BMO Financial Group Reports First Quarter Net Income of $225 Million, Reflecting Difficult Conditions in the Credit and Capital Markets Environments
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Personal and Commercial Banking Canada Continues to Report Strong Revenue
and Net Income
Good Underlying Performance in BMO Capital Markets
Tier 1 Capital Ratio Remains Strong at 10.21%
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Financial Highlights:
- Net income of $225 million, down $30 million or 12% from a year ago
- EPS(1) of $0.39 and cash EPS(2) of $0.40, down $0.08 or 17% and $0.09
or 18%, respectively, from a year ago
- Adjusted cash EPS(2) of $1.09 after excluding capital markets
environment charges of $359 million after tax ($0.69 per share)
- Provisions for credit losses of $428 million, up $198 million from a
year ago
- Our strong Tier 1 Capital Ratio, at 10.21%, and strong liquidity
position were further enhanced during the quarter
ST. JOHN'S, March 3 /CNW/ - For the first quarter ended January 31, 2009,
BMO Financial Group reported net income of $225 million or $0.39 per share.
Canadian personal and commercial banking had a strong quarter, with net income
of $325 million, up $34 million or 12% from a year ago, despite a slowing
economy.
Results included losses of $359 million after tax ($0.69 per share) in
respect of capital markets environment charges, detailed in the Effects of the
Capital Markets Environment on First Quarter Results section.
"Our core business performed well. P&C Canada, our Canadian personal and
commercial banking unit, reported strong year-over-year growth, with higher
revenues and net income up 12%," said Bill Downe, President and Chief
Executive Officer, BMO Financial Group. "We are adding attractive products
that customers want, and we are making gains in customer loyalty and market
share. Our focus on the customer is paying off and our success in this area is
reflected in strong results again this quarter.
"Financial institutions everywhere continue to face headwinds in credit
markets and the capital markets environment," said Mr. Downe. "BMO is well
positioned to meet these challenges, having accessed markets to bolster our
capital position and having further strengthened our strong liquidity in the
period, albeit at a higher cost. The difficult conditions and our capital
strength provide us with the flexibility to acquire attractive businesses at
good value, as demonstrated by our agreement in the quarter to acquire the
Canadian life insurance business of American International Group.
"Reported results in U.S. personal and commercial banking were up from a
year ago and the fourth quarter. Management remains focused on core
operations, new customer acquisition and serving our customers effectively. In
the quarter, there was deposit growth and improved deposit spreads, with
customer loyalty scores remaining consistently high relative to the fourth
quarter and up from a year ago," added Mr. Downe.
In our wealth management business, revenue from term investment products
increased year over year. Results were affected by reduced levels of managed
and administered assets due primarily to the significant declines in equity
markets. Results this quarter were also affected by a further $11 million
after-tax charge in respect of last quarter's decision to assist certain U.S.
clients by offering to purchase auction-rate securities from their accounts.
"BMO Capital Markets showed strength in equity and foreign exchange
trading, and in our corporate banking and interest- rate-sensitive businesses.
Equity underwriting performed well in the quarter as we participated in a
number of new issuances," said Mr. Downe. Overall performance in BMO Capital
Markets was affected by $348 million of after-tax charges as explained in the
Effects of the Capital Markets Environment on First Quarter Results section.
Market conditions continued to be extremely volatile through the first
quarter, due to concerns related to the U.S. real estate market and global
recessionary pressures. These concerns have led to continued weakness in the
credit environment and further tightening of many credit markets. Provisions
for credit losses in the current quarter totalled $428 million, comprised of
$111 million of specific provisions in Canada and $317 million in the United
States, with no increase in the general allowance. Specific provisions
increased $258 million from a year ago, primarily related to loans in our U.S.
personal and commercial business. In the first quarter of 2008, provisions
totalled $230 million, consisting of $170 million of specific provisions and a
$60 million increase in the general allowance.
BMO employs an expected loss provisioning methodology whereby expected
credit losses are charged to the operating groups and the difference between
expected losses and actual losses is charged (or credited) to Corporate
Services.
Corporate Services incurred a net loss in the quarter of $370 million,
with approximately one-half due to provisions for credit losses allocated to
Corporate Services under our expected loss provisioning methodology and the
remaining half due to lower revenues. Low revenues in Corporate Services were
attributable to three factors: the impact of market interest rate changes that
created a negative carry on certain asset liability interest rate positions;
mark-to-market losses on hedging activities; and funding activities to further
enhance our strong liquidity position. These factors coupled with increased
provisions for credit losses, primarily related to U.S. real estate, muted the
continuing strong fundamentals of our core businesses. Capital and
term-funding actions taken through the first quarter contributed to BMO's
strong capital and liquidity position; the majority of our estimated fiscal
2009 term-funding requirements have now been met.
Today, we announced a second quarter dividend of $0.70 per common share,
reflective of an annual dividend of $2.80 per common share.
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(1) All Earnings per Share (EPS) measures in this document refer to
diluted EPS unless specified otherwise.
(2) The adjustments that change results under generally accepted
accounting principles (GAAP) to cash results are outlined in the
Non-GAAP Measures section at the end of Management's Discussion and
Analysis (MD&A), where such non-GAAP measures and their closest GAAP
counterparts are outlined. Adjusted cash EPS is also a non-GAAP
measure; please see details in the Effects of the Capital Markets
Environment on First Quarter Results section and also the Non-GAAP
Measures section.
Operating Segment Overview
P&C Canada
Net income was $325 million, up $34 million or 12% from a year ago,
despite a slowing economy. Revenue increased across our personal, commercial
and cards businesses, led by volume growth and improved net interest margin.
Margins increased from a year ago due to higher volumes in more profitable
products, pricing initiatives in light of rising long-term funding costs, and
favourable prime rates relative to rates on Bankers' Acceptances (BA rates),
partially offset by lower mortgage refinancing fees.
We achieved strong results this quarter in tough market conditions. Our
customers are telling us our services have improved. Our focus on the quality
of our customer relationships has translated into improved loyalty scores and
revenue growth. In 2009, our objective remains to increase market share in an
environment of slower growth.
In personal banking, we introduced a new high interest Smart Saver
Account where customers can open an account online, a new Tax-Free Savings
Account and the BMO First Home Essentials kit to guide first time homebuyers
step-by-step in financing, choosing and purchasing their first home. We
launched a new 5-year variable rate mortgage product on February 9th to
provide our customers with more choices in managing their mortgage needs. In
addition, on January 13, 2009, we announced a definitive agreement with
American International Group, Inc. (AIG) to purchase AIG's Canadian life
insurance business, providing BMO customers with a broader suite of BMO-
branded wealth and insurance products. The acquisition is expected to close by
June 1, 2009, subject to regulatory approval.
In commercial banking, we are progressing toward our goal of becoming the
bank of choice for business across Canada. In the tight credit environment, we
continue to make credit available to our small and medium-sized business
clients. Loan growth was 5.8% year over year. We rank second in Canadian
business market share at 19.93%, up 56 basis points year over year. Customer
service scores improved in both branch managed and relationship managed
businesses.
We also grew our card business, leveraging the launch of new products
last year including Shell Mosaik MasterCard, AIR MILES and CashBack rewards.
Cards and Payment Services revenue increased $57 million or 24% year over
year. Our brand marketing and promotions together with better integration of
card sales across the branch system have resulted in continued growth in the
card portfolio.
P&C U.S. (all amounts in U.S. $)
Net income was $27 million, up $1 million or 3.4% from a year ago. Cash
net income was $33 million, unchanged from a year ago. In the quarter, there
was growth in deposits and loans as well as improved deposit spreads. We
continue to make good progress in our core business with higher revenues and
better operating leverage. The weak credit environment is affecting results as
there are higher levels of non-performing loans and costs of managing our
portfolio have increased, which lowered net income in the current quarter by
$10 million, compared with $4 million a year ago. We continue to focus on
managing discretionary costs. We also continue to be focused on winning new
customers, including consumer and commercial customers, while maintaining our
strong underwriting standards.
Revenue increased $29 million or 13%, largely driven by the $19 million
impact of our Wisconsin acquisitions and improved deposit spreads. Excluding
expenses associated with the Wisconsin acquisitions of $16 million, expenses
increased $6 million or 3.7%.
Net interest margin increased from last year due to our continued focus
on pricing and new deposit generation.
Private Client Group
Net income was $57 million, compared with $96 million a year ago, as
results were impacted by a more difficult operating environment and by a $17
million ($11 million after tax) charge in respect of last quarter's decision
to assist certain U.S. clients by offering to purchase auction-rate securities
from their accounts.
Revenue for the quarter decreased $61 million or 12% from a year ago,
primarily due to lower fee-based and commission revenue in Full-Service
Investing and lower revenue in our mutual fund businesses on significantly
lower assets, which have been impacted by difficult market conditions. This
was partially offset by increased revenue from term investment products.
Assets under management and administration have been affected by softer
market conditions and decreased $20 billion or 8.3%, despite the $16 billion
benefit related to the stronger U.S. dollar. There was strong volume growth in
term deposits, which increased $8 billion or 21% year over year.
Given recent challenges in the global economy and equity markets, we are
making adjustments in how we spend and allocate resources. We will continue to
deliver the high level of service our clients expect while continuing to
responsibly manage our employee and discretionary expenses in these difficult
market conditions.
The group continues to innovate on its products and services. During the
quarter, BMO was proud to be the first bank to offer a Registered Disability
Savings Plan (RDSP), a new federal government initiative introduced to enhance
the long-term financial security of people with disabilities. BMO RDSPs
feature a wide range of investment solutions that are suitable for long-term
investors including guaranteed investment certificates, mutual funds and
managed solutions portfolios.
For the third year in a row, BMO Mutual Funds was ranked first for client
service in both the English and French programs in Dalbar's annual rankings of
mutual funds. As well, BMO InvestorLine ranked second for its service to
investors in the direct brokerage rankings.
In addition, we acquired a further 18% equity stake in Virtus Investment
Partners, Inc. and now hold a 23% voting interest through voting preferred
shares. Virtus provides investment management products and services to
individuals and institutions, operating as a multi-manager asset management
business that comprises a number of individual affiliated wholly-owned
managers.
BMO Capital Markets
Net income was $179 million, up $208 million from a year ago. Revenue
rose $454 million to $727 million. There was significantly higher trading
revenue, stronger corporate banking revenues and continued robust performance
in our interest-rate-sensitive businesses. Results were lowered by unrealized
losses totalling $511 million ($348 million after tax) due to credit valuation
adjustments, the Canadian credit protection vehicle Apex, and third-party
asset-backed commercial paper subject to the completed Montreal Accord as
described in the Effects of the Capital Markets Environment on First Quarter
Results section. Results a year ago reflected charges of $488 million ($324
million after tax) in respect of the capital markets environment, as described
in the Notable Items section at the end of the MD&A.
Market conditions allowed the group to achieve strong earnings during the
quarter through a diversified, dynamic portfolio of businesses that is focused
on serving the evolving needs of our clients. This focus has resulted in
strong equity and foreign exchange trading, higher corporate banking revenues
and a turnaround in equity underwriting activity as issuers chose to bolster
their capital base in the current economic environment. Consistent with this
strategy, we continue to focus on improving our risk-return profile by
optimizing our capital usage and adjusting our trading strategies accordingly.
BMO Capital Markets was involved in 102 new issues in the quarter
including 20 corporate debt deals, 29 government deals, 14 issues of preferred
shares and 39 common equity transactions, raising $43.3 billion, up $19.8
billion from last quarter.
Management's Discussion and Analysis
MD&A commentary is as of March 3, 2009. Unless otherwise indicated, all
amounts are in Canadian dollars and have been derived from financial
statements prepared in accordance with Canadian generally accepted accounting
principles (GAAP). The MD&A should be read in conjunction with the unaudited
consolidated financial statements for the period ended January 31, 2009,
included in this document, and the annual MD&A for the year ended October 31,
2008, included in BMO's 2008 Annual Report. The material that precedes this
section comprises part of this MD&A.
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Bank of Montreal uses a unified branding approach that links all of the
organization's member companies. Bank of Montreal, together with its
subsidiaries, is known as BMO Financial Group. As such, in this document,
the names BMO and BMO Financial Group mean Bank of Montreal, together
with its subsidiaries.
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Summary Data
(Unaudited)
(Canadian $ in Increase Increase
millions, except (Decrease) (Decrease)
as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
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Net interest income 1,331 117 10% (82) (6%)
Non-interest revenue 1,111 299 37% (289) (21%)
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Revenue 2,442 416 21% (371) (13%)
Specific provision for
credit losses 428 258 +100% 113 36%
Increase in the general
allowance - (60) (100%) (150) (100%)
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Total provision for
credit losses 428 198 86% (37) (8%)
Non-interest expense 1,841 227 14% 15 1%
Restructuring charge - - - 8 100%
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Total non-interest
expense 1,841 227 14% 23 1%
Recovery of income taxes 71 (20) (22%) 22 45%
Non-controlling interest
in subsidiaries 19 1 3% - -
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Net income 225 (30) (12%) (335) (60%)
Amortization of
acquisition-related
intangible assets
(after tax)(1) 8 - - (2) (12%)
Cash net income(2) 233 (30) (11%) (337) (59%)
Earnings per share -
basic ($) 0.39 (0.09) (19%) (0.67) (63%)
Earnings per share -
diluted ($) 0.39 (0.08) (17%) (0.67) (63%)
Cash earnings per share
- diluted ($)(2) 0.40 (0.09) (18%) (0.68) (63%)
Return on equity (ROE) 4.9% (1.8%) (9.1%)
Cash ROE(2) 5.2% (1.7%) (9.1%)
Productivity ratio 75.4% (4.3%) 10.8%
Cash productivity
ratio(2) 75.0% (4.2%) 10.8%
Operating leverage 6.4% nm nm
Cash operating
leverage(2) 6.4% nm nm
Net interest margin
on earning assets 1.51% 0.06% (0.20%)
Effective tax rate (41.0%) 9.3% (31.8%)
Capital Ratios
Tier 1 Capital Ratio 10.21% 0.73% 0.44%
Total Capital Ratio 12.87% 1.61% 0.70%
Net income:
Personal and Commercial
Banking 359 42 13% 14 4%
P&C Canada 325 34 12% (8) (2%)
P&C U.S. 34 8 27% 22 +100%
Private Client Group 57 (39) (40%) (18) (24%)
BMO Capital Markets 179 208 +100% (111) (38%)
Corporate Services,
including Technology
and Operations (T&O) (370) (241) (+100%) (220) (+100%)
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BMO Financial Group
Net Income 225 (30) (12%) (335) (60%)
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(1) The amortization of non-acquisition-related intangible assets is not
added back in the determination of cash net income.
(2) These are non-GAAP amounts or non-GAAP measures. Please see the Non-
GAAP Measures at the end of the MD&A, which outlines the use of non-
GAAP measures in this document.
nm - not meaningful.
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Management's Responsibility for Financial Information
BMO's CEO and Interim CFO have signed certifications relating to the
appropriateness of the financial disclosures in our interim MD&A and unaudited
interim consolidated financial statements for the period ended January 31,
2009 and relating to the design of our disclosure controls and procedures and
internal control over financial reporting.
BMO's internal control over financial reporting includes policies and
procedures that: pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of BMO; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the financial statements in accordance with
Canadian generally accepted accounting principles and the requirements of the
Securities and Exchange Commission in the United States, as applicable, and
that receipts and expenditures of BMO are being made only in accordance with
authorizations of management and directors of BMO; and provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of BMO's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
There were no changes in our internal control over financial reporting
during the quarter ended January 31, 2009 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
As in prior quarters, BMO's audit committee reviewed this document,
including the attached unaudited interim consolidated financial statements,
and BMO's Board of Directors approved the document prior to its release.
A comprehensive discussion of our businesses, strategies and objectives
can be found in Management's Discussion and Analysis in BMO's 2008 Annual
Report, which can be accessed on our web site at
www.bmo.com/investorrelations. Readers are also encouraged to visit the site
to view other quarterly financial information.
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Caution Regarding Forward-Looking Statements
Bank of Montreal's public communications often include written or oral
forward-looking statements. Statements of this type are included in this
document, and may be included in other filings with Canadian securities
regulators or the U.S. Securities and Exchange Commission, or in other
communications. All such statements are made pursuant to the 'safe harbor'
provisions of, and are intended to be forward-looking statements under, the
United States Private Securities Litigation Reform Act of 1995 and any
applicable Canadian securities legislation. Forward-looking statements may
involve, but are not limited to, comments with respect to our objectives and
priorities for 2009 and beyond, our strategies or future actions, our targets,
expectations for our financial condition or share price, and the results of or
outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make
assumptions and are subject to inherent risks and uncertainties. There is
significant risk that predictions, forecasts, conclusions or projections will
not prove to be accurate, that our assumptions may not be correct and that
actual results may differ materially from such predictions, forecasts,
conclusions or projections. We caution readers of this document not to place
undue reliance on our forward-looking statements as a number of factors could
cause actual future results, conditions, actions or events to differ
materially from the targets, expectations, estimates or intentions expressed
in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be
influenced by many factors, including but not limited to: general economic and
market conditions in the countries in which we operate; interest rate and
currency value fluctuations; changes in monetary policy; the degree of
competition in the geographic and business areas in which we operate; changes
in laws; judicial or regulatory proceedings; the accuracy and completeness of
the information we obtain with respect to our customers and counterparties;
our ability to execute our strategic plans and to complete and integrate
acquisitions; critical accounting estimates; operational and infrastructure
risks; general political conditions; global capital market activities; the
possible effects on our business of war or terrorist activities; disease or
illness that impacts on local, national or international economies;
disruptions to public infrastructure, such as transportation, communications,
power or water supply; and technological changes.
We caution that the foregoing list is not exhaustive of all possible
factors. Other factors could adversely affect our results. For more
information, please see the discussion on pages 30 and 31 of BMO's 2008 Annual
Report, which outlines in detail certain key factors that may affect BMO's
future results. When relying on forward-looking statements to make decisions
with respect to Bank of Montreal, investors and others should carefully
consider these factors, as well as other uncertainties and potential events,
and the inherent uncertainty of forward-looking statements. Bank of Montreal
does not undertake to update any forward-looking statement, whether written or
oral, that may be made, from time to time, by the organization or on its
behalf, except as required by law. The forward-looking information contained
in this document is presented for the purpose of assisting our shareholders in
understanding our financial position as at and for the periods ended on the
dates presented and our strategic priorities and objectives, and may not be
appropriate for other purposes.
In determining that the acquisition of American International Group,
Inc.'s Canadian life insurance business is expected to close by June 1, 2009,
subject to regulatory approval, we have assumed that our joint plans for the
completion of pre-closing activities proceed according to the mutually agreed
schedule and that the results of our pre-closing activities are consistent
with our expectations. In determining that the acquisition is expected to
reduce our Tier 1 and Total Capital Ratios by less than 15 and 25 basis
points, respectively, we have assumed that the purchase price will approximate
$375 million.
In concluding that mark-to-market adjustments to derivative hedges that
do not qualify for hedge accounting are expected to reverse over the life of
the hedges with no economic loss, we have assumed that we will hold the
derivative instruments until their expiry.
Assumptions about the level of asset sales, expected asset sale prices,
net funding cost, credit quality and risk of default and losses on default of
the underlying assets of the structured investment vehicles were material
factors we considered when establishing our expectations regarding the
structured investment vehicles discussed in this document, including the
amount to be drawn under the BMO liquidity facilities and the expectation that
the first-loss protection provided by the subordinate capital notes will
exceed future losses. Key assumptions included that assets would continue to
be sold with a view to reducing the size of the structured investment
vehicles, under various asset price scenarios, and that the level of defaults
and losses will be consistent with the credit quality of the underlying assets
and our current expectations regarding continuing difficult market conditions.
Assumptions about the level of defaults and losses on defaults were
material factors we considered when establishing our expectation of the future
performance of the transactions that Apex Trust has entered into. Key
assumptions included that the level of defaults and losses on defaults would
be consistent with historical experience. Material factors that were taken
into account when establishing our expectations of the future risk of credit
losses in Apex Trust included industry diversification in the portfolio,
initial credit quality by portfolio and the first-loss protection incorporated
into the structure.
Assumptions about the performance of the Canadian and U.S. economies in
2009 and how it would affect our businesses were material factors we
considered when setting our strategic priorities and objectives and our
outlook for our businesses. Key assumptions included that the Canadian and the
U.S. economies would contract in the first half of 2009, and that interest
rates and inflation would remain low. Our current expectations are for weaker
economic conditions and lower interest rates than we anticipated at the end of
fiscal 2008. We also assumed that housing markets in Canada would weaken in
2009 and strengthen in the second half of the year in the United States. We
assumed that capital markets would improve somewhat in the second half of 2009
and that the Canadian dollar would strengthen modestly relative to the U.S.
dollar. In determining our expectations for economic growth, both broadly and
in the financial services sector, we primarily consider historical economic
data provided by the Canadian and U.S. governments and their agencies. Tax
laws in the countries in which we operate, primarily Canada and the United
States, are material factors we consider when determining our sustainable
effective tax rate.
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Regulatory Filings
Our continuous disclosure materials, including our interim filings,
annual MD&A and audited consolidated financial statements, our Annual
Information Form and the Notice of Annual Meeting of Shareholders and Proxy
Circular are available on our web site at www.bmo.com/investorrelations, on
the Canadian Securities Administrators' web site at www.sedar.com and on the
EDGAR section of the SEC's web site at www.sec.gov.
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Economic Outlook and Review
The Canadian economy is expected to contract about 2% in 2009, marking
the nation's first recession in 17 years. Declining global demand and lower
commodity prices are expected to continue to reduce exports. Stimulative
monetary and fiscal polices, however, should encourage a gradual recovery late
in the year. Housing market activity and residential mortgage growth are
expected to moderate further amid deepening consumer caution. Growth in
consumer spending and personal credit should slow in the face of rising
unemployment, though remain positive due to low interest rates. Business
investment and loan growth are expected to decline, led by the resource and
manufacturing sectors. The unemployment rate will likely climb above 8% before
year end, about three percentage points above last year's low but well below
the highs of previous recessions. The Bank of Canada is expected to reduce
overnight rates to new record lows in 2009. The Canadian dollar and commodity
prices are projected to remain weak in the near term, but should strengthen as
the global economy recovers later this year.
The U.S. economy is projected to remain in a deep recession in the first
half of 2009. A slow recovery is expected to emerge late in the year in
response to stimulative monetary and fiscal policies and lower fuel prices.
Despite greatly improved affordability, housing markets should remain weak in
the first half of the year because of still-high inventories of unsold homes,
tight credit standards and heavy job losses, implying continued softness in
demand for new mortgages. Consumer spending and personal credit will likely
decline as households rebuild savings and pay down debt. Companies will likely
continue to reduce spending, resulting in weak growth in business credit. The
unemployment rate is expected to climb above 9% later this year, the highest
in 25 years. Certain capital market activities should remain weak until the
uncertainty in credit markets and the economy abates. The Federal Reserve is
expected to keep rates near zero in 2009, and to employ a wide range of
special lending programs to increase the availability of credit to businesses
and households.
