Bank of Montreal 2010 Annual Report Download - page 94

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
2009 Financial Performance Review
The preceding discussions in the MD&A focused on our performance in
2010. This section summarizes our performance in fiscal 2009 relative
to fiscal 2008. As noted on page 26, certain prior year data has been
restated to conform to the presentation in 2010, including restatements
arising from transfers between operating groups. Further detail is pro-
vided on page 43.
Net income decreased $191 million or 10% to $1,787 million in
fiscal 2009 and earnings per share fell $0.68 or 18% to $3.08. Results
for the year were affected by charges related to notable items totalling
$474 million after tax ($0.88 per share). Results in 2008 were affected
by charges related to notable items totalling $426 million after tax
($0.84 per share). Amounts are detailed in the Notable Items section on
page 36. We also recorded elevated provisions for credit losses in 2009
and higher income taxes. Return on equity was 9.9%, down from 13.0%
in 2008, primarily due to increases in the number of common and
preferred shares, as well as lower net income.
Revenue rose $859 million or 8.4% in 2009 to $11,064 million.
Revenue in 2009 was reduced by charges of $521 million associated with
notable items related to the impact of the weak capital markets environ-
ment. In 2008, revenue was reduced by $388 million of such charges.
The higher charges in 2009 dampened revenue growth by $133 million.
The stronger U.S. dollar increased overall revenue growth by $363 million
or 3.5 percentage points, while the net impact of acquired businesses
increased revenue growth by $172 million or 1.7 percentage points.
The remaining increase was primarily attributable to business growth,
as there was solid revenue growth in P&C Canada, P&C U.S. and
BMO Capital Markets.
Credit conditions remained difficult in 2009, with indications of
stabilization appearing in the latter half of the year. BMO recorded a
$1,603 million provision for credit losses, consisting of $1,543 million
of specific provisions and a $60 million increase in the general allowance
for credit losses. These amounts compare to a $1,330 million provision
recorded in 2008, comprised of specific provisions of $1,070 million and
a $260 million increase in the general allowance.
Non-interest expense increased $487 million or 7.1% to $7,381 mil-
lion. The net effect of businesses acquired in 2009 and 2008 increased
expenses in 2009 relative to 2008 by $124 million (1.8%). The stronger
U.S. dollar increased costs in 2009 by $216 million (3.1%). Other employee
compensation expense, which includes salaries and employee benefits,
was $368 million or 14% higher than in 2008. Approximately one third
of this increase was due to $118 million of severance costs, one third to
higher benefit costs and the remainder to business acquisitions in P&C
U.S. and Private Client Group, as well as the stronger U.S. dollar. Benefit
costs were increased by higher pension costs. Employ ment levels were
reduced in 2009 by 900 full-time equivalent employees or 2.4% to
36,173 full-time equivalent employees at October 31, 2009 as a result
of expense management efforts.
The provision for income taxes was $217 million in 2009, compared
with a $71 million recovery of income taxes in 2008. The effective tax
rate in 2009 was a tax expense rate of 10.5%, compared with a recovery
rate of 3.6% in 2008. Results included a recovery of prior years’ income
taxes of $160 million in 2008. The higher effective tax rate in 2009 was
mainly attributable to a lower recovery of prior years’ income taxes
and a lower proportion of income from lower-tax-rate jurisdictions.
Net income in P&C Canada rose $262 million or 23% from 2008 to
$1,415 million. Revenue increased $493 million or 10% to $5,287 million.
Results largely reflected higher volumes in most products and improve-
ments in net interest margin. There was very strong revenue growth
across personal banking, commercial banking and cards and payment
services. Non-interest expense increased $104 million or 3.8% to
$2,837 million due to increases in employee benefits costs, performance-
based compensation and occupancy and payment services costs,
partially offset by lower business initiative spending and cost savings
resulting from reduced employment levels.
Net income in P&C U.S. increased $44 million to $286 million in
2009. On a U.S. dollar basis, net income increased $7 million or 3.0%.
Revenue increased $226 million to $1,568 million, but increased $41 mil-
lion or 3.2% on a U.S. dollar basis. The increase was largely driven by
our Wisconsin acquisitions, strong deposit volume growth and gains
on
the sale of mortgages. This was partially offset by the impact of
increases in impaired loans and the benefit in 2008 of the sale of
a portion of our investment in Visa. Non-interest expense increased
$127 million or 14% to $1,042 million, but increased only $12 million
or 1.4% on a U.S. dollar basis.
Net income in Private Client Group was $359 million, down
$67 million from 2008, reflecting weak equity markets and a low
interest rate environment. Results in 2009 were reduced by $17 million
($11 million after tax) of charges associated with actions taken to
support U.S. clients in the difficult capital markets environment, but also
reflected a $23 million recovery of prior years’ income taxes. Results in
2008 were affected by a $31 million ($19 million after tax) charge for
similar actions to support clients. Revenue of $2,012 million decreased
$134 million, primarily due to lower revenues in our brokerage and
mutual fund businesses. Insurance revenues increased as a result of the
acquisition of BMO Life Assurance. Non-interest expense was unchanged
at $1,569 million.
Net income in BMO Capital Markets increased $305 million to
$873 million. Results in 2009 were affected by charges of $521 million
($355 million after tax) related to the deterioration in capital markets.
Results in 2008 were affected by $388 million ($260 million after tax) of
such charges. Additionally, 2008 net income included a $115 million
recovery of prior periods’ income taxes. Revenue increased $911 million
or 42% to $3,089 million. Revenue growth was largely driven by signifi-
cantly higher trading revenues as well as corporate banking revenues.
Revenues from our interest-rate-sensitive businesses also increased due
to favourable market spreads and equity underwriting fees increased
as well, driven by corporate clients choosing to strengthen their capital
positions. Non-interest expense increased $108 million or 6.6% to
$1,744 million, primarily due to increased employee costs, in line with
improved business performance, and higher allocated costs.
Corporate Services net loss for the year was $1,146 million,
compared with a net loss of $411 million in 2008. The increased loss
in part reflected lower revenues, higher provisions for credit losses and
increased expenses. The reduction in revenues was primarily driven by a
negative carry on certain asset-liability interest rate positions as a result
of changes in interest rates, the impact of funding activities undertaken
to enhance our strong liquidity position, the mark-to-market impact of
hedging activities and the effect on results in 2009 of credit card securi-
tizations completed in 2008. Non-interest expense was $148 million
higher, largely related to a $118 million ($80 million after tax) severance
charge and higher deposit insurance premiums.
92 BMO Financial Group 193rd Annual Report 2010