News Releases
Improved Credit Performance and Lower Costs Boost Fourth Quarter Earnings by 10% Year-Over-Year.
Fiscal 2004 Year-over-Year Operating Highlights:
- Record net income of $2,351 million in 2004, up $526 million
- Achieved or exceeded all annual financial targets
- EPS1 of $4.42, up 29%, and cash EPS2 of $4.57, up 27%
- ROE of 19.4%, up from 16.4%
- Productivity ratio2 improves 160 basis points to 64.1% and cash productivity ratio2 improves 155 basis points to 63.0%
- Revenue2 increases 3.7%, while expenses rise 1.1%
- A $103 million net recovery of credit losses, comprised of $67 million of specific provisions and a $170 million reduction of the general allowance, compared with $455 million of specific provisions and no reduction of the general allowance in 2003
- Strong Tier 1 Capital Ratio of 9.81%, up from 9.55%
- Quarterly dividends increase twice in 2004 and rise 26% from fiscal 2003
Fourth Quarter Year-over-Year Operating Highlights:
- Net income of $563 million, up $50 million or 10%
- EPS of $1.06, up 9.3%, and cash EPS of $1.10, up 10%
- ROE of 17.8%, down marginally from 17.9%
- A $13 million net recovery of credit losses, comprised of $37 million of specific provisions for credit losses and a $50 million reduction of the general allowance, compared with $95 million of specific provisions and no reduction of the general allowance a year ago
- Revenue declines 4.2% and expenses decline 3.4%, in part due to the weaker U.S. dollar
- Productivity ratio up 60 basis points to 64.6%, and cash productivity ratio up 40 basis points to 63.5%
1 All Earnings per Share (EPS) measures in this release refer to diluted EPS unless specified otherwise.
2 The adjustments that change results under generally accepted accounting principles (GAAP) to cash results and GAAP revenue and income taxes to a taxable equivalent basis (teb) are outlined in the Non-GAAP Measures section in the Financial Performance Review, where all non-GAAP measures and their closest GAAP counterparts are outlined. Revenues and income taxes in the financial statements are stated in accordance with GAAP. Otherwise, all revenues and income taxes and measures that include revenues or income taxes in this document are stated on a taxable equivalent basis.
Bank of Montreal uses a unified branding approach that links all of the organization's member companies. Bank of Montreal, together with its subsidiaries, is known as BMO Financial Group. As such, in this document, the names BMO and BMO Financial Group mean Bank of Montreal.
FISCAL 2004 AND FOURTH QUARTER 2004 FINANCIAL REVIEW
(1) These are non-GAAP amounts or non-GAAP measures. Please see footnote 2 to the previous table and the Non-GAAP Measures section in the Financial Performance Review, which outline the use of non-GAAP measures in this document.
Toronto, November 23, 2004 — BMO Financial Group reported record net income of $2,351 million for its 2004 fiscal year, as net income rose 29% over 2003. Net income for the fourth quarter of 2004 was 10% higher than a year ago.
PERFORMANCE OVERVIEW
Net income was $2,351 million for the fiscal year ended October 31, 2004, up $526 million from a year ago. Earnings per share (EPS) of $4.42 rose 29%. Cash EPS, which reflects the add-back of the after-tax amortization of intangible assets, was $4.57. Higher net income was attributable to a $558 million ($363 million after tax) improvement in credit performance, which drove approximately two-thirds of the 29% increase in net income, and to strong operating group results.
"We had an extremely successful year," said Tony Comper, President and Chief Executive Officer, BMO Financial Group. "We achieved our cash productivity target and surpassed all our other financial targets for 2004, earning our highest-ever net income."
Each group improved their productivity and earned record net income in 2004. Personal and Commercial Client Group earned net income of just over $1 billion, up $66 million or 7.0% from a year ago as strong volume growth more than offset the impact of reduced net interest margin, reflecting a competitive low interest rate environment. Private Client Group earned $231 million, up $87 million or 60% from 2003 and Investment Banking Group earned $856 million, up $135 million or 19%. Both benefited from the more favourable capital markets environment, particularly in the first half of the year.