This Economic Outlook section contains forward-looking statements. Please
see the Caution Regarding Forward-Looking Statements.
Effects of the Capital Market Environment on First Quarter Results
The market environment remains weak. Results in the first quarter of 2009
were affected by unrealized capital markets environment charges of $528
million ($359 million after tax and $0.69 per share).
BMO Capital Markets recorded unrealized capital markets environment
charges of $511 million ($348 million after tax) in respect of:
- mark-to-market valuations of $214 million ($146 million after tax) on
counterparty credit exposures on derivative contracts, largely as a
result of corporate counterparties credit spreads widening relative
to BMO's;
- charges of $248 million ($169 million after tax) in respect of
exposures to Apex, a Canadian credit protection vehicle; and
- mark-to-market valuations of $49 million ($33 million after tax) on
our holdings of non-bank-sponsored asset-backed commercial paper
(ABCP) on completion of the Montreal Accord. Our holdings are now
valued at 45% of their face value.
PCG also recorded unrealized charges of $17 million ($11 million after
tax) related to auction-rate securities.
The $528 million of charges outlined above reduced trading non-interest
revenue ($285 million), investment securities gains ($226 million) and other
income ($17 million).
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net
income, revenues, expenses, provisions for credit losses and income taxes were
increased relative to the first and fourth quarters of 2008 by the
strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange
rate, expressed in terms of the Canadian dollar cost of a U.S. dollar, rose by
23% from a year ago. The average exchange rate in the current quarter rose by
11% from the fourth quarter of 2008. The following table indicates the
relevant average Canadian/U.S. dollar exchange rates and the impact of changes
in the rates.
Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results
Q1-2009
vs. vs.
(Canadian $ in millions, except as noted) Q1-2008 Q4-2008
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Canadian/U.S. dollar exchange rate (average)
Current period 1.2271 1.2271
Prior period 0.9984 1.1107
Increased revenue 170 87
Increased expense (92) (47)
Increased provision for credit losses (60) (30)
Increased income tax recovery 5 2
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Increased net income 23 12
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At the start of each quarter, BMO enters into hedging transactions that
are expected to partially offset the pre-tax effects of exchange rate
fluctuations in the quarter on our expected U.S. dollar net income for that
quarter. As such, these activities partially mitigate the impact of exchange
rate fluctuations within a single quarter; however, the hedging transactions
are not designed to offset the impact of year-over-year or quarter-over-
quarter fluctuations in exchange rates. Over the course of the current
quarter, the U.S. dollar strengthened slightly, as the exchange rate increased
from Cdn$1.2045 per U.S. dollar at October 31, 2008 to an average of
Cdn$1.2271. As a result, hedging transactions resulted in an after-tax loss of
$1 million in the quarter. The gain or loss from hedging transactions in
future periods will be determined by both future currency fluctuations and the
amount of underlying future hedging transactions, since the transactions are
entered into each quarter in relation to expected U.S.-dollar-denominated net
income for the next three months.
The effect of currency fluctuations on our investments in foreign
operations is discussed in the Income Taxes section.
Other Value Measures
Net economic profit was negative $219 million (see the Non-GAAP Measures
section), compared with negative $127 million in the first quarter of 2008 and
$145 million in the fourth quarter.
BMO's average annual total shareholder return for the five-year period
ended January 31, 2009 was -6.9%.
Net Income
Q1 2009 vs Q1 2008
Net income was $225 million for the first quarter of 2009, down $30
million or 12% from a year ago. Earnings per share were $0.39, compared with
$0.47. Results for the quarter include $359 million after tax ($0.69 per
share) in respect of capital markets environment charges as set out in the
preceding Effects of the Capital Markets Environment on First Quarter Results
section. Results a year ago included $324 million after tax ($0.64 per share)
for capital markets environment charges, as set out in the Notable Items
section that follows at the end of this MD&A.
Provisions for credit losses were $198 million higher as the credit
environment was considerably weaker than a year ago. Results a year ago
included a $60 million ($38 million after tax) increase in the general
allowance for credit losses.
P&C Canada net income increased a strong $34 million or 12% despite a
slowing economy. Earnings increased in each of its three segments and there
were improved volumes across most businesses with increased net interest
margin.
P&C U.S. net income increased Cdn$8 million, or by US$1 million and 3.4%.
The increase was due to volume growth, improved spreads on deposits and the
benefit of a reduction to a Visa litigation accrual, partially offset by the
impact of the weak credit environment.
Private Client Group net income decreased $39 million or 40%. Results
were lowered by the $11 million after-tax charge for auction-rate securities
as a result of last quarter's decision to assist certain U.S. clients by
offering to purchase auction-rate securities from their accounts. There were
reduced brokerage revenues and mutual fund fees as managed and administered
assets fell due to weaker equity markets.
BMO Capital Markets net income increased $208 million to net income of
$179 million. Current results reflect $348 million of after-tax charges in
respect of the weaker capital markets environment. Last year's results
reflected $324 million of after-tax charges. Revenues were up significantly in
trading, corporate banking and interest-rate-sensitive businesses.
Corporate Services net loss of $370 million was worse than the prior year
by $241 million primarily due to higher provisions for credit losses allocated
to Corporate Services under our expected loss provisioning methodology and to
reduced revenues. Lower revenues were attributable to three factors: the
impact of market interest rate changes that created a negative carry on
certain asset-liability management interest rate positions; mark-to-market
losses on hedging activities; and funding activities to further enhance our
strong liquidity position.
Q1 2009 vs Q4 2008
Net income decreased $335 million or 60% from the fourth quarter. Results
in the fourth quarter were affected by charges of $27 million after tax in
respect of the capital markets environment, as detailed in the Notable Items
section at the end of the MD&A. Provisions for credit losses decreased $37
million as results in the fourth quarter included a $150 million ($98 million
after tax) increase in the general allowance for credit losses.
P&C Canada net income decreased $8 million or 2.2% due to lower revenues.
Fourth quarter revenues included interest on tax refunds, while the current
quarter reflected lower securitization revenue, partially offset by an
improved net interest margin.
P&C U.S. net income rose Cdn$22 million, or by US$16 million to US$27
million, due to lower acquisition integration costs, the reduction to the Visa
litigation accrual and higher spread and volume growth on deposits, partially
offset by the increased negative impact of the weak credit environment.
Private Client Group net income decreased $18 million or 24%. Results in
the prior quarter were affected by $31 million ($19 million after tax) of
charges in respect of actions taken to support U.S. clients in the weak
capital markets environment, compared with the $11 million after-tax charge
recorded in the current quarter. Results reflected reduced brokerage revenues
and lower fee-based revenues largely associated with reduced levels of managed
and administered assets.
BMO Capital Markets net income decreased $111 million or 38%. Charges in
respect of the capital markets environment were considerably higher in the
current quarter, while there were strong performances in a number of core
businesses. Income taxes in the fourth quarter included a $52 million recovery
of prior-period taxes.
Corporate Services net loss of $370 million was $220 million worse than
in the fourth quarter primarily due to reduced revenues. Lower revenues were
attributable to three factors: the impact of market interest rate changes that
created a negative carry on certain asset-liability management interest rate
positions; mark-to-market losses on hedging activities; and funding activities
to further enhance our strong liquidity position.
Revenue
BMO analyzes consolidated revenues on a GAAP basis. However, like many
banks, BMO analyzes revenue of its operating groups and associated ratios
computed using revenue on a taxable equivalent basis (teb). This basis
includes an adjustment that increases GAAP revenues and the GAAP provision for
income taxes by an amount that would raise revenues on certain tax-exempt
securities to a level equivalent to amounts that would incur tax at the
statutory rate. The offset to the group teb adjustments is reflected in
Corporate Services revenues.
Total revenue increased $416 million or 21% from a year ago as revenue
was higher in each of the operating groups except Private Client Group and
Corporate Services.
Revenue decreased $371 million from the fourth quarter of 2008 due to the
capital markets environment charges in the current quarter and the negative
impact of reduced revenues in Corporate Services.
The stronger U.S. dollar increased revenue growth by $170 million or 8.4
percentage points year over year and $87 million or 3.1 percentage points from
the fourth quarter. Changes in net interest income and non-interest revenue
are reviewed in the sections that follow.
Net Interest Income
Net interest income increased $117 million or 9.6% from a year ago,
driven by volume growth in all of the operating groups, partly offset by a
significant decline in Corporate Services. Average earning assets increased
$16 billion, due primarily to the stronger U.S. dollar, acquisitions and
organic loan growth in P&C U.S. and growth in corporate lending in BMO Capital
Markets.
Relative to the fourth quarter, net interest income fell $82 million.
Average earning assets increased $20 billion, due primarily to increased
assets relating to higher customer deposit balances, reflecting the attraction
of bank deposits in difficult times, and increased money market securities
balances in BMO Capital Markets.
BMO's overall net interest margin on earning assets for the first quarter
of 2009 was 1.51%, or 6 basis points higher than in the first quarter of the
prior year and 20 basis points lower than in the fourth quarter. The main
drivers of the change in total bank margin are the level of net interest
income recorded in Corporate Services, the individual group margins and the
change in the magnitude of each operating group's assets. The year-over-year
increase of 6 basis points was mainly due to higher volumes in more profitable
products in P&C Canada and strong performance in interest-rate-sensitive
businesses in BMO Capital Markets, partially offset by reduced net interest
income in Corporate Services. Private Client Group had a significant margin
decline but it is a relatively smaller group and its effect on the total bank
margin change was minimal.
Net interest margins improved 14 basis points in P&C Canada relative to a
year ago due to higher volumes in more profitable products including personal
loans and cards, pricing initiatives in light of rising long-term funding
costs and favourable prime rates relative to BA rates, partially offset by
lower mortgage refinancing fees. Relative to the fourth quarter, P&C Canada
net interest margin improved 10 basis points, due to the same factors outlined
above. The fourth quarter margin was elevated by the impact of interest on tax
refunds. Margins improved in P&C U.S. due to better deposit spreads. BMO
Capital Markets margin rose from a year ago and from the previous quarter
mainly due to higher spreads in interest-rate-sensitive businesses. Corporate
Services net interest income fell significantly. The decline was in large part
due to the negative carry on certain asset-liability management interest rate
positions resulting from the impact of market interest rate changes, and
funding activities to further enhance our strong liquidity position.
Net Interest Margin (teb)(*)
Increase Increase
(Decrease)(Decrease)
vs. vs.
(In basis points) Q1-2009 Q1-2008 Q4-2008
-------------------------------------------------------------------------
P&C Canada 272 14 10
P&C U.S. 305 8 5
-------------------------------------------------------------------------
Personal and Commercial Client Group 279 15 10
Private Client Group 848 (19) (69)
BMO Capital Markets 107 41 24
Corporate Services, including Technology
and Operations (T&O) nm nm nm
-------------------------------------------------------------------------
Total BMO 151 6 (20)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Canadian Retail(xx) 310 19 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(*) Net interest margin is disclosed and computed with reference to
average earning assets, rather than total assets. This basis
provides a more relevant measure of margins and changes in margins.
Operating group margins are stated on a teb basis while total BMO
margin is stated on a GAAP basis.
(xx) Total Canadian retail margin represents the net interest margin of
the combined Canadian business of P&C Canada and Private Client
Group.
nm - not meaningful
Non-Interest Revenue
Non-interest revenue increased $299 million or 37% from a year ago. Non-
interest revenue was affected by the $528 million of charges outlined in the
Effects of the Capital Markets Environment on First Quarter Results section.
They included reductions in trading non-interest revenue ($285 million),
investment securities gains ($226 million) and other income ($17 million).
Non-interest revenue in the first quarter of 2008 was affected by $488 million
of charges outlined in the Notable Items section. They included reductions in
trading non-interest revenue ($420 million), investment securities gains ($23
million) and other income ($45 million).
There was growth in P&C Canada due to higher revenue from cards and
Moneris businesses, and strong growth in BMO Capital Markets due to higher
trading revenues and in Corporate Services due to strong growth in
securitization revenue.
Securitization revenues increased $184 million from a year ago to $264
million. The increase was attributable to $124 million from securitizing
credit card loans and $60 million from securitizing residential mortgages.
Revenues included gains of $26 million on the sale of loans for new
securitizations, up $21 million from a year ago, and gains of $156 million on
sales of loans to revolving securitization vehicles, up $102 million from a
year ago. The securitization of assets results in the recognition of less
interest income ($170 million less in 2009), reduced credit card fees ($126
million less in 2009) and lower provisions for credit losses ($32 million less
in 2009). The combined impact of securitizing assets in the current and prior
periods had no impact on pre-tax income in the current quarter. We securitize
loans primarily to obtain alternate sources of cost-effective funding. In the
quarter, we securitized $4.7 billion of residential mortgage loans.
Securitizations are detailed in Note 4 of the unaudited financial statements.
Investment securities losses were up $312 million largely due to charges
associated with the weak capital markets environment. Private Client Group
non- interest revenue decreased primarily due to lower fee-based and
commission revenue in the full-service investing business and lower mutual
fund revenue.
Relative to the fourth quarter, non-interest revenue decreased $289
million or 21%. The decrease was due to reduced revenues in all of the
operating groups and Corporate Services. P&C Canada revenues decreased due to
lower securitization revenues. Private Client Group non-interest revenue
decreased due to lower revenue in the brokerage businesses and lower fee-based
revenue in the mutual fund businesses. BMO Capital Markets non-interest
revenue fell sharply due to the impact of the current quarter's charges to
trading revenues and investment securities gains, partially offset by the
impact of increased equity underwriting activities. Corporate Services
non-interest revenues fell primarily due to mark-to-market losses on hedging
activities compared with gains in the fourth quarter. The market interest rate
volatility has resulted in mark-to-market adjustments to derivative hedges
that do not qualify for hedge accounting. These adjustments are expected to
reverse over the life of the hedges and no economic loss is expected.
Non-Interest Expense
Non-interest expense increased $227 million from a year ago to $1,841
million. Expenses were raised by the $92 million effect of the stronger U.S.
dollar, the $40 million impact of acquired businesses and a $30 million
increase in severance costs. Adjusted for these items, non-interest expense
increased $65 million or 4.0%. There were higher performance-based costs,
pension costs and business development costs. Performance-based compensation
costs were up in BMO Capital Markets but down in Private Client Group.
There were higher expenses in each of the operating groups, particularly
BMO Capital Markets and P&C U.S. largely due to acquisitions, with modest
growth in Private Client Group. BMO Capital Markets employee costs were higher
primarily due to variable compensation as a result of improved revenue
performance, as well as severance costs. Corporate Services had increased
benefit costs, higher FDIC insurance premiums as a result of enhancements to
protection levels and increased premium rates, and higher capital tax expense
due in part to increased capital.
Cash operating leverage was 6.4% in the quarter.
Non-interest expense increased $23 million or 1.2% from the fourth
quarter. Expenses were raised by the $47 million effect of the stronger U.S.
dollar and by $45 million of stock-based compensation costs for employees
eligible to retire that are booked annually in the first quarter. Adjusted for
these items, non interest expense decreased $69 million, in part due to
reductions in variable compensation and acquisition integration costs,
partially offset by higher severance costs in BMO Capital Markets and higher
benefits costs across the groups.
Risk Management
Market conditions continued to be extremely volatile through the first
quarter, due to concerns related to the U.S. real estate market and global
recessionary pressures. These concerns have led to continued weakness in the
credit environment and further tightening of credit markets.
Specific provisions for credit losses in the current quarter totalled
$428 million, comprised of $111 million in Canada and $317 million in the
United States. In the first quarter of 2008, provisions totalled $230 million,
consisting of $170 million of specific provisions and a $60 million increase
in the general allowance. In the fourth quarter of fiscal 2008, there were
$315 million of specific provisions and a $150 million increase in the general
allowance.
BMO employs a methodology for segmented reporting purposes whereby
expected credit losses are charged to the operating groups quarterly based on
their share of expected credit losses over an economic cycle. The difference
between quarterly charges based on expected losses over the credit cycle and
required quarterly provisions based on actual losses is charged (or credited)
to Corporate Services. The following outlines provisions for credit losses
based on actual losses for the quarter. In the first quarter of 2009, BMO's
$428 million specific provision for credit losses was comprised of $111
million in P&C Canada, $192 million in P&C U.S. and $125 million in BMO
Capital Markets. In the first quarter of 2008, BMO's $170 million specific
provision for credit losses was comprised of $70 million in P&C Canada, $30
million in P&C U.S. and $70 million in BMO Capital Markets. In the fourth
quarter of 2008, BMO's $315 million specific provision for credit losses was
comprised of $99 million in P&C Canada, $96 million in P&C U.S. and $120
million in BMO Capital Markets. There were no provisions in respect of Private
Client Group in any of the periods.
Specific provisions this quarter represented 90 basis points of average
net loans and acceptances compared with 40 basis points a year ago and a 23
basis point average over the past five years. Effective in the first quarter
of 2009, we report credit statistics on a basis that excludes securities
borrowed or purchased under resale agreements from loans. All comparative
figures have been restated.
New impaired loan formations totalled $712 million in the quarter, down
from $806 million in the previous quarter but in line with $708 million in the
same quarter a year ago. The U.S. commercial real estate and manufacturing
sectors accounted for the majority of first quarter formations. There were no
impaired loan sales in the first quarter, consistent with the prior quarter
but compared with $11 million of sales a year ago. Gross impaired loans were
$2,666 million at the end of the first quarter, up from $2,387 million at the
end of the prior quarter due to the formations discussed above.
The total allowance for credit losses was $1,741 million, compared with
$1,747 million in the prior quarter, and was comprised of a specific allowance
of $407 million and a general allowance of $1,334 million. The general
allowance is maintained to absorb impairment in the existing credit portfolio
that cannot yet be associated with specific credit assets. It is assessed on a
quarterly basis and increased $13 million from the end of the previous fiscal
year due to the change in the Canadian/U.S. dollar exchange rate.
BMO's loan book continues to be comprised largely of more stable consumer
and commercial portfolios which, excluding securities borrowed or purchased
under resale agreements, represented 73.1% of the loan portfolio at the end of
the quarter, down from 73.8% in the previous quarter and 78.2% a year ago. The
declines were due to strong growth in corporate loans. Approximately 88.0% of
the consumer portfolio is comprised of secured loans. Excluding credit card
loans, approximately 90.1% of consumer loans are secured. In the United
States, the consumer portfolio totals US$16.6 billion and is primarily
comprised of three main asset classes: residential first mortgages (39%), home
equity products (31%) and indirect automobile loans (27%).
We expect the credit environment to continue to be challenging through
2009 as the global economy continues to experience a significant slowdown.
BMO's market risk and liquidity and funding management practices and key
measures are outlined on pages 77 to 82 of BMO's 2008 Annual Report. As
disclosed in the preceding quarter, certain positions were transferred from
our trading portfolio to our available-for-sale portfolio in the fourth
quarter of 2008. These positions, however, remained in our Comprehensive VaR
and Issuer Risk measures throughout the fourth quarter. The removal of these
positions from our Comprehensive VaR and Issuer Risk measures in the first
quarter is the primary reason for the decrease in our Trading and Underwriting
Market Value Exposure (MVE) and Earnings Volatility (EV) quarter over quarter.
The interest rate risk associated with these positions is now being captured
in our Interest Rate Risk (accrual) MVE measures. There were no significant
changes to our Trading and Underwriting market risk management practices over
the quarter.
There have been no significant changes to the levels of liquidity and
funding risk over the quarter. We remain satisfied that our liquidity and
funding management framework provides us with a sound position despite recent
market developments. During the quarter our liquidity and funding positions
were strengthened, as reflected by growth in cash resources of $5.3 billion
and core deposits of $9.9 billion. Core deposits provide a stable funding base
as they are generally less responsive to changes in the market environment
than larger institutional deposits. Core deposits are comprised of individual
customer operating and savings deposits and small fixed-date deposits. In the
quarter, deposits from individuals increased by $8.5 billion.
There was no significant change in our structural market risk management
practices during the quarter. There has been an increase in structural market
risk, as reflected in the increase in 12-month earnings volatility in the
attached table. The increase is attributable to the fact that further
reductions in interest rates would be expected to lower yields on assets more
than rates paid on deposits.
This Risk Management section and the following Income Taxes section
contain forward-looking statements. Please see the Caution Regarding Forward-
Looking Statements.
Provisions for Credit Losses (PCL)
(Canadian $ in millions,
except as noted) Q1-2009 Q4-2008 Q1-2008
-------------------------------------------------------------------------
New specific provisions 483 361 205
Reversals of previously established
allowances (19) (23) (13)
Recoveries of loans previously written-off (36) (23) (22)
-------------------------------------------------------------------------
Specific provision for credit losses 428 315 170
Increase in the general allowance - 150 60
-------------------------------------------------------------------------
Provision for credit losses 428 465 230
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Specific PCL as a % of average net loans
and acceptances (annualized) 0.90% 0.68% 0.40%
PCL as a % of average net loans and
acceptances (annualized) 0.90% 1.01% 0.55%
Changes in Gross Impaired Loans and Acceptances (GIL)
(Canadian $ in millions,
except as noted)
-------------------------------------------------------------------------
GIL, Beginning of Period 2,387 1,798 720
Additions to impaired loans & acceptances 712 806 708
Reductions in impaired loans & acceptances(1) 58 170 21
Write-offs (491) (387) (102)
-------------------------------------------------------------------------
GIL, End of Period 2,666 2,387 1,347
-------------------------------------------------------------------------
-------------------------------------------------------------------------
GIL as a % of gross loans & acceptances 1.39% 1.26% 0.79%
GIL as a % of equity and allowances
for credit losses 11.91% 11.34% 7.46%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes impaired amounts returned to performing status, loan sales,
repayments, the impact of foreign exchange fluctuations and offsets
for consumer write-offs which have not been recognized as formations
(Q1-09 $158MM; Q4-08 $137MM; and Q1-08 $87MM).
Aggregate Market Value Exposure and Earnings Volatility for Trading and
Underwriting and Structural Positions ($ millions)(*)
(After-tax Canadian Market value 12-month earnings
equivalent) exposure (MVE) volatility
-------------------------------------------------------------------------
Jan. 31 Oct. 31 Jan. 31 Oct. 31
2009 2008 2009 2008
-------------------------------------------------------------------------
Trading and Underwriting (23.5) (33.4) (18.1) (28.7)
Structural (276.1) (267.9) (100.5) (30.2)
-------------------------------------------------------------------------
BMO Financial Group (299.6) (301.3) (118.6) (58.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(*) Measured at a 99% confidence interval. Losses are in brackets.
