News Releases
BMO Financial Group Reports Third Quarter Net Income Of $660 Million Including $97 Million In After-Tax Losses, Largely Related To Reducing Risk In Our Commodities Business
Net Income Down 7.1% ($50 Million) But Up 6.6% ($47 Million) Excluding Commodities Losses As Other Businesses Performed Well
Performance Highlights:
Third Quarter 2007 Compared with Third Quarter 2006:
- Net income of $660 million, down $50 million or 7.1%
- EPS1 of $1.28 and cash EPS2 of $1.30, both down $0.10 or 7.2% and 7.1%, respectively
- ROE of 18.0%, compared with 20.3% last year
- Revenue up $6 million or 0.2% and non-interest expense up $59 million or 3.6%
- Provision for credit losses up $49 million to $91 million
- Effective tax rate down 3.1 percentage points to 21.0%
- Results in the quarter were affected by losses in our commodities business of $149 million ($97 million after tax and $0.19 per share), as we reduced the size and risk of the commodities portfolio. Our other businesses performed well, overall, generating a $47 million3 or 6.6% increase in net income and revenue growth of $155 million or 5.9%
- Announced on August 28, 2007 a $0.02 per share dividend increase, raising quarterly common share dividends to $0.70 per share, up 2.9% from the third quarter and 12.9% from a year ago, reflecting our policy of maintaining a 45% to 55% dividend payout ratio over time
Operating Group Net Income:
- Personal and Commercial Banking, Canada (P&C Canada) up $3 million or 1.0% to a record $350 million. Excluding P&C Canada's MasterCard gain in the prior year and income tax recoveries in both periods, net income increased $40 million or 14%, driven by broad-based volume growth across our personal and commercial businesses and a stable net interest margin
- Personal and Commercial Banking, U.S. (P&C U.S). down $4 million or 17% to $26 million, including acquisition integration costs, as margin declined in a difficult economic and competitive environment
- Private Client Group up $22 million or 26% to $105 million, driven by strong revenue growth in full-service investing and mutual funds
- BMO Capital Markets down $7 million or 3.4% to $196 million, including losses in our commodities business. Our other businesses performed well, with broad-based growth. Those businesses increased net income by $90 million or 45%, generating $293 million of net income
- Corporate Services net income fell $64 million to a loss of $17 million on lower revenue and higher provisions for credit losses
Year-to-Date 2007 Compared with a Year Ago:
- Net income of $1,679 million, down $288 million or 15%
- EPS of $3.24 and cash EPS of $3.29, down $0.56 or 15% and $0.57 or 15%, respectively
- ROE of 15.1%, compared with 19.2% last year
- Net income and EPS were reduced by the year-to-date net impact of $829 million ($424 million after tax and $0.83 per share) of losses in our commodities business and a $135 million restructuring charge ($88 million after tax and $0.17 per share)
- Tier 1 Capital Ratio remains strong at 9.29%
1 All Earnings per Share (EPS) measures in this document 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.
3 Results stated on a basis that excludes commodities losses and/or the first quarter restructuring charge are non-GAAP measures. Please see the non-GAAP Measures section.
Underlying Performance Was Good in the Third Quarter
Toronto, August 28, 2007 – BMO Financial Group reported net income of $660 million for the third quarter ended July 31, 2007, or $1.28 per share.
Results included after-tax losses of $97 million, or $0.19 a share, in our commodities business. Our other businesses performed well, overall, as they generated net income of $757 million or $1.47 per share. In those businesses, revenue grew 5.9% from a year ago and net income rose by $47 million, or 6.6%.
Earnings in P&C Canada rose 1% to a record $350 million. Excluding the impact of a $38 million ($25 million after tax) gain on the MasterCard International Inc. (MCI) IPO and a $26 million recovery of prior years' income taxes in the third quarter a year ago, as well as a $14 million recovery of prior years' income taxes in the current quarter, P&C Canada's earnings rose 14%. BMO Capital Markets earnings grew 45%, excluding the impact of the commodities losses, driven by broad-based revenue growth and a lower effective tax rate. Net income increased 26% in Private Client Group, driven by strong revenue growth in full-service investing and mutual funds. P&C U.S. earnings decreased 17% as margin has declined in a difficult economic and competitive environment. P&C U.S. net income would have increased quarter-over-quarter in each period in fiscal 2007 in the absence of acquisition integration costs.
“P&C Canada performed well,” said Bill Downe, President and Chief Executive Officer of BMO Financial Group. “Its operating performance improved more than the reported results might suggest, as there was a substantial investment gain and tax recovery in the third quarter a year ago. It also performed well relative to the second quarter with higher volumes across most products, strong improvement in personal and commercial loan market share and better net interest margin. Our focus on serving customers and profitably growing the business is paying off.
“With the exception of the commodities business, we had good results in BMO Capital Markets, with revenues in some of our investment banking businesses doubling from a year ago. Private Client Group also performed well, increasing its income by 26% on strength in full-service investing and mutual funds.
“P&C U.S. loan and deposit volumes were up both year-over-year and relative to the second quarter. Although revenue growth has been affected by the weak U.S. dollar and lower net interest margins relative to last year, our margins were stable in the quarter and we expect them to remain so in the coming quarter.”
Net Income Summary
| Amounts in the above table are non-GAAP amounts. Please see footnote 2 to the preceding Operating Highlights and the Non-GAAP Measures section that follows, which outline the use of non-GAAP measures in this document. |
During the quarter we recorded losses in our commodities business. We completed a number of significant steps to reduce the size of the portfolio and its risk. Approximately 50% of the loss on the portfolio in the quarter related to certain large proprietary positions that we eliminated by entering into offsetting contracts with a counterparty. The other 50% was largely attributable to other trading activities, which included actions related to managing and reducing the risk in the remainder of the portfolio. During the quarter, we reduced the fair market value of commodity derivative contracts assets from $22.7 billion to $11.5 billion. The actions taken in the third quarter significantly reduced our proprietary positions, the amount of profit and loss volatility, and the complexity of the portfolio as well as the fair market value of assets.
Other activities during the quarter included:
- appointing a new head of energy trading and hiring additional key personnel;
- investing in the infrastructure of our back office processes;
- lowering our risk exposure to stress events such as hurricanes; and
- completing the implementation of new risk limits and reductions to existing limits.
BMO has received inquiries, requests for documents and subpoenas pertaining to the commodities trading losses from securities, commodities, banking and law enforcement authorities. As these inquiries are in the early stages, we are unable to determine whether any proceedings against the Bank will result. We are cooperating with all of these authorities.
“We made significant progress in reducing our trading book during the quarter and while further reduction is still intended, it will occur within the ongoing trading activity of the business,” added Mr. Downe. “We expect this process to occur over the next two quarters.”
The foregoing losses in the commodities business were recorded in BMO Capital Markets, primarily in its U.S. operations. As a result, BMO Capital Markets net income for the third quarter was $196 million (including $97 million after-tax losses on commodities) compared with $203 million a year ago and net income of $199 million (including $90 million after-tax losses on commodities) in the second quarter. Its net income for the year to date was $377 million (including $424 million after-tax losses on commodities), compared with $672 million a year ago.
As previously reported, we recorded a charge of $135 million in the first quarter for restructuring, including the elimination of approximately 1,000 jobs in primarily non-customer-facing areas across all the support functions and business groups. We continue to make good progress on our initiatives to improve the efficiency and effectiveness of the organization. The expected run-rate savings of $300 million will assist our revenue growth and customer service initiatives, supporting our productivity targets, specifically in P&C Canada where we expect the majority of the savings to be realized and reinvested. To date, we have eliminated roughly 700 positions with significant reductions in Corporate Services, including Technology and Operations, while adding to our front-line personnel, especially in P&C Canada, Private Client Group and BMO Capital Markets. We remain on track to achieve our objectives by the end of the fiscal year.
Operating Segment Overview
P&C Canada
Net income rose $3 million or 1.0% from a year ago to a record $350 million. Results in the third quarter a year ago included a $38 million ($25 million after tax) gain on the MasterCard International Inc. (MCI) IPO and a $26 million recovery of prior years' income taxes. The current quarter included a $14 million recovery of prior years' income taxes. Excluding these items, net income rose $40 million or 14%. Revenue rose $25 million or 2.0%, but increased $63 million or 5.2% excluding the MCI gain in the third quarter of the prior year. There was solid top-line growth in each of the personal, commercial and cards businesses. Expenses declined from a year ago due to lower capital tax expense and cost efficiencies.
Relative to the second quarter, net income increased $26 million or 8.0%. The second quarter included the $32 million after-tax combined benefit of an insurance gain and a gain on an investment security. Excluding those items and this quarter's $14 million income tax recovery, net income increased $44 million or 15%. There was good revenue growth, due to having three more days in the current quarter, higher net interest margin and volume growth. Expenses increased due to the impact of more days in the current quarter as well as increased employee costs and higher depreciation related to completed initiatives.
In personal banking, there was growth in most products, particularly higher-spread loans and cards as we continue to focus on improving the customer experience and strengthening relationships. Personal loans grew a strong 11.6% from a year ago and market share improved year-over-year and relative to the second quarter. Mortgage growth slowed with third party and broker mortgages declining from the second quarter as anticipated, as we re-focus our efforts on proprietary channels and building relationships with customers. We have been building our mortgage sales force this year with further expansion expected in 2008. We are aggressively targeting growth in personal deposits through simplified products, streamlined account opening and an improved customer experience.
In commercial banking, there was continued good growth in loans and deposits. Loans grew 7.7% from a year ago with growth in all regions. Our Canadian business banking market share, at 19.20%, increased strongly for the second quarter in a row, rising 40 basis points relative to the second quarter and 56 basis points relative to a year ago. With our integrated approach to client service and broad spectrum of products, we are building on our competitive strength to be a market leader in commercial lending.
P&C U.S.
Net income decreased $4 million from a year ago to $26 million. Revenue increased on a U.S. dollar basis but reported revenues included in Canadian consolidated results declined because of the weaker U.S. dollar. Increased revenues were attributable to the inclusion of First National Bank and Trust (FNBT), effective in the second quarter, as well as loan and deposit growth. Revenue growth was lowered by reduced net interest margin.
Relative to the second quarter, net income fell by $1 million or 5.7%. On a U.S. dollar basis, excluding acquisition integration costs, net income increased by $2 million or 6.7%. Revenue declined, but increased on a U.S. dollar basis, largely due to loan and deposit growth and a stable margin.
Quarterly results in 2007 have been affected by ongoing acquisition integration costs. In the absence of these costs, earnings would have increased quarter-over-quarter in each period in 2007, growing from US$23.8 million in the fourth quarter of 2006 to US$28.4 million in the current quarter. Acquisition integration costs of FNBT are substantially complete.
We continue to operate under somewhat difficult economic and market conditions. In this environment, growing revenue is challenging and we have chosen to manage costs by actions such as reducing personnel costs and slowing down new branch openings.
P&C U.S. does not originate subprime mortgage programs and has very little retail exposure with subprime characteristics. Please see the following Economic Outlook & Market Environment section.
We recently announced a definitive agreement to purchase Ozaukee Bank, a community bank with six full-service and two limited-service locations in the affluent northern part of the greater Milwaukee area. With US$694 million in assets and US$561 million in deposits, Ozaukee Bank has a leading share of deposits in its market, significantly ahead of its nearest competitor.
We also announced signing a definitive agreement to purchase Merchants and Manufacturers Bancorporation, Inc., a holding company with six bank subsidiaries operating 34 full-service and 11 limited-service locations in an area concentrated in Milwaukee, and extending into Green Bay to the north and LaCrosse to the west. Merchants and Manufacturers' banks have a combined US$1.5 billion in assets and US$1.2 billion in deposits, holding more than half of their deposits in the Milwaukee area.
Private Client Group
Net income increased $22 million or 26% from a year ago to $105 million. Revenue increased $43 million or 8.8% on broad-based growth, particularly in Full-Service Investing and Mutual Funds. Expenses also increased but at a slower pace.
Relative to the second quarter, net income increased $4 million or 2.9%. Revenue was relatively unchanged but grew $14 million excluding the impact of a gain on sale of Montreal Stock Exchange common shares in the prior quarter and the impact of the weaker U.S. dollar. The growth was primarily due to an increase in mutual fund revenue. Expenses declined marginally.
The group continues to be recognized for its products and services. Harris Private Bank was ranked among the Top 5 local private banks in the United States in Euromoney Magazine's 2007 Global Survey on the delivery of locally based wealth management services.
BMO Mutual Funds successfully launched BMO LifeStage Plus Funds. This product automatically adjusts the asset mix based on an investