Bank of Montreal 2015 Annual Report Download - page 52

MD&A
Corporate Services Provision for Credit Losses
(Canadian $ in millions)
As at or for the year ended October 31 2015 2014 2013
Impaired real estate loans 28 21 (43)
Interest on impaired loans 17 26 48
Purchased credit impaired loans (86) (252) (410)
Purchased performing loans (1) 582 –
Recovery of credit losses, adjusted basis (36) (123) (405)
Purchased performing loans (1) –– 240
Decrease in collective allowance –– (10)
Recovery of credit losses, reported basis (36) (123) (175)
Average loans and acceptances 242 452 972
Year-end loans and acceptances 182 306 526
(1) Effective the first quarter of 2014, Corporate Services adjusted results include credit-related items in respect of the purchased performing loan portfolio. Further details are provided in the Non-GAAP
Measures section on page 33.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Review of Fourth Quarter 2015 Performance
Reported net income was $1,214 million for the fourth quarter of 2015, up $144 million or 13% from the prior year. Adjusted net income was
$1,264 million, up $153 million or 14% from the prior year, with good income growth across all of our operating groups. Adjusted results for the
quarter exclude the amortization of acquisition-related intangible assets of $43 million ($33 million after-tax) which were charged to the non-interest
expense of the operating groups and acquisition integration costs of $20 million ($17 million after-tax) which were primarily recorded in non-interest
expense. Acquisition integration costs related to F&C were charged to Wealth Management and acquisition integration costs related to GE Capital’s
Transportation Finance business were charged to Corporate Services.
Reported EPS of $1.83 and adjusted EPS of $1.90 were both up 17% from the prior year. Return on equity was 12.9% and adjusted return on
equity was 13.5%.
Amounts in the rest of this Review of Fourth Quarter 2015 Performance section are stated on an adjusted basis. Summary income statements
and data for the quarter and comparative quarters are outlined on page 67.
The combined P&C banking business adjusted net income of $782 million was up 11%. Canadian P&C results increased 7%, driven by higher
revenue and strong credit performance, partially offset by higher expenses. U.S. P&C adjusted net income increased 22% on a Canadian dollar basis
and increased 3% on a U.S. dollar basis, driven by lower provisions for credit losses. Wealth Management adjusted net income was $271 million, up
8% from a year ago. Adjusted net income in traditional wealth was $214 million, driven by a gain on sale and underlying business growth, despite
softer equity markets, partially offset by a legal reserve. Adjusted net income in traditional wealth was up $79 million or 60%. Adjusted net income in
insurance was $57 million, compared to $117 million a year ago, primarily due to high actuarial benefits in the prior year. BMO Capital Markets results
increased 27% due to higher revenue. Corporate Services adjusted results were better as lower revenue was more than offset by lower expenses,
and credit loss recoveries.
Total revenue of $4,984 million increased $344 million or 7% from the fourth quarter a year ago. On a net revenue basis, revenue increased
$377 million or 9%, including the 6% impact of the stronger U.S. dollar. Canadian P&C revenue increased due to higher balances across most products
and increased non-interest revenue. U.S. P&C revenue increased 19% on a Canadian dollar basis and was consistent with the prior year on a
U.S. dollar basis as higher loan and deposit volume and mortgage banking revenue were offset by lower net interest margin. Wealth Management
results increased on a net revenue basis, with traditional wealth revenue benefitting from a gain on sale and higher fee-based revenue, partially
offset by lower brokerage commissions. Net insurance revenue decreased mainly due to high actuarial benefits in the prior year. BMO Capital Markets
revenue was up due to higher trading revenue, including the unfavourable impact of implementing a funding valuation adjustment in the prior year
and higher securities commissions and fees. Investment and Corporate Banking revenue increased due to higher lending revenue. Both Trading
Products and Investment and Corporate Banking revenue were impacted by lower securities gains. Corporate Services revenue was lower due to a
higher group teb adjustment and lower treasury-related revenue.
Net interest income of $2,367 million increased $189 million or 9% from a year ago, due to the impact of the stronger U.S. dollar and volume
growth, partially offset by lower net interest margin. BMO’s overall net interest margin decreased by 3 basis points to 1.57%. Average earning assets
increased $58 billion or 11% to $597 billion, including a $42 billion increase as a result of the stronger U.S. dollar.
Non-interest revenue increased $188 million or 9% on a net revenue basis to $2,350 million. Excluding the impact of the stronger U.S. dollar, net
non-interest revenue increased 3%. Increases in other non-interest revenue and mutual fund revenues were partially offset by lower net insurance
revenue, underwriting and advisory fees, and securities gains.
The total provision for credit losses was $128 million, a decrease of $42 million from the prior year, due to net recoveries in Corporate Services
and lower provisions in Canadian P&C. There was no net change to the collective allowance in the quarter.
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $265 million, down $35 million from the fourth quarter a year
ago, when lower long-term interest rates increased our policy benefit liabilities, partially offset by increased underlying business premiums in the
current quarter. The decrease was largely offset in revenue.
Adjusted non-interest expense increased $198 million or 7% to $3,032 million. Excluding the impact of the stronger U.S. dollar, adjusted non-
interest expense was well controlled, up by $9 million or less than 1%. On a net revenue basis, adjusted operating leverage was positive 1.8% year
over year. On a net revenue basis and excluding the impact of the stronger U.S. dollar, adjusted operating leverage was positive 2.6% year over year.
The adjusted efficiency ratio was 60.8%, and was 64.2% on a net revenue basis, improving 110 basis points from the prior year.
The adjusted provision for income taxes of $295 million increased $70 million from a year ago. The adjusted effective tax rate was 18.9% in the
current quarter, compared with 16.8% a year ago. The higher adjusted tax rate was primarily due to a higher proportion of income from higher tax-
rate jurisdictions. On a teb basis, the adjusted effective tax rate for the quarter was 24.7%, compared with 22.6% a year ago.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 63