Total Trading and Underwriting MVE Summary ($ millions)(*)
As at
For the quarter ended October
January 31, 2009 31, 2008
(Pre-tax Canadian Quarter- Quarter-
equivalent) end Average High Low end
--------------------------------------------------------------- ---------
Commodities Risk (0.4) (0.8) (1.7) (0.4) (0.9)
Equity Risk (9.6) (9.9) (16.3) (5.9) (7.3)
Foreign Exchange Risk (6.3) (1.4) (6.8) (0.7) (1.4)
Interest Rate Risk
(Mark-to-Market)(1) (16.1) (19.4) (29.1) (14.2) (30.6)
Diversification(2) 10.7 9.1 nm nm 6.4
------------------------------------------- ---------
Comprehensive Risk (21.7) (22.4) (31.2) (16.6) (33.8)
Interest Rate Risk
(accrual) (9.8) (11.5) (14.6) (5.7) (11.6)
Issuer Risk (4.7) (5.8) (8.5) (4.2) (6.1)
------------------------------------------- ---------
Total MVE (36.2) (39.7) (52.1) (29.6) (51.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
(*) One-day measure using a 99% confidence interval. Losses are in
brackets and benefits are presented as positive numbers.
(1) In the first quarter of 2009, measures exclude securities transferred
to the available-for-sale portfolio in the fourth quarter of 2008.
(2) Computation of a diversification effect for the high and low is not
meaningful.
Structural Balance Sheet Earnings and Value Sensitivity to Changes in
Interest Rates ($ millions)(*)
Earnings
sensitivity
(After-tax Canadian Economic value over the next
equivalent) sensitivity 12 months
-------------------------------------------------------------------------
Jan. 31 Oct. 31 Jan. 31 Oct. 31
2009 2008 2009 2008
-------------------------------------------------------------------------
100 basis point increase (222.7) (220.8) 10.6 (4.4)
100 basis point decrease 220.8 169.2 (22.1) (21.0)
200 basis point increase (472.3) (488.6) 5.4 (16.2)
200 basis point decrease 417.9 328.4 (123.3) (177.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(*) Losses are in brackets and benefits are presented as positive
numbers.
Income Taxes
As explained in the Revenue section, management assesses BMO's
consolidated results and associated provisions for income taxes on a GAAP
basis. We assess the performance of the operating groups and associated income
taxes on a taxable equivalent basis and report accordingly.
The recovery of income taxes decreased $20 million from the first quarter
of 2008 and increased $22 million from the fourth quarter of 2008, to a
recovery of $71 million. The effective tax rate for the quarter was a recovery
rate of 41.0%, compared with recovery rates of 50.3% in the first quarter of
2008 and 9.2% in the fourth quarter of 2008.
The tax recoveries for the quarter were primarily due to the capital
markets environment charges which resulted in a lower proportion of income for
the quarter from higher-tax-rate jurisdictions. Excluding the impact of
capital markets environment charges, the adjusted effective tax rate for the
quarter was 14.0%, compared with 13.0% in first quarter of 2008. The weak
economic environment as well as difficult credit and capital market conditions
create added uncertainty in the estimation of future financial performance and
therefore the sustainable tax rate. Accordingly, we will not be disclosing a
sustainable tax rate range in the current environment.
BMO hedges the foreign exchange risk arising from its investments in U.S.
operations by funding the investments in U.S. dollars. Under this program, the
gain or loss from hedging and the unrealized gain or loss from translation of
the investments in U.S. operations are charged or credited to shareholders'
equity. For income tax purposes, the gain or loss on the hedging activities
attracts an income tax charge or credit in the current period, which is
charged or credited to shareholders' equity, while the associated unrealized
gain or loss on the investments in U.S. operations does not attract income
taxes until the investments are liquidated. The income tax charge/benefit
arising from a hedging gain/loss is a function of the fluctuation in U.S.
rates from period to period. Hedging of the investments in U.S. operations has
given rise to income tax recoveries in shareholders' equity of $66 million for
the quarter. Refer to the Consolidated Statement of Changes in Shareholders'
Equity included in the attached unaudited consolidated financial statements
for further details.
Summary Quarterly Results Trends
(Canadian $ in millions,
except as noted) Q1-2009 Q4-2008 Q3-2008 Q2-2008
-------------------------------------------------------------------------
Total revenue 2,442 2,813 2,746 2,620
Provision for credit losses
- specific 428 315 434 151
Provision for credit losses
- general - 150 50 -
Non-interest expense 1,841 1,826 1,782 1,680
Restructuring charge - (8) - -
-------------------------------------------------------------------------
Total non-interest expense 1,841 1,818 1,782 1,680
Net income 225 560 521 642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share ($) 0.39 1.06 1.00 1.25
Diluted earnings per share ($) 0.39 1.06 0.98 1.25
Net interest margin on earning
assets (%) 1.51 1.71 1.59 1.48
Effective income tax rate (%) (41.0) (9.2) (12.2) 16.3
Canadian/U.S. dollar exchange
rate (average) 1.23 1.11 1.01 1.01
Net income:
P&C Canada 325 333 331 320
P&C U.S. 34 12 28 30
-------------------------------------------------------------------------
Personal and Commercial Banking 359 345 359 350
Private Client Group 57 75 108 107
BMO Capital Markets 179 290 263 187
Corporate Services, including T&O (370) (150) (209) (2)
-------------------------------------------------------------------------
BMO Financial Group 225 560 521 642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(Canadian $ in millions,
except as noted) Q1-2008 Q4-2007 Q3-2007 Q2-2007
-------------------------------------------------------------------------
Total revenue 2,026 2,200 2,555 2,528
Provision for credit losses
- specific 170 101 91 59
Provision for credit losses
- general 60 50 - -
Non-interest expense 1,614 1,631 1,659 1,614
Restructuring charge - 24 - -
-------------------------------------------------------------------------
Total non-interest expense 1,614 1,655 1,659 1,614
Net income 255 452 660 671
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share ($) 0.48 0.89 1.30 1.31
Diluted earnings per share ($) 0.47 0.87 1.28 1.29
Net interest margin on earning
assets (%) 1.45 1.47 1.61 1.65
Effective income tax rate (%) (50.3) (19.3) 15.7 19.4
Canadian/U.S. dollar exchange
rate (average) 1.00 1.00 1.07 1.14
Net income:
P&C Canada 291 293 361 333
P&C U.S. 26 33 25 29
-------------------------------------------------------------------------
Personal and Commercial Banking 317 326 386 362
Private Client Group 96 101 99 97
BMO Capital Markets (29) 46 194 197
Corporate Services, including T&O (129) (21) (19) 15
-------------------------------------------------------------------------
BMO Financial Group 255 452 660 671
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BMO's quarterly earning trends were reviewed in detail on pages 87 and 88
of the 2008 Annual Report. Readers are encouraged to refer to that review for
a more complete discussion of trends and factors affecting past quarterly
results including the modest impact of seasonal variations in results. The
above table outlines summary results for the second quarter of fiscal 2007
through the first quarter of fiscal 2009.
Notable items have affected revenues in BMO Capital Markets. There were
commodities losses of $171 million and $149 million in the second and third
quarters of 2007 with smaller losses in 2008 as the size and risk of the
portfolio was reduced. The fourth quarter of 2007 through first quarter of
2009 reflected charges related to the effects of the capital markets
environment. The charges were largely reflected in BMO capital markets and
amounted to $318 million, $488 million, ($42 million), $134 million, $45
million and $528 million, respectively. BMO Capital Markets other businesses
that were not affected by notable items performed very strongly over the
course of 2007 but market conditions were softer in 2008 with improvement in
the first quarter of 2009.
Personal and Commercial Banking has continued to benefit from strong
volume growth over 2007 and into 2009, with favourable movements in market
share in a number of key businesses. Its focus on customer service has
produced strong results over 2008 into 2009. P&C U.S. has operated in a
difficult business environment over the past year and results in 2008 and 2009
have increasingly been impacted by the effects of the credit environment,
which lowers revenues and increases expenses. Its results in the fourth
quarter of 2008 were affected by the completion of the integration of the
Wisconsin acquisitions.
Private Client Group results had demonstrated fairly consistent growth as
capital markets were quite strong over the course of 2007, with revenue growth
slowing in late 2007 and in 2008. Managed and administered asset levels fell
in the fourth quarter of 2008 and first quarter of 2009 amid weak equity
markets. This, together with charges related to assisting certain U.S. clients
in the difficult environment, lowered results in the two most recent quarters.
Corporate Services results reflect increased provisions for credit losses
because of BMO's allocation of provisions on an expected loss basis. Results
in the most recent quarter were also affected by low revenues as explained in
the Corporate Services section.
Provisions for credit losses are higher as economic conditions have
softened from the particularly favourable credit environment of past years.
The U.S. dollar strengthened late in 2008 and especially in the first
quarter of 2009, after having weakened over the course of past years. A weaker
U.S. dollar lowers the translated values of BMO's U.S.-dollar-denominated
revenues and expenses.
Balance Sheet
Total assets of $443.2 billion increased $27.1 billion from October 31,
2008 including the impact of a stronger U.S. dollar that increased the
translated value of U.S.-denominated assets by $3.8 billion. The $27.1 billion
increase primarily reflects growth in derivative assets of $16.4 billion, cash
resources of $5.3 billion, securities borrowed or purchased under resale
agreements of $4.3 billion and net loans and acceptances of $3.1 billion,
partially offset by decreases in securities of $1.7 billion and other assets
of $0.3 billion.
The $16.4 billion increase in derivative financial assets was primarily
in interest rate contracts, due to the effects of movement in interest rates,
and in commodity contracts, partially offset by a decrease in foreign exchange
and equity contracts. Similar movements were observed in derivative financial
liabilities.
The growth in securities borrowed or purchased under resale agreements of
$4.3 billion was a result of higher trading activity. The increase in net
loans and acceptances of $3.1 billion was due to an increase in acceptances of
$1.3 billion, an increase in residential mortgages of $0.8 billion in the
Canadian portfolio, higher consumer instalment and other personal loans of
$0.6 billion and higher loans to businesses and governments of $0.4 billion.
The $5.3 billion increase in cash resources was largely attributable to
growth in demand deposits from corporate clients. These deposits have been
invested on a short-term basis with the U.S. Federal Reserve.
Liabilities and shareholders' equity increased $27.1 billion from October
31, 2008 including $3.8 billion due to the effects of the stronger U.S.
dollar. The $27.1 billion increase primarily reflects growth in derivative
financial liabilities of $17.7 billion, deposit growth of $6.9 billion, higher
securities lent or sold under repurchase agreements of $3.5 billion and higher
shareholders' equity of $1.4 billion, partially offset by a decrease in
securities sold but not yet purchased of $2.4 billion.
Deposits by banks, which account for 12% or $31.4 billion of total
deposits, increased $1.1 billion and were used in trading activities. Deposits
by businesses and governments, which account for 50% or $133.4 billion of
total deposits, decreased $2.7 billion. Deposits from individuals, which
account for the remaining 38% or $99.8 billion of total deposits, increased
$8.5 billion, primarily in fixed-term deposits and demand deposits and were
used to fund growth in loans and to reduce short-term deposits from businesses
and governments. Increased deposit balances reflect the attraction of bank
deposits in difficult times. The net increase in securities lent or sold under
repurchase agreements and securities sold but not yet purchased were used in
trading activities.
The increase in shareholders' equity of $1.4 billion largely reflects
$1.0 billion raised by the issuance of 33.3 million common shares.
Contractual obligations by year of maturity were outlined in Table 20 on
page 100 of BMO's 2008 Annual Report. There have been no material changes to
contractual obligations that are outside the ordinary course of our business.
Capital Management
At January 31, 2009, BMO's Tier 1 Capital Ratio was 10.21%, with Tier 1
capital of $19.7 billion and risk-weighted assets (RWA) of $193.0 billion. The
ratio remains strong, and increased 44 basis points from 9.77% in the fourth
quarter primarily due to growth in capital.
Capital grew primarily due to net capital issuance in the quarter. We
completed the issuance of 33,340,000 common shares for gross proceeds of
approximately $1 billion on December 24, 2008 and we completed the issuance of
$150 million of 6.50% Preferred Shares Series 18 on December 11, 2008. BMO
Capital Trust II, a closed-end trust wholly-owned by BMO, issued $450 million
of 10.22% BMO Tier 1 Notes - Series A on December 18, 2008 that qualify as
innovative Tier 1 capital. We redeemed the $250 million of 4.75% Preferred
Shares Series 6 on November 25, 2008. We also adopted a new Basel II
requirement on November 1, 2008, whereby investments in non-consolidated
entities and substantial investments, excluding insurance subsidiaries, are
deducted 50% from Tier 1 capital and 50% from Tier 2 capital. Previously the
deductions were taken from Tier 2 capital.
BMO's Total Capital Ratio was 12.87% at January 31, 2009. The ratio
increased 70 basis points from 12.17% in the fourth quarter for the reasons
outlined above as well as an increase in the allowable general allowance
included in Tier 2 capital.
The foregoing capital ratios do not reflect the impact of the acquisition
of AIG's Canadian insurance business announced on January 13th. The
acquisition is expected to reduce the Tier 1 Capital Ratio and Total Capital
Ratio by less than 15 and 25 basis points, respectively, when it closes later
this year.
During the quarter, 1,351,977 shares were issued due to the exercise of
stock options, share exchanges and the dividend reinvestment plan. We did not
repurchase any Bank of Montreal common shares under our common share
repurchase program during the quarter.
On March 3, 2009, BMO's Board of Directors declared a quarterly dividend
payable to common shareholders of $0.70 per share, unchanged from a year ago
and from the preceding quarter. The dividend is payable May 28, 2009 to
shareholders of record on May 1, 2009. Common shareholders who, in lieu of
cash, elect to have this dividend reinvested in additional common shares under
BMO's Shareholder Dividend Reinvestment and Share Purchase Plan, will receive
a two percent discount from the average market price of the common shares (as
defined in the plan).
This Capital Management section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
Qualifying Regulatory Capital
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions) Q1 2009 Q4 2008
-------------------------------------------------------------------------
Common shareholders' equity 16,929 15,974
Non-cumulative preferred shares 1,896 1,996
Innovative Tier 1 Capital Instruments 2,942 2,486
Non-controlling interest in subsidiaries 29 39
Goodwill and excess intangible assets (1,706) (1,635)
Accumulated net after-tax unrealized losses
from available-for-sale equity securities (40) (15)
-------------------------------------------------------------------------
Net Tier 1 Capital 20,050 18,845
Securitization-related deductions (142) (115)
Expected loss in excess of allowance - AIRB approach - -
Substantial investments (198) -
Other deductions - (1)
-------------------------------------------------------------------------
Adjusted Tier 1 Capital 19,710 18,729
-------------------------------------------------------------------------
Subordinated debt 4,389 4,175
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gain from
available-for-sale equity securities - -
Eligible general allowance for credit losses 607 494
-------------------------------------------------------------------------
Total Tier 2 Capital 5,796 5,469
Securitization-related deductions (9) (6)
Expected loss in excess of allowance - AIRB approach - -
Substantial Investments/Investment in insurance
subsidiaries (655) (871)
Other deductions - -
-------------------------------------------------------------------------
Adjusted Tier 2 Capital 5,132 4,592
-------------------------------------------------------------------------
Total Capital 24,842 23,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Risk-Weighted Assets (RWA)
(Canadian $ in millions) Q1 2009 Q4 2008
-------------------------------------------------------------------------
Credit risk 163,781 163,616
Market risk 12,386 11,293
Operational risk 16,798 16,699
-------------------------------------------------------------------------
Total risk-weighted assets 192,965 191,608
Regulatory floor - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Transitional Risk-Weighted Assets 192,965 191,608
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding Shares and Securities Convertible into Common Shares
Number of shares or
As of February 25, 2009 Canadian dollar amount
-------------------------------------------------------------------------
Common shares 540,737,000
Class B Preferred Shares
Series 5 $ 200,000,000
Series 13 $ 350,000,000
Series 14 $ 250,000,000
Series 15 $ 250,000,000
Series 16 $ 300,000,000
Series 18 (note 1) $ 150,000,000
Convertible into common shares:
Class B Preferred Shares
Series 10 $ 396,000,000
Stock options
- vested 14,167,000
- non-vested 7,051,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Details on share capital are outlined in Notes 21 and 23 to the audited
financial statements on pages 135, 136 and 137 and the table on page 62
in the Annual MD&A included in the 2008 Annual Report.
Note 1: No series 17 shares have been issued.
Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) and any similar
provincial and territorial legislation, BMO designates all dividends paid on
both its common and preferred shares after December 31, 2005, and all
dividends (including deemed dividends) paid thereafter, as "eligible
dividends" unless BMO indicates otherwise.
Credit Rating
BMO's senior debt credit ratings remain unchanged with a stable outlook.
All four ratings are indicative of high-grade, high-quality issues. They
remain: DBRS (AA); Fitch (AA-); Moody's (Aa1); and Standard & Poor's (A+).
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our
directors and executives and their affiliated entities, joint ventures and
equity-accounted investees on the same terms that we offer our customers. A
select suite of customer loan and mortgage products is offered to our
employees at rates normally accorded to our preferred customers. We also offer
employees a fee-based subsidy on annual credit card fees.
Stock options and deferred share units granted to directors and preferred
rate loan agreements for executives, relating to transfers we initiate, are
both discussed in Note 28 of the audited consolidated financial statements on
page 146 of the 2008 Annual Report.
Off-Balance-Sheet Arrangements
BMO enters into a number of off-balance-sheet arrangements in the normal
course of operations. The most significant off-balance sheet arrangements that
we enter into are credit instruments and VIEs, which are described on page 68
of the 2008 Annual Report and in Notes 5 and 7 to the attached unaudited
consolidated financial statements. See the Financial Instruments in the
Difficult Credit Environment section for changes to our off-balance-sheet
arrangements during the three months ended January 31, 2009.
Accounting Policies and Critical Accounting Estimates
The notes to BMO's October 31, 2008 audited consolidated financial
statements outline our significant accounting policies.
Pages 69 to 71 of the 2008 Annual Report contain a discussion of certain
accounting estimates that are considered particularly important as they
require management to make significant judgments, some of which relate to
matters that are inherently uncertain. Readers are encouraged to refer to the
2008 Annual Report to review that discussion.
Accounting Changes
Goodwill and Intangible Assets
On November 1, 2008, BMO adopted the CICA's new accounting requirements
for goodwill and intangible assets. We have restated prior periods' financial
statements for this change. New rules required us to reclassify certain
computer software from premises and equipment to intangible assets. The impact
of implementation of this standard was not material to our results of
operations or financial position and had no impact on net income. See Note 2
to the interim consolidated financial statements.
Transition to International Financial Reporting Standards
Canadian public companies will be required to prepare their financial
statements in accordance with International Financial Reporting Standards
(IFRS), as issued by the International Accounting Standards Board, for
financial years beginning on or after January 1, 2011. Effective November 1,
2011, we expect to adopt IFRS as the basis for preparing our consolidated
financial statements.
Due to anticipated changes in International Accounting Standards prior to
transition to IFRS, we are not in a position to determine the impact on our
financial results.
Our transition plan to meet the requirements of IFRS remains on track.
Page 71 of our 2008 Annual Report contains a discussion of the key elements of
our transition plan and readers are encouraged to refer to the 2008 Annual
Report to review that discussion.
Financial Instruments in the Difficult Credit Environment
Pages 62 to 67 of BMO's 2008 annual report provided enhanced disclosure
related to financial instruments that, effective in 2008, markets started to
consider to be carrying higher risk. Readers are encouraged to review that
disclosure to assist in understanding the nature of BMO's exposures at January
31, 2009 that are discussed in the sections that follow.
Consumer Loans
In the United States, the consumer portfolio totals US$16.6 billion and
is primarily comprised of three asset classes: residential first mortgages
(39%), home equity products (31%) and indirect automobile loans (27%). The
balance of the U.S. portfolio includes our limited exposure to other retail
lending products including a nominal US$3 million of credit card loans that
relate to the Wisconsin acquisitions.
In Canada, the consumer portfolio totals $73 billion and is also
comprised of three main asset classes: residential mortgages (54%), instalment
and other personal loans (43%) and credit card loans (3%).
The sections below discuss subprime mortgage loans, Alt-A mortgage loans
and home equity products, portfolios that are of increased investor interest
in today's environment.
Subprime First Mortgage Loans
In the United States, we have US$0.27 billion (US$0.25 billion at October
31, 2008) of first mortgage loans that had subprime characteristics at the
date of authorization. A small portion of the above is in respect of uninsured
loans with a loan-to-value ratio above 80% at issuance. A modest $7.1 million
or 2.60% ($5.4 million or 2.14% at October 31, 2008) of the portfolio was 90
days or more in arrears. This compares with a rate of 1.31% on BMO's total
U.S. first mortgage loan portfolio.
In Canada, BMO does not have any subprime mortgage programs. BMO mortgage
lending decisions incorporate a full assessment of the customer and loan
structure. Credit score is only one component of the adjudication process and
consequently we do not categorize loans based upon credit scores alone.
We also have net exposure of US$140 million (US$159 million at October
31, 2008) to a business that purchased distressed mortgages (including
subprime mortgages) at a discounted price.
Alt-A First Mortgage Loans
In the United States, Alt-A loans are generally considered to be loans
for which borrower qualifications are subject to limited verification. The
U.S. loan portfolio had two loan programs that met this definition - our Easy
Doc and No Doc programs. The programs were discontinued in the third quarter
of 2008. Loans under the No Doc program, which comprise most of the exposure
in this class, required minimum credit bureau scores of 660 and maximum loan-
to-value ratios of 80% (90% with private mortgage insurance). Due to these
lending requirements, the credit quality of our Alt-A portfolio is strong and
the loans have performed well. In the United States, our direct Alt-A loans
totalled US$1.5 billion (US$1.6 billion at October 31, 2008). Of this, $21
million or 1.39% was 90 days or more in arrears ($10 million or 0.62% at
October 31, 2008).
In Canada, we do not have a mortgage program that we consider Alt-A. In
the past, we may have chosen to not verify income or employment for certain
customers where there were other strong characteristics supporting the credit
worthiness of a loan as part of our credit adjudication process; however, this
approach is no longer in use. Our Newcomers to Canada/non-resident mortgage
program permits limited income verification but has other strong qualification
criteria. There was approximately $2.3 billion ($2.2 billion at October 31,
2008) outstanding under this program. Of this, only $16 million or 0.67% was
90 days or more in arrears ($11 million or 0.51% at October 31, 2008),
reflecting the strong credit quality of these loans.
Home Equity Products
In the United States, we have a US$5.1 billion home equity loan
portfolio, which amounted to 2.7% of BMO's total loan portfolio as of January
31, 2009. Of the total portfolio, loans of US$306 million (US$300 million at
October 31, 2008) were extended to customers with original credit bureau
scores of less than 620, and would be categorized as subprime loans (US$563
million authorized) if included in the mortgage portfolio. Of this amount,
only US$4 million or 1.26% was 90 days or more in arrears (US$2 million and
0.81% at October 31, 2008).
BMO also offered loans under two limited documentation programs within
the home equity portfolio in the United States that would be categorized as
Alt-A if they were in the first mortgage loans portfolio. The amount
authorized under these programs was US$1.0 billion and US$0.6 billion was
outstanding. Loans made under these programs have the same strong credit score
and loan-to-value requirements as the first mortgage portfolio and, as such,
the portfolio has performed well. As at January 31, 2009, US$4 million or
0.67% of the portfolio was greater than 90 days in arrears, little changed
from October 31, 2008. This compares with a rate of 0.78% (0.57% at October
31, 2008) for BMO's total U.S. home equity loan portfolio. We discontinued
offering these programs in the third quarter of 2008.