BMO's revenue1 increased $341 million or 3.7% in fiscal 2004, with all operating groups contributing to the growth. Personal and Commercial Client Group revenue rose $90 million or 1.9% on higher volumes and the inclusion of acquired businesses in the United States, partially offset by the impact of lower net interest margins and lower card fees. Investment Banking Group revenue rose $176 million or 6.6%, due to higher securities trading commissions and underwriting fees, and to net gains on investment securities, compared with net losses a year ago, as well as the inclusion of $69 million of Harris Nesbitt Gerard revenue. Private Client Group revenue increased $113 million or 6.5%, as successful revenue generating initiatives and improved market fundamentals drove higher commission and fee-based revenues. The weaker U.S. dollar lowered revenue growth by $243 million or 2.6 percentage points overall and reduced the pace of revenue growth in each of the client groups.
Net interest margin1 was lower in all operating groups, but because of asset growth in Personal and Commercial Client Group, BMO's overall net interest margin for fiscal 2004 declined by only 3 basis points from the prior year, to 1.88%. Net interest margins are detailed in the revenue section of the financial performance review.
Results included $67 million of specific provisions for credit losses, compared with specific provisions of $455 million in fiscal 2003. Results also included a $170 million reduction in the general allowance for credit losses, producing a total net recovery of credit losses of $103 million in 2004, a $558 million improvement from 2003. The improvement reflects the more favourable credit environment and improved credit performance.
Non-interest expenses totalled $6,157 million, an increase of $70 million or 1.1% from a year ago. The $106 million incremental impact of acquired businesses and a $90 million increase in performance-based compensation costs contributed to the rise. These factors were partially offset by the $177 million impact of the weaker U.S. dollar. Our focus on improving productivity limited expense growth from other factors to $51 million, or less than 1%. The non-interest expense-to-revenue ratio1 (productivity ratio) was 64.1% in 2004, compared with 65.7% in 2003.
"In 2004, our top priority was to improve our cash productivity ratio1 by 150 to 200 basis points," added Mr. Comper. "We achieved that target, improving cash productivity by 155 basis points and we are now targeting a further improvement of 150 to 200 basis points in 2005."
Net income for the fourth quarter of 2004 was $563 million, an increase of $50 million or 10% from the fourth quarter a year ago. There was a $108 million ($70 million after tax) improvement in credit performance. In addition, earnings were higher in each of the operating groups as higher volumes in our personal and commercial business drove increased earnings, while lower revenue in our capital markets businesses was more than offset by reduced performance-based compensation costs and effective cost containment. Corporate Support net income was affected by reduced revenue related to lower investment securities gains and lower investment earnings in the low interest rate environment.
“We indicated at the end of the third quarter that earnings would decline in the fourth quarter,” added Mr. Comper. “The decline was expected in light of unusually high recoveries of credit losses in the third quarter and slowing capital markets. Nonetheless, we continue to benefit from our focus on improving productivity and from our superior credit management and did achieve our ninth consecutive quarter of year-over-year earnings growth.”
Relative to the record results in the third quarter, net income declined $91 million or 14%. Results in the third quarter benefited from high reductions of previously established allowances on certain loans and recoveries on loans that were previously written off. As such, the decline in results was in large part due to a $97 million ($63 million after tax) reduction of the recovery of credit losses and $33 million ($21 million after tax) of interest collected in the third quarter on loans that were previously impaired or written off. Investment Banking Group's revenues were down appreciably but the impact on its results was largely offset by lower performance-based compensation costs.
