Speeches

Toronto, February 22, 2005
 

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Good morning fellow shareholders.

Before starting, I'll draw your attention to our usual caution regarding forward-looking statements.

As I was preparing for this annual meeting, I realized that it has been 20 years since I joined the senior executive team at Bank of Montreal, and six years since I was appointed Chief Executive Officer.

So if you find my mood a little more celebratory than usual, this 20^th anniversary is probably part of the cause. But given all the other reasons shareholders have to celebrate at this year's annual meeting, it's no more than the proverbial icing on the cake.

In 2004 we grew earnings per share by 29% — the second-best annual increase in our Canadian peer group — performing especially well against all of our financial targets for the year. All three operating groups had a hand in this success, with each of them turning in record-setting profits. These results, as well as our confidence in the future, enabled us to increase BMO's quarterly dividend by 26% during the year.

Since we operate in a fiercely competitive and highly successful industry (more on this in a moment), relative rather than absolute performance is what really counts with shareholders. That's why I am delighted to report that we surpassed our major Canadian competitors in 71% of the key performance measures for 2004 — a dramatic improvement over the previous year.

Shareholders are reaping the benefits of all the hard strategic decisions we took back in 1999 when we set our current strategic course — changing our business mix, exiting low-return, low-growth businesses and reinvesting our capital in higher-return businesses. We sacrificed substantial revenues for several years as we laid a stronger foundation for future growth.

As our Chief Financial Officer will report, we are starting 2005 on a strong note, with first-quarter results positioning us well to achieve all of our financial targets for the year.

Our ingrained strength in credit risk management plus our growing strength in productivity have played significant roles in our recent success. Let me emphasize here that this year, as last, increasing revenues while reducing costs continues to be the #1 priority at BMO.

I firmly believe that productivity is the key to becoming the top-performing financial institution on either side of the Canada-U.S. border — which, in a nutshell, is our long-term vision of 'what's next' for BMO.

After six years of rebuilding and disciplined execution, we are now ready to reach for the top. Because we can. And because we should: our shareholders deserve nothing less.

I will return to this point and share a few other admittedly biased observations about the future of financial services in North America — and BMO's place in this future.

First though, in the wake of yet another very fine year for BMO, and yet another good year for our industry in general, I would like to point out something that doesn't get pointed out enough:

The banks have done a pretty good job on behalf of Canada and Canadians over the years and, most particularly over the past 20, contributing disproportionately to the growth of the Canadian economy. From 1984 to 2004, when overall output in the economy grew threefold to $1.3 trillion, bank profits grew almost ninefold to $13.3 billion.

Bank shareholders — and many millions of Canadians hold shares in Canadian banks — also fared exceptionally well.

Over those two decades, for example, BMO shareholders earned an average annual Total Shareholder Return of 17.5%. That's almost twice the TSX average during the same time frame, and a second-best showing within our high-performing Canadian peer group.

If you take just the past five years, when we have been repositioning BMO for the future, our return to shareholders has nonetheless averaged 18.9% per year.

To what do shareholders of Canadian bank stocks owe this delightful rise in fortunes?

Some observers postulate that much of the financial services sector has been on a 20-year lucky streak…

… and that some of our "breaks" were one-time-only — lower inflation, for example — and thus, over the next 20 years, we just might not be able to keep our streak alive.

Now there's no question that our industry in general and BMO in particular have been on a streak over the past 20 years, but I refuse to call it lucky.

If Canadian bank profits tripled as a share of GDP since 1984, and grew in value at twice the rate of the GDP average (and became a tide that helped lift all ships), it is not only because of forces beyond our control. After all, such forces are always with us. I believe it is because thoughtful people in our industry saw the future of banking — customer-driven, technology-fueled and globally competitive — and responded with vision and imagination.

Despite the enormous expenditures involved — making the changes necessary to meet the needs of increasingly discerning customers through multiple channels including cyberspace doesn't come cheap and neither does training a new generation of customer-savvy bankers — we took up the challenge of meeting rising expectations in an increasingly competitive marketplace.

Having lived through the monumental changes in our industry over the past two decades — and understanding that this degree of change is now a constant in our industry — my own view is that there has never been a better time to be a bank shareholder.

In the case of BMO, we believe investors should buy or continue to hold our shares because we have a solid reputation as Canada's high-return, low-risk bank with a high return on equity and a good track record for stability, earnings consistency and strong dividend growth.