We also consider home equity loans to customers with credit bureau scores
above 620 but below 660 to be a higher-risk component of the loan portfolio.
This component of the portfolio was US$0.3 billion and US$3 million or 1.05%
of these loans were greater than 90 days in arrears (US$3 million and 0.90% at
October 31, 2008).
Loans having a loan-to-value ratio higher than 90% at issuance represent
US$0.3 billion or 6.7% of the U.S. home equity loan portfolio and loans having
a loan-to-value ratio higher than 80% to customers with a credit bureau score
below 660 at the time of issuance also represent just $0.3 billion of the
portfolio.
In Canada, we have a $14.3 billion ($13.8 billion at October 31, 2008)
home equity line of credit portfolio. Authorized amounts total $26.1 billion
($25.4 billion at October 31, 2008). Home equity loans do not exceed loan-to-
value ratios of 80% at issuance except in rare circumstances. The home equity
line of credit portfolio is high-quality, with only 0.10% of the loans in the
portfolio in arrears 90 days or more (0.08% at October 31, 2008). Of these
lines of credit, one product line is offered only in first mortgage position
and represents approximately 54% of the total portfolio. The others include a
blend of first mortgage and higher positions. We also have a $0.3 billion home
equity instalment loan portfolio on which less than $2 million of loans are in
arrears 90 days or more.
Leveraged Finance
Leveraged finance loans are defined by BMO as loans to private equity
businesses and mezzanine financings where our assessment indicates a higher
level of credit risk. BMO has limited exposure to leveraged finance loans,
representing less than 1% of our total assets, with $3.6 billion outstanding
as at January 31, 2009 ($5.6 billion authorized), compared with $3.6 billion
outstanding ($5.8 billion authorized) at October 31, 2008. Of this amount,
$267 million or 7% was considered impaired as at January 31, 2009.
Monoline Insurers and Credit Derivative Product Companies
BMO's direct exposure to companies that specialize in providing default
protection amounted to $719 million ($573 million at October 31, 2008) in
respect of the mark-to-market value of counterparty derivatives and $22
million ($19 million at October 31, 2008) in respect of the mark-to-market
value of traded credits. The cumulative adjustment for counterparty credit
risk recorded against these exposures is $104 million ($60 million at October
31, 2008).
Approximately 83% of the $719 million (88% of $573 million at October 31,
2008) exposure is related to counterparties rated AA or better. Approximately
half of the remainder relates to A rated counterparties and the balance to CCC
rated counterparties. Approximately 58% of the $22 million exposure to traded
credits is related to counterparties rated BBB- or better and the remainder is
primarily related to CCC rated counterparties. The notional value of direct
contracts involving monoline insurers and credit derivative product companies
was approximately $4.3 billion, (approximately $4.5 billion at October 31,
2008). Most contracts with these companies relate to collateralized debt
obligations and credit default swaps within our trading portfolio and provide
protection against losses arising from defaults. These instruments have
minimal subprime exposure.
BMO also held $1,160 million ($1,176 million at October 31, 2008) of
securities insured by monoline insurers, of which $756 million were municipal
bonds. Approximately 94% (approximately 79% at October 31, 2008) of the
municipal bond portfolio is rated investment grade, including the benefits of
the insurance guarantees. Approximately 73% (approximately 68% at October 31,
2008) of the municipal bond holdings have ratings exclusive of the insurance
guarantees and all of those are rated investment grade.
BMO-Sponsored Canadian Securitization Vehicles
BMO sponsors nine Canadian securitization vehicles. They include three
Canadian bank securitization vehicles, two of which hold Canadian residential
mortgage loans transferred from BMO while the third holds credit card loans
transferred from BMO. BMO's investment in the asset-backed commercial paper of
the two residential mortgage conduits totalled $84 million ($509 million at
October 31, 2008). BMO provides $5.1 billion in liquidity facilities to these
vehicles and no amounts have been drawn on the facilities. The credit card
securitization vehicle issues only term asset-backed securities and does not
issue asset-backed commercial paper. As a result, we do not provide any
liquidity facilities to this vehicle. Notes issued by the mortgage programs
are rated R-1 (high) by DBRS and Prime-1 by Moody's. The senior notes issued
by the credit card programs are rated AAA by DBRS and Aaa by Moody's.
We also sponsor six customer securitization vehicles in Canada that hold
assets transferred by our customers to provide them with financing. We
consolidate the accounts of two of the vehicles where the majority of the
expected gain or loss of the vehicles has been deemed as accruing to BMO. In
aggregate, these two vehicles hold $248 million of assets, including exposure
to $8 million of Canadian residential mortgage loans with subprime
characteristics and $63 million of Canadian residential mortgage loans with
Alt-A characteristics.
Notes issued by the remaining four customer securitization conduits are
rated R-1 (high) by DBRS and Prime-1 by Moody's and account for $9.6 billion
($11.0 billion at October 31, 2008) of BMO's liquidity support facility, which
remains undrawn. The assets of each of these four customer securitization
conduits consist primarily of diversified pools of Canadian auto receivables
and Canadian residential mortgages. These asset classes, combined, account for
74% of the aggregate assets of these four conduits. Their assets include a
nominal $96 million of Canadian residential mortgage loans with subprime
characteristics and $867 million of Canadian residential mortgage loans with
Alt-A characteristics. There are no collateralized debt obligations (CDOs) and
no exposure to monoline insurers in these conduits.
BMO's investment in the asset-backed commercial paper (ABCP) of the seven
non-consolidated vehicles totalled $1.2 billion ($2.6 billion at October 31,
2008). No losses have been recorded on BMO's investment in the ABCP of these
vehicles.
BMO-Sponsored U.S. Securitization Vehicle
BMO provides committed liquidity support facilities of US$7.5 billion
(US$8.2 billion at October 31, 2008) to our U.S. multi-seller ABCP vehicle.
Approximately 60% of the vehicle's commitments have been rated by Moody's
or S&P, and all are rated investment grade, with 78% rated A or higher by
Moody's and 100% rated A or higher by S&P. Approximately US$1.4 billion of the
commitments are insured by monolines, primarily MBIA and Ambac.
The vehicle has US$6.0 billion of commercial paper outstanding (US$6.5
billion at October 31, 2008). The ABCP of the conduit is rated A1 by S&P and
P1 by Moody's. BMO has not invested in the conduit's ABCP. Outstanding
commercial paper has consistently been purchased by third-party investors,
notwithstanding market disruptions, and pricing levels are in line with those
of top-tier ABCP conduits in the United States.
Non-Bank Sponsored Canadian Securitization Vehicles
We held $325 million of ABCP of six non-bank-sponsored Canadian vehicles
with a carrying value of $187 million as at October 31, 2008. We had not
provided backstop liquidity commitments to these vehicles. In the fourth
quarter of 2008, we recorded a decline in fair value of $14 million that was
charged against other comprehensive income.
The agreement reached among certain non-bank-sponsored Canadian ABCP
conduits and investors known as the Montreal Accord closed on January 21, 2009
and our $325 million of ABCP was exchanged for $7 million of cash and $323
million of newly issued longer-term notes. At that time, we charged the $14
million decline described above and a further $35 million decline in fair
value against securities gains (other than trading). Our $323 million of notes
is now carried at its estimated fair value of $145 million in trading assets.
As part of the commitment made by Canadian banks to facilitate closing of the
restructuring on January 21, 2009 and in addition to our existing exposure of
$323 million, BMO provided a senior loan facility of $300 million. No draws
have been made on the facility and none are anticipated within the next 18
months.
Credit Protection Vehicle
We also sponsor Apex Trust (Apex), a Canadian special purpose vehicle
that provides credit protection via credit default swaps through 12 leveraged
super-senior tranches of diversified pools of U.S. and European corporate
credits. Apex has exposure to approximately 450 corporate credits that are
diversified by geographic region and industry. Approximately 73% are rated
investment grade, of which 62% are rated BBB or equivalent. A number of these
ratings on the underlying companies are on watch for downgrade.
Apex has issued $2.2 billion of medium-term notes with terms of five and
eight years (the "Notes"), of which BMO's exposure is $815 million. Another
party has a $600 million exposure to the Notes through a total return swap
with BMO. The total return swap has a price reset in September, 2009 based on
a reference index and BMO has the sole option to terminate the swap at that
time. If BMO chooses to extend the swap, its cost is likely to increase due to
the terms of the price reset, depending on market conditions at that time.
A senior funding facility of $1.13 billion (the "Senior Facility") has
been made available to Apex, with BMO providing $1.03 billion of that
facility. Advances under the Senior Facility rank ahead of the Notes. As of
January 31, 2009, $941 million ($553 million at October 31, 2008) had been
advanced through BMO's committed share of the Senior Facility to fund
collateral calls arising from declining mark-to-market values of the
underlying credit default swaps. The Notes and the Senior Facility total
approximately $3.3 billion and represent about 16% of the approximately $21
billion of net notional credit positions held by the vehicle.
BMO has entered into credit default swap contracts on the net notional
positions with the swap counterparties and into offsetting swaps with Apex. As
a result, BMO also has exposure if losses exceed the aggregate $3.3 billion
value of the Notes and the Senior Facility.
In the first quarter, we recorded a total charge of $248 million
consisting of a charge of $177 million on our Notes exposure, reducing the
carrying value of our $815 million of Notes to $448 million ($625 million at
October 31, 2008), and an additional $71 million charge in relation to the
total return swap transaction. The decline in fair value in the quarter
resulted from deterioration in the credit quality of the underlying portfolios
and increases in credit spreads given current market conditions.
Realized credit losses on the Apex Notes will only be incurred should
losses on defaults in the underlying credits exceed the first-loss protection
on a tranche. A significant majority of Apex's positions benefit from
substantial first-loss protection. The lowest level of first-loss protection
is an estimated 5.7% (an estimated 7.0% at October 31, 2008) on a tranche with
a notional amount of $875 million. Its rating was downgraded to BB (high) in
February. The second lowest level of first-loss protection is an estimated
10.4% (an estimated 11.2% at October 31, 2008) on a tranche with a notional
amount of $342 million. Its rating was downgraded to BBB in the quarter. Each
of the other 10 tranches has first-loss protection ranging from 13.5% to 29.7%
(14.4% to 30.3% at October 31, 2008), with a weighted average of 23.2%, and
all were rated AAA. This substantial first loss protection from future
defaults on the AAA tranches is significantly higher than the historical
credit loss experience of the corporate credits. If losses were realized on
the full notional amounts of $1,217 million represented by the two tranches
with the lowest levels of first-loss protection, BMO's pro-rata realized
losses on its exposure of $815 million in Notes would be $450 million (based
on BMO's exposure to $815 million of the $2.2 billion of medium-term notes
outstanding). As mentioned above, BMO has recorded unrealized charges of $367
million against its Notes.
Structured Investment Vehicles
We provide senior-ranked funding support through BMO liquidity facilities
for two BMO-managed Structured Investment Vehicles (SIVs), Links Finance
Corporation (Links) and Parkland Finance Corporation (Parkland).
At January 31, 2009, amounts drawn on the facilities totalled US$4.9
billion and (euro)447 million (US$3.7 billion and (euro)477 million at October
31, 2008). The liquidity facilities totalled approximately US$7.1 billion for
Links and (euro)641 million for Parkland at January 31, 2009, down from US$7.7
billion and (euro)672 million at October 31, 2008. Advances under the
liquidity facilities rank ahead of the SIVs' subordinated capital notes. The
total amount drawn under the liquidity facilities is impacted by a number of
factors including the pace and price of asset sales, the maturity profile of
the senior notes and asset maturities. While the assets of the SIVs mature
over time, a significant portion is expected to be repaid in the period
between 2010 and 2012.
Consistent with the strategy of selling assets in an orderly and
value-sensitive manner and as a result of weak market conditions, the pace of
asset sales remained slow during the quarter. We continue to anticipate that
the SIVs will continue the strategy of selling assets in an orderly manner
based upon market conditions. However, for illustrative purposes, if there
were no further asset sales and assets were repaid as we anticipate given
their terms, we would expect that outstanding amounts under the senior ranked
funding facility would peak at $6.5 billion in August 2009 for Links and
(euro)620 million in July 2009 for Parkland.
The SIVs' capital noteholders will continue to bear the economic risk
from actual losses up to the full amount of their investment. The par value of
the subordinate capital notes net of the accumulated deficit in Links and
Parkland at January 31, 2009 was US$1.1 billion and (euro)158 million,
respectively. The market value of the assets held by Links and Parkland
totalled US$5.6 billion and (euro)616 million, respectively, reduced from
US$6.8 billion and (euro)698 million at October 31, 2008. While the market
value of the SIVs' assets is currently lower than the amount of senior debt
outstanding, BMO believes that the first-loss protection provided by the
subordinate capital notes exceeds future expected losses.
The asset quality of Links and Parkland remains high, with approximately
69% of debt securities rated Aa3 or better by Moody's (84% at October 31,
2008), 62% rated AA- or better by S&P (73% at October 31, 2008) and 98% rated
investment grade. Certain of the debt security ratings are on credit watch,
for downgrade. The senior notes of the SIVs were downgraded during the quarter
to levels consistent with BMO's senior debt ratings of Aa1 (Moody's) and A+
(S&P). The SIVs hold no direct exposure to U.S. subprime mortgages. They hold
a diversified mix of debt securities and the mix of securities is largely
unchanged from October 31, 2008.
Auction-Rate Securities
A disruption in the market for auction-rate securities (ARS) occurred in
the early part of 2008. There are no BMO-sponsored ARS programs in the market
and BMO did not hold any ARS in its trading portfolio at the end of 2008.
However, in the fourth quarter, BMO offered to purchase ARS at par value plus
accrued interest from certain client accounts. During the fourth quarter, BMO
recorded a charge of $12 million ($8 million after tax) in respect of the
valuation of ARS expected to be tendered to our offer. In the current quarter,
BMO recorded a charge of $17 million ($11 million after tax). At January 31,
2009, US$143 million of ARS had been tendered to our offer.
Exposure to Major Financial Institutions
Since October 31, 2008, governments in Europe and the United States have
continued to provide significant financial support to local financial
institutions. Trade flows between countries and regions have been reducing in
recent months, which has put pressure on the economies and banking systems in
many countries. In view of the foregoing, BMO has continued to proactively
manage its major financial institution counterparty exposures.
Caution
Given the uncertainty in the capital markets environment, our capital
markets instruments could experience further valuation gains and losses due to
changes in market value.
This Financial Instruments in the Difficult Credit Environment section
contains forward-looking statements. Please see the Caution Regarding
Forward-Looking Statements.
The following table provides additional detail on other select financial
instruments that are held in our investment and trading books. Most of our
CDOs and CLOs are fully hedged with other large financial institutions. Net
CDO exposure is minimal at $29 million, consisting of the $18 million carrying
value of unhedged and wrapped instruments and an $11 million cumulative net
loss on hedged investments. Net CLO exposure is also modest, at $107 million,
consisting of the $85 million carrying value of unhedged and wrapped
investments and a $22 million net loss on hedged instruments.
BMO has invested only in senior and super-senior tranches of CDOs and
CLOs. Tranche ratings in the table use the lowest external rating available
provided by S&P, Moody's or Fitch. The difference between hedged investment
amounts and carrying value of hedged investment amounts reflect mark-to-market
adjustments, which are generally recoverable through total return or credit
default swaps. The underlying securities are primarily a wide range of
corporate assets. Approximately 50% of the hedged investment amounts have been
hedged through swaps with three financial institution counterparties rated A+
or better. The value of BMO's interest in those hedges is supported by
collateral held, with the exception of relatively modest amounts as permitted
under counterparty agreements. The remainder of the hedged investment amounts
is hedged through three monoline insurer counterparties rated A to AAA.
During the quarter, BMO closed total return swap arrangements with two
financial institutions and delivered the related underlying CDO positions, at
a modest gain as both the investments and the hedge instruments closed at
values approximating their October 2008 valuations. These hedged investment
amounts had carrying values of $1.134 billion at October 31, 2008.
Exposures to Other Select Financial Instruments ($ millions - Cdn)
(Note 1)
Carrying Cumul-
Value Carrying ative
of Value Loss in Net
Unhedged of Value Cumul- Losses
As at & Hedged Hedged of ative on
January Wrapped Invest- Invest- Hedged Gain Hedged
31, Tranche Invest- ment ment Invest- on Invest-
2009 Rating ments Amounts Amounts ments Hedges ments
CDO's(2) AAA 18 Sundry
securities
AAA 173 113 (60) 60 - Hedged with
FI's rated
A+ or
better
AAA 316 276 (40) 29 (11) Hedged
with
monolines
rated
AAA(3)
A- to 303 117 (186) 186 - Hedged with
AA+ FI's rated
A+ or
better
CCC or 19 - (19) 19 - Hedged with
worse FI's rated
AA- or
better
----------------------------------------------------
18 811 506 (305) 294 (11)
----------------------------------------------------
----------------------------------------------------
CLO's AAA 85 Mostly U.K.
and
European
mid-size
corporate
loans
AAA 686 555 (131) 131 - Hedged with
FI's rated
A or
better
AAA 1,236 1,055 (181) 159 (22) Hedged with
monolines
rated A
or better
----------------------------------------------------
85 1,922 1,610 (312) 290 (22)
----------------------------------------------------
----------------------------------------------------
Residential
MBS(4)
No AAA 37 Mostly U.K.
subprime and
Australian
mortgages
U.S. A- to 4 Wrapped
subprime AA+ with
wrapped(2) monolines
rated
AAA(3)
BBB- to 17 Wrapped
BBB+ with
monolines
rated A
CCC 9 Wrapped
with
monolines
rated CCC
U.S. AAA 103 54 (49) 48 (1) Hedged with
subprime FI's rated
AA or
better
A- to 100 35 (65) (65) Hedged with
AA+ FI's rated
AA or
better
BBB- to 62 31 (31) 31 - Hedged with
BBB+ FI's rated
AA or
better
B- to 1 Mostly low
BB+ loan-to-
value or
older U.S.
mortgages
B- to 113 41 (72) 72 - Hedged with
BB+ FI's rated
AA or
better
----------------------------------------------------
68 378 161 (217) 151 (66)
----------------------------------------------------
----------------------------------------------------
Commercial AAA 41 European,
MBS U.K. and
U.S.
commercial
real
estate
loans
A- to 59 Mostly
AA+ Canadian
commercial
and multi-
use resi-
dential
loans
----------------------------------------------------
100
----------------------------------------------------
----------------------------------------------------
Asset- AAA 219 Mostly
backed Canadian
Secu- credit
rities card re-
ceivables
and auto
loans
A- to 136 Mostly
AA+ Canadian
credit
card re-
ceivables
and auto
loans
BBB- to 63 Collateral
BBB+ notes on
Canadian
credit
card re-
ceivables
----------------------------------------------------
418
----------------------------------------------------
----------------------------------------------------
FI's
=
Financial
Institutions
(1) Most of the unhedged and wrapped investments were transferred to the
available-for-sale portfolio effective August 1, 2008.
(2) CDOs include indirect exposure to approximately $0.2 billion of U.S.
subprime residential mortgages. As noted above, this exposure is
hedged via total return swaps with three large non-monoline financial
institutions. Amounts exclude the US$1.5 billion notional value of
CDO credit default swap (CDS) protection purchases from two credit
derivative product company counterparties that have a market value of
$406 million and corresponding CDS protection provided to other
financial institutions in our role as intermediary.
(3) Certain ratings are under review.
(4) Wrapped MBS have an insurance guarantee attached and are rated
inclusive of the wrap protection. Residential MBS included in the
hedged investment amounts of $378 million have exposure to
approximately $184 million of underlying U.S. subprime loans.
Review of Operating Groups' Performance
Operating Groups' Summary Income Statements and Statistics for Q1-2009
Q1-2009
-----------------------------------------------
(Canadian $ in Corporate
millions, except including Total
as noted) P&C PCG BMO CM T&O BMO
-------------------------------------------------------------------------
Net interest income
(teb)(1) 1,065 178 516 (428) 1,331
Non-interest revenue 508 280 211 112 1,111
-------------------------------------------------------------------------
Total revenue (teb)(1) 1,573 458 727 (316) 2,442
Provision for (recovery
of) credit losses 113 1 42 272 428
Non-interest expense 946 375 473 47 1,841
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interest in subsidiaries 514 82 212 (635) 173
Income taxes (recovery)
(teb)(1) 155 25 33 (284) (71)
Non-controlling interest
in subsidiaries - - - 19 19
-------------------------------------------------------------------------
Net income Q1-2009 359 57 179 (370) 225
-------------------------------------------------------------------------
Net income Q4-2008 345 75 290 (150) 560
-------------------------------------------------------------------------
Net income Q1-2008 317 96 (29) (129) 255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other statistics
-------------------------------------------------------------------------
Net economic profit 183 32 (10) (424) (219)
Return on equity 21.2% 23.6% 9.9% nm 4.9%
Operating leverage 1.5% (12.4%) 143.2% nm 6.4%
Cash operating leverage 1.4% (12.5%) 143.2% nm 6.4%
Productivity ratio (teb) 60.1% 81.7% 65.0% nm 75.4%
Cash productivity
ratio (teb) 59.6% 81.6% 65.0% nm 75.0%
Net interest margin
on earning assets (teb) 2.79% 8.48% 1.07% nm 1.51%
Average common equity 6,465 937 6,553 2,266 16,221
Average earning assets
($ billions) 151.5 8.3 191.0 (2.3) 348.5
Full-time equivalent
staff 20,637 4,562 2,393 9,631 37,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
(1) Operating group revenues and income taxes are stated on a taxable
equivalent basis (teb). The group teb adjustments are offset in
Corporate, and Total BMO revenue, income taxes and net interest
margin are stated on a GAAP basis. See the Non-GAAP Measures section.
The following sections review the financial results of each of our
operating segments and operating groups for the first quarter of 2009.
Periodically, certain business lines and units within the business lines
are transferred between client groups to more closely align BMO's
organizational structure and its strategic priorities. All comparative figures
are reclassified to reflect these transfers.
Note 17 to the attached unaudited interim consolidated financial
statements outlines how income statement items requiring allocation are
distributed among the operating groups, including the allocation of the
provision for credit losses. Corporate Services is generally charged (or
credited) with differences between the periodic provisions for credit losses
charged to the client groups under our expected loss provisioning methodology
and the periodic provisions required under GAAP.
