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Remarks by William A. Downe, President and Chief Executive Officer, BMO Financial Group at the Scotiabank GBM Financials Summit

Toronto, ON, September 4, 2013

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Thank you, Kevin, and good morning, everyone.

Before I continue, please note the caution regarding forward-looking statements on slide 1. You’ll find additional details in the public filings of BMO Financial Group.

For most Canadians, the week before Labour Day marks the end of the season that everyone in this country lives for: summer.

In Canadian banking, Labour Day is bracketed by the release of third-quarter results, and then Kevin Choquette’s conference – neither of which involves sitting on a dock watching the sunset.

It’s a pleasure to be back at the Scotiabank Financials Summit.

And from BMO’s perspective, the timing couldn’t be better. We’ve just reported record net income and earnings per share, anchored by record results from Canadian retail banking. All of our businesses have clear momentum in their year-to-date financial performance, with earnings growth in every operating segment.

In that spirit, I want to focus this morning on a theme that’s top of mind for everyone in the room, and that's growth.

Growth is important for shareholders, because it defines the value of the firm. And it’s important for people, everywhere, to have confidence that growth will improve their standard of living and ensure future prosperity.

My comments today are divided into three parts:

  • First, the North American context, where we see the most promising growth opportunities.
  • Second, its relevance to BMO – why we believe our bank is ideally positioned to gain advantage in these areas of opportunity.
  • And third, measuring progress – how our strategic focus on sustainable growth is reflected in BMO’s latest financial results.

I’ll begin with the broader economic context, and where we find the most encouraging prospects for near-term growth.

Globally, there’s a general expectation that the current slow-growth environment will be with us for some time to come. And there is no simple line of demarcation between advantaged and challenged markets.

Most signs point to continued lackluster growth in Japan. And in the Euro area, GDP growth was just 1.1% in Q2 and is expected to soften in the second half of the year. We anticipate slower expansion, at least compared to recent history, in emerging economies as well.

However, this does not mean that all markets and all sectors will languish in the doldrums. In fact, North America is increasingly seen as a brighter spot in the global economy.

In Canada, growth is moving through a transition from dependence on consumer spending to a recovery in manufacturing and services. While we’ve recently seen a weakening in natural resources – reflected in the exchange rate – this sector is cyclical by nature and it will recover.

In the meantime, other areas of the economy are picking up the slack. Exports are expected to rise in response to higher U.S. demand. And business investment should strengthen.

In the U.S., specific indicators vary on a weekly basis. But looking past the noise in the data, GDP should show meaningful growth in 2014 – we currently project around 3.0%. The unemployment rate should fall below 7%, and the reasons are straightforward:

  • A recovery in the savings rate has improved household finances.
  • The pace of new-home construction is not yet sufficient to meet demand for housing.
  • And in the U.S. the average age of cars and light trucks on the road is just over 11 years.

At the same time, there is a growing belief in the ability of the real economy to power through continuing fiscal debate in Washington.

U.S. companies that weathered the downturn have emerged with a sharper focus and new ways of thinking.

Kevin Lynch, BMO’s Vice-Chair, through his constant thought leadership on innovation and productivity, reminds us that the competitiveness model is changing. Industry leaders are adjusting, and recognize the importance of continually developing new processes and new markets – and this requires both invention and investment.

As a North American bank centred in the heart of the continent, BMO is connected to the markets and sectors that hold the most promise for growth – whether it’s the recharged manufacturing economy in the U.S. Midwest, the vital transportation hubs of the Great Lakes corridor, or the dynamic high-tech industry clusters that dot our strategic footprint.

BMO is the second-largest Canadian bank measured by its retail network in Canada and the U.S., with about 1,600 branches – and $214 billion in customer deposits. We’re centered in six U.S. Midwest states – Illinois, Indiana, Wisconsin, Minnesota, Missouri and Kansas – whose total population and GDP exceed those of Canada.

Add in the three broad regions of Canada, and you have one of the biggest contiguous markets on the continent, with more than 74 million people and GDP of about $3.7 trillion.

In this market, the scope of our commercial banking business is as diverse as the North American economy. In the U.S., we’ve generated strong double-digit growth in our core commercial and industrial portfolio for seven consecutive quarters.

On any given day, we’re booking business with a broad cross-section of commercial customers:

  • A Wisconsin dairy processor significantly upgrading its facilities to meet demand.
  • A Newfoundland company that develops diving equipment for offshore oilrigs.
  • A custom fabricator in Minneapolis expanding to serve the growing home improvement market.
  • High-tech firms in southern Ontario making everything from microprocessors to improved hydraulics for heavy machinery.