And, as I said, we have put our house in order, completing some of the toughest and most sweeping changes in the history of BMO. Knowingly sacrificing several years' worth of significant revenues (and taking some heat for it), we redirected our resources, both human and financial, into higher-return businesses.

We're now playing to our strengths; and our improving results, both absolute and relative, really have begun to speak forcefully for themselves.

They also speak forcefully to the ability of BMO leaders to make whatever hard decisions need to be made in the years ahead, irrespective of the vagaries of politics and the marketplace.

How can I be so sure? Because, as we have demonstrated many times over in the past 20 years (and with increasing frequency in the past six), the ability to embrace change is one of the ways by which we define ourselves. It's embedded in our culture now, an ever-growing source of both inspiration and pride.

So when I say, matter-of-factly, that BMO is aiming to become the top-performing financial services organization in North America, that's because this goal really is within our reach.

I also say it in the knowledge that we compete on a daily basis, and on both sides of the border, with some of the indisputably best-managed banks in the world — a long-time fact that is sadly lost on far too many people.

But the kinds of strengths we are dealing from are the kinds of strengths that make top performance possible, starting with our conviction that we have identified the right business mix, the right growth strategy and the right priorities to build on our growing reputation as Canada's high-return, low-risk bank.

Boston Consulting Group assesses financial services companies worldwide based on total shareholder returns adjusted for the influence of national stock markets and the risk to which shareholders have been exposed. They call this measure Risk-Adjusted Relative Total Shareholder Return.

BMO fares exceptionally well on this measure, ranking #4 globally in 2003 and ranking as one of the leading six financial services companies in the world over the five-year period measured — pretty solid proof of our high-return low-risk status.

As a reminder, we have determined that the "right" growth strategy at BMO is to invest in growing our core Canadian franchise while improving and selectively expanding our U.S. franchise.

In Canada that translates into increasing our position in the commercial market, gaining share in the rapidly growing high-net-worth market, and expanding our share of in the investment banking business — in other words, focusing on our well-established strengths.

One thing we are not focusing on is a domestic bank merger. I do not detect much political will for a bank merger right now; nor do I see that situation improving for at least three to five years. However, I do believe that market forces will make further consolidation of the Canadian industry inevitable.

I say "further consolidation" because it's easy to forget that the Canadian industry underwent a major round of consolidation and rationalization early in the last century, long before the U.S. industry, where there are literally still thousands of banks, and where consolidation has only just begun in earnest.

As capital accumulates in the Canadian industry, competitive pressures mount and domestic expansion opportunities wane, market forces will bring about the next round of consolidation. It's not a matter of whether but when.

Until "when" comes to pass, however, it's probably safe to say that the Big Five, BMO very much included, will be stepping up the pace of foreign acquisitions.

For us, that obviously means the United States, where consolidation is now moving along smartly. And where, as evidenced by our acquisition of three more banks in the U.S. Midwest over the past year or so — an investment of more than $560 million — we are very much in the thick of it.

And the reason we're in the thick of it speaks to our great and abiding strength when it comes to U.S. expansion — our existing Harris franchise and all of its abiding strengths, including the superb Harris brand and our track record to date.

After all, we are already competing successfully against large and determined new market entrants in the Chicago area, one of the highest-growth-potential and most hotly contested markets in the U.S. We have a proven capacity to achieve targeted growth from our existing personal and business banking and wealth platform. We have an established and growing mid-market presence in the Midwest. And we have unparalleled equity research capability. Together, these strengths translate into below-average reinvestment risk.

Despite the fact that the competition grows ever fiercer for dominance in this third-largest marketplace in the U.S., we are confident that, when the dust clears, Harris will emerge as the #1 personal and business bank in the U.S. Midwest …

…as well as a leading player in the corporate mid-market and wealth management sectors in the Midwest, and a major player, nationwide, in wealth management services.

In recent years, our overriding priority in building out our U.S. franchise has been to establish a stronger foundation for successful expansion. While we have made 22 U.S. acquisitions since 1984 (14 of them in the past five years), the pace of acquisitions has been relatively cautious. In the long run, however, I believe our strategy of strengthening our foundation prior to more aggressive U.S. expansion will prove to have been in our shareholders' interests.