Personal and Commercial Banking (P&C)
Canadian $ in Increase Increase
millions, except (Decrease) (Decrease)
as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) 1,065 125 13% 38 4%
Non-interest revenue 508 42 9% (31) (6%)
-------------------------------------------------------------------------
Total revenue (teb) 1,573 167 12% 7 1%
Provision for
credit losses 113 21 22% 12 12%
Non-interest expense 946 89 10% (22) (2%)
-------------------------------------------------------------------------
Income before income
taxes and non-
controlling interest
in subsidiaries 514 57 13% 17 4%
Income taxes (teb) 155 15 12% 3 2%
Non-controlling
interest in subsidiaries - - - - -
-------------------------------------------------------------------------
Net income 359 42 13% 14 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of intangible
assets (after tax) 7 - - (1) (10%)
-------------------------------------------------------------------------
Cash net income 366 42 13% 13 4%
-------------------------------------------------------------------------
Return on equity 21.2% (4.5%) (1.7%)
Cash return on equity 21.7% (4.6%) (1.8%)
Operating leverage 1.5% nm nm
Cash operating leverage 1.4% nm nm
Productivity ratio (teb) 60.1% (0.9%) (1.7%)
Cash productivity
ratio (teb) 59.6% (0.7%) (1.6%)
Net interest margin on
earning assets (teb) 2.79% 0.15% 0.10%
Average earning assets 151,484 9,804 7% (437) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
Personal and Commercial Banking (P&C) represents the sum of our two retail
and business banking operating segments, Personal and Commercial Banking
Canada (P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.). These
operating segments are reviewed separately in the sections that follow.
Personal and Commercial Banking Canada (P&C Canada)
(Canadian $ in Increase Increase
millions, except (Decrease) (Decrease)
as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) 825 52 7% 10 1%
Non-interest revenue 449 31 7% (32) (7%)
-------------------------------------------------------------------------
Total revenue (teb) 1,274 83 7% (22) (2%)
Provision for
credit losses 95 12 14% 6 7%
Non-interest expense 715 23 4% (10) (1%)
-------------------------------------------------------------------------
Income before income
taxes and non-
controlling interest
in subsidiaries 464 48 12% (18) (4%)
Income taxes (teb) 139 14 10% (10) (7%)
Non-controlling interest
in subsidiaries - - - - -
-------------------------------------------------------------------------
Net income 325 34 12% (8) (2%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of intangible
assets (after tax) 1 1 100% 1 +100%
-------------------------------------------------------------------------
Cash net income 326 35 12% (7) (2%)
-------------------------------------------------------------------------
Personal, Insurance
& Other revenue 626 21 3% (44) (7%)
Commercial revenue 346 5 1% 12 4%
Cards revenue 302 57 24% 10 4%
Operating leverage 3.5% nm nm
Cash operating leverage 3.5% nm nm
Productivity ratio (teb) 56.2% (1.9%) 0.2%
Cash productivity
ratio (teb) 56.1% (1.9%) 0.2%
Net interest margin
on earning
assets (teb) 2.72% 0.14% 0.10%
Average earning assets 120,217 963 1% (3,590) (3%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
Q1 2009 vs Q1 2008
Net income of $325 million increased $34 million or 12% from a year ago,
despite a slowing economy.
Revenue rose $83 million or 7.0%, driven by volume growth, higher revenue
from cards and Moneris, and an improved net interest margin, partially offset
by net investment securities losses.
Net interest margin increased by 14 basis points due to higher volumes in
more profitable products including personal loans and cards, pricing
initiatives in light of rising long-term funding costs, and favourable prime
rates relative to BA rates, partially offset by lower mortgage refinancing
fees.
In the personal banking segment, revenue increased $21 million or 3.4%.
HomeOwner Readiline growth drove our personal loan growth of 21% from the
first quarter of 2008. Market share increased 80 basis points from the prior
year and 8 basis points from the fourth quarter to 12.07%.
In a weaker housing market, our mortgage loans declined from a year ago.
Positive balance growth from our proprietary channels was offset by the
planned runoff of our mortgage broker portfolio. Mortgage market share
decreased 110 basis points from a year ago and 24 basis points from the fourth
quarter.
Personal deposits increased 2.8% from the first quarter of 2008. Market
share increased 31 basis points relative to the fourth quarter and increased
22 basis point year over year to 12.33% in a highly competitive environment.
In the commercial banking segment, revenue increased $5 million or 1.4%,
due to growth in higher spread loans and deposits and higher activity fees.
Growth was negatively impacted by net investment securities losses due to
softer equity markets. Loans grew 5.8% from a year ago despite economic
weakness and continued intense competition. BMO ranks second in Canadian
business banking market share at 19.93%. Market share increased by 56 basis
points from the prior year and increased 9 basis points from the fourth
quarter. In the $1 to $5 million commercial loan segment, there was loan
growth of 8.4% year over year. Market share increased 77 basis points year
over year and was flat relative to the fourth quarter. On the deposit side of
the business, balance growth of 6.8% was accompanied by a steady increase in
the number of commercial operating account customers.
We are pleased with our improved loyalty scores in personal and
commercial banking where we have made gains relative to our competition.
Cards and Payment Services revenue increased $57 million or 24% year over
year, largely due to growth in transactions, balances and yield, as well as
higher Moneris revenue. We have grown our card business by leveraging last
year's launch of new products including Shell Mosaik MasterCard, AIR MILES and
CashBack rewards. Our brand marketing and promotions, together with the
integration of card sales across the branch system, have resulted in continued
growth in the card portfolio.
Non-interest expense increased $23 million or 3.5%, primarily due to
higher employee benefits costs, initiatives spending and Moneris costs. Going
forward, we plan to continue to invest strategically to improve our
competitive position and, mindful of the current economic environment,
continue to manage our tactical spending.
Average loans and acceptances, including securitized loans, increased
$6.8 billion or 5.3% from the first quarter of 2008 and personal and
commercial deposits grew $1.3 billion or 2.8%. The group's cash operating
leverage was 3.5%.
Q1 2009 vs Q4 2008
Net income decreased $8 million or 2.2%.
Revenue decreased $22 million or 1.7% driven by lower securitization
revenue and interest on tax refunds in the fourth quarter, partially offset by
an improved net interest margin. Net interest margin improved by 10 basis
points due to higher volumes in more profitable products, favourable prime
rates relative to BA rates, and pricing initiatives in light of rising
long-term funding costs, which more than offset the impact of interest on tax
refunds in the previous quarter and lower mortgage refinancing fees in the
current quarter.
Non-interest expense decreased $10 million or 1.4% due to lower
initiatives spending, advertising and consulting costs, partially offset by
higher employee-related expenses including annual stock-based compensation
costs for employees eligible to retire and higher employee benefits costs.
Average loans and acceptances including securitized loans increased $0.5
billion or 0.4% from the fourth quarter, personal deposits increased $0.5
billion or 1.9%, and commercial deposits increased $1.2 billion or 5.2%.
Personal and Commercial Banking U.S. (P&C U.S.)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) 240 73 44% 28 13%
Non-interest revenue 59 11 23% 1 2%
-------------------------------------------------------------------------
Total revenue (teb) 299 84 39% 29 11%
Provision for credit
losses 18 9 +100% 6 40%
Non-interest expense 231 66 39% (12) (5%)
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interest in subsidiaries 50 9 25% 35 +100%
Income taxes (teb) 16 1 21% 13 +100%
Non-controlling interest
in subsidiaries - - - - -
-------------------------------------------------------------------------
Net income 34 8 27% 22 +100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of intangible
assets (after tax) 6 (1) (14%) (2) (15%)
-------------------------------------------------------------------------
Cash net income 40 7 24% 20 +100%
-------------------------------------------------------------------------
Operating leverage (0.1%) nm nm
Cash operating leverage (1.6%) nm nm
Productivity ratio (teb) 77.0% - (12.8%)
Cash productivity ratio
(teb) 74.3% 0.9% (11.9%)
Net interest margin on
earning assets (teb) 3.05% 0.08% 0.05%
Average earning assets 31,267 8,841 39% 3,153 11%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Select Financial
Data (US$ in millions)
Net interest income (teb) 196 29 17% 5 3%
Non-interest revenue 48 - - (4) (7%)
-------------------------------------------------------------------------
Total revenue (teb) 244 29 13% 1 1%
Non-interest expense 188 22 13% (29) (14%)
Net Income 27 1 3% 16 +100%
Average earning assets 25,481 3,018 13% 168 1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
Q1 2009 vs Q1 2008
Net income increased $8 million or 27% to $34 million. On a U.S. dollar
basis, net income rose $1 million or 3.4% to $27 million.
The weak credit environment reduced net income in the quarter by US$10
million as there are higher levels of non-performing loans and costs of
managing our portfolio have increased.
Revenue rose US$29 million or 13%. Our Wisconsin acquisitions added US$19
million of the growth. Excluding acquisitions, loans grew US$1.1 billion or
5.6% and deposits grew US$762 million or 4.3%. The effects of volume growth
and better deposit spreads were partially offset by lower service charges and
other fees and the increased negative impact of weak credit markets of US$7
million.
Non-interest expense increased US$22 million or 13%. Excluding the US$16
million impact of acquisitions, expenses increased US$6 million, largely due
to strategic advertising, costs of branches that were opened during 2008 and
higher credit market costs of US$3 million. These factors were partially
offset by a reduction of US$6 million in the accrual for Visa litigation.
Q1 2009 vs Q4 2008
Net income increased by $22 million to $34 million. On a U.S. dollar
basis, net income rose $16 million to $27 million.
Revenue increased US$1 million. Deposit growth and better deposit spreads
were partially offset by lower service charges and other fees and the
increased negative impact of weak credit markets of US$4 million.
Non-interest expense decreased US$29 million or 14% due to lower
integration costs and changes in the Visa litigation accrual.
Our Retail Net Promoter Score, a measure of the strength of customer
loyalty, remained consistent with the prior quarter at 42, and improved from
41 a year ago at a time when others are declining.
Private Client Group (PCG)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) 178 23 14% (6) (4%)
Non-interest revenue 280 (84) (23%) (30) (10%)
-------------------------------------------------------------------------
Total revenue (teb) 458 (61) (12%) (36) (7%)
Provision for credit
losses 1 - - - -
Non-interest expense 375 3 1% (10) (3%)
-------------------------------------------------------------------------
Income before income taxes 82 (64) (44%) (26) (24%)
Income taxes (teb) 25 (25) (49%) (8) (24%)
-------------------------------------------------------------------------
Net income 57 (39) (40%) (18) (24%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of intangible
assets (after tax) 1 - - - -
-------------------------------------------------------------------------
Cash net income 58 (39) (40%) (18) (24%)
-------------------------------------------------------------------------
Return on equity 23.6% (12.8%) (3.1%)
Cash return on equity 23.9% (12.8%) (3.1%)
Operating leverage (12.4%) nm nm
Cash operating leverage (12.5%) nm nm
Productivity ratio (teb) 81.7% 10.0% 4.0%
Cash productivity ratio
(teb) 81.6% 10.1% 4.2%
Net interest margin on
earning assets (teb) 8.48% (0.19%) (0.69%)
Average earning assets 8,318 1,192 17% 305 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Select Financial
Data (US$ in millions)
Total revenue (teb) 40 (22) (36%) 6 19%
Non-interest expense 53 (6) (10%) (7) (11%)
Net income (8) (10) (+100%) 7 44%
Cash net income (8) (11) (+100%) 7 45%
Average earning assets 2,270 176 8% 59 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
Q1 2009 vs Q1 2008
Net income decreased $39 million or 40% to $57 million. Net income in the
quarter was lowered by the $17 million ($11 million after tax) charge in
respect of last quarter's decision to assist certain U.S. clients by offering
to purchase auction-rate securities from their accounts.
Revenue decreased $61 million or 12% due in part to the above charges.
The stronger U.S. dollar increased revenues by $10 million or 1.9% relative to
a year ago. Non-interest revenue decreased primarily due to lower fee-based
and commission revenue in the full-service investing business and lower mutual
fund revenue on significantly lower client assets, which have been impacted by
difficult equity market conditions. Lower trust and investment revenue in
North American Private Banking also contributed to the decline. Net interest
income increased primarily due to higher deposit balances and spreads in term
investment products, partially offset by spread compression in the brokerage
businesses. Higher loans and deposits in North American Private Banking also
contributed to the growth.
Non-interest expenses increased $3 million or 0.7%. The stronger U.S.
dollar increased expenses by $12 million or 3.1% relative to a year ago.
Higher costs associated with last year's expansion of the sales forces and the
impact of the fixed administration fee implemented during the first quarter of
2008 were partially offset by reduced revenue-based costs and incentive
compensation. The cash operating leverage was -12.5%.
The Group's $271 billion of assets under management and administration
and term deposits decreased $12 billion or 4.2% year over year. Term deposits
increased $8 billion or 21%. Assets under management and administration
declined $20 billion or 8.3%, despite the $16 billion or 6.4% benefit related
to the stronger U.S. dollar.
Q1 2009 vs Q4 2008
Net income decreased $18 million or 24% from the prior quarter. Results
in the prior quarter were affected by $31 million ($19 million after tax) of
charges in respect of actions taken to support U.S. clients in the weak
capital markets environment. They included charges related to securities of
Lehman Brothers Holdings Inc. and in respect of the valuation of auction-rate
securities that we offered to purchase from client accounts.
Revenue decreased $36 million or 7.3%. The impact of the charges in both
quarters added $14 million to revenue growth. The stronger U.S. dollar
increased revenues by $5 million or 1.1%. Revenue was negatively impacted by
lower commission revenue in the brokerage businesses, lower fee-based revenue
in our mutual fund businesses and lower trust and investment revenue in North
American Private Banking, reflecting the negative impact of softer market
conditions on the group's assets under management and administration. Lower
net interest income in the brokerage businesses, primarily due to spread
compression, also contributed to the decline.
Non-interest expense decreased $10 million or 2.5%. Reduced revenue-based
costs and the effects of cost management were partly offset by higher costs
due to the stronger U.S. dollar ($6 million) and stock-based compensation
costs for retirement eligible employees that were recognized in the first
quarter.
The group's assets under management and administration and term deposits
decreased $4 billion or 1.4% during the quarter. Term deposits increased $4
billion or 8.8%, while assets under management and administration decreased $8
billion or 3.4%.
BMO Capital Markets (BMO CM)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) 516 206 67% 154 43%
Non-interest revenue 211 248 +100% (149) (41%)
-------------------------------------------------------------------------
Total revenue (teb) 727 454 +100% 5 1%
Provision for credit
losses 42 13 47% 12 39%
Non-interest expense 473 91 24% 22 5%
-------------------------------------------------------------------------
Income before income taxes 212 350 +100% (29) (12%)
Income taxes (teb) 33 142 +100% 82 +100%
-------------------------------------------------------------------------
Net income 179 208 +100% (111) (38%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of intangible
assets (after tax) - - - - -
-------------------------------------------------------------------------
Cash net income 179 208 +100% (111) (38%)
-------------------------------------------------------------------------
Trading Products revenue 322 336 +100% 88 38%
Investment and Corporate
Banking and Other revenue 405 118 41% (83) (17%)
Return on equity 9.9% 12.7% (8.9%)
Cash return on equity 9.9% 12.6% (8.9%)
Operating leverage 143.2% nm nm
Cash operating leverage 143.2% nm nm
Productivity ratio (teb) 65.0% (75.3%) 2.6%
Cash productivity ratio
(teb) 65.0% (75.2%) 2.6%
Net interest margin on
earning assets (teb) 1.07% 0.41% 0.24%
Average earning assets 191,035 4,716 3% 17,215 10%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Select Financial
Data (US$ in millions)
Revenue 485 192 66% 151 46%
Non-interest expense 191 (18) (8%) 26 17%
Net Income 199 144 +100% 100 100%
Average earning assets 68,889 (5,513) (7%) 3,820 6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
nm - not meaningful
Q1 2009 vs Q1 2008
Net income was $179 million, up $208 million from a year ago. Results for
the quarter reflected charges of $511 million ($348 million after tax) as
described in the Effects of the Capital Markets Environment on First Quarter
Results section. Results a year ago reflected $488 million ($324 million after
tax) as described in the Notable Items section.
Revenue rose $454 million to $727 million. The stronger U.S. dollar
increased revenues by $134 million relative to a year ago. There was
significantly higher trading revenue, stronger corporate banking revenues and
continued robust performance in our interest-rate-sensitive businesses. These
increases in revenue were partly offset by large net securities losses and
continued softness in merger and acquisition fees.
Trading Products revenue increased significantly from a prior year net
loss of $14 million to revenue of $322 million in the current quarter. Trading
performance improved considerably in all areas, with the largest improvements
in interest rate and equity trading. Our foreign exchange trading business
maintained its strong performance of recent quarters. Partially offsetting
these revenue increases were large net unrealized securities losses related to
valuation adjustments in Apex, non-bank-sponsored asset-backed commercial
paper on completion of the Montreal Accord, and other-than-temporary
impairments in our available-for-sale portfolios.
Investment and Corporate Banking and Other revenue increased by $118
million or 41% in part due to significantly higher corporate banking net
interest income. Our lending business is starting to see the positive impacts
of re-pricing initiatives begun in the prior year. There was also increased
trading revenues from mark-to-market gains on credit default swaps used to
hedge our loan portfolio. Equity underwriting revenues were particularly
strong as we benefited from current economic conditions which have led many
companies to shore up their capital base. Mergers and acquisition activity
remained soft, which is reflective of the difficult market conditions. In
addition, there were net securities losses on certain merchant banking
investments.
Net interest income rose from a year ago due to higher revenues from our
interest-rate-sensitive businesses, higher corporate banking net interest
income and increased trading net interest income. Trading net interest income
consists of interest earned on trading assets less the costs of funding the
assets. Net interest margin improved 41 basis points from the prior year due
to higher spreads in our interest-rate-sensitive businesses and corporate
lending business.
Non-interest expense increased $91 million or 24%, mainly due to higher
employee costs, including higher variable compensation as a result of improved
revenue performance and $24 million of severance charges in the quarter. The
stronger U.S. dollar increased expenses by $39 million or 10% relative to a
year ago.
Q1 2009 vs Q4 2008
Net income decreased $111 million or 38%. The current quarter included
charges of $511 million ($348 million after tax) as described in the Effects
of the Capital Markets Environment section. Results in the fourth quarter
reflected charges of $14 million ($8 million after tax) as described in the
Notable Items section. Results in the previous quarter benefited from our
group's $52 million share of BMO's recovery of prior-period income taxes and
from higher tax-exempt income.
Revenue rose $5 million or 0.7%. The stronger U.S. dollar increased
revenues by $68 million. Stronger performance from our interest-rate-sensitive
businesses and higher revenues from corporate banking and equity underwriting
activity were offset by larger net securities losses, lower trading revenue
and reductions in mergers and acquisition activity.
Non-interest expense was $22 million or 4.8% higher, primarily due to the
$24 million charge for severance costs in the current quarter. The stronger
U.S. dollar increased expenses by $20 million or 4.4%.
Corporate Services, Including Technology and Operations
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q1-2009 vs. Q1-2008 vs. Q4-2008
-------------------------------------------------------------------------
Net interest income (teb) (428) (237) (+100%) (268) (+100%)
Non-interest revenue 112 93 +100% (79) (42%)
-------------------------------------------------------------------------
Total revenue (teb) (316) (144) (84%) (347) (+100%)
Provision for credit
losses 272 164 +100% (61) (18%)
Non-interest expense 47 44 +100% 25 +100%
Restructuring charge - - - 8 100%
-------------------------------------------------------------------------
Total non-interest expense 47 44 +100% 33 +100%
Loss before income
taxes and non-controlling
interest in subsidiaries 635 352 +100% 319 +100%
Income tax recovery (teb) 284 112 66% 99 54%
Non-controlling interest
in subsidiaries 19 1 6% - -
-------------------------------------------------------------------------
Net loss 370 241 +100% 220 +100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
U.S. Select Financial Data
(US$ in millions)
Revenue (122) (56) (84%) (113) (+100%)
Provision for credit
losses 224 105 88% 15 7%
Non-interest expense (14) 6 21% 7 33%
Restructuring charge - - - 2 100%
-------------------------------------------------------------------------
Total non-interest expense (14) 6 21% 9 34%
Income tax recovery (teb) 129 59 79% 58 79%
Net loss 208 108 +100% 80 63%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Corporate Services
Corporate Services includes the corporate units that provide expertise
and governance support to BMO Financial Group in areas such as strategic
planning, law, finance, internal audit, risk management, corporate
communications, corporate marketing, human resources and learning. Operating
results include revenues and expenses associated with certain securitization
activities, the hedging of foreign-source earnings, and activities related to
the management of certain balance sheet positions and BMO's overall
asset-liability structure.
Corporate Services is generally charged (or credited) with differences
between the periodic provisions for credit losses charged to the client groups
under our expected loss provisioning methodology and the required periodic
provisions charged by the consolidated organization under GAAP.
Technology and Operations
Technology and Operations (T&O) manages, maintains and provides
governance over information technology, operations services, real estate and
sourcing for BMO Financial Group. T&O focuses on enterprise-wide priorities
that improve service quality and efficiency to deliver an excellent customer
experience.
Financial Performance Review
Technology and Operations operating results are included with Corporate
Services for reporting purposes. Costs of T&O's services are transferred to
the client groups (P&C, PCG and BMO Capital Markets) and only relatively minor
amounts are retained within T&O. As such, results in this section largely
reflect the other corporate units outlined above.
There was a net loss of $370 million in the quarter with approximately
one-half due to provisions for credit losses and the balance to low revenues.
There was a net loss of $129 million in the prior year. Increased provisions
for credit losses reflect BMO's expected loss provisioning methodology whereby
expected credit losses are charged to the operating groups and the difference
between expected losses and actual losses is charged (or credited) to
Corporate Services. Lower revenues were attributable to three factors; the
impact of market interest rate changes that created a negative carry on
certain asset-liability management interest rate positions; mark-to-market
losses on hedging activities; and funding activities to further enhance our
strong liquidity position. Expenses were higher mainly due to increases in
benefit costs, higher FDIC insurance premiums as a result of enhancements to
protection levels and increased premium rates, and higher capital tax expense
due in part to increased capital.
There was a $150 million net loss in the fourth quarter of 2008. The net
loss increased $220 million from the fourth quarter of 2008 primarily due to
lower revenues. Revenues decreased $347 million for the reasons outlined
above. Expenses were up $33 million primarily due to increases in benefit
costs, FDIC insurance premiums and a recovery of the 2007 restructuring charge
in the prior quarter. Results in the fourth quarter included $21 million of
recoveries of prior-year income taxes.
Notable items
(Canadian $ in millions, except as noted) Q1-2009 Q4-2008 Q1-2008
-------------------------------------------------------------------------
Charges related to deterioration in
capital markets environment 528 45 488
Related income taxes 169 18 164
-------------------------------------------------------------------------
Net impact of charges related to
deterioration in capital markets
environment(a) 359 27 324
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Increase in general allowance - 150 60
Related income taxes - 52 22
-------------------------------------------------------------------------
Net impact of increase in general
allowance(b) - 98 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net impact of notable items(a+b) 359 125 362
-------------------------------------------------------------------------
Notable Items
Q1 2009
Charges related to the capital markets environment in the first quarter
are detailed in the Effects of the Capital Markets Environment on First
Quarter Results section.