Wherever companies are building inventory, expanding sales teams, upgrading factories or investing in innovation, we’re working alongside them. Our bankers have deep expertise in specific sectors like food and agriculture. And they know that their success is tied to growing the value of their customers’ businesses.

This brings me to the second point I want to cover this morning: why BMO is ideally positioned to help businesses compete and grow – and to help individuals and families save and invest.

Our role as a bank is to help all of our customers to make better decisions with better information, and to have confidence in the choices they make. Their success fuels our growth.

The composition of our balance sheet bears out that point: In the first nine months of 2013, loans were up 8%. Customer deposits increased by $15 billion, also up 8% from a year ago. By focusing on high-quality earning assets grounded in deep customer relationships, we’re growing revenue and net income, and we’re maintaining discipline in the underlying portfolios.

And I can highlight a few specific areas where we believe our future growth prospects are especially strong.

The first is our success in deepening and expanding the linkage between BMO’s retail and wealth businesses.

In the U.S., our personal and private bankers have been attracting new customers in the space where their traditional segments overlap. When account coverage is shared between personal bankers and wealth management teams, we make life simpler for our customers.

This optimization grows our customer base and drives greater share of wallet without increasing the cost of supporting the banking relationship. In the past 24 months, we've adjusted the coverage of almost 30,000 accounts between personal banking and wealth, and we expect to double that through next year.

In Canada, too, our personal banking and wealth businesses have partnered to drive significant growth. In Q3 the bank posted record year-to-date gross sales of BMO Mutual Funds, which were up by 48% – our strongest showing in Canada in a decade, and more than twice the industry growth rate.

For those who may not have been tracking the momentum of wealth management at BMO, let me briefly take you through our five lines of business:

  • BMO Nesbitt Burns, our full-service brokerage, has the second-largest investment advisor network in Canada. We recently received the highest client loyalty score for investment advice in the 2013 Full Service Brokerage Report from Ipsos Reid.
  • BMO InvestorLine, our self-directed investing business, has been rated the best bank-owned online brokerage by The Globe and Mail for three years running.
  • BMO Insurance offers life, illness and annuity products, successfully working with one of the largest networks of independent agents in Canada, in addition to creditor insurance, which we sell through our branches.
  • BMO Global Asset Management manufactures and distributes mutual funds, ETFs and other products in Canada, the U.S. and internationally. In less than five years since its launch, our ETF business has built a #2 share in Canada, with 20% of the market, and we’ve led the field in originating net new sales for two years in a row.
  • And lastly, in Global Private Banking, we were named Best Private Bank in Canada for the third consecutive year by Global Banking and Finance Review. And earlier this year, we began delivering BMO-branded services to high-net-worth clients through BMO Private Bank Asia, based in Hong Kong and Singapore.

Consistent with our longstanding presence in China, the wealth business is emerging as a substantial contributor. We have an equity interest in Fullgoal, one of China’s leading fund management companies, and in COFCO Trust, a partnership with the largest supplier of diversified products and services to the country’s agricultural and food sector.

Taken together, our strong wealth franchise contributes roughly 20% of the bank’s total revenues. Over the full cycle, we expect this to be the fastest-growing part of the bank, with many opportunities to maintain that momentum.

Another area of continuing strong growth is commercial banking, where BMO is a market leader on both sides of the Canada-U.S. border. Our large North American platform is a key differentiator – it positions us well to continue increasing market share.

In the U.S., our ambition is to be the leading commercial bank in the Midwest – and nationally, in select industries – with our unique combination of sector expertise, and focus on mid-market companies with local access to the leaders of these companies.

This is a point I want to underline regarding each of the growth areas I’ve highlighted today: at the intersection of personal banking and wealth and in commercial banking, we’ve been clear about our focus on deep customer relationships and maintaining industry-leading loyalty to drive financial performance.

The final point I’ll touch on this morning is our pursuit of innovation to boost productivity while building long-term customer loyalty.

The productivity initiatives we’ve introduced over the past two years have taken significant costs out of day-to-day transactions. According to a recent Financial Post report on Canadian banks, BMO is top quartile in revenue per employee and net income per employee – both key measures of efficiency.

And as we push to find smarter, more effective ways of doing things, we’re also creating a better experience for customers. It is innovation rooted in the way work is done and in understanding the way customers behave. It is not just about technology.

Across the bank, we’ve undertaken a broad organizational review and realignment that will help us adapt more quickly to changing customer behaviours and expectations. In the latest quarter, we rolled out a new divisional structure that will expand and energize leadership in Personal and Commercial Banking Canada.

We’re eliminating unproductive conversations, and making accountabilities clearer than ever. And above all, we’re simplifying. Across the country, more than 80 of the most senior leaders are moving closer to the customer.

At the same time, we’re evaluating new models for how financial services will be purchased and consumed in the future.

