SpeechesRemarks by Russel C. Robertson, Chief Financial Officer, BMO Financial Group, at the Annual Meeting of Shareholders
Vancouver, British Columbia, March 22, 2011
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Thank you very much Bill, and good morning, everyone.
I’m pleased to be here today in Vancouver at our annual meeting. This morning, I’m going to report on the financial performance of our company in fiscal 2010 and the first quarter of 2011, as well as providing a few comments on regulatory changes related to Basel III and International Accounting Standards.
Before I begin, as some of my comments may be forward-looking, I would like to draw your attention to the caution regarding forward-looking statements. In addition, we use certain cash and core earnings measures to assess performance. Accordingly, we also provide this caution that these measures do not have standardized meanings under generally accepted accounting principles. Please refer to our 2010 annual report on page 91 for a discussion and reconciliation of these measures.
In fiscal 2010, net income of $2.8 billion was $1 billion higher than 2009 – resulting in earnings per share of $4.75. Our return on equity improved to 14.9%. We remained financially strong with a Tier 1 Capital Ratio at October 31 of 13.45% which I’ll comment on shortly.
Taking you through our income statement, revenue for the year was $12 billion, up 10.4% or more than $1.1 billion from the previous year. This increase was driven by two main factors. First, there was good organic revenue growth in each of our three operating groups: Personal and Commercial Banking, Private Client Group and BMO Capital Markets. Second, revenue benefited year over year from strategic acquisitions, with the two most prominent being the Diners Club credit card business in P&C Canada and a transaction to acquire certain assets and liabilities of a Rockford Illinois-based bank in P&C U.S. With revenue growth over 9% in 2008, over 8% in 2009 and over 10% in 2010, we’re delivering strong top line growth with continued momentum across all of our businesses.
Provision for credit losses at $1 billion, while still at elevated levels, improved significantly in 2010, declining 35% year over year, reflecting an improving trend across both our Canadian and U.S. loan portfolios.
Non-interest expense of $7.6 billion increased 3% in 2010. The increase was attributable to acquired businesses, higher performance-based compensation in line with improved results, and higher investment spending to support our business initiatives.
We continue to improve financial performance by growing revenue and effectively managing our costs. We measure our progress by pre-provision pre-tax earnings, or simply put, revenue minus expenses.
The pre-provision pre-tax earnings measure is a simple but helpful way to look at our operating progress. In 2010, we achieved $4.6 billion of pre-provision pre-tax earnings, the highest in the history of the bank, and up over $900 million from a year ago, demonstrating good momentum.
We also measure our progress through the cash productivity ratio, which is cash expenses divided by revenues. You can see on the slide that in 2010, for every dollar of revenue we earned, we spent less to generate it – a good indicator of our ability to effectively manage our costs. In 2010, cash productivity improved to 61.9% from 66.3% in 2009.
Let me now turn to the performance of our operating groups … where our commitment to customers and their success is clearly visible.
As a reminder, BMO employs a methodology for segment-reporting purposes whereby expected credit losses are charged to the operating groups. The difference between expected and actual provisions is charged to corporate.
Personal & Commercial Banking Canada reported net income of $1.6 billion in 2010 – over 16% higher than a year ago. Revenues of $5.8 billion increased 10% – top-tier in our Canadian peer group. Revenue growth was driven by volume growth in most products, improvement in net interest margin and the impact of the Diners Club acquisition.
BMO’s largest business serves more than seven million customers offering a full range of products and services, with a differentiated brand position built around making money make sense. We invested $35 million in training and development of our front-line employees geared to improving the quality and consistency of their conversations with customers. We strengthened our distribution network, opening and upgrading a total of 27 branches, and launched an innovative new branch format designed to encourage great conversations with our customers. We also acquired the previously mentioned Diners Club North American franchise, which more than doubled our corporate card business. In addition, we continue to redesign processes and technologies to achieve a high-quality customer experience and create capacity for customer-facing employees.
In U.S. dollars we reported net income of $168 million in our U.S. Personal and Commercial Banking business, where we serve nearly 1.3 million customers and enjoy a rich heritage of more than 125 years in the U.S. Midwest. Revenue of $1.4 billion improved $25 million or 1.8%. Revenue reflected improved net interest margin, primarily due to improved loan spreads, and the Rockford transaction that closed late in the second quarter of 2010. Core deposits, which includes chequing, savings and certain money market accounts, grew by more than 15%, maintaining our number-two ranking for retail deposit market share in the Chicago area.
Turning now to our Private Client Group, which consists of both traditional wealth management plus insurance businesses, we reported 2010 net income of $470 million, up 31% from a year ago. The financial results reflect our ability to continue to differentiate ourselves by delivering a great client experience that is anchored in financial and retirement planning. Revenue of just over $2.2 billion grew $233 million or 12%, reflecting increases across all of our businesses while we continued to manage expenses effectively. This resulted in cash productivity improving 630 bps to 71.5% in 2010.