Q1 2008
In the first quarter of 2008, BMO recorded $548 million ($362 million
after tax and $0.72 per share) of charges for certain trading activities and
valuation adjustments and an increase in the general allowance for credit
losses. They included $488 million ($324 million after tax) of charges in
respect of the capital markets environment in BMO Capital Markets and a $60
million ($38 million after tax) increase in the general allowance for credit
losses to reflect portfolio growth and risk migration recorded in Corporate
Services.
Non-interest revenue in the first quarter of 2008 was affected by the
$488 million of charges outlined above. They included reductions in trading
non-interest revenue ($420 million), investment securities gains ($23 million)
and other income ($45 million).
Q4 2008
BMO's results in the fourth quarter of 2008 were affected by capital
markets environment charges of $45 million ($27 million after tax and $0.06
per share) reflected in BMO Capital Markets and Private Client Group. There
were $14 million ($8 million after tax) of charges recorded in BMO Capital
Markets and $31 million ($19 million after tax) recorded in Private Client
Group.
The above capital markets environment charges of $45 million were all
reflected in non-interest revenue. There was $228 million of losses in
securities gains (losses), other than trading, a reduction of $30 million in
other revenue and a $213 million increase in trading non-interest revenue.
Results also reflected a $150 million ($98 million after tax) increase in
the general allowance for credit losses recorded in Corporate Services.
GAAP and Related Non-GAAP Measures used in the MD&A
(Canadian $ in millions, except as noted) Q1-2009 Q4-2008 Q1-2008
-------------------------------------------------------------------------
Total non-interest expense (a) 1,841 1,818 1,614
Amortization of acquisition-related
intangible assets (note 1) (10) (11) (10)
-------------------------------------------------------------------------
Cash-based non-interest expense (b) (note 2) 1,831 1,807 1,604
-------------------------------------------------------------------------
Net income 225 560 255
Amortization of acquisition-related
intangible assets, net of income taxes 8 10 8
-------------------------------------------------------------------------
Cash net income (note 2) 233 570 263
Preferred share dividends (23) (25) (15)
Charge for capital (note 2) (429) (400) (375)
-------------------------------------------------------------------------
Net economic profit (note 2) (219) 145 (127)
-------------------------------------------------------------------------
Revenue (c) 2,442 2,813 2,026
Revenue growth (%) (d) 20.5 27.9 (2.0)
Productivity ratio (%) ((a/c) x 100) 75.4 64.6 79.7
Cash productivity ratio (%) ((b/c) x 100)
(note 2) 75.0 64.2 79.2
Non-interest expense growth (%) (e) 14.1 9.9 (3.5)
Cash-based Non-expense growth (%) (f)
(note 2) 14.1 9.9 (3.5)
Operating leverage (%) (d-e) 6.4 18.0 1.5
Cash Operating leverage (%) (d-f) (note 2) 6.4 18.0 1.5
EPS (uses net income) ($) 0.39 1.06 0.47
Cash EPS (note 1) (uses cash net income) ($) 0.40 1.08 0.49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 1: The amortization of non-acquisition-related intangible assets is
not added back in the determination of cash net income.
Note 2: These are non-GAAP amounts or non-GAAP measures.
Non-GAAP Measures
BMO uses both GAAP and certain non-GAAP measures to assess performance.
Securities regulators require that companies caution readers that earnings and
other measures adjusted to a basis other than GAAP do not have standardized
meanings under GAAP and are unlikely to be comparable to similar measures used
by other companies. The above table reconciles the non-GAAP measures, which
management regularly monitors, to their GAAP counterparts.
At times, we indicate certain measures excluding the effects of items but
generally do so in conjunction with disclosure of the nearest GAAP measure and
provide detail of the reconciling item. Amounts and measures stated on such a
basis are considered useful as they could be expected to be reflective of
ongoing operating results or assist readers' understanding of performance. To
assist readers, we have also provided a schedule that summarizes notable items
that have affected results in the reporting periods.
Cash earnings, cash productivity and cash operating leverage measures may
enhance comparisons between periods when there has been an acquisition,
particularly because the purchase decision may not consider the amortization
of intangible assets to be a relevant expense. Cash EPS measures are also
disclosed because analysts often focus on this measure, and cash EPS is used
by Thomson First Call to track third-party earnings estimates that are
frequently reported in the media. Cash measures add the after-tax amortization
of acquisition-related intangible assets to GAAP earnings to derive cash net
income (and associated cash EPS) and deduct the amortization of
acquisition-related intangible assets from non-interest expense to derive cash
productivity and cash operating leverage measures.
Net economic profit represents cash net income available to common
shareholders, less a charge for capital, and is considered an effective
measure of economic value added.
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our web site at
www.bmo.com/investorrelations to review this quarterly news release,
presentation materials and a supplementary financial information package
online. Copies of these documents are also available at BMO Financial Group's
offices at 100 King Street West, 18th Floor, 1 First Canadian Place, Toronto,
Ontario, M5X 1A1.
Quarterly Conference Call and Webcast Presentations
Interested parties are also invited to listen to our quarterly conference
call on Tuesday, March 3, 2009 at 12:30 p.m. (EST). At that time, senior BMO
executives will comment on results for the quarter and respond to questions
from the investor community. The call may be accessed by telephone at
416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside
Toronto). A replay of the conference call can be accessed until Monday, May
25, 2009 by calling 416-695-5800 (from within Toronto) or 1-800-408-3053
(toll-free outside Toronto) and entering passcode 3277495.
A live webcast of the call can be accessed on our web site at
www.bmo.com/investorrelations. A replay can be accessed on the site until
Monday, May 25, 2009.
Media Relations Contacts
Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Lucie Gosselin, Montreal, lucie.gosselin@bmo.com, 514-877-8224
Investor Relations Contacts
Viki Lazaris, Senior Vice-President, viki.lazaris@bmo.com,
416-867-6656
Steven Bonin, Director, steven.bonin@bmo.com, 416-867-5452
Andrew Chin, Senior Manager, andrew.chin@bmo.com, 416-867-7019
Chief Financial Officer
Russel Robertson, Interim Chief Financial Officer
russ.robertson@bmo.com, 416-867-7360
Corporate Secretary
Blair Morrison, Vice-President & Corporate Secretary
corp.secretary@bmo.com, 416-867-6785
-------------------------------------------------------------------------
Shareholder Dividend Reinvestment For other shareholder information,
and Share Purchase Plan please contact
Average market price Bank of Montreal
November 2008 $ 32.24 Shareholder Services
December 2008 $ 30.16 Corporate Secretary's Department
January 2009 $ 32.05 One First Canadian Place, 19th Floor
Toronto, Ontario M5X 1A1
For dividend information, change Telephone: (416) 867-6785
in shareholder address or to Fax: (416) 867-6793
advise of duplicate mailings, E-mail: corp.secretary@bmo.com
please contact
For further information on
Computershare Trust Company this report, please contact
of Canada
100 University Avenue, 9th Floor Bank of Montreal
Toronto, Ontario M5J 2Y1 Investor Relations Department
Telephone: 1-800-340-5021 P.O. Box 1, 1 First Canadian
(Canada and the United States) Place, 18th Floor
Telephone: (514) 982-7800 Toronto, Ontario M5X 1A1
(international)
Fax: 1-888-453-0330 To review financial results online,
(Canada and the United States) please visit our web site at
Fax: (416) 263-9394 www.bmo.com
(international)
E-mail: service@computershare.com
-------------------------------------------------------------------------
(R) Registered trade-mark of Bank of Montreal
Financial Highlights
(Unaudited)
(Canadian $
in millions,
except as
noted) For the three months ended
-------------------------------------------------------------------------
Change
from
January October July April January January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008 31, 2008
-------------------------------------------------------------------------
Income
Statement
Highlights
Total
revenue $ 2,442 $ 2,813 $ 2,746 $ 2,620 $ 2,026 20.5%
Provision for
credit losses 428 465 484 151 230 86.1
Non-interest
expense 1,841 1,818 1,782 1,680 1,614 14.1
Net income 225 560 521 642 255 (11.7)
-------------------------------------------------------------------------
Net Income by
Operating
Segment
P&C Canada $ 325 $ 333 $ 331 $ 320 $ 291 11.7%
P&C U.S. 34 12 28 30 26 30.8
PCG 57 75 108 107 96 (40.6)
BMO CM 179 290 263 187 (29) +100
Corporate
Services(a) (370) (150) (209) (2) (129) (+100)
-------------------------------------------------------------------------
Common Share
Data ($)
Diluted
earnings
per share $ 0.39 $ 1.06 $ 0.98 $ 1.25 $ 0.47 $ (0.08)
Diluted cash
earnings per
share(b) 0.40 1.08 1.00 1.26 0.49 (0.09)
Dividends
declared per
share 0.70 0.70 0.70 0.70 0.70 0.00
Book value per
share 32.18 32.02 30.15 29.71 28.64 3.54
Closing share
price 33.25 43.02 47.94 50.10 56.75 (23.50)
Total market
value of
common shares
($ billions) 17.9 21.7 24.2 25.2 28.3 (10.4)
-------------------------------------------------------------------------
As at
-------------------------------------------------------------------------
Change
from
January October July April January January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008 31, 2008
-------------------------------------------------------------------------
Balance Sheet
Highlights
Assets $ 443,174 $ 416,050 $ 375,047 $ 375,158 $ 376,825 17.6%
Net loans and
acceptan-
ces(d) 190,099 186,962 175,882 171,826 168,994 12.5
Deposits 264,580 257,670 248,657 238,580 242,911 8.9
Common
shareholders'
equity 17,371 16,158 15,207 14,954 14,304 21.4
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
January October July April January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008
-------------------------------------------------------------------------
Financial
Measures
(%)(c)
Average
annual five
year total
shareholder
return (6.9) 0.9 5.1 8.2 10.1
Diluted earnings
per share
growth (17.0) 21.8 (23.4) (3.1) (29.9)
Diluted cash
earnings per
share growth(b) (18.4) 21.3 (23.1) (3.8) (27.9)
Return on equity 4.9 14.0 13.5 17.9 6.7
Cash return on
equity(b) 5.2 14.3 13.7 18.1 6.9
Net economic
profit (NEP)
growth(b) (71.8) +100 (56.5) (7.9) (+100)
Operating
leverage 6.4 18.0 0.1 (0.5) 1.5
Cash operating
leverage(b) 6.4 18.0 0.0 (0.7) 1.5
Revenue growth 20.5 27.9 7.5 3.6 (2.0)
Non-interest
expense-to-
revenue ratio 75.4 64.6 64.9 64.1 79.7
Cash non-interest
expense-to-
revenue ratio(b) 75.0 64.2 64.5 63.8 79.2
Provision for
credit losses-
to-average
loans and
acceptances
(annualized)(d) 0.90 1.01 1.10 0.35 0.55
Gross impaired
loans and
acceptances-to-
equity and
allowance for
credit losses 11.91 11.34 9.09 9.54 7.46
Cash and
securities-to-
total assets
ratio 28.2 29.1 29.6 29.6 30.7
Tier 1 capital
ratio -
Basel II 10.21 9.77 9.90 9.42 9.48
Credit rating
DBRS AA AA AA AA AA
Fitch AA- AA- AA- AA- AA-
Moody's Aa1 Aa1 Aa1 Aa1 Aa1
Standard &
Poor's A+ A+ A+ A+ A+
-------------------------------------------------------------------------
Financial Ratios
(% except as
noted)(c)
Twelve month
total
shareholder
return (37.7) (27.9) (24.4) (24.6) (15.6)
Dividend yield 8.42 6.51 5.84 5.59 4.93
Price-to-earnings
ratio (times) 9.0 11.4 13.4 12.9 14.5
Market-to-book
value (times) 1.03 1.34 1.59 1.69 1.98
Net economic
profit
($ millions)(b) (219) 145 122 266 (127)
Return on
average assets 0.19 0.54 0.52 0.66 0.26
Net interest
margin on
average earning
assets 1.51 1.71 1.59 1.48 1.45
Non-interest
revenue-to-
total revenue 45.5 49.8 53.2 55.2 40.1
Non-interest
expense growth 14.1 9.9 7.4 4.1 (3.5)
Cash non-interest
expense
growth(b) 14.1 9.9 7.5 4.3 (3.5)
Total capital
ratio -
Basel II 12.87 12.17 12.29 11.64 11.26
Equity-to-assets
ratio 4.3 4.3 4.5 4.4 4.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All ratios in this report are based on unrounded numbers.
(a) Corporate Services includes Technology and Operations.
(b) Refer to the "Non-GAAP Measures" section of Management's Discussion
and Analysis for an explanation of cash results and net economic
profit. Securities regulators require that companies caution readers
that earnings and other measures adjusted to a basis other than
generally accepted accounting principles (GAAP) do not have
standardized meanings under GAAP and are unlikely to be comparable to
similar measures used by other companies.
(c) For the period ended, or as at, as appropriate.
(d) Effective in the first quarter of 2009, securities borrowed or
purchased under resale agreements are excluded from net loans and
acceptances and credit statistics. All comparative figures have been
restated.
Interim Consolidated Financial Statements
Consolidated Statement of Income
(Unaudited)
(Canadian $ in millions,
except as noted) For the three months ended
-------------------------------------------------------------------------
January October July April January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008
-------------------------------------------------------------------------
Interest, Dividend
and Fee Income
Loans $ 2,213 $ 2,554 $ 2,467 $ 2,609 $ 2,984
Securities 828 748 705 805 948
Deposits with banks 96 182 203 230 315
-------------------------------------------------------------------------
3,137 3,484 3,375 3,644 4,247
-------------------------------------------------------------------------
Interest Expense
Deposits 1,446 1,590 1,612 1,842 2,297
Subordinated debt 60 61 61 51 49
Capital trust securities
and preferred shares 21 23 22 23 23
Other liabilities 279 397 394 554 664
-------------------------------------------------------------------------
1,806 2,071 2,089 2,470 3,033
-------------------------------------------------------------------------
Net Interest Income 1,331 1,413 1,286 1,174 1,214
Provision for credit
losses (Note 3) 428 465 484 151 230
-------------------------------------------------------------------------
Net Interest Income
After Provision for
Credit Losses 903 948 802 1,023 984
-------------------------------------------------------------------------
Non-Interest Revenue
Securities commissions
and fees 248 270 294 270 271
Deposit and payment
service charges 205 203 190 181 182
Trading revenues (losses) 224 435 220 192 (301)
Lending fees 119 120 116 101 92
Card fees 24 58 88 78 67
Investment management and
custodial fees 88 87 86 85 81
Mutual fund revenues 114 140 151 144 154
Securitization revenues 264 167 133 133 80
Underwriting and advisory
fees 77 66 97 98 92
Securities gains (losses),
other than trading (314) (252) (75) 14 (2)
Foreign exchange, other
than trading 13 (4) 25 30 29
Insurance income 56 52 56 52 62
Other (7) 58 79 68 5
-------------------------------------------------------------------------
1,111 1,400 1,460 1,446 812
-------------------------------------------------------------------------
Net Interest Income and
Non-Interest Revenue 2,014 2,348 2,262 2,469 1,796
-------------------------------------------------------------------------
Non-Interest Expense
Employee compensation
(Note 9) 1,087 1,007 1,044 980 945
Premises and equipment
(Note 2) 327 338 312 300 291
Amortization of intangible
assets (Note 2) 51 48 45 45 45
Travel and business
development 82 95 87 74 72
Communications 51 57 50 53 42
Business and capital taxes 15 11 20 (1) 12
Professional fees 92 113 102 90 79
Other 136 157 122 139 128
-------------------------------------------------------------------------
1,841 1,826 1,782 1,680 1,614
-------------------------------------------------------------------------
Restructuring Charge
(Reversal) (Note 10) - (8) - - -
-------------------------------------------------------------------------
Income Before Provision
for (Recovery of) Income
Taxes and Non-Controlling
Interest in Subsidiaries 173 530 480 789 182
Income taxes (71) (49) (59) 128 (91)
-------------------------------------------------------------------------
244 579 539 661 273
Non-controlling interest
in subsidiaries 19 19 18 19 18
-------------------------------------------------------------------------
Net Income $ 225 $ 560 $ 521 $ 642 $ 255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Preferred share
dividends $ 23 $ 25 $ 19 $ 14 $ 15
Net income available
to common shareholders $ 202 $ 535 $ 502 $ 628 $ 240
Average common shares
(in thousands) 520,020 503,004 504,124 502,054 499,067
Average diluted common
shares (in thousands) 523,808 506,591 508,032 506,638 505,572
-------------------------------------------------------------------------
Earnings Per Share
(Canadian $)
Basic $ 0.39 $ 1.06 $ 1.00 $ 1.25 $ 0.48
Diluted 0.39 1.06 0.98 1.25 0.47
Dividends Declared Per
Common Share 0.70 0.70 0.70 0.70 0.70
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Interim Consolidated Financial Statements
Consolidated Balance Sheet
(Unaudited)
(Canadian $ in millions) As at
-------------------------------------------------------------------------
January October July April January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008
-------------------------------------------------------------------------
Assets
Cash Resources $ 26,390 $ 21,105 $ 22,054 $ 22,237 $ 26,122
-------------------------------------------------------------------------
Securities
Trading 61,752 66,032 63,628 64,443 63,377
Available-for-sale 35,189 32,115 23,426 22,453 24,341
Other 1,517 1,991 1,821 1,774 1,747
-------------------------------------------------------------------------
98,458 100,138 88,875 88,670 89,465
-------------------------------------------------------------------------
Securities Borrowed or
Purchased Under
Resale Agreements 32,283 28,033 32,433 33,596 42,937
-------------------------------------------------------------------------
Loans
Residential mortgages 50,107 49,343 51,757 52,583 53,224
Consumer instalment and
other personal 44,355 43,737 40,292 37,954 34,517
Credit cards 2,105 2,120 3,532 4,338 4,685
Businesses and
governments 84,557 84,151 71,961 67,942 66,205
-------------------------------------------------------------------------
181,124 179,351 167,542 162,817 158,631
Customers' liability
under acceptances 10,716 9,358 9,834 10,345 11,590
Allowance for credit
losses (Note 3) (1,741) (1,747) (1,494) (1,336) (1,227)
-------------------------------------------------------------------------
190,099 186,962 175,882 171,826 168,994
-------------------------------------------------------------------------
Other Assets
Derivative instruments 81,985 65,586 43,167 44,557 36,857
Premises and equipment
(Note 2) 1,709 1,721 1,582 1,570 1,521
Goodwill 1,706 1,635 1,449 1,398 1,189
Intangible assets
(Note 2) 676 710 658 662 608
Other 9,868 10,160 8,947 10,642 9,132
-------------------------------------------------------------------------
95,944 79,812 55,803 58,829 49,307
-------------------------------------------------------------------------
Total Assets $ 443,174 $ 416,050 $ 375,047 $ 375,158 $ 376,825
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Deposits
Banks $ 31,422 $ 30,346 $ 29,988 $ 30,938 $ 34,991
Businesses and
governments 133,388 136,111 131,748 122,707 125,312
Individuals 99,770 91,213 86,921 84,935 82,608
-------------------------------------------------------------------------
264,580 257,670 248,657 238,580 242,911
-------------------------------------------------------------------------
Other Liabilities
Derivative instruments 77,764 60,048 36,786 40,347 32,776
Acceptances 10,716 9,358 9,834 10,345 11,590
Securities sold but
not yet purchased 16,327 18,792 17,415 20,053 28,393
Securities lent or
sold under repurchase
agreements 36,012 32,492 28,148 29,894 28,331
Other 12,969 14,071 11,650 13,940 12,478
-------------------------------------------------------------------------
153,788 134,761 103,833 114,579 113,568
-------------------------------------------------------------------------
Subordinated Debt
(Note 11) 4,389 4,315 4,204 4,199 3,446
-------------------------------------------------------------------------
Capital Trust Securities 1,150 1,150 1,150 1,150 1,150
-------------------------------------------------------------------------
Preferred Share Liability
(Note 12) - 250 250 250 250
-------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 12) 7,676 6,454 6,458 6,114 5,648
Contributed surplus 76 69 68 67 65
Retained earnings 11,434 11,632 11,471 11,327 11,056
Accumulated other
comprehensive income
(loss) 81 (251) (1,044) (1,108) (1,269)
-------------------------------------------------------------------------
19,267 17,904 16,953 16,400 15,500
-------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 443,174 $ 416,050 $ 375,047 $ 375,158 $ 376,825
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Interim Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
(Unaudited) (Canadian $ in millions) For the three months ended
-------------------------------------------------------------------------
January 31, January 31,
2009 2008
-------------------------------------------------------------------------
Net income $ 225 $ 255
Other Comprehensive Income
Net change in unrealized gains
(losses) on available-for-sale
securities 66 (2)
Net change in unrealized gains
on cash flow hedges 192 64
Net gain on translation of net
foreign operations 74 202
-------------------------------------------------------------------------
Total Comprehensive Income $ 557 $ 519
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) (Canadian $ in millions) For the three months ended
-------------------------------------------------------------------------
January 31, January 31,
2009 2008
-------------------------------------------------------------------------
Preferred Shares
Balance at beginning of period $ 1,746 $ 1,196
Issued during the period (Note 12) 150 -
-------------------------------------------------------------------------
Balance at End of Period 1,896 1,196
-------------------------------------------------------------------------
Common Shares
Balance at beginning of period 4,773 4,411
Issued during the period (Note 12) 1,000 -
Issued under the Shareholder Dividend
Reinvestment and Share Purchase Plan 35 28
Issued under the Stock Option Plan 10 13
-------------------------------------------------------------------------
Balance at End of Period 5,818 4,452
-------------------------------------------------------------------------
Treasury Shares (Note 12) (38) -
-------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 69 58
Stock option expense/exercised 5 7
Premium on treasury shares 2 -
-------------------------------------------------------------------------
Balance at End of Period 76 65
-------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period 11,632 11,166
Net income 225 255
Dividends - Preferred shares (23) (15)
- Common shares (378) (350)
Share issue expense (22) -
-------------------------------------------------------------------------
Balance at End of Period 11,434 11,056
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income
(Loss) on Available-for-Sale Securities
Balance at beginning of period (74) 35
Unrealized losses on available-for-sale
securities arising during the period
(net of income taxes of $20 and $12) (44) (25)
Reclassification to earnings of losses
in the period (net of income taxes of
$52 and $10) 110 23
-------------------------------------------------------------------------
Balance at End of Period (8) 33
-------------------------------------------------------------------------
Accumulated Other Comprehensive Income
(Loss) on Cash Flow Hedges
Balance at beginning of period 258 (166)
Gains on cash flow hedges arising
during the period (net of income taxes
of $78 and $15) 193 27
Reclassification to earnings of (gains)
losses on cash flow hedges (net of
income taxes of less than $1 and $17) (1) 37
-------------------------------------------------------------------------
Balance at End of Period 450 (102)
-------------------------------------------------------------------------
Accumulated Other Comprehensive Loss on
Translation of Net Foreign Operations
Balance at beginning of period (435) (1,402)
Unrealized gain on translation of net
foreign operations 228 592
Impact of hedging unrealized gain on
translation of net foreign operations
(net of income taxes of $66 and $185) (154) (390)
-------------------------------------------------------------------------
Balance at End of Period (361) (1,200)
-------------------------------------------------------------------------
Total Accumulated Other Comprehensive
Income (Loss) 81 (1,269)
-------------------------------------------------------------------------
Total Shareholders' Equity $ 19,267 $ 15,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Cash Flows
(Unaudited) (Canadian $ in millions) For the three months ended
-------------------------------------------------------------------------
January 31, January 31,
2009 2008
-------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 225 $ 255
Adjustments to determine net cash flows
provided by (used in) operating activities
Write-down of securities, other than
trading 241 39
Net loss (gain) on securities, other
than trading 73 (37)
Net decrease in trading securities 4,880 9,198
Provision for credit losses 428 230
(Gain) on sale of securitized loans
(Note 4) (182) (59)
Change in derivative instruments
- (Increase) in derivative asset (16,068) (3,442)
- Increase (decrease) in derivative
liability 17,178 (1,881)
Amortization of premises and equipment 65 61
Amortization of intangible assets 51 45
Net (increase) decrease in future
income taxes (130) 15
Net (increase) in current income taxes (21) (461)
Change in accrued interest
- Decrease in interest receivable 209 243
- (Decrease) in interest payable (137) (55)
Changes in other items and accruals, net (514) (973)
-------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,298 3,178
-------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits 4,919 4,208
Net increase (decrease) in securities sold
but not yet purchased (2,588) 3,087
Net increase (decrease) in securities lent
or sold under repurchase agreements 3,382 (3,902)
Net increase in liabilities of subsidiaries - 1,665
Repayment of subordinated debt (Note 11) (140) -
Redemption of preferred share liability
(Note 12) (250) -
Proceeds from issuance of preferred shares
(Note 12) 150 -
Proceeds from issuance of common shares
(Note 12) 1,010 13
Share issue expense (22) -
Cash dividends paid (366) (337)
-------------------------------------------------------------------------
Net Cash Provided by Financing Activities 6,095 4,734
-------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) decrease in interest
bearing deposits with banks 2,523 (2,746)
Purchases of securities, other than trading (11,860) (6,826)
Maturities of securities, other than trading 4,030 5,466
Proceeds from sales of securities, other
than trading 5,711 3,972
Net (increase) in loans (5,498) (3,957)
Proceeds from securitization of loans (Note 4) 4,637 545
Net (increase) in securities borrowed or
purchased under resale agreements (4,079) (4,909)
Premises and equipment - net purchases (41) (33)
Purchased and developed software -
net purchases (46) (27)
Acquisitions (Note 8) (6) (40)
-------------------------------------------------------------------------
Net Cash Used in Investing Activities (4,629) (8,555)
-------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 53 90
-------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 7,817 (553)
Cash and Cash Equivalents at Beginning
of Period 9,134 3,650
-------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 16,951 $ 3,097
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Represented by:
Cash and non-interest bearing deposits
with Bank of Canada and other banks $ 15,537 $ 1,216
Cheques and other items in transit, net 1,414 1,881
-------------------------------------------------------------------------
$ 16,951 $ 3,097
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information
Amount of interest paid in the period $ 1,937 $ 3,046
Amount of income taxes paid in the period $ 140 $ 364
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Notes to Consolidated Financial Statements
January 31, 2009 (Unaudited)
-------------------------------------------------------------------------
Note 1: Basis of Presentation
These interim consolidated financial statements should be read in
conjunction with the notes to our annual consolidated financial
statements for the year ended October 31, 2008 as set out on pages 108 to
151 of our 2008 Annual Report. These interim consolidated financial
statements have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") using the same accounting
policies and methods of computation as were used for our annual
consolidated financial statements for the year ended October 31, 2008,
except as described in Note 2.
