net loss of US$4 million in 2009. Revenue increased 16%
and expenses were relatively unchanged, reflecting effective expense
management initiatives. Results a year ago included a US$9 million
after-tax charge related to the decision to assist our U.S. clients.
BMO Financial Group 193rd Annual Report 2010 53