SpeechesAddress to Shareholders by William A. Downe, President and Chief Executive Officer, BMO Financial Group
St. John’s, Newfoundland and Labrador, March 3, 2009
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Thank you, Chairman, and good morning, everyone.
Chers actionnaires, chers invités, mesdames et messieurs, bonjour.
Je vous souhaite à tous la plus cordiale bienvenue à notre 191e assemblée annuelle de la Banque de Montréal. Je suis heureux de vous avoir avec nous en si grand nombre aujourd’hui.
We are very pleased to be here in St. John’s to mark our 191st year in business and to recognize the 60th anniversary of Newfoundland and Labrador joining Confederation. I would like to thank Mr. Galloway and the Board for their guidance. And I would like to acknowledge Eva Kwok and Steve Bachand, who are not standing for re-election as directors today, for their invaluable service to the bank. In my time as CEO, I have greatly benefitted from their support and counsel.
The Annual Meeting is one of the most important days in the year… giving us the opportunity to meet in person with our shareholders to discuss the progress of the company.
BMO has more than 225,000 individual shareholders, and many more investors own our shares through mutual funds, retirement accounts and pension funds.
In the end, our company operates, and our shares exist, to benefit you – and it gives me great pleasure to meet with the people on whose behalf we are working. Your questions encourage us to examine our assumptions and our performance; and your comments – whether encouragement or advice – are important to me as CEO and to the management team of the bank here with me today.
I remember, well, being in St. John’s for the annual meeting just over ten years ago. This year’s meeting confirms once again the importance of this province to BMO, and to BMO’s future. Banks succeed when they support the economic growth of the towns, cities, and communities they serve – and Newfoundland and Labrador is an engine of growth in the Canadian economy. We want to play a significant part in that growth – this year and in the years after, as we have done for more than a century.
Let me take a moment now to introduce the leaders of our Atlantic Canada management team. Steve Murphy, Janet Peddigrew, Tom Foran, Jeff Burt and Ryan McNally – please stand.
Steve is our Senior Vice-President for Atlantic Division (based in Halifax). Janet, whom you saw in the opening video, is the Vice President heading up BMO Bank of Montreal in Newfoundland and Labrador. Ryan McNally leads BMO Harris Private Banking.
Jeff Burt heads up our BMO Nesbitt Burns business in Newfoundland and Labrador and Tom Foran, who put BMO Nesbitt Burns on the map in Newfoundland and Labrador, is also here today. Our team of BMO Nesbitt Burns Investment Advisors covers the province from branches in St. John’s and Corner Brook.
If you don’t already bank here, this team would really like the opportunity to show you what a good job we can do for you. They would be pleased to have the chance to introduce themselves to you before you leave today.
When you work with this team, you’re working with the best – the team that has made commercial banking in the Atlantic Division the most successful in our company. More than one in four businesses in this region have chosen to do business with BMO Bank of Montreal. And we’d like to recognize all the businesses and business owners here in the province who have made this one of the strongest economies in Canada.
I would also like to thank our more than 300 employees in the region who understand so well that our financial performance is linked to our ability to deliver what customers want – less complexity, clear choices and help in making sense of their financial decisions.
These talented professionals are building on BMO’s history in this province, which goes back to the closing years of the 19th Century.
BMO’s long history in Newfoundland and Labrador
We established offices down on Duckworth Street in 1895, at a time when the economy was in a fragile state. It was a good decision.
That same year, we became the official Bank of the Dominion of Newfoundland. It was the beginning of a long, deep relationship that began with Dominion-issued bank notes, which were redeemable at Bank of Montreal.
Today we have 24 branches in the province – and we will be opening a new branch in Paradise this fall, and another in Goose Bay soon after. Just three months ago, we opened the new BMO Harris Private Banking Centre on the 3rd floor of our Water Street Branch.
One of our first customers here was Alexander J. Harvey and his growing business empire. Today, the A. Harvey Group of Companies is one of the biggest businesses in the province. More than a century later, they are still a customer.
We are honoured today to be joined in the audience by Alexander Harvey’s granddaughter, Mrs. Susan H. Patten, Board Chair of the Harvey Group.
Thank you for sharing your story today – to help us tell ours.
When Bank of Montreal opened in St. John’s more than a century ago, the two leading commercial banks in the city had just folded. World commodity prices had plummeted. The fishing industry was in desperate straits because of protectionism in the United States.
The situation Newfoundland faced when we were invited to set up operations in St. John’s echoes the economic environment of today.
Global commodity prices have moved from exuberance to the exact opposite. The manufacturing sector is struggling with overcapacity. And these issues are global in scale.
Canadian banks stand out among global peers
In the midst of this, Canada has distinguished itself as a nation with moderate debt to output. Time-honoured principles of prudent risk management have operated to the benefit of the Canadian banking sector.
Many non-bank sources of credit have withdrawn from the market, but there has, in fact, been an expansion of bank balance sheets to help meet the demand by individuals and companies for credit.
