Bank of Montreal 2015 Annual Report Download - page 53

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
2014 Financial Performance Review
The preceding discussions in the MD&A focused on our performance in fiscal 2015. This section summarizes our performance in fiscal 2014 relative to
fiscal 2013. As noted on page 26, certain prior year data has been reclassified to conform to the presentation in 2015, including restatements arising
from transfers between operating groups. In addition, commencing in the first quarter of 2015, insurance claims, commissions and changes in policy
benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance revenue in non-interest revenue. Further
information on restatements is provided on page 46.
Net Income
Net income increased $138 million or 3% to $4,333 million in 2014 and EPS increased $0.24 or 4% to $6.41. Adjusted net income increased
$230 million or 5% to $4,453 million and adjusted EPS increased $0.38 or 6% to $6.59, reflecting strong adjusted net income growth of 11% in
Canadian P&C, 4% growth in BMO Capital Markets and 2% growth in U.S. P&C on a U.S. dollar basis. There was a modest decline in Wealth
Management, due to a $121 million after-tax security gain in the prior year, and lower results in Corporate Services.
Adjusting items are detailed in the Non-GAAP Measures section on page 33.
Return on Equity
Return on equity and adjusted return on equity were 14.0% and 14.4%, respectively, in 2014, compared with 14.9% and 15.0%, respectively, in
2013. There was an increase of $147 million in earnings ($239 million in adjusted earnings) available to common shareholders. In 2014, we held
higher levels of average common shareholders’ equity as a result of increased capital expectations for banks internationally. Average common
shareholders’ equity increased $2.7 billion from 2013.
Revenue
Revenue increased $1,393 million or 8% to $18,223 million in 2014. Adjusted revenue increased $2,084 million or 13% to $18,223 million. Excluding
the impact of the stronger U.S. dollar, adjusted revenue increased $1,761 million or 11%, due to growth in Wealth Management, Canadian P&C and
BMO Capital Markets.
Provisions for Credit Losses
The provision for credit losses was $561 million in 2014, down from $587 million in 2013 and up from $357 million in 2013 on an adjusted basis.
There were no adjusting items in 2014. The increase in adjusted PCL was due to a significant reduction in recoveries on the purchased credit impaired
portfolio and the inclusion of provisions on the purchased performing loan portfolio in adjusted PCL in 2014, offset in part by reduced provisions in
Canadian P&C and U.S. P&C.
Non-Interest Expense
Non-interest expense increased $695 million or 7% to $10,921 million in 2014. Adjusted non-interest expense increased $1,006 million or 10% to
$10,761 million. Excluding the impact of the stronger U.S. dollar, adjusted non-interest expense increased 8%, primarily due to continued investment
in the business, higher employee-related costs, including severance, increased regulatory costs and the acquired F&C business.
Provision for Income Taxes
The provision for income taxes was $903 million in 2014, compared with $1,055 million in 2013. The reported effective tax rate in 2014 was
17.2%, compared with 20.1% in 2013. The adjusted provision for income taxes was $943 million in 2014, compared with $1,037 million in 2013.
The adjusted effective tax rate in 2014 was 17.5%, compared with 19.7% in 2013. The lower adjusted effective tax rate was mainly attributable
to higher tax-exempt income and a lower proportion of income from higher tax-rate jurisdictions.
Canadian P&C
Canadian P&C reported net income of $2,016 million in 2014, up $204 million or 11% from 2013. Revenue increased $385 million or 6% to
$6,405 million. Revenue growth was at or above 6% in each quarter of 2014. Revenue increased $244 million or 6% in our personal banking business
and revenue increased $141 million or 7% in our commercial banking business, mainly driven by growth in balances and fees across most products.
Non-interest expense was $3,182 million, up $127 million or 4% from the prior year, primarily due to continued investment in the business, net of
expense management.
U.S. P&C
Net income in U.S. P&C of $654 million in 2014 increased $64 million or 11% from 2013, while adjusted net income of $706 million increased
$61 million or 9%. All amounts in the remainder of this section are on a U.S. dollar basis.
Net income of $597 million in 2014 increased $18 million or 3% from the prior year. Adjusted net income of $644 million increased $11 million
or 2%. Revenue decreased $52 million or 2% to $2,880 million, as the benefits of strong commercial loan growth were more than offset by the
effects of lower net interest margin and reduced mortgage banking revenue. Non-interest expense of $1,899 million increased $7 million. Adjusted
non-interest expense of $1,832 million increased $21 million, as we continued to focus on productivity while making selective investments in the
business and responding to regulatory changes.
Wealth Management
Wealth Management net income was $780 million in 2014, compared to $827 million in 2013. Adjusted net income was $843 million in 2014,
compared to $854 million in 2013. Results in 2014 reflected the contribution from the acquired F&C business and results in 2013 included a
$121 million after-tax security gain. Adjusted net income in traditional wealth was $557 million in 2014, compared to $593 million in 2013, as strong
growth from the businesses of $85 million or 18%, including the contribution from the acquired F&C business, was more than offset by the impact of
the security gain in the prior year. Adjusted net income in insurance was $286 million, up $25 million or 9%. Wealth Management revenue of
$3,833 million in 2014 increased $384 million or 11% on a basis that nets CCPB with insurance revenue. Revenue in traditional wealth increased
$525 million or 19%, excluding the security gain in the prior year, reflecting growth in client assets and a contribution from the F&C acquisition.
64 BMO Financial Group 198th Annual Report 2015