As virtual channels transform the traditional bank footprint, we’re investing where we believe it will be most meaningful to customers. Just as important, we’re developing new leaders who’ve grown up with a different understanding of how relationship-building can occur.

And in speaking to our customers, we’re cost-effectively applying the same models in Canada and the U.S. For example, a broadcast campaign we developed in the U.S. to drive brand awareness has now been fine-tuned for the Canadian market, and will debut here later this month. We’re focused on achieving many efficiencies across our North American business in this manner.

Which brings me to my third and final topic this morning: how this focus on driving organic growth – across a wide geography and a diversified business mix – translates into year-to-date performance.

I’m going to focus on adjusted results, noting that all adjusting items, other than the amortization of intangibles, are booked in our corporate segment.

All operating groups are expanding – starting from a base of 12 million customers and growing the number of primary, multi-product relationships. These are the high-value, loyal individuals and companies that are the most profitable.

In P&C Canada, momentum has built through the year and drove strong performance in the third quarter, generating record adjusted net income1 of $500 million – an increase of 8%, year over year. Adjusted earnings for the first nine months were $1.4 billion.

These results demonstrate the earnings power of Personal and Commercial Banking Canada and reinforce our belief in working side by side with customers to break down complex questions into simple answers. It is the essence of Making money make sense. And as an industry leader in customer loyalty, we are building the momentum to keep growing market share.

In Canadian commercial banking, the story is the same, with third-quarter loan volumes up 12% from last year and deposits grew by 15%.

And our commercial banking strength in the U.S. Midwest contributed to the healthy performance of the P&C U.S. business, where year-to-date adjusted earnings1 rose 7% to US $520 million.

In the annual customer survey conducted by American Banker and the Reputation Institute, we were number one among 30 major U.S. banks evaluated for long-term trust, and number five for overall bank reputation.

In U.S. retail banking, our transformed footprint is adopting new customer segmentation and retail lending strategies to drive improved profitability. BMO Harris Bank has great customer recognition, and it's gaining visibility as we increase our market share and presence through targeted campaigns and community engagement.

In BMO Capital Markets, we’ve seen consistent revenue and earnings growth over the previous year, reflecting the positive impact of our diversified approach. The business is focused on mid-cap markets – on fast-growing, innovative companies – and on recognized research, on expert M&A advice, and on first-rate execution in debt and equity capital markets. Year-to-date adjusted earnings1 are $867 million, up 23% with notable contribution from the U.S.

As I noted earlier, our wealth management businesses posted record earnings. For the first nine months, adjusted net income1 was $542 million, up 44% from a year ago. We continue to attract new clients, grow market share and drive strong performance through our dual focus on productivity and customer experience.

Overall, the bank’s year-to-date adjusted earnings1 are up 7%, totaling $3.2 billion, with a return on equity of 15%. Credit performance has been very good in both legacy and acquired portfolios.

Our capital position remains strong, with a Common Equity Tier 1 ratio of 9.6% at the end of Q3.

Regarding leverage: based on our position and on everything we know about the rules as they’re contemplated, we don’t expect the leverage ratio to be a constraint for us.

The bank’s capital strength has given us the flexibility to repurchase 8 million shares in the second and third quarters. We expect to continue with this effective use of excess capital under our normal course issuer bid.

Year to date, we’ve balanced buybacks with dividends to provide an effective return of capital to shareholders in excess of 60% of earnings.

BMO’s overall year-to-date performance reflects a disciplined growth strategy that’s linked to clear strategic priorities and is yielding tangible results:

  • An advantaged business mix.
  • A strong balance sheet.
  • A focus on generating high-quality assets.
  • A prudent approach to risk.
  • A distinct, well-differentiated brand.
  • And above all, a set of clearly identified areas of growth.

BMO is in the right markets – a U.S. heartland that’s poised for new growth, and the Canadian regions and sectors that will benefit most from a resurgence south of the border.

And along with our longer-term confidence in personal banking, we’re concentrated in the right customer segments – specifically commercial banking and wealth management.

And we’re aggressively retooling our organization to get closer to customers, forge deeper relationships and build long-term loyalty. Because these are the keys to continued strong performance, increased market share and sustainable organic growth.

Thank you for your attention – and now I’m happy to take some questions.


1 On a reported basis: P&C Canada Q3 net income of $497million, an increase of 9% year over year, earnings for the first nine months were $1.4 billion; P&C U.S year-to-date earnings rose 10% to US$482 million; BMO Capital Markets year-to-date earnings are $865 million, up 22%; Wealth management businesses earnings for the first nine months was $522 million, up 45% from a year ago; the bank’s year-to-date earnings are up 2% totaling $3.2 billion, with a return on equity of 14.9%.

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