We needed to put the right technology platform in place in order to consolidate back-office operations and readily absorb new acquisitions, and we have done that. We needed to significantly improve the profitability profile of the franchise through a wide range of initiatives, including the consolidation of all the Harris bank charters that is now under way and will be complete within the next six months.

Along the way, we acquired considerable experience and a steady track record for successfully bringing new acquisitions into our operations. The same core team has developed a broad range of experience through numerous acquisitions, and this lowers the integration risk for further deals.

We have also developed a superior business model that is uniquely suited to a large Canadian bank looking to succeed in the vastly larger and quite distinctive U.S. environment. It retains the best of the Harris heritage while positioning us for higher growth and profits in the future. Let me explain what I mean.

We are seeing the emergence in the U.S. of banks built on the network business model. Offering the customer value based on convenience and consistency, network banks are driven by process, relying on centralization and high volumes to achieve scale efficiencies and keep costs down.

Harris, on the other hand, has a longstanding reputation as a community-based bank whose strong local presence, superior customer service and strong relationships with customers set it apart from the network banks.

We are now using BMO's Canadian experience in operating a large and diverse banking network to blend the best of two banking models — network banking and community banking — to create a powerful, growth-generating bank, which (to put it simply) combines a community-focused front office with a high-efficiency back office.

With our foundational work almost done, we are now highly focused on expanding Harris's footprint at a faster pace than we have to date. We are seeking acquisitions in three categories: small banks with a purchase price of less than $500 million (essentially alternatives to our ongoing expansion through new branch construction); medium, in the $500-million to $2-billion range; and large, above $2 billion.

A $2-billion acquisition would represent less than 10% of our market capitalization. And we are willing to spend more for a property that is a good strategic, cultural and financial fit.

I would also note that the stronger Canadian dollar makes potential acquisitions more affordable — although if it continues to strengthen, it may adversely affect the profitability of the acquisition in Canadian dollars.

Our buyer's advantages in the Chicago area include our excellent reputation as a locally focused acquirer of choice. We are also looking at potential acquisitions in the greater Midwest, which could include opportunities in urban markets such as St. Louis, Indianapolis, Kansas City, Minneapolis, and Milwaukee. Because of the progress we have made in building a superior business model that benefits from back-office consolidation, we are most interested in acquisitions involving a very significant level of ownership, preferably 100%.

So the stage is set, the die is cast and as Holmes might say, the game is afoot for BMO Financial Group. We are building on the strengths that have got us where we are today, and developing new strengths to get us where we plan to be tomorrow.

One of the strengths we are building upon, the one that I've saved for the last, is the quality of our people, including a demonstrated willingness to embrace change and, I happily note, growing excitement at the prospect of striving to become not a, but the top performer.

My colleagues understand that when domestic consolidation begins in earnest, our efforts to become the top performer will have put us in fighting form and in charge of our own destiny.

My colleagues understand that no matter how complex and sophisticated banking has become, it is still a people-driven business. Today, as two decades ago — and indeed two centuries ago — it is simply people helping people meet their financial needs. Which means BMO people are an integral part of the equation.

My colleagues understand that it is not only their hard work but also their passion and their ingenuity in meeting customer needs that will propel BMO ahead of the competition. Their drive to take up a challenge and make it their own. Their willingness to reach higher. Their determination to succeed.

My colleagues — practical bankers to the core — also understand that this quest of ours is for real, that Becoming The Top Performer is more than a rah-rah slogan but a measurable and attainable goal, complete with measurable and attainable targets, quarter-by-quarter and year-by-year.

The thought I want you to leave with today, and I hope I've at least partly succeeded, is that if the next 20 years are as challenging for our industry as the last 20 (which would not surprise me, by the way), the advantage will belong to Canada's well-run, farsighted banks.

Apart from the IT industry itself, nobody adapted to the age of information technology faster than financial services, and no bank has been more cutting-edge than the one I have so proudly led for the past six years.

And if there is one thing I've learned about "us" along the way, it is that given a clear challenge and the right tools, BMO people will come through and rise to any occasion — including the opportunity to reach for the top.

Thank you for your kind attention. I will now call on our Chief Financial Officer, Karen Maidment, to review our annual results for 2004 as well as the First Quarter results for 2005, which were approved by our Board of Directors and announced earlier this morning.

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Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this presentation, and may be included in 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 the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2005 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.

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