Results excluding the insurance business had strong performance relative to our Canadian peers with double-digit revenue growth. Revenue growth was driven by an improvement in client assets under management and administration.
Insurance financial results benefited from higher premiums and the inclusion of a full year from our acquisition late in the second quarter of 2009.
We continue to invest in the businesses and enhance our product offers. As an example, we recently launched ten new Exchange Traded Funds in early February, expanding our product lineup to a total of 40, as part of our managed solutions program for retail customers. We have also effectively integrated and expanded our insurance businesses, and streamlined related sales processes and applications.
BMO Capital Markets posted a strong fiscal 2010 with net income of $820 million and a return on equity of 18.8%. Revenues increased 6% to $3.3 billion and revenue growth was supported by our continued focus on clients and building a diversified and dynamic portfolio of businesses.
Expense growth of 4% was driven by increased employee costs, as we made strategic hires across our operations to position our businesses for future growth. The group’s productivity ratio improved from 56.5% to 55.5%.
We also improved our Canadian league table-standing, reflecting the changes that have been underway in the business. For fiscal 2010 Bloomberg named us number one in mergers and acquisitions for “announced” transactions.
Corporate Services net loss for the year was $299 million. There was improvement year over year due to lower provisions for credit losses and higher revenues. The improvement in revenues is primarily a result of more stable market conditions.
Turning now to capital management, BMO is committed to a disciplined approach that balances the interest and requirements of shareholders, regulators and customers. Our objective is to maintain a strong capital position underpinning our operating groups’ business strategies and to continue to maintain and build upon depositor and investor confidence.
We continue to maintain a very strong balance sheet. As highlighted earlier, our year-end Tier 1 Capital Ratio was 13.45%, up from 12.24% in 2009. Our Tier 1 Capital Ratio remains well above the current minimum regulatory capital requirements.
I would now like to turn briefly to our first-quarter results for 2011 which we announced on March 1st.
Net income of $776 million, our highest ever, was up $119 million or 18% from a year ago reflecting strong performance in each of the operating groups. Earnings per share of $1.30 were up 16% and our return on equity improved to 15.7% from 14.3% a year ago.
Revenue of $3.3 billion increased $321 million or 11% from a year ago as there were solid increases in each of our groups. Credit losses of $248 million were down from a year ago and from the previous quarter while impaired loan formations continue to trend favourably. Expenses increased from a year ago, due to continued investment in our P&C businesses combined with higher employee compensation expenses in Private Client Group and BMO Capital Markets, resulting from higher revenues and staff additions. Revenues and expense increases also reflect the effects of our acquisitions. Finally, our pre-provision pre-tax earnings reached $1.3 billion and our cash productivity was 60.9% in the quarter.
In the first quarter we announced two acquisitions. In addition to M&I, we also announced the signing of a definitive agreement to purchase Hong Kong-based Lloyd George Management, an independent investment manager specializing in Asian and global emerging markets. The deal will strengthen our portfolio management capabilities in those markets. The transaction is anticipated to close early in the third quarter of fiscal 2011.
Turning to the changing regulatory environment, we have undertaken a great deal of work in regards to both new Basel III capital requirements and the transition to International Accounting Standards. The strength of the people we have in place, combined with the work we have done, has us on track to adopt the regulatory changes while continuing to execute on our growth strategy.
BMO’s pro-forma Basel III capital ratios remain strong after considering the acquisitions and International Accounting Standards, and the bank is well-positioned to meet Basel III capital requirements in the near term.
Effective November 1, 2011, we will adopt International Accounting Standards as the basis for preparing our consolidated financial statements. Overall, we are on track and expect no significant issues in meeting the reporting standards.
In conclusion and looking forward, we remain committed to our strategic priorities, and we have established the following medium-term financial objectives.
Thank you for your time. I would now like to turn the podium back to the Chairman.
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 document, 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 document 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; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; 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 market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on 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 on pages 29, 30, 61 and 62 of BMO’s 2010 Annual Report, which outlines in detail certain key factors that may affect BMO’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 statement, whether written or oral, that may be made, from time to time, by the organization or on its behalf except as require by law.
The forward-looking information contained in our documents is presented for the purpose of assisting our shareholders in understanding our position as at and for the periods ended on the dates presented and 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 and regulatory capital ratios, 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 such estimates. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at January 31 or as close to January 31 as was practical. The impact of IFRS conversion on our capital ratios is based on the analysis completed as of October 31, 2010. In calculating the impact of M&I and LGM on our capital position, our estimates reflect expected RWA and capital deductions at closing based on anticipated balances outstanding and credit quality at closing and our estimate of their fair value. It also reflects our assessment of goodwill, intangibles and deferred tax asset balances that would arise at closing. The Basel rules could be subject to further 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 performance of the Canadian and U.S. economies in 2011 as well as overall market conditions and their combined effect on the bank’s business are material factors we consider when determining our strategic priorities, objectives and expectations for our business. 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, as well as the historical relationship between economic and financial market variables.