Bank of Montreal 2010 Annual Report Download - page 95

MD&A
Review of Fourth Quarter Performance
Results in the fourth quarter of 2010 were very good, with solid
revenue growth, reflecting the consistent execution of BMO’s strategy of
providing an industry-leading customer experience and the benefits of
our diversified business mix. P&C Canada had another strong quarter,
driven by volume growth across most lines of business and improved net
interest margins. P&C U.S. saw the benefit of loan spread improvement,
new account openings and growing deposit balances but results were
affected by higher credit losses, the impact of impaired loans and acqui-
sition integration costs. Private Client Group produced strong results with
net income substantially higher than in the same quarter a year ago,
with strong revenue growth. Results for BMO Capital Markets reflected
revenue growth, from the strong levels of a year ago, but net income
decreased due to higher credit losses and increased expenses, as a result
of investing to grow the business.
BMO’s net income was $739 million, up $92 million or 14% from
a year ago. Summary income statements and data for the quarter and
comparative quarters are outlined on page 95. Increased revenues
and lower provisions for credit losses were partially offset by the impact
of increased expenses. Results in the fourth quarter of 2009 included
a $50 million pre-tax charge related to our Canadian Credit Protection
Vehicle, which was considered a notable item in the 2009 fiscal year.
There were no notable items in the fourth quarter of 2010.
Personal and Commercial Banking net income increased $9 million
or 2.1% from a year ago to $458 million. P&C Canada net income increased
$22 million or 5.5% to $420 million. Revenue increased $138 million
or 10%, driven by volume growth across most products, the inclusion of
Diners Club business revenues in financial results and an improved net
interest margin. Provisions for credit losses increased $30 million due to
growth in the portfolio and the addition of the Diners Club business.
Non-interest expense increased $80 million or 11% due to higher initia-
tives expense, higher salaries and benefits from increased staff levels
and the inclusion of the Diners Club business in results, as well as low
capital tax expense in the prior year.
P&C U.S. net income of US$37 million was down US$11 million
or 21% from US$48 million a year ago, but was essentially unchanged
after adjusting results in both years for acquisition integration costs.
The benefits of loan spread improvement and deposit balance growth
were largely offset by an increase in the impact of impaired loans,
higher provisions for credit losses, a decrease in loan balances and deposit
spread compression. On a basis that adjusts for the impact of impaired
loans, a reduction in our Visa litigation accrual and acquisition integration
costs, net income was US$59 million, an increase of US$1 million
or 2.1% from results of a year ago on a comparably-adjusted basis.
Revenue increased US$42 million or 13% due to the Rockford, Illinois-
based bank transaction and improved loan spreads. Non-interest
expense increased due to the Rockford transaction including higher
acquisition integration costs.
Private Client Group net income was $131 million, up a strong
$25 million or 25% from last year. Revenue increased $48 million or 8.6%
with strong growth across most businesses. PCG, excluding insurance,
achieved strong revenue growth, driven by an 11% improvement in client
assets under management and administration. Revenue from the
insurance business was unchanged year over year, as the benefit from
higher premium revenue was offset by effects of the unfavourable
market movements on policy liabilities.
BMO Capital Markets net income of $216 million decreased
$44 million or 17% from the very strong results of a year ago. Revenue
increased but there were higher provisions for credit losses and
expenses also increased, in part due to higher employee costs as we
continued to invest in strategic hiring across the business. Revenue for
the quarter increased $20 million from a year ago to $834 million, driven
by gains in investment securities and higher mergers and acquisitions
revenues and debt underwriting fees. Trading revenue was slightly lower
due to accounting adjustments in the equity trading business in the
current quarter. Continued weak demand, particularly in the United
States, contributed to lower corporate banking revenues. Non-interest
expense increased $59 million, primarily due to higher employee costs.
Corporate Services incurred a net loss of $66 million in the
quarter, due primarily to low revenues. Net interest income was reduced,
in part, by a write-down on our equity investment in Symcor Inc.,
a joint-venture between certain of the banks that provides financial
processing services. Results were $102 million better than in the
prior year, largely due to lower provisions for credit losses, offset in
part by higher expenses. Expenses were $58 million higher mainly
due to increases in investment spending, professional fees and
performance-based compensation.
BMO’s revenue increased $240 million or 8.0% from a year ago
to $3,229 million. There were solid increases in each of our operating
groups, with particularly strong growth in P&C Canada, our largest
operating group. The weaker U.S. dollar decreased revenue growth by
$36 million or 1.2 percentage points.
Net interest income increased $168 million or 12% from a year ago.
Higher net interest margins in most of the operating groups produced a
16 basis point increase at the total bank level, and drove the increase in
net interest income, with higher average earning assets also contributing
to the growth. Average earning assets increased $7.3 billion or 2.2%
relative to a year ago, but adjusted to exclude the impact of the weaker
U.S. dollar, increased by $12.5 billion. The increase was driven by
broad-based volume growth in P&C Canada with some contribution
from volume growth in Private Client Group.
Non-interest revenue increased $72 million or 4.7% from a year
ago, mostly due to strong increases in P&C Canada and Private Client
Group. There was strong growth in card fees, due largely to the Diners
Club business acquisition. There were solid increases in securities
commissions, mutual fund revenues, underwriting and advisory fees,
and investment securities gains. Securitization revenues and other
revenues were lower.
Non-interest expense increased $244 million or 14% from a year
ago to $2,023 million. There was modest growth in Private Client Group
with higher increases across the other operating groups. Approximately
25% of expense growth was attributable to the Rockford and Diners Club
business acquisitions, including integration costs. There were increases in
employee compensation, due in part to staffing related to business ini-
tiatives and to performance-based compensation, in line with improved
performance. Staffing levels increased in each of the operating groups.
There were also significant increases in premises and equipment
expense (notably in computer costs related to software development),
and in professional fees and travel and business development, primarily
related to supporting investments in the business. The weaker U.S. dollar
reduced expense growth by $22 million or 1.2 percentage points. Cash
operating leverage was –5.7% in the current quarter.
Specific provisions for credit losses in the fourth quarter of 2010
were $253 million or an annualized 58 basis points of average net loans
and acceptances, compared with $386 million or 89 basis points in the
fourth quarter of 2009. There was no general provision in the quarter or
in the comparable quarter.
The provision for income taxes of $196 million increased $38 million
from the fourth quarter of 2009. The effective tax rate for the quarter
was 20.6%, compared with 19.2% in the fourth quarter of 2009.
BMO Financial Group 193rd Annual Report 2010 93