Note 2: Change in Accounting Policy
On November 1, 2008, we adopted the Canadian Institute of Chartered
Accountants' new accounting requirements for goodwill and intangible
assets. We have restated prior periods' financial statements for this
change. The new rules required us to reclassify certain computer software
from premises and equipment to intangible assets. The impact of this
change in accounting policy on the current and prior periods is as
follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
January October July April January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008
-------------------------------------------------------------------------
Consolidated Balance
Sheet
(Decrease) in Premises
and Equipment $ (515) $ (506) $ (469) $ (454) $ (456)
Increase in
Intangible Assets 515 506 469 454 456
-------------------------------------------------------------------------
Consolidated Statement
of Income
(Decrease) in Premises
and Equipment $ (41) $ (37) $ (34) $ (35) $ (35)
Increase in
Amortization of
Intangible Assets 41 37 34 35 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table outlines the restated software intangible assets for
the current and prior periods:
(Canadian $ in millions)
-------------------------------------------------------------------------
January October July April January
31, 2009 31, 2008 31, 2008 30, 2008 31, 2008
-------------------------------------------------------------------------
Intangible Assets
Purchased
Software(1) $ 1,009 $ 1,003 $ 980 $ 974 $ 971
Developed
Software(1)(2) 743 696 614 567 536
-------------------------------------------------------------------------
Software Intangible
Assets 1,752 1,699 1,594 1,541 1,507
-------------------------------------------------------------------------
Accumulated
Amortization (1,237) (1,193) (1,125) (1,087) (1,051)
-------------------------------------------------------------------------
Carrying Value $ 515 $ 506 $ 469 $ 454 $ 456
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Amortized on a straight-line basis over its useful life up to a
maximum of 5 years.
(2) Includes $58 million as at January 31, 2009, $55 million as at
October 31, 2008, $57 million as at July 31, 2008, $51 million as at
April 30, 2008 and $61 million as at January 31, 2008 of software in
development which is not subject to amortization.
Note 3: Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated Balance
Sheet is maintained at a level which we consider adequate to absorb
credit-related losses on our loans, customers' liability under
acceptances and other credit instruments. The portion related to other
credit instruments is recorded in other liabilities in our Consolidated
Balance Sheet. As at January 31, 2009 and January 31, 2008 there was no
allowance for credit losses related to other credit instruments included
in other liabilities.
A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
Credit card,
consumer instalment
Residential and other Business and
mortgages personal loans government loans
-------------------------------------------------------------------------
For the three January January January January January January
months ended 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Specific
Allowance at
beginning of
period $ 13 $ 14 $ 2 $ 1 $ 411 $ 142
Provision for
credit losses 3 1 129 68 296 101
Recoveries - - 28 19 8 3
Write-offs - - (158) (87) (333) (15)
Foreign exchange
and other - - - - 8 3
-------------------------------------------------------------------------
Specific
Allowance at
end of period 16 15 1 1 390 234
-------------------------------------------------------------------------
General
Allowance at
beginning of
period 8 11 242 327 1,030 517
Provision for
credit losses 13 (3) 16 30 (28) 36
Foreign exchange
and other - - - - 13 19
-------------------------------------------------------------------------
General
Allowance at
end of period 21 8 258 357 1,015 572
-------------------------------------------------------------------------
Total
Allowance $ 37 $ 23 $ 259 $ 358 $ 1,405 $ 806
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-----------------------------------------------------
Customers'
liability
under acceptances Total
-----------------------------------------------------
For the three January January January January
months ended 31, 2009 31, 2008 31, 2009 31, 2008
-----------------------------------------------------
Specific
Allowance at
beginning of
period $ - $ - $ 426 $ 157
Provision for
credit losses - - 428 170
Recoveries - - 36 22
Write-offs - - (491) (102)
Foreign exchange
and other - - 8 3
-----------------------------------------------------
Specific
Allowance at
end of period - - 407 250
-----------------------------------------------------
General
Allowance at
beginning of
period 41 43 1,321 898
Provision for
credit losses (1) (3) - 60
Foreign exchange
and other - - 13 19
-----------------------------------------------------
General
Allowance at
end of period 40 40 1,334 977
-----------------------------------------------------
Total
Allowance $ 40 $ 40 $ 1,741 $ 1,227
-----------------------------------------------------
-----------------------------------------------------
Note 4: Securitization
The following tables summarize our securitization activity related to our
assets and its impact on our Consolidated Statement of Income for the
three months ended January 31, 2009 and 2008:
(Canadian $ in millions)
-------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
-------------------------------------------------------------------------
For the three January January January January January January
months ended 31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Net cash
proceeds(1) $ 4,617 $ 548 $ - $ - $ 4,617 $ 548
Investment in
securitization
vehicles(2) - - - - - -
Deferred
purchase
price 89 24 - - 89 24
Servicing
liability (20) (4) - - (20) (4)
-------------------------------------------------------------------------
4,686 568 - - 4,686 568
Loans sold 4,660 563 - - 4,660 563
-------------------------------------------------------------------------
Gain on sale
of loans
from new
securiti-
zations $ 26 $ 5 $ - $ - $ 26 $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gain on sale
of loans sold
to revolving
securiti-
zation
vehicles $ 40 $ 15 $ 116 $ 39 $ 156 $ 54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net cash proceeds represent cash proceeds less issuance costs.
(2) Includes credit card securities retained on-balance sheet by the
Bank.
The key weighted-average assumptions used to value the deferred purchase
price for these securitizations were as follows:
-------------------------------------------------------------------------
Residential
mortgages Credit card loans(1)
-------------------------------------------------------------------------
For the three January January January January
months ended 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Weighted-average life (years) 3.08 4.43 - -
Prepayment rate (%) 16.56 10.00 - -
Interest rate (%) 4.07 5.21 - -
Expected credit losses(2) - - - -
Discount rate (%) 2.48 4.77 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) There were no credit card securitization transactions in the three
months ended January 31, 2009 and 2008.
(2) As the residential mortgages are fully insured, there are no expected
credit losses.
Note 5: Variable Interest Entities
Canadian Customer Securitization Vehicles
Customer securitization vehicles (also referred to as bank-sponsored
multi-seller conduits) assist our customers with the securitization of
their assets to provide them with alternate sources of funding.
Assets held by our unconsolidated Canadian customer securitization
vehicles amounted to $9,385 million as at January 31, 2009
($11,106 million as at October 31, 2008). Our exposure to losses relates
to our investment in commercial paper issued by the vehicles, derivative
contracts we have entered into with the vehicles and the liquidity
support we provide through backstop liquidity facilities. As at
January 31, 2009, we had an exposure of $1,098 million from commercial
paper held ($2,139 million as at October 31, 2008) classified as trading
securities. The total undrawn backstop liquidity facilities was
$9,580 million as at January 31, 2009 ($11,040 million as at
October 31, 2008). No amounts have been drawn against the facilities as
at January 31, 2009 and October 31, 2008. The fair value of derivatives
outstanding with these Variable Interest Entities ("VIEs") was recorded
in our Consolidated Balance Sheet as a derivative asset of $79 million as
at January 31, 2009 (derivative asset of $55 million as at
October 31, 2008).
Included in our Consolidated Balance Sheet as at January 31, 2009, were
assets of $248 million classified as other assets ($265 million as at
October 31, 2008) relating to two VIEs we consolidate as we absorb the
majority of the expected losses.
U.S. Customer Securitization Vehicle
Assets held by our unconsolidated U.S. customer securitization vehicle
amounted to $7,642 million (US$6,231 million) as at January 31, 2009
($7,993 million or US$6,636 million as at October 31, 2008). Our exposure
to losses in our U.S. customer securitization vehicle relates to
liquidity support we provide through backstop liquidity facilities. As at
January 31, 2009, our exposure related to undrawn backstop liquidity
facilities amounted to $9,153 million (US$7,463 million) ($10,015 million
or US$8,315 million as at October 31, 2008). As at January 31, 2009, we
have provided funding of US$851 million in accordance with the terms of
these liquidity facilities (US$851 million as at October 31, 2008). The
fair value of derivatives outstanding with this vehicle was recorded in
our Consolidated Balance Sheet as a derivative liability of $11 million
(US$9 million) as at January 31, 2009 (derivative asset of $1 million or
US$1 million as at October 31, 2008). We are not required to consolidate
our U.S. customer securitization vehicle.
Bank Securitization Vehicles
We use bank securitization vehicles to securitize our Canadian mortgage
loans and Canadian credit card loans to obtain alternate sources of
funding. Total assets held by these vehicles amounted to $9,719 million
as at January 31, 2009 ($9,719 million as at October 31, 2008), all of
which relate to assets in Canada. We are not required to consolidate our
bank securitization vehicles. We also provide liquidity support to our
Canadian mortgage bank securitization vehicles for the face value of the
commercial paper outstanding.
The total contract amount of the liquidity support was $5,100 million as
at January 31, 2009 and October 31, 2008. No amounts were drawn as at
January 31, 2009 and October 31, 2008. As at January 31, 2009, we held
$84 million of the commercial paper issued by these vehicles
($509 million as at October 31, 2008) which was classified as trading
securities.
The fair value of derivatives we have outstanding with these vehicles was
recorded in our Consolidated Balance Sheet as a derivative asset of
$156 million as at January 31, 2009 (derivative asset of $121 million as
at October 31, 2008).
Credit Protection Vehicle
We sponsor Apex Trust ("Apex"), a VIE that provides credit protection to
investors on investments in corporate debt portfolios through credit
default swaps. Assets held by Apex were $3,219 million as at
January 31, 2009 ($2,794 million as at October 31, 2008). A senior
funding facility of $1,130 million is available to Apex, of which we
provide $1,030 million. As at January 31, 2009, $941 million had been
drawn against our facility ($553 million as at October 31, 2008). We have
also authorized a senior demand facility for Apex of $1 billion. No
amounts have been drawn against this facility. We have entered into
credit default swaps with swap counterparties and offsetting swaps with
Apex.
We hold mid-term notes ("MTNs") of Apex with a face value of $815 million
which are classified as available-for-sale securities. As at January 31,
2009, we had recorded the MTNs at a fair value of $448 million
($625 million as at October 31, 2008). A third party holds its exposure
to Apex through a total return swap with us on $600 million of MTNs. The
total return swap and underlying MTNs are classified as trading
instruments. We are not required to consolidate Apex.
Structured Investment Vehicles
Structured investment vehicles ("SIVs") provide investment opportunities
in customized, diversified debt portfolios in a variety of asset and
rating classes. We hold interests in two SIVs and act as asset manager.
Assets held by these SIVs totalled $7,847 million as at January 31, 2009,
including cash of $2 million (total assets of $9,291 million as at
October 31, 2008, including cash of $nil).
Our exposure to loss relates to our investments in these vehicles,
derivative contracts we have entered into with the vehicles and senior
funding we provide through a liquidity facility in order to fund the
repayment of senior notes. Our investment in the capital notes of the
SIVs is recorded in available-for-sale securities in our Consolidated
Balance Sheet, and was $nil as at January 31, 2009 and October 31, 2008.
Amounts drawn on the liquidity facility provided to the SIVs totalled
$6,752 million as at January 31, 2009 ($5,208 million as at
October 31, 2008). Our exposure includes undrawn facilities of
$3,012 million as at January 31, 2009 ($5,063 million as at
October 31, 2008). The fair value of the derivative contracts we have
outstanding with the SIVs was recorded in our Consolidated Balance Sheet
as a derivative asset of $61 million as at January 31, 2009 (derivative
asset of $57 million as at October 31, 2008). We are not required to
consolidate these VIEs.
Note 6: Financial Instruments
Change in Accounting Policy
On August 1, 2008, we elected to transfer securities from trading to
available-for-sale for which we had a change in intent caused by current
market circumstances to hold the securities for the foreseeable future
rather than to exit or trade them in the short term.
A continuity of the transferred securities is as follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
Fair value of securities as at August 1, 2008 $ 2,078
Net (sales) purchases (52)
Fair value change recorded in Other Comprehensive Income (183)
Other than temporary impairment recorded in income (29)
Impact of foreign exchange 141
-------------------------------------------------------------------------
Fair value of securities as at October 31, 2008 1,955
-------------------------------------------------------------------------
Net (sales/maturities) purchases (222)
Fair value change recorded in Other Comprehensive Income 31
Other than temporary impairment recorded in income (50)
Impact of foreign exchange 23
-------------------------------------------------------------------------
Fair value of securities as at January 31, 2009 $ 1,737
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fair Value Measurement
We use a fair value hierarchy to categorize the inputs we use in
valuation techniques to measure fair value. The extent of our use of
quoted market prices (Level 1), internal models using observable market
information as inputs (Level 2) and internal models without observable
market information (Level 3) in the valuation of securities, fair value
liabilities, derivative assets and derivative liabilities as at
January 31, 2009 were as follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
Available-for-sale Trading Fair value
securities securities liabilities
-------------------------------------------------------------------------
January October January October January October
31, 2009 31, 2008 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Valued using
quoted market
prices $ 16,916 $ 9,044 $ 59,840 $ 64,129 $ 16,327 $ 18,792
Valued using
internal
models (with
observable
inputs) 16,086 20,873 1,392 1,441 1,096 1,070
Valued using
internal
models
(without
observable
inputs) 2,187 2,198 520 462 - -
-------------------------------------------------------------------------
Total $ 35,189 $ 32,115 $ 61,752 $ 66,032 $ 17,423 $ 19,862
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-----------------------------------------------------
Derivative Instruments
---------------------------------------
Asset Liability
---------------------------------------
January October January October
31, 2009 31, 2008 31, 2009 31, 2008
-----------------------------------------------------
Valued using
quoted market
prices $ 4,930 $ 6,170 $ 2,201 $ 2,096
Valued using
internal
models (with
observable
inputs) 75,627 57,601 75,124 57,568
Valued using
internal
models
(without
observable
inputs) 1,428 1,815 439 384
-----------------------------------------------------
Total $ 81,985 $ 65,586 $ 77,764 $ 60,048
-----------------------------------------------------
-----------------------------------------------------
Sensitivity analysis for the most significant items valued using internal
models without observable inputs is described below.
Within available-for-sale securities as at January 31, 2009 was
$448 million of Apex MTNs with a face value of $815 million (see Note 5).
The valuation of these MTNs has been determined by management based on
expected discounted cash flows. The determination of the discount rate
used in the discounted cash flow model has the most significant impact on
the valuation of the MTNs and is impacted by changes in credit spreads
and the ratings of the underlying credit default swaps. The impact of
assuming the discount rate increased or decreased by 50 basis points
would result in a change in fair value of $(11) million and $10 million,
respectively. The impact on income for the quarter ended January 31, 2009
related to changes in the fair value of our investment in Apex MTNs was a
charge of $177 million before tax.
A third party holds its exposure to the Apex MTNs through a total return
swap with us. The valuations of this swap and the related underlying MTNs
have been determined by management based on expected discounted cash
flows. The determination of the discount rate used in the discounted cash
flow model has the most significant impact on the valuation of the swap
and underlying securities and is impacted by changes in credit spreads
and the ratings of the underlying credit default swaps. The impact of
assuming the discount rate increased or decreased by 50 basis points
would result in a change in fair value of $(2) million and $3 million,
respectively. The impact on income for the quarter ended January 31, 2009
related to changes in the fair value of the swap and underlying MTNs, was
a charge of $71 million before tax.
During the quarter, we exchanged our asset-backed commercial paper
("ABCP") subject to the Montreal Accord for new longer term notes issued
by the restructured vehicles. Upon exchange of the notes, we recognized a
loss of $14 million in income that was previously recorded in other
comprehensive income for the quarter ended October 31, 2008 related to
the ABCP and recorded a further $35 million decline in the fair value for
the quarter ended January 31, 2009. The new notes are recorded as trading
securities at a fair value of $145 million (face value $323 million). The
valuation of these notes has been determined by management based on
expected discounted cash flows. The determination of the discount rate
used in the discounted cash flow model has the most significant impact on
the valuation of the notes and is impacted by changes in credit spreads
and the rating of the notes. The impact of assuming the discount rate
increased or decreased by 50 basis points would result in a change in
fair value of $(5) million and $5 million, respectively.
Within derivative assets and derivative liabilities as at January 31,
2009 was $828 million and $103 million, respectively, related to the
mark-to-market of credit default swaps and total return swaps on
structured products. The valuation of these derivatives has been
determined by management based on estimates of current market spreads for
similar structured products. The impact of assuming a 10 basis point
increase or decrease in that spread would result in a change in fair
value of $(3) million and $3 million, respectively. The impact on income
for the quarter ended January 31, 2009 related to changes in the fair
value of these derivatives was income of $6 million before tax.
Financial Liabilities Designated as Held for Trading
The fair value and amount due at contractual maturity of structured notes
accounted for as held for trading as at January 31, 2009 were
$1,095 million and $1,162 million, respectively ($1,070 million and
$1,197 million, respectively, as at October 31, 2008). The change in fair
value of these structured notes was a decrease in non-interest revenue,
trading revenues of $15 million for the quarter ended January 31, 2009.
The portion of the change in fair value attributable to changes in credit
risk was an unrealized gain of $22 million for the quarter ended January
31, 2009 and $137 million for the period from designation as held for
trading to January 31, 2009.
Note 7: Guarantees
In the normal course of business we enter into a variety of guarantees.
The most significant guarantees are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees represent our obligation to make
payments to third parties on behalf of another party if that party is
unable to make the required payments or meet other contractual
requirements. The maximum amount payable under standby letters of credit
and guarantees totalled $15,612 million as at January 31, 2009
($15,270 million as at October 31, 2008). Collateral requirements for
standby letters of credit and guarantees are consistent with our
collateral requirements for loans.
No amount was included in our Consolidated Balance Sheet as at
January 31, 2009 and October 31, 2008 related to these standby letters of
credit and guarantees.
Backstop and Other Liquidity Facilities
Backstop liquidity facilities are provided to ABCP programs administered
by either us or third parties as an alternative source of financing in
the event that such programs are unable to access ABCP markets or when
predetermined performance measures of the financial assets owned by these
programs are not met. The terms of the backstop liquidity facilities do
not require us to advance money to these programs in the event of
bankruptcy of the borrower. The facilities' terms are generally no longer
than one year, but can be several years.
The maximum amount payable under these backstop and other liquidity
facilities totalled $27,900 million as at January 31, 2009
($32,806 million as at October 31, 2008). As at January 31, 2009,
$1,216 million was drawn ($1,143 million as at October 31, 2008) in
accordance with the terms of the backstop liquidity facilities, of which
$1,044 million (US$851 million) ($1,025 million or US$851 million as at
October 31, 2008) related to the VIEs discussed in Note 5.
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities to
transactions within ABCP programs administered by either us or third
parties. As at January 31, 2009, credit enhancement facilities of
$6,061 million ($6,243 million as at October 31, 2008) are included in
backstop liquidity facilities. These facilities include amounts that
relate to our U.S. customer securitization vehicle discussed in Note 5.
Senior Funding Facilities
We also provide senior funding support to our SIVs and our credit
protection vehicle. The majority of these facilities support the
repayment of senior note obligations of the SIVs. As at January 31, 2009,
$7,693 million was drawn ($5,761 million as at October 31, 2008), in
accordance with the terms of the funding facilities related to the VIEs
discussed in Note 5.
In addition to our investment in the notes subject to the Montreal
Accord, we have provided a senior loan facility of $300 million. No
amounts were drawn as at January 31, 2009.