Last month, in a speech in Halifax, Bank of Canada Governor Mark Carney said that in contrast to many international banks, Canadian banks “have actually been raising capital to grow their businesses”. In distinct contrast to many parts of the industrialized world, Canadian banks continue to lend.
That is true at BMO. In December, we raised $1 billion in new common equity to have the capacity to meet market demand and maintain a protective cushion.
At the end of the first quarter, BMO had $19.7 billion in Tier 1 Capital, which represented more than 10.2% of our risk-weighted assets.
A strong capital position means we are helping businesses grow – providing the capital they need to continue to build our economy.
As shareholders, you should also expect the strength of our capital base to provide the flexibility to seize new opportunities when they present themselves – as it did when we announced our intent to acquire AIG’s Canadian Life Insurance operations, a business that will help us bring compelling new retirement products to our customers.
Observations re: 2008 results
Now, I would like to speak to you on a more personal level about financial performance and Bank of Montreal’s four operating groups.
Despite a slowing economy, we continue to see good growth in most of our businesses. While it is true that the supply of credit worldwide has contracted, it has come after a decade in which the historic relationship between risk and return was almost completely eroded by too much liquidity – and inconsistent regulatory supervision.
Against this backdrop, many market participants in Europe and the United States have been struggling to find their way. Canada, by contrast, has a strong regulatory framework and well-capitalized financial institutions. We have a unique opportunity to capture strong business growth on sound economic terms.
And that is what we are doing.
Our business share is continuing to grow and our market share is growing… because banking is about people – individual customers. And we are acutely aware of the degree to which the economic climate has also affected them: their savings, investments and in some cases their incomes – and much of the hard work of the bank in 2008 was directed to our role in helping them respond to this changing environment.
Nearly 45,000 Canadian families came to us to help them buy a house in the last twelve months – over 1,100 from right here in Newfoundland. In my career, there is just one other time that I recall seeing mortgage rates as low as they are today. Down at our Water Street Branch, right now, you can get a 5-year BMO mortgage for as low as 4.49% – and I am pleased to say a lot of people are doing so.
Newfoundlanders borrowed more than $157 million from us in the past 12 months to buy homes – up nearly 28.4% from last January.
Right now, nationally we’re providing working capital and business loans to close to 200,000 businesses. In 2008, we increased our business debt financing by 13.2%, year over year, to $142 billion. Capital keeps businesses going, ensures employees and suppliers are paid and supports economic and employment growth.
In the last 180 days, BMO Capital Markets, our wholesale business, has renewed or extended credit to 115 of our largest clients. There has been no retreat – quite the opposite; we want to ensure we are providing them with what they need to take advantage of the opportunities that they have.
We’re helping Canadian students through college and university: more than 3,800 here in Newfoundland and Labrador and nearly 67,000 students across the country. That figure represents more than double the total enrolment for Memorial University and the College of the North Atlantic combined. At the end of January, students nationwide had borrowed more than $425 million from us for their education, up more than 20% in the last year. We are helping them get the education they need to launch their own careers – and we are proud to play a part in that.
In our wealth management business, we help people save and invest for tomorrow. Our customers continue to seek our advice and entrust their savings to our investment advisors. Our new assets in BMO Nesbitt Burns – money that we’ve been asked to invest on behalf of customers – is three times higher in the current quarter compared to the same quarter a year ago. We know our customers are counting on us to help them make sense of the markets and get their retirement plans back on track. And that is what we are doing.
This month, we announced the launch of BMO Exchange Traded Funds. These ETFs bring to our customers an additional cost-effective investment option. You can’t buy them yet, but you can see a copy of the preliminary prospectus at your broker. They will be available pending regulatory approval in April. We will be the only bank in Canada to offer our own family of ETFs and we can’t wait to introduce them to our customers.
In Chicago, where some people say you can’t get a bank loan, Harris’ name is seen as strong and stable - a financial partner of the highest quality and one people want to do business with. More than 1.2 million Midwesterners bank with us at Harris, and the number is growing.
In the last quarter alone, we received more than $900 million in deposits from people seeking the stability Harris offers. In January, we received 1,600 new mortgage applications. Eighty percent were approved and what’s more, half were new customers coming to Harris.
Through volunteering, donations and sponsorship programs, we continue to invest in our neighbourhoods, towns and regions — because we are a part of them. Our commitment to helping meet the needs of the many organizations and groups that make our communities strong is unwavering — regardless of the economic environment.
In 2008, BMO and its employees donated over $64 million to such groups, including 135 charities right here in Newfoundland and Labrador. And it is our employees who have led the charge for BMO in promoting environmental sustainability and reducing our impact on the environment.
In so many ways, Bank of Montreal today is much closer to its customers. People bank and invest with us for the experience and insight we bring to the table. Our promise to make sense of banking and investing is just that, a promise. When customers walk out through our doors, they will have a sense of confidence – confidence in their financial futures and confidence they have chosen the right bank: BMO.
If you listened carefully to the description I just provided of our four operating groups, you might have noticed that I spoke about growth in terms of individual customers and their reasons for coming to us – and the objective that motivated their saving or their investing.