Revenue for the quarter declined $99 million or 4.2% from a year ago to $2,312 million. The decline was attributable to a $70 million revenue decline in Corporate Support primarily related to lower investment securities gains and lower investment earnings in the low interest rate environment, the $40 million impact of the weaker U.S. dollar and lower spreads and lending volumes in Investment Banking Group. Revenues rose in Personal and Commercial Client Group on higher volumes, but the growth was partially mitigated by the weaker U.S. dollar, reduced net interest margins and lower card fees revenue. Net investment securities gains were higher overall but the increase was largely offset by lower trading income.
Revenue declined $111 million or 4.6% from the third quarter, primarily due to lower Investment Banking Group revenues, reflecting lower net interest income on narrower spreads in the Group's interest-rate-sensitive businesses and the aforementioned $33 million interest collections in the third quarter. Private Client Group revenue also fell as both groups earned lower commissions on reduced client activity and were affected by the weaker U.S. dollar.
Net interest margin for the fourth quarter of 2004 was 1.87%, a decrease of 4 basis points from a year ago and 5 basis points from the third quarter, in part due to the collection of the $33 million of interest. Net interest margin was lower in all operating groups and is detailed in the Revenue section of the Financial Performance Review.
This quarter's results included a $37 million specific provision for credit losses, compared with a specific provision of $95 million in the fourth quarter of 2003. The improvement reflects low levels of new provisions. Results also included a $50 million reduction in the general allowance for credit losses, producing a total net recovery of credit losses of $13 million for the quarter. In the fourth quarter of 2003, there was no reduction in the general allowance. Third quarter results included a $70 million net recovery of specific credit losses and a $40 million reduction in the general allowance, producing a total net recovery of credit losses of $110 million. The third quarter benefited from $60 million of recoveries on loans that were previously impaired or written off.
During the quarter, we repurchased 1,665,400 Bank of Montreal common shares under our common share repurchase programs at an average cost of $54.30 per share for a total of $90 million for the quarter. Over the course of fiscal 2004, we repurchased 6,220,500 shares at an average cost of $53.63 per share for a total of $333 million.
We achieved or surpassed all five of our financial targets, as we did last year. Our performance for 2004 and targets for 2005 are set out in the table below. Our EPS growth target for 2005 is lower than both our 2004 target and our 2004 performance because we expect 2005 provisions for credit losses to increase from 2004's unusually low levels as new provisions, recoveries and reversals are anticipated to return to more normalized levels at this stage in the credit cycle. Our targets for 2005 have been established in the context of our expectations for the economy, as set out in the economic outlook that follows.
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1 On a taxable equivalent basis — see the Non-GAAP Measures section
2005 Economic Outlook
The Canadian economy is expected to grow at a moderate pace in 2005. Personal spending will continue to benefit from historically low, albeit rising, interest rates and business investment should gather strength amid strong corporate profitability and increased confidence in the economic expansion. However, export growth will slow in response to the higher Canadian dollar. Interest rates should continue to rise gradually towards more normal levels, while the Canadian dollar is projected to hold firm at current levels against the U.S. dollar as a result of positive trade balances. The economic expansion should support growth in residential mortgages, personal loans and business lending, and at the same time underpin fee-based banking activity. Though remaining above the norm, mortgage growth will moderate from the strong pace of 2004 as a result of higher interest rates.
The U.S. economy is projected to grow strongly in 2005, led by business investment in productivity-enhancing capital equipment. However, the pace of activity will moderate from the rapid rate of 2004 because of past increases in energy costs and waning support from monetary and fiscal policies. Housing market activity should cool down as rising interest rates reduce affordability, thereby lessening demand for residential mortgages. Conversely, continued strength in capital spending should underpin demand for business loans. Interest rates will likely continue to increase gradually in 2005 as the Federal Reserve reduces the monetary stimulus in the economy.
Management's Responsibility for Financial Information
A rigorous and comprehensive financial governance framework is in place at BMO and its subsidiaries at both the management and board levels. Each year, BMO's Annual Report contains a statement signed by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) outlining management's responsibility for financial information contained in the report. As in the prior year, BMO will file certifications, signed by the CEO and CFO, with the SEC in the United States in December 2004 when we file our Annual Report and other annual financial disclosure documents. In those filings, BMO's CEO and CFO certify, as required by the United States Sarbanes Oxley Act, the appropriateness of BMO's financial disclosures in our Form 40-F filings and the effectiveness of controls and procedures over those disclosures. Pursuant to new Canadian securities legislation, BMO's CEO and CFO certify the appropriateness of our financial disclosures in BMO's interim filings with securities regulators, including the second and third quarter results news release and the unaudited interim consolidated financial statements for those periods.
As in prior quarters, BMO's audit committee reviewed this document, including the attached unaudited interim consolidated financial statements, and BMO's Board of Directors approved the document prior to its release.
A comprehensive discussion of our businesses, strategies and objectives can be found in Management's Discussion and Analysis of Operations and Financial Condition in BMO's 2003 Annual Report, which can be accessed on our web site at www.bmo.com/investorrelations. Readers are also encouraged to visit our web site to view quarterly financial information.
Regulatory Filings
Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, our Annual Information Form and the Notice of Annual Meeting of Shareholders and Proxy Circular are available on our web site, on the Canadian Securities Administrators' web site at www.sedar.com, and on the EDGAR section of the SEC's web site at www.sec.gov.
BMO's audited consolidated financial statements for the year ended October 31, 2004 will be available on our web site at www.bmo.com on or about December 7, 2004. Management's Discussion and Analysis for 2004 will be available on our web site on or about December 14, 2004.
To view the rest of this news release consisting of:
| Financial Highlights | |
| Financial Performance Review | |
| Unaudited Financial Statements |
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 news release, and may be included in 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 the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2005 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 and other forward-looking statements will not prove to be accurate. 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: global capital market activities; interest rate and currency value fluctuations; the effects of war or terrorist activities; the effects of disease or illness that impact on local, national or international economies; the effects of disruptions to public infrastructure, such as transportation, communications, power or water supply disruptions; industry and worldwide economic and political conditions; regulatory and statutory developments; the effects of competition in the geographic and business areas in which we operate; management actions; and technological changes. We caution that the foregoing list of factors is not exhaustive and that 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.
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested investors, the media and others are invited to visit our web site at www.bmo.com/investorrelations to review this quarterly news release, presentation materials and a supplementary financial information package online. Copies of these documents are also available at BMO Financial Group's offices at 100 King Street West, 18th Floor, 1 First Canadian Place, Toronto, Ontario, M5X 1A1.
Quarterly Conference Call and Webcast Presentations
Interested parties are invited to listen to our quarterly conference call on Tuesday, November 23, 2004 at 2:00 p.m. (EST). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of the conference call can be accessed until Tuesday, December 7, 2004 by calling 416-695-5292 (from within Toronto) or 1-888-742-2491 (toll-free outside Toronto) and entering pass code 3484.
A live webcast of the quarterly conference call can be accessed on our web site at www.bmo.com/investorrelations. A replay can be accessed on the site until Monday, February 21, 2005.
Media Relations Contacts
Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Ronald Monet, Montreal, ronald.monet@bmo.com, 514-877-1101
Investor Relations Contacts
Susan Payne, Senior Vice-President, Investor Relations, susan.payne@bmo.com, 416-867-6656
Steven Bonin, Director, Investor Relations, steven.bonin@bmo.com, 416-867-5452
Amanda Mason, Senior Manager, Investor Relations, amanda.mason@bmo.com, 416-867-3562
Chief Financial Officer
Karen Maidment, Senior Executive Vice-President and Chief Financial Officer, karen.maidment@bmo.com, 416-867-6776
Corporate Secretary
Velma Jones, Vice-President and Corporate Secretary, Corporate and Legal Affairs, corp.secretary@bmo.com, 416-867-6785