Bank of Montreal 2015 Annual Report Download - page 24

MD&A
Return on Equity
Increased capital expectations for banks internationally have resulted in increased levels of common
shareholders’ equity over the last several years which, all else being equal, negatively impacts return on equity
(ROE). ROE was 12.5% in 2015 and adjusted ROE was 13.3%, compared with 14.0% and 14.4%, respectively, in
2014. ROE declined in 2015 primarily due to growth in common equity exceeding growth in income. There was
an increase of $96 million in earnings ($252 million in adjusted earnings) available to common shareholders in
2015. Average common shareholders’ equity increased by $4.5 billion from 2014, primarily due to the impact of
the stronger U.S. dollar on our investments in foreign operations and increased retained earnings. Adjusted return
on tangible common equity (ROTCE) was 16.4%, compared with 17.4% in 2014. Book value per share increased
17% from the prior year to $56.31, given the substantial increase in shareholders’ equity. ROTCE is meaningful
both because it measures the performance of businesses consistently, whether they were acquired or developed
organically, and because it is commonly used in the North American banking industry.
ROE (%)
Adjusted ROE Adjusted ROTCE
ROE
2013 20152014
ROE remains strong.
14.014.4
17.4
14.9
17.3
15.0
12.5
16.4
13.3
Return on common shareholders’ equity (ROE) is calculated as net income, less non-controlling interest in
subsidiaries and preferred dividends, as a percentage of average common shareholders’ equity. Common
shareholders’ equity is comprised of common share capital, contributed surplus, accumulated other
comprehensive income (loss) and retained earnings. Adjusted ROE is calculated using adjusted net income
rather than net income.
Adjusted return on tangible common equity (ROTCE) is calculated as adjusted net income available to
common shareholders as a percentage of average tangible common equity. Tangible common equity is
calculated as common shareholders’ equity less goodwill and acquisition-related intangible assets, net of
related deferred tax liabilities.
Return on Equity and Adjusted Return on Tangible Common Equity
(Canadian $ in millions, except as noted)
For the year ended October 31 2015 2014 2013 2012 2011*
Reported net income 4,405 4,333 4,195 4,156 3,114
Attributable to non-controlling interest in subsidiaries (35) (56) (65) (74) (73)
Preferred dividends (117) (120) (120) (136) (146)
Net income available to common shareholders 4,253 4,157 4,010 3,946 2,895
Average common shareholders’ equity 34,135 29,680 26,956 24,863 19,145
Return on equity (%) 12.5 14.0 14.9 15.9 15.1
Adjusted net income available to common shareholders 4,529 4,277 4,038 3,849 3,056
Adjusted return on equity (%) 13.3 14.4 15.0 15.5 16.0
Average tangible common equity 27,666 24,595 22,860 20,798 16,790
Adjusted return on tangible common equity (%) 16.4 17.4 17.3 18.0 17.9
* 2011 has not been restated to reflect the IFRS standards adopted in 2014.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Basel III Common Equity Tier 1 Ratio
BMO’s Basel III Common Equity Tier 1 (CET1) Ratio is the last of our four key value measures. BMO’s CET1 Ratio
is strong and exceeds the Office of the Superintendent of Financial Institutions Canada’s requirements for large
Canadian banks. Our CET1 Ratio was 10.7% at October 31, 2015, compared to 10.1% at October 31, 2014.
The CET1 Ratio increased by 60 basis points from the end of fiscal 2014 primarily due to higher capital, partially
offset by an increase in risk-weighted assets. The acquisition of GE Capital’s Transportation Finance business is
expected to reduce BMO’s CET1 Ratio by approximately 70 basis points on closing in the first quarter of 2016.
BMO’s CET1 Ratio has been
consistently strong.
Basel III CET1 Ratio (%)
2013 20152014
10.7
10.1
9.9
Basel III Common Equity Tier 1 (CET1) Ratio is calculated as CET1 capital, which is comprised of common
shareholders’ equity less deductions for goodwill, intangible assets, pension assets, certain deferred tax assets
and other items, divided by risk-weighted assets for CET1.
BMO Financial Group 198th Annual Report 2015 35