Bank of Montreal 2010 Annual Report Download - page 96

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
revenue and net income. Results in the first quarter of 2009 were
reduced by charges related to our decision to purchase certain holdings
from our U.S. clients. Results in the third quarter of 2009 included a
recovery of prior periods’ income taxes. Private Client Group is focused
on providing a great client experience and delivering the best-in-class
financial services that its clients expect.
BMO Capital Markets results were strong in 2009, reflecting robust
trading performance, as we capitalized on market opportunities, and
good corporate banking revenues as we benefited from our continued
focus on client relationships. Strong results were achieved despite
charges related to notable items that affected revenues in 2009. These
charges, which related to deterioration in the capital markets environ-
ment, totalled $521 million ($355 million after tax) in 2009 and were
concentrated in the first half of the year. In 2010, revenues improved
from 2009 but net income was down slightly and quarterly results were
uneven, with strong results in the second quarter and particularly weak
net income in the third quarter. Generally, revenues in interest-rate-
sensitive businesses were lower in 2010 as market spreads were more
favourable in 2009, and corporate banking revenues were also lower,
reflecting a reduction in corporate loan balances. Trading revenues were
lower in the less favourable trading environment, but mergers and
acquisitions fees and debt underwriting revenues were higher. BMO
Capital Markets has refocused its business over the past three years with
the goal of improving its risk-return profile and concentrating on core
profitable client relationships.
Corporate Services quarterly net income varies in large part because
of our expected loss provisioning methodology, general provisions for
credit losses and the impact of recording revenue, expenses and income
taxes not attributed to the operating groups. Revenues were affected
in 2009 by the impact of market interest rate changes on our balance
sheet management activities, but the effects diminished over the course
of the year. Results in the second quarter of 2009 were reduced by a
$118 million ($80 million after tax) severance charge. Results were much
improved in 2010 as revenues increased from the low levels of the first
nine months of 2009 and provisions for credit losses were much lower.
Corporate Services net income improved in each consecutive quarter
of 2009 and 2010 until the most recent quarter, when net income was
lowered by an upward movement in provisions for credit losses.
The U.S. dollar was weaker over the course of 2009, with a parti-
cularly sharp drop in the third quarter. It weakened further in 2010,
although the decrease in its value was less pronounced. A weaker U.S.
dollar lowers the translated value of U.S.-dollar-denominated revenues,
expenses, provisions for credit losses, income taxes and net income.
The effect of movements in exchange rates is sometimes muted by deci-
sions to hedge their impact within a single quarter, which is explained
on page 36.
BMO’s provisions for credit losses measured as a percentage of
loans and acceptances were at elevated levels in 2009. Provisions were
lower in 2010, reflecting an improving economy and credit environment,
although conditions remain challenging.
The effective income tax rate can vary, as it depends on the timing
of resolution of certain tax matters, recoveries of prior periods’ income
taxes and the relative proportion of earnings attributable to the different
jurisdictions in which we operate. The effective rate was more stable
in 2010.
Caution
This Quarterly Earnings Trends section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
Quarterly Earning Trends
BMO’s results and performance measures for the past eight quarters are
outlined on page 95. In the second quarter of 2010, we identified U.S.
mid-market clients that would be better served by a commercial banking
model and transferred their business to P&C U.S. from BMO Capital
Markets.
Comparative figures have been restated to reflect the effects
of the transfer and conform to the current presentation. Certain other
changes also resulted in changes to comparative figures, as detailed
on page 43.
We have remained focused on our objectives and priorities and
made good progress in embracing a culture that places the customer at
the centre of everything we do. We maintained this focus in 2009 in the
face of very difficult capital and credit market conditions, as well as a
slowing economy. Conditions were at times challenging for some of our
businesses in 2010, but overall economic conditions improved and we
maintained our focus on our vision and strategy, while also reporting
results in 2010 that were stronger than in 2009.
BMO’s quarterly earnings, revenue and expense are modestly
affected by seasonal factors. Since our second fiscal quarter has 89 days
and other quarters have 92 days, second-quarter results are lower rela-
tive to other quarters because there are three fewer calendar days, and
thus fewer business days. The months of July (third quarter) and August
(fourth quarter) are typically characterized by lower levels of capital
markets activity, which has an effect on results in Private Client Group
and BMO Capital Markets. The December holiday season also contributes
to a slowdown in some activities; however, credit card purchases are
particularly robust in that first-quarter period, as well as in the back-to-
school period that falls in our fourth quarter.
Personal and Commercial Banking earnings and revenues have
trended higher through 2009 and 2010 and are strong.
P&C Canada has been successful in instilling its vision among
employees, who are now firmly aligned behind the need to keep the
customer at the centre of everything they do and provide a great cus-
tomer experience. P&C Canada has increased market share in some of
its key businesses, with volume growth in most. Quarterly revenues
have trended higher due to volume growth in most products and
improvements in net interest margin, although margin growth was more
subdued in 2010. Net income also increased strongly over the course of
2009 and has generally trended higher in 2010.
P&C U.S. has operated in a difficult economic environment in 2009
and 2010 and results have increasingly reflected the impact of impaired
loans, which reduces revenues and increases expenses. Results in 2010
have also been reduced by higher levels of acquisition integration costs
following the acquisition of select assets and liabilities of a Rockford,
Illinois-based bank in an FDIC-assisted transaction late in the second
quarter of 2010. The 2010 economic environment in the United States
has also led to a drop in loan utilization, which suppressed revenue
growth in 2010 and lowered 2010 net income relative to 2009. P&C U.S.
is building a customer-focused culture centred on understanding and
responding to evolving customer expectations to deliver a great
customer experience that differentiates Harris in its markets.
Private Client Group’s results were affected in the first half of 2009
by weak stock markets and low interest rates. Asset levels were lower
and clients held large cash balances as they waited for markets to
recover. Performance improved over the last six months of 2009 as
equity markets regained strength, and the momentum continued into
2010 as conditions in equity markets improved further, driving growth in
94 BMO Financial Group 193rd Annual Report 2010