We understand that our financial performance is tied to our ability to deliver what customers want – less complexity and easier access to the help they need to make better financial decisions. In a determined and methodical way, BMO is changing. As a consequence, we are raising customers’ expectations of us and standing for something that is distinct in the marketplace.
We are opening new branches in locations that are more convenient to use. We have been updating our existing branches and improving our visibility at the street level with greater use of BMO’s distinctive blue – one of the most recognized corporate colours in Canada.
We have taken the same approach with Harris branches in the Midwest and, in both markets, we are reinforcing our brand promise with clear distinctive advertising. In the last 24 months, we have brought a range of compelling new product offers to market that reinforce our commitment to make money make sense. You saw a number of them featured on the panels outside the meeting room today.
We are building our online presence in banking and investing because we know that many, if not most, of our customers prefer self service for routine transactions and record keeping. But we also know that they want immediate and convenient access to the support of an experienced and knowledgeable professional when making important financial decisions. And because BMO Financial Group is distinguished by the depth and quality of the people who work in this company, we are claiming a position in the market that will not be easily imitated.
Even in this environment, we have been building customer loyalty – and, as a consequence, increasing market share in so many of our businesses and the principal geographic areas in which we operate.
We’ve strengthened customer relationships – a trend clearly indicated by our growing customer base and rising customer loyalty scores.
That is the reason we have continued to see good core operating revenue and profit growth in 2007, 2008 and the first quarter of 2009. Net income in our main operating group, Personal and Commercial Banking Canada, was up 12% from a year ago in the first quarter.
And it is the core operating income that determines our ability to reinvest for future growth and pay dividends to shareholders.
Dividend is at right level
This morning, we declared a second quarter common share dividend of $0.70, unchanged from the previous quarter. In so doing, your company has extended its unmatched record of continuous dividend payment – stretching back to 1829 – an unbroken string of 180 years, the longest such string in Canada.
In 2005 and 2006, we increased the dividend in response to strong feedback from shareholders that a higher payout ratio was desired. At the time, we were accumulating excess capital and could find few acquisition opportunities that represented real value. In that environment, it made a great deal of sense to increase the target payout to 45%-55% of net income.
Since then, earnings have been impacted by loan losses that have escalated to levels that are much higher, although still consistent with this stage of the credit cycle. At the same time, there have been valuation charges related to the capital markets environment.
However BMO’s core businesses continue to perform very well.
Shareholders of Canadian banks place a high value on consistency.
Given our strong capital position, core earnings power and the importance our shareholders attach to the dividend, and in the absence of a more negative outlook for the economy and the bank, we believe it is appropriate to pay the current dividend. We will be managing capital and expenses aggressively – and continuing to grow revenue with a view to returning the payout ratio to our long-term target range.
Dividend Reinvestment Plan
In January, we introduced a discount of 2% to our dividend reinvestment plan. And the resulting increase in our reinvestment plan’s participation went from about 10% to just under 30%. This program provides a great opportunity for shareholders to acquire additional shares in a very cost-effective way – at a discounted price. We continue to encourage our shareholders to enrol in the Plan, reinvest their dividends and benefit from this option.
Before asking Russ Robertson, our Interim Chief Financial Officer to review the financial results, I would like to leave you with a perspective on the road ahead – and why we, as shareholders, can have confidence in our investment in BMO Financial Group.
We are in the middle of a deep recession and, as has been the case of past recessions, there are adjustments taking place in our society to restore a healthier balance between consumption and saving.
Businesses are adjusting to a world in which financial capital is demanding a more disciplined recognition of risk relative to return. And markets for debt and equity are reflecting volatile price swings as they work to establish a new equilibrium – and this has set the stage for adjustments that will create the energy for a new period of growth and prosperity.
Just as the economy of the United States has led the world into this correction – the size and flexibility of its economy will set the pace for recovery in the rest of the world.
Headquartered in Canada, with the majority of our assets based in North America, our bank is well positioned to benefit from the recovery as it takes place.
And we start as one of the best capitalized banks in the world.
While not completely immune from the global financial dislocation, we have essentially no exposure to the U.S. sub-prime housing market, and our U.S. subsidiary stands out in that market for the strength of its brand.
In the last five years, we have turned the market position of our Canadian personal bank 180 degrees:
Our focus on the customer – on defining great customer experience – has ignited the energy of our employees.
We have defined a place in the market where we will compete and a territory where we can be a dominant competitor.
The opening pages of our 2008 annual report feature some of our customers expressing how they feel about our company – and speaking about the essence of our commitment to them. They say:
BMO Financial Group has a straightforward and easily understood strategy, the foundation of which is our commitment to our customers.
And, as Newfoundland and Labrador grows, we want to play our part. As you grow, we would like to grow with you.
We have great employees in this company, which is why I am so confident for the future. They have taken up our challenge to exceed customers’ expectations, and we see the results of their successes day after day.
On behalf of 37,000 BMO employees, I thank you for entrusting the stewardship of your company to us – and, on a personal note, for the hospitality you have shown us here in St. John’s.