Note 8: Acquisitions
We account for acquisitions of businesses using the purchase method. This
involves allocating the purchase price paid for a business to the assets
acquired, including identifiable intangible assets, and the liabilities
assumed, based on their fair values at the date of acquisition. Any
excess is then recorded as goodwill. The results of operations of
acquired businesses are included in our consolidated financial statements
beginning on the date of acquisition.
Griffin, Kubik, Stephens & Thompson, Inc.
On May 1, 2008, we completed the acquisition of Chicago-based Griffin,
Kubik, Stephens & Thompson, Inc. ("GKST"), for cash consideration of
$31 million, subject to a post-closing adjustment based on net equity.
The acquisition of GKST provides us with the opportunity to significantly
expand our presence in the U.S. municipal bond market. Goodwill related
to this acquisition is deductible for tax purposes. GKST is part of our
BMO Capital Markets reporting segment.
Merchants and Manufacturers Bancorporation, Inc.
On February 29, 2008, we completed the acquisition of Wisconsin-based
Merchants and Manufacturers Bancorporation, Inc. ("Merchants and
Manufacturers"), for total cash consideration of $135 million. The
acquisition of Merchants and Manufacturers provides us with the
opportunity to expand our banking network into Wisconsin. As part of this
acquisition, we acquired a core deposit intangible asset, which is being
amortized on an accelerated basis over a period not to exceed 10 years.
Goodwill related to this acquisition is not deductible for tax purposes.
Merchants and Manufacturers is part of our Personal and Commercial
Banking U.S. reporting segment.
Ozaukee Bank
On February 29, 2008, we completed the acquisition of Ozaukee Bank
("Ozaukee"), a Wisconsin-based community bank, for 3,283,190 shares of
Bank of Montreal with a market value of $54.97 per share for total
consideration of $180 million. The acquisition of Ozaukee provides us
with the opportunity to expand our banking network into Wisconsin. As
part of this acquisition, we acquired a core deposit intangible asset,
which is being amortized on an accelerated basis over a period not to
exceed 10 years. Goodwill related to this acquisition is not deductible
for tax purposes. Ozaukee is part of our Personal and Commercial Banking
U.S. reporting segment.
Pyrford International plc
On December 14, 2007, we completed the acquisition of Pyrford
International plc ("Pyrford"), a London, U.K.-based asset manager, for
total cash consideration of $41 million, plus a contingent consideration
of $6 million paid during the quarter, based on our retention of the
assets under management one year after the closing date. The acquisition
of Pyrford provides us with the opportunity to expand our investment
management capabilities outside of North America. As part of this
acquisition, we acquired a customer relationship intangible asset, which
is being amortized on a straight-line basis over a period not to exceed
15 years. Goodwill related to this acquisition is not deductible for tax
purposes. Pyrford is part of our Private Client Group reporting segment.
Future Acquisition
On January 13, 2009, we announced that we had reached a definitive
agreement to purchase AIG Life Insurance Company of Canada (AIG Life of
Canada). The acquisition of AIG Life of Canada will provide our clients
with a wider range of investment, financial planning and insurance
solutions. The acquisition of AIG Life of Canada is expected to close by
June 1, 2009, subject to regulatory approval.
The estimated fair values of the assets acquired and the liabilities
assumed at the dates of acquisition are as follows:
(Canadian $ in millions) January 31, 2009
-------------------------------------------------------------------------
Merchants and
GKST Manufacturers Ozaukee Pyrford
-------------------------------------------------------------------------
Cash resources $ - $ 47 $ 54 $ 1
Securities 63 133 115 -
Loans - 1,013 517 -
Premises and equipment 1 34 14 1
Goodwill 8 100 120 26
Core deposit/Customer
relationship intangible asset - 39 24 17
Other assets 24 16 11 4
-------------------------------------------------------------------------
Total assets 96 1,382 855 49
-------------------------------------------------------------------------
Deposits - 1,029 584 -
Other liabilities 65 218 91 2
-------------------------------------------------------------------------
Total liabilities 65 1,247 675 2
-------------------------------------------------------------------------
Purchase price $ 31 $ 135 $ 180 $ 47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The allocations of the purchase price for GKST, Merchants and
Manufacturers and Ozaukee are subject to refinement as we complete the
valuation of the assets acquired and liabilities assumed.
Note 9: Employee Compensation
Stock Options
During the quarter ended January 31, 2009, we granted a total of
2,216,504 stock options. The weighted-average fair value of options
granted during the three months ended January 31, 2009 was $5.57 per
option. The following weighted-average assumptions were used to
determine the fair value of options on the date of grant:
For stock options granted during the three months ended January 31, 2009
-------------------------------------------------------------------------
Expected dividend yield 5.9%
Expected share price volatility 23.8%
Risk-free rate of return 2.6%
Expected period until exercise (in years) 6.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Changes to the input assumptions can result in materially different fair
value estimates.
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as
follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
Pension Other employee
benefit plans future benefit plans
-------------------------------------------------------------------------
January January January January
For the three months ended 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Benefits earned by employees $ 30 $ 34 $ 4 $ 5
Interest cost on accrued benefit
liability 66 58 12 13
Actuarial loss recognized in
expense 19 4 - 3
Amortization of plan amendment
costs 3 2 (2) (1)
Expected return on plan assets (61) (72) (2) (1)
-------------------------------------------------------------------------
Benefits expense 57 26 12 19
Canada and Quebec pension
plan expense 14 14 - -
Defined contribution expense 2 3 - -
-------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses $ 73 $ 43 $ 12 $ 19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 10: Restructuring Charge
The continuity of our 2007 restructuring charge is as follows:
(Canadian $ in millions) Severance related charges
-------------------------------------------------------------------------
Opening Balance as at November 1, 2007 $ 96
Paid in the year ended October 31, 2008 (45)
Reversal in the year ended October 31, 2008 (8)
-------------------------------------------------------------------------
Balance as at October 31, 2008 43
Paid in the quarter ended January 31, 2009 (13)
-------------------------------------------------------------------------
Balance as at January 31, 2009 $ 30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 11: Subordinated Debt
During the quarter ended January 31, 2009, our $140 million 10.85%
Debentures, Series 12 matured.
During the quarter ended January 31, 2009, we issued $450 million of BMO
Tier 1 Notes - Series A ("BMO T1Ns - Series A"), due December 31, 2107,
through BMO Capital Trust II ("Trust II"). Trust II is a variable
interest entity which we are not required to consolidate; therefore, the
BMO T1Ns - Series A issued by Trust II are not reported in our
Consolidated Balance Sheet. Trust II used the proceeds of the issuance
to purchase a senior deposit note from us which is reported as a
business and government deposit liability in our Consolidated Balance
Sheet. The BMO T1Ns - Series A are redeemable, at the option of Trust
II, subject to certain conditions on or after December 31, 2013. In
certain circumstances, the BMO T1Ns - Series A may be automatically
exchanged, or interest payable thereon may be paid, by the issuance of
Class B non-cumulative preferred shares of the Bank. The BMO T1Ns -
Series A and the senior deposit note issued to Trust II from us bear
interest at an annual rate of 10.221% and 10.421%, respectively. Both
rates will be reset on December 31, 2018 and on every fifth anniversary
of such date thereafter until December 31, 2103 (the "Interest Reset
Date"). BMO T1Ns - Series A and the senior deposit note will mature on
December 31, 2107.
Note 12: Share Capital
During the quarter ended January 31, 2009, we issued 33,340,000 common
shares at a price of $30.00 per share, representing an aggregate issue
price of approximately $1.0 billion.
During the quarter ended January 31, 2009, we issued 6,000,000 6.5%
Non-Cumulative 5-year Rate Reset Class B Preferred Shares, Series 18, at
a price of $25.00 per share, representing an aggregate issue price of
$150 million.
During the quarter ended January 31, 2009, we redeemed all our 10,000,000
Non-Cumulative Class B Preferred Shares, Series 6 that were classified as
preferred share liabilities, at a price of $25.00 per share plus any
declared and unpaid dividends to the date of redemption. This represents
an aggregate redemption price of approximately $253 million.
During the quarters ended January 31, 2009 and January 31, 2008, we did
not repurchase any common shares.
We did not repurchase any common shares under the existing normal course
issuer bid that expires on September 7, 2009 and pursuant to which we are
permitted to purchase up to 15,000,000 common shares.
Treasury Shares
When we purchase our common shares as part of our trading business, we
record the cost of those shares as a reduction in shareholders' equity.
If those shares are resold at a value higher than their cost, the premium
is recorded as an increase in contributed surplus. If those shares are
resold at a value below their cost, the discount is recorded as a
reduction first to contributed surplus and then to retained earnings for
any amounts in excess of total contributed surplus related to treasury
shares.
Share Capital Outstanding(a)
(Canadian $ in millions,
except as noted) January 31, 2009
-------------------------------------------------------------------------
Number of shares Amount Convertible into...
-------------------------------------------------------------------------
Preferred Shares -
Classified as Equity
Class B - Series 5 8,000,000 $ 200 -
Class B - Series 10(c) 12,000,000 396 common shares(b)
Class B - Series 13 14,000,000 350 -
Class B - Series 14 10,000,000 250 -
Class B - Series 15 10,000,000 250 -
Class B - Series 16 12,000,000 300 -
Class B - Series 18 6,000,000 150 -
-------------------------------------------------------------------------
1,896
Common Shares 540,736,959 5,818
Treasury Shares (994,999) (38)
-------------------------------------------------------------------------
Share Capital $ 7,676
-------------------------------------------------------------------------
Stock options issued under
stock option plan n/a 21,218,592 common
shares
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) For additional information refer to Notes 21 and 23 to our
consolidated financial statements for the year ended October 31, 2008
on pages 135 to 138 of our 2008 Annual Report.
(b) The number of shares issuable on conversion is not determinable until
the date of conversion.
(c) Face value is US$300 million.
n/a - not applicable
Note 13: Capital Management
Our capital management framework is designed to maintain the level of
capital that: meets our target regulatory capital ratios; meets our
internal assessment of required economic capital; is consistent with our
targeted credit ratings; underpins our operating groups' business
strategies; and builds long-term shareholder value.
We have met our capital targets as at January 31, 2009. Our capital
position as at January 31, 2009 is detailed in the Capital Management
section on page 13 of Management's Discussion and Analysis of the First
Quarter Report to Shareholders.
Note 14: Risk Management
We have an enterprise-wide approach to the identification, measurement,
monitoring and management of risks faced across the organization. The key
financial instrument risks are classified as credit and counterparty,
market, liquidity and funding risk.
Credit and Counterparty Risk
We are exposed to credit risk from the possibility that counterparties
may default on their financial obligations to us. Credit risk arises
predominantly with respect to loans, over-the-counter derivatives and
other credit instruments. This is the most significant measurable risk
that we face. Key measures as at January 31, 2009 are outlined in the
Risk Management section on pages 9 to 10 of Management's Discussion and
Analysis of the First Quarter Report to Shareholders.
Market, Liquidity and Funding Risk
Market risk is the potential for a negative impact on the balance sheet
and/or income statement resulting from adverse changes in the value of
financial instruments as a result of changes in certain market variables.
These variables include interest rates, foreign exchange rates, equity
and commodity prices and their implied volatilities, as well as credit
spreads, credit migration and default. We incur market risk in our
trading and underwriting activities and structural banking activities.
Liquidity and funding risk is the potential for loss if we are unable to
meet financial commitments in a timely manner at reasonable prices as
they fall due. It is our policy to ensure that sufficient liquid assets
and funding capacity are available to meet financial commitments,
including liabilities to depositors and suppliers, and lending,
investment and pledging commitments, even in times of stress. Managing
liquidity and funding risk is essential to maintaining both depositor
confidence and stability in earnings.
Key measures as at January 31, 2009 are outlined in the Risk Management
section on pages 9 to 10 of Management's Discussion and Analysis of the
First Quarter Report to Shareholders.
Note 15: Contingent Liabilities
Following our disclosures of mark-to-market losses in our commodities
trading business on April 27, 2007 and May 17, 2007, aggregating
$680 million (pre-tax) as of April 30, 2007, we have received inquiries,
requests for documents or subpoenas pertaining to those trading losses
from securities, commodities, banking and law enforcement authorities. On
November 18, 2008, a number of proceedings were commenced by these
authorities against certain parties that were involved in the commodities
trading losses. We are not a party to these proceedings. We are
cooperating with all of these authorities.
Note 16: United States Generally Accepted Accounting Principles
Reporting under United States GAAP would have resulted in the following:
(Canadian $ in millions,
except earnings per share figures)
-------------------------------------------------------------------------
January January
For the three months ended 31, 2009 31, 2008
-------------------------------------------------------------------------
Net Income - Canadian GAAP $ 225 $ 255
United States GAAP adjustments 78 5
-------------------------------------------------------------------------
Net Income - United States GAAP $ 303 $ 260
-------------------------------------------------------------------------
Earnings Per Share
Basic - Canadian GAAP $ 0.39 $ 0.48
Basic - United States GAAP 0.54 0.49
Diluted - Canadian GAAP 0.39 0.47
Diluted - United States GAAP 0.54 0.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Offsetting of Amounts Related to Certain Contracts
During the quarter ended January 31, 2009, we adopted new United States
guidance issued by the Financial Accounting Standards Board which permits
an entity to offset recorded fair value amounts for cash collateral
against the fair value of derivatives executed with the same counterparty
under the same master netting arrangement. This new guidance did not have
any impact on our United States GAAP reconciliation as our current policy
on offsetting is consistent with this guidance.
Note 17: Operating and Geographic Segmentation
Operating Groups
We conduct our business through operating groups, each of which has a
distinct mandate. We determine our operating groups based on our
management structure and therefore these groups, and results attributed
to them, may not be comparable with those of other financial services
companies. We evaluate the performance of our groups using measures such
as net income, revenue growth, return on equity, net economic profit and
non-interest expense-to-revenue (productivity) ratio, as well as cash
operating leverage.
Personal and Commercial Banking
Personal and Commercial Banking ("P&C") is comprised of two operating
segments: Personal and Commercial Banking Canada and Personal and
Commercial Banking U.S.
Personal and Commercial Banking Canada
Personal and Commercial Banking Canada ("P&C Canada") offers a full range
of consumer and business products and services, including: everyday
banking, financing, investing, credit cards and insurance, as well as a
full suite of commercial and capital market products and financial
advisory services, through a network of branches, telephone banking,
online banking, mortgage specialists and automated banking machines.
Personal and Commercial Banking U.S.
Personal and Commercial Banking U.S. ("P&C U.S.") offers a full range of
products and services to personal and business clients in select U.S.
Midwest markets through branches and direct banking channels such as
telephone banking, online banking and a network of automated banking
machines.
Private Client Group
Private Client Group ("PCG") brings together all of our wealth management
businesses. Operating under the BMO brand in Canada and Harris in the
United States, PCG serves a full range of client segments, from
mainstream to ultra-high net worth, as well as select institutional
market segments. We offer our clients a broad range of wealth management
products and solutions, including full-service and online brokerage in
Canada, and private banking and investment products in Canada and the
United States.
BMO Capital Markets
BMO Capital Markets ("BMO CM") combines all of our businesses serving
corporate, institutional and government clients. In Canada and the United
States, its clients span a broad range of industry sectors. BMO CM also
serves clients in the United Kingdom, Europe, Asia and Australia. It
offers clients complete financial solutions, including equity and debt
underwriting, corporate lending and project financing, mergers and
acquisitions, advisory services, merchant banking, securitization,
treasury and market risk management, debt and equity research and
institutional sales and trading.
Corporate Services
Corporate Services includes the corporate units that provide expertise
and governance support in areas such as strategic planning, law, finance,
internal audit, risk management, corporate communications, economics,
corporate marketing, human resources and learning. Operating results
include revenues and expenses associated with certain securitization
activities, the hedging of foreign-source earnings and activities related
to the management of certain balance sheet positions and our overall
asset liability structure.
Technology and Operations ("T&O") manages, maintains and provides
governance over our information technology, operations services, real
estate and sourcing. T&O focuses on enterprise-wide priorities that
improve quality and efficiency to deliver an excellent customer
experience.
Operating results for T&O are included with Corporate Services for
reporting purposes. However, costs of T&O services are transferred to the
three operating groups. As such, results for Corporate Services largely
reflect the activities outlined above.
Corporate Services also includes residual revenues and expenses
representing the differences between actual amounts earned or incurred
and the amounts allocated to operating groups.
Basis of Presentation
The results of these operating segments are based on our internal
financial reporting systems. The accounting policies used in these
segments are generally consistent with those followed in the preparation
of our consolidated financial statements as disclosed in Notes 1 and 2.
Notable accounting measurement differences are the taxable equivalent
basis adjustment and the provision for credit losses, as described below.
Taxable Equivalent Basis
We analyze net interest income on a taxable equivalent basis ("teb") at
the operating group level. This basis includes an adjustment which
increases GAAP revenues and the GAAP provision for income taxes by an
amount that would raise revenues on certain tax-exempt securities to a
level that would incur tax at the statutory rate. The operating groups'
teb adjustments are eliminated in Corporate Services.
Analysis on a teb basis neutralizes the impact of investing in tax-exempt
or tax-advantaged securities rather than fully taxable securities with
higher yields. It reduces distortions in net interest income related to
the choice of tax-advantaged and taxable investments.
Provisions for Credit Losses
Provisions for credit losses are generally allocated to each group based
on expected losses for that group over an economic cycle. Differences
between expected loss provisions and provisions required under GAAP are
included in Corporate Services.
Inter-Group Allocations
Various estimates and allocation methodologies are used in the
preparation of the operating groups' financial information. We allocate
expenses directly related to earning revenue to the groups that earned
the related revenue. Expenses not directly related to earning revenue,
such as overhead expenses, are allocated to operating groups using
allocation formulas applied on a consistent basis. Operating group net
interest income reflects internal funding charges and credits on the
groups' assets, liabilities and capital, at market rates, taking into
account relevant terms and currency considerations. The offset of the net
impact of these charges and credits is reflected in Corporate Services.
Geographic Information
We operate primarily in Canada and the United States but we also have
operations in the United Kingdom, Europe, the Caribbean and Asia, which
are grouped in Other countries. We allocate our results by geographic
region based on the location of the unit responsible for managing the
related assets, liabilities, revenues and expenses, except for the
consolidated provision for credit losses, which is allocated based upon
the country of ultimate risk.
Our results and average assets, grouped by operating segment and
geographic region, are as follows:
(Canadian $ in millions)
-------------------------------------------------------------------------
For the three
months ended Corporate Total
January 31, P&C P&C Servi- (GAAP
2009(2) Canada U.S. PCG BMO CM ces(1) basis)
-------------------------------------------------------------------------
Net interest
income $ 825 $ 240 $ 178 $ 516 $ (428) $ 1,331
Non-interest
revenue 449 59 280 211 112 1,111
-------------------------------------------------------------------------
Total Revenue 1,274 299 458 727 (316) 2,442
Provision for
credit losses 95 18 1 42 272 428
Non-interest
expense 715 231 375 473 47 1,841
-------------------------------------------------------------------------
Income before
taxes and
non-controlling
interest in
subsidiaries 464 50 82 212 (635) 173
Income taxes 139 16 25 33 (284) (71)
Non-controlling
interest in
subsidiaries - - - - 19 19
-------------------------------------------------------------------------
Net Income $ 325 $ 34 $ 57 $ 179 $ (370) $ 225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average
Assets $125,259 $ 33,753 $ 9,134 $288,118 $ 6,739 $463,003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill
(As At) $ 122 $ 1,117 $ 354 $ 111 $ 2 $ 1,706
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Corporate Total
January 31, P&C P&C Servi- (GAAP
2008(2) Canada U.S. PCG BMO CM ces(1) basis)
-------------------------------------------------------------------------
Net interest
income $ 773 $ 167 $ 155 $ 310 $ (191) $ 1,214
Non-interest
revenue 418 48 364 (37) 19 812
-------------------------------------------------------------------------
Total Revenue 1,191 215 519 273 (172) 2,026
Provision for
credit losses 83 9 1 29 108 230
Non-interest
expense 692 165 372 382 3 1,614
-------------------------------------------------------------------------
Income before
taxes and
non-controlling
interest in
subsidiaries 416 41 146 (138) (283) 182
Income taxes 125 15 50 (109) (172) (91)
Non-controlling
interest in
subsidiaries - - - - 18 18
-------------------------------------------------------------------------
Net Income $ 291 $ 26 $ 96 $ (29) $ (129) $ 255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average
Assets $123,386 $ 24,206 $ 7,855 $232,990 $ 2,922 $391,359
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill
(As At) $ 104 $ 668 $ 322 $ 93 $ 2 $ 1,189
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Other
January 31, United countr-
2009 Canada States ies Total
-------------------------------------------------------------------------
Net interest income $ 799 $ 425 $ 107 $ 1,331
Non-interest revenue 796 367 (52) 1,111
-------------------------------------------------------------------------
Total Revenue 1,595 792 55 2,442
Provision for credit losses 111 317 - 428
Non-interest expense 1,285 513 43 1,841
-------------------------------------------------------------------------
Income before taxes and
non-controlling interest in
subsidiaries 199 (38) 12 173
Income taxes 3 (56) (18) (71)
Non-controlling interest in
subsidiaries 13 6 - 19
-------------------------------------------------------------------------
Net Income $ 183 $ 12 $ 30 $ 225
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Assets $273,968 $159,460 $ 29,575 $463,003
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill (As At) $ 440 $ 1,242 $ 24 $ 1,706
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three
months ended Other
January 31, United countr-
2008 Canada States ies Total
-------------------------------------------------------------------------
Net interest income $ 907 $ 213 $ 94 $ 1,214
Non-interest revenue 591 289 (68) 812
-------------------------------------------------------------------------
Total Revenue 1,498 502 26 2,026
Provision for credit losses 74 148 8 230
Non-interest expense 1,151 414 49 1,614
-------------------------------------------------------------------------
Income before taxes and
non-controlling interest in
subsidiaries 273 (60) (31) 182
Income taxes 8 (48) (51) (91)
Non-controlling interest in
subsidiaries 13 5 - 18
-------------------------------------------------------------------------
Net Income $ 252 $ (17) $ 20 $ 255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Assets $236,226 $122,587 $ 32,546 $391,359
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill (As At) $ 421 $ 762 $ 6 $ 1,189
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis - see Basis of
Presentation section.
Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.
For further information: Media Relations Contacts: Ralph Marranca,
Toronto, ralph.marranca@bmo.com, (416) 867-3996; Lucie Gosselin, Montreal,
lucie.gosselin@bmo.com, (514) 877-8224; Investor Relations Contacts: Viki
Lazaris, Senior Vice-President, viki.lazaris@bmo.com, (416) 867-6656; Steven
Bonin, Director, steven.bonin@bmo.com, (416) 867-5452; Andrew Chin, Senior
Manager, andrew.chin@bmo.com, (416) 867-7019; Chief Financial Officer: Russel
Robertson, Interim Chief Financial Officer, russ.robertson@bmo.com, (416)
867-7360; Corporate Secretary: Blair Morrison, Vice-President & Corporate
Secretary, corp.secretary@bmo.com, (416) 867-6785
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