Management’s Discussion and Analysis

Value Measures

 

Total Shareholder Return

The average annual total shareholder return (TSR) is a key measure of shareholder value, and confirms that our strategic priorities drive value creation for our shareholders. Our one-year TSR of 20.2% and our three-year average annual TSR of 10.9% were strong, and both outperformed the overall market in Canada. Our five-year average annual TSR of 15.5% outperformed the corresponding average returns of both our Canadian bank peer group and the overall market in Canada.

The table below summarizes dividends paid on BMO common shares over the past five years and the movements in BMO’s share price. An investment of $1,000 in BMO common shares made at the beginning of fiscal 2013 would have been worth $2,058 at October 31, 2017, assuming reinvestment of dividends, for a total return of 105.8%.

On December 5, 2017, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $0.93 per share, up $0.03 per share or 3% from the prior quarter and up $0.05 per share or 6% from a year ago. The dividend is payable on February 27, 2018 to shareholders of record on February 1, 2018. We have increased our quarterly dividend declared four times over the past two years from $0.82 per common share for the first quarter of 2016. Dividends paid over a five-year period have increased at an average annual compound rate of 4.7%.

*All returns represent total returns.

The average annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common shares made at the beginning of a fixed period. The return includes the change in share price and assumes dividends received were reinvested in additional common shares.

Total Shareholder Return

For the year ended October 31 2017 2016 2015 2014 2013 3-year
CAGR (1)
5-year
CAGR (1)

(1) Compound annual growth rate (CAGR) expressed as a percentage.

(2) Total annual shareholder return assumes reinvestment of quarterly dividends and therefore does not equal the sum of dividend and share price returns in the table.

nm – not meaningful

Closing market price per common share ($) 98.83 85.36 76.04 81.73 72.62 6.5 10.9
Dividends paid ($ per share) 3.52 3.36 3.20 3.04 2.92 5.0 4.7
Dividend yield (%) 3.6 4.0 4.3 3.8 4.0 nm nm
Increase (decrease) in share price (%) 15.8 12.3 (7.0) 12.5 23.0 nm nm
Total annual shareholder return (%) (2) 20.2 17.0 (3.0) 17.1 28.8 10.9 15.5

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Earnings per Share Growth

The year-over-year percentage changes in earnings per share (EPS) and in adjusted EPS are our key measures for analyzing earnings growth. All references to EPS are to diluted EPS, unless otherwise indicated.

EPS was $7.92, up $1.00 or 14% from $6.92 in 2016. Adjusted EPS was $8.16, up $0.64 or 9% from $7.52 in 2016, consistent with our objective of achieving average annual adjusted EPS growth of 7% to 10%. EPS growth primarily reflected increased earnings. Reported net income available to common shareholders was 15% higher year-over-year, while the average number of diluted common shares outstanding was relatively unchanged.

Earnings per share (EPS) is calculated by dividing net income attributable to bank shareholders, after the deduction of preferred dividends, by the average number of common shares outstanding. Diluted EPS, which is our basis for measuring performance, adjusts for possible conversions of financial instruments into common shares if those conversions would reduce EPS, and is more fully explained in Note 24 (PDF, 24 Ko) of the consolidated financial statements. Adjusted EPS is calculated in the same manner using adjusted net income.


 

Return on equity (ROE) was 13.3% in 2017 and adjusted ROE was 13.7%, compared with 12.1% and 13.1%, respectively, in 2016. ROE increased in 2017, primarily due to growth in income exceeding growth in common equity. There was an increase of $692 million or 15% in net income available to common shareholders and $461 million or 10% in adjusted net income available to common shareholders in 2017. Average common shareholders’ equity increased $2.0 billion or 5% from 2016, primarily due to increased retained earnings, partially offset by higher unrealized losses on cash flow hedges and the impact of the weaker U.S. dollar on our investments in foreign operations. The reported return on tangible common equity (ROTCE) was 16.3%, compared with 15.3% in 2016 and adjusted ROTCE was 16.5%, compared with 16.1% in 2016. Book value per share increased 4% from the prior year to $61.92, reflecting the increase in shareholders’ equity.

Return on common shareholders’ equity (ROE) is calculated as net income, less non-controlling interest in subsidiaries and preferred dividends, as a percentage of average common shareholders’ equity. Common shareholders’ equity is comprised of common share capital, contributed surplus, accumulated other comprehensive income (loss) and retained earnings. Adjusted ROE is calculated using adjusted net income rather than net income.

Return on tangible common equity (ROTCE) is calculated as net income available to common shareholders adjusted for the amortization of acquisition-related intangible assets as a percentage of average tangible common equity. Tangible common equity is calculated as common shareholders’ equity less goodwill and acquisition-related intangible assets, net of related deferred tax liabilities. Adjusted ROTCE is calculated using adjusted net income rather than net income. ROTCE is commonly used in the North American banking industry and is meaningful because it measures the performance of businesses consistently, whether they were acquired or developed organically.

Return on Equity and Return on Tangible Common Equity

(Canadian $ in millions, except as noted)
For the year ended October 31
2017 2016 2015

Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures (PDF, 30 KB) section.

Reported net income 5,350 4,631 4,405
Attributable to non-controlling interest in subsidiaries (2) (9) (35)
Preferred dividends (184) (150) (117)
Net income available to common shareholders (A) 5,164 4,472 4,253
After-tax amortization of acquisition-related intangible assets 116 124 127
Net income available to common shareholders after adjusting for amortization of acquisition-related intangible assets (B) 5,280 4,596 4,380
After-tax impact of other adjusting items 42 265 149
Adjusted net income available to common shareholders (C) 5,322 4,861 4,529
Average common shareholders’ equity (D) 38,962 36,997 34,135
Return on equity (%) (= A/D) 13.3 12.1 12.5
Adjusted return on equity (%) (= C/D) 13.7 13.1 13.3
Average tangible common equity (E) 32,303 30,101 27,666
Return on tangible common equity (%) (= B/E) 16.3 15.3 15.8
Adjusted return on tangible common equity (%) (= C/E) 16.5 16.1 16.4

 

Common Equity Tier 1 Ratio

BMO’s Common Equity Tier 1 (CET1) Ratio reflects a well-capitalized position relative to the risk in our business. Our CET1 Ratio was 11.4% at October 31, 2017, compared to 10.1% at October 31, 2016. The CET1 Ratio increased from the end of fiscal 2016 due to higher capital, largely from retained earnings growth and common shares issued through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options, as well as modestly lower source currency risk-weighted assets, partially offset by share repurchases.

Common Equity Tier 1 (CET1) Ratio is calculated as CET1 capital, which is comprised of common shareholders’ equity less deductions for goodwill, intangible assets, pension assets, certain deferred tax assets and other items, divided by risk-weighted assets for CET1.