Speeches"Taking BMO to the Next Level"
Remarks by Karen Maidment, Chief Financial and Administrative Officer, BMO Financial Group, at Bank of Montreal Annual Meeting of Shareholders
Toronto, Ontario, March 1, 2007
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Follows Slides 1-11
SLIDE 12 - Karen Maidment, CF&AO
Thank you, David, and hello everyone.
It’s great to be able to report to shareholders during this exciting time of transition and growth for our company.
Our outgoing and incoming Chief Executives have talked this morning about BMO’s accomplishments and plans for future growth and success. It is now my pleasure to report on our financial performance in 2006 and in the first quarter of the year now under way.
SLIDE 13 - Caution Regarding Forward-Looking Statements
As some of my comments will be forward-looking, let me remind you of the caution noted earlier in the meeting.
SLIDE 14 - Consistent, High-Quality Returns on Your Investment
Investors have long looked to BMO to provide consistent, high-quality returns on your investment.
In striving to meet – and, whenever possible, exceed – your expectations, we earned record net income in 2006. As the Chairman noted, this was the fourth consecutive year of record results for BMO.
With record net income in each of the operating groups, low and stable credit losses, and a more favourable tax rate, your earnings per share grew 11.2% and the return on equity reached 19.2%.
During the year we also increased your quarterly dividend by 16 cents or 35% from the fourth quarter of 2005. Dividend leadership was a highlight of the year, and I’ll come back to this theme.
The one-year total return on BMO common shares was 24.1% in 2006 – the second-best performance in our Canadian peer group. Over the past five years, shareholders have earned an average annual total return of 19.1%.
Nonetheless, we must grow faster and deliver stronger operating performance in order to reach our goal of top performance.
My key message today is that we are stepping up to the challenge. We are taking BMO to the next level of performance.
SLIDE 15 - Fiscal 2006 Financial Results
Let’s look more closely at financial results for 2006.
Slide 16 - Fiscal 2006 Financial Results
We achieved a significant milestone as total reported revenue for 2006 passed the $10-billion mark, increasing 1.5% from 2005 to $10.1 billion. Revenue increased $577 million or almost 6% excluding the impact of Harrisdirect (a business we sold in 2005) and the weaker U.S. dollar.
Expenses increased 0.3% on a reported basis – or 6.1% excluding the business sale and the weaker U.S. dollar. This was a result of two key factors: growth in businesses with higher variable costs, such as Trading in the Investment Banking Group; and our strategic decision to invest in our personal and commercial network, in both Canada and the U.S., to build a better bank for our customers.
After subtracting expenses, provisions for credit losses and taxes (as shown on this slide), net income for the year exceeded $2.6 billion, an increase of more than 11% from 2005, as mentioned previously.
Slide 17 - Achieved or Surpassed Four of Five 2006 Financial Targets
We surpassed four of our five financial targets for the year, finishing ahead of target on earnings per share growth, return on equity, credit, and Tier 1 capital.
Cash productivity improvement was below target at 25 basis points as we made a conscious decision to invest in our Canadian retail network, updating almost all of our BMO Bank of Montreal branches and replacing all of our automated banking machines. We have improved cash productivity by 538 basis points over the past three years; and this important long-term measure continues to be a top priority.
During 2006 we also maintained BMO’s record of excellence in credit risk management. This benefits both our customers and our shareholders.
We managed foreign exchange fluctuations related to Canadian and U.S. currencies effectively. Overall, the weaker U.S. dollar reduced our net income by only $24 million for the year – which translates into less than 1% of net income.
And our Tier 1 capital ratio of 10.22% at the end of the year reflected our strong earnings performance, positioning us well for the future.
Slide 18 - Leadership in Dividend Yield
There is one highlight of the year which, I predict, will shine brightest when BMO shareholders look back on 2006. And that is the leadership we took to increase your dividend payout at a time when yield was becoming much more significant to shareholders.
Last May, we increased BMO’s target dividend payout range to an industry-leading 45% to 55% of net income available to shareholders. This, by the way, was prior to the government’s announcement of changes to the tax treatment of income trusts.
Overall, total dividends paid in 2006 increased 18% from the previous year to $2.13 per share.
Earlier this morning, we announced a 4.6% increase in quarterly dividends to $0.68 per common share, ushering in BMO’s 15th consecutive year of rising dividends. This represents a 28% increase from a year ago – and our quarterly payout ratio is now at an industry-leading 51%.
A higher dividend payout reflects management’s confidence in our ability to continue growing earnings. It also reflects BMO’s strong capital position, which gives us great flexibility in capital management. Top value-creating companies have a good track record for steadily increasing dividends.
SLIDE 19 - Q1 2007 Financial Results
Turning now to the first quarter of 2007, I am pleased to report broad-based growth and high-quality earnings in our three operating groups.
SLIDE 20 - Broad-Based Growth and High-Quality Q1 2007 Earnings
Net income reached $673 million for the quarter after excluding a restructuring charge, announced in January, of $135 million pre-tax (or $88 million after tax).
Approximately $117 million of the charge is for severance costs. We are eliminating about 1,000 jobs in primarily non-customer-facing areas across all support functions and business groups.
It was not easy to take business decisions resulting in job reductions. It never is. However, we owe it to our customers and our shareholders to simplify how we work and provide more efficient support for our sales and service colleagues on the front line.
This is an essential step to achieve the superior customer focus, faster pace and higher growth that will ensure our future success.
After excluding the restructuring charge from the results discussed today, earnings per share increased 11% from a year ago, return on equity was 18%, and our excellent credit performance continued.
SLIDE 21 - Q1 2007 Financial Highlights
This slide shows the key components of our quarterly earnings excluding the charge.
We produced total revenue of $2.6 billion. Subtract: expenses of $1.6 billion; a provision for credit losses of only $52 million; and taxes and minority interest of $264 million. What’s left is net income for the quarter of $673 million.
This represents an earnings increase of $67 million or 11% from a year ago.
SLIDE 22 - Revenue Growth in Operating Groups ($million)
Reported revenue grew 4.1% year over year in the first quarter with contributions from all three operating groups.
Revenue increased 5.5% in the Personal and Commercial Banking Group. Progress in our Canadian retail operations was especially encouraging. Personal and Commercial Canada had revenue growth of 6.4% with strong growth and improved market share in both personal loans and commercial lending. Private Client Group revenue grew 8.9% driven by growth across all lines of business. And Investment Banking Group revenue declined 3.6% as the prior year included record Trading revenue.
Expenses increased only 2.8% from a year ago. There was operating leverage as revenue growth outpaced expense growth by 1.3 percentage points.
Revenue will continue to be a priority as we focus on enhancing customer service and increasing sales.
SLIDE 23 - On Track to Achieve 2007 Financial Targets
We are on track to achieve our financial targets for 2007:
Slide 24 - Success in Meeting Performance Targets
Management is determined to maintain BMO’s reputation for delivering consistent returns while building long-term shareholder value – understanding, of course, that we will always encounter small bumps along the way.
We believe in setting tough but realistic targets, aiming to stretch and challenge our business leaders while taking our commitments to shareholders very seriously.
Looking back over the past five years, we have a strong track record for meeting our commitments. We achieved or surpassed 21 of 24 targets over that time frame.
For 2007, we have raised the bar on the percentage of growth that must come from higher operating performance.
As Bill Downe has made clear, our huge focus right now is on boosting BMO’s overall performance. We are convinced we can achieve higher and faster growth by investing more of our resources in customer-facing activities. This is part of an overall drive for growth through increased responsiveness to our customers’ needs.
Slide 25 - Leadership in Risk Management, Financial Disclosure and Corporate Governance
Our focus on stronger performance extends to every corner of the enterprise. We are also, for example, working to gain greater benefit from our expertise in risk management through a more innovative approach to balancing risk and return. I discussed our leadership in risk management at last year’s annual meeting.
We are also renewing our commitment to maintain BMO’s leadership in financial reporting and disclosure and in corporate governance generally, which Tony discussed and which has been widely acknowledged by experts in the field. Our Annual Report, for example, has won awards every year for a number of years; and last year received the Award of Excellence in Financial Reporting across all industry sectors from the Canadian Institute of Chartered Accountants.
Nonetheless, it is important for shareholders to understand that we are feeling the growing financial burden of an onslaught of prescriptive regulations. Not just BMO but the entire financial services industry. That is why I am delighted that U.S. legislators are debating some of the more onerous elements of the Sarbanes-Oxley legislation.
I want to make it clear that BMO wholeheartedly supports the principles of Sarbanes-Oxley with its focus on more and greater clarity in financial disclosure. In fact, we had implemented many of its requirements well in advance of the legislation. We also support the principles behind Basel II and the anti-money laundering legislation.
However, the price tag for meeting all of the requirements of all of the regulations now runs to tens of millions of dollars annually for our company alone.
While these are important and well-intentioned initiatives, they are having the unintended consequence of constraining good business judgment and growth; and we must find ways to bring down the huge costs of compliance.
At BMO, we will contribute positively to ongoing discussions, maintaining and continually improving upon our high standards of disclosure and governance.
Slide 26 - Taking BMO to the Next Level
In concluding my remarks to shareholders today, let me re-emphasize BMO’s recent track record for value creation. You earned a return on common shares of more than 24% in fiscal 2006.
BMO delivered these returns while at the same time:
But that was last year. And today is the beginning of a new era for BMO – a new era in which we will take BMO to the next level of performance for our shareholders.
Slide 27 - Karen Maidment, CF&AO
Finally, let me take this opportunity to pay tribute to my boss Tony Comper at this, his last official event as our President & Chief Executive Officer. It has been an honour and a great learning experience to work alongside someone with Tony’s intellect, values and broad industry knowledge.
I want to extend my personal thanks, Tony, for your mentorship and generosity of spirit, which supported and encouraged me every step of the way. I am very grateful. And I wish you and Elizabeth a wonderful life after BMO.
I would also like to extend my congratulations and best wishes to Bill Downe. Bill, I know you’re going to do a great job, and I am looking forward to working with you to take BMO to an even higher level. Thank you very much.
Slide 28 - Investor Relations