Management’s Discussion
and Analysis

Caution Regarding Forward-Looking Statements

BMO’s President & Chief Executive Officer and Chief Financial Officer have signed a statement outlining management’s responsibility for financial information (PDF, 38 KB) in the annual consolidated financial statements and Management’s Discussion and Analysis (MD&A). The statement also explains the roles of the Audit Committee and Board of Directors in respect of that financial information.

The MD&A comments on BMO’s operations and financial condition for the years ended October 31, 2010 and 2009. The MD&A should be read in conjunction with our consolidated financial statements for the year ended October 31, 2010. The MD&A commentary is as of December 7, 2010. Unless otherwise indicated, all amounts are stated in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP).

Certain prior year data has been reclassified to conform with the current year’s presentation, including restatements arising from transfers of certain businesses between operating groups. See the 2010 Review of Operating Groups Performance (PDF, 795 KB).

MD&A Index

Complete MD&A

Who We Are 

provides an overview of BMO Financial Group, explains the links between our objectives and our overall vision, presents key performance data and outlines “Reasons to invest in BMO.”

Enterprise-Wide Strategy 

outlines our enterprise-wide strategy and the context in which it is developed, as well as our progress in relation to our strategic priorities.

Caution Regarding Forward-Looking Statements 

advises readers about the limitations and inherent risks and uncertainties of forward-looking information.

Factors That May Affect Future Results 

outlines certain industry and company-specific factors that investors should consider when assessing BMO’s earnings prospects.

Economic Developments 

includes commentary on the impact of economic developments on our businesses in 2010 and expectations for the Canadian and U.S. economies in 2011.

Value Measures 

reviews financial performance on the four key measures that assess or most directly influence shareholder return.

  • Total Shareholder Return
  • Earnings per Share Growth
  • Return on Equity
  • Net Economic Profit Growth

2010 Financial Performance Review 

provides a detailed review of BMO’s consolidated financial performance by major income statement category. It also includes the impact of business acquisitions, changes in foreign exchange, and a summary of notable items affecting results.

Operating Group Review 

outlines the strategies of our operating groups, the paths they choose to differentiate their businesses and the challenges they face, along with their strengths and key value drivers. It also includes a summary of their achievements in 2010, their priorities for 2011 and a review of their financial performance for the year.

  • Summary
  • Personal and Commercial Banking
    • Personal and Commercial Banking Canada
    • Personal and Commercial Banking U.S.
  • Private Client Group
  • BMO Capital Markets
  • Corporate Services, including Technology and Operations

Financial Condition Review 

discusses our assets and liabilities by major balance sheet category. It reviews our capital adequacy and our approach to ensuring we optimize our capital position to support our business strategies and maximize returns to our shareholders. It discusses proposed regulatory changes that are expected to impact capital and liquidity management as well as certain business operations. It also discusses off-balance sheet arrangements and financial instruments.

  • Summary Balance Sheet
  • Enterprise-Wide Capital Management
  • Select Financial Instruments
  • U.S. Regulatory Developments
  • Off-Balance Sheet Arrangements

Accounting Matters and Disclosure and Internal Control 

reviews critical accounting estimates and changes in accounting policies in 2010 and for future periods. It also discusses our evaluation of disclosure controls and procedures and internal control over financial reporting.

  • Critical Accounting Estimates
  • Changes in Accounting Policies in 2010
  • Future Changes in Accounting Policies – IFRS
  • Disclosure Controls and Procedures and Internal Control over Financial Reporting
  • Shareholders’ Auditors’ Services and Fees

Enterprise-Wide Risk Management 

outlines our approach to managing the key financial risks and other related risks we face.

Non-GAAP Measures

includes explanations of non-GAAP measures and their reconciliation to their GAAP counterparts.

2009 Financial Performance Review, Review of Fourth Quarter Performance and Quarterly Earnings Trends

provide commentary on results for relevant periods other than fiscal 2010.

Supplemental Information 

presents many useful financial tables and provides more historical detail.

Regulatory Filings

Our continuous disclosure materials, including our interim management’s discussion and analysis and interim financial statements, and annual audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders & Proxy Circular, are available on our website at, on the Canadian Securities Administrators’ website at and on the EDGAR section of the SEC’s website at BMO’s President & Chief Executive Officer and Chief Financial Officer each certify the appropriateness and fairness of BMO’s annual and interim consolidated financial statements and MD&A and Annual Information Form, and the effectiveness of BMO’s disclosure controls and procedures and material changes in our internal control over financial reporting.

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 Annual Report, 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 2011 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 Annual Report 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; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; 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 markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects 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 below, which outlines in detail certain key factors that may affect Bank of Montreal’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 statements, 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, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

In calculating the pro-forma impact of Basel III on our regulatory capital, regulatory capital ratios, and risk-weighted assets (including Counterparty Credit Risk and Market Risk), we have assumed our interpretation of the proposed rules announced by the Basel Committee on Banking Supervision (BCBS) as of this date and our models used to assess those requirements are consistent with the final requirements that will be promulgated by BCBS and the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted assets, the regulatory capital treatment for non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are adopted as proposed by BCBS and OSFI. We also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in the October 31, 2010 pro-forma calculations. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at year end or as close to year end as was practical. The Basel rules are not yet finalized and are subject to change, which may impact the results of our analysis. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.

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, whether consolidation will be required 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. In determining amounts of asset maturities by year, we made assumptions as to which issuers will redeem subordinated debt prior to its maturity date, where permitted.

Assumptions about the level of defaults and losses on defaults were material factors we considered when establishing our expectations of the future performance of the transactions that Apex Trust has entered into. Among the key assumptions were 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 and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges that BMO has entered into.

Our expectations regarding the key impacts of our transition to International Financial Reporting Standards (IFRS) are based on IFRS as issued by the International Accounting Standards Board (IASB) that are in effect as of this date. Should IFRS change prior to our transition to IFRS, our expectations of the key impacts of transition could change.

Assumptions about the performance of the Canadian and U.S. economies in 2011 and how that will 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 U.S. economies will grow moderately in 2011, that interest rates will remain low and that our assumptions regarding regulatory reforms will be consistent with the implementation of such reforms. We also assumed that housing markets will strengthen in Canada and the United States. We assumed that conditions in capital markets will improve somewhat and that the Canadian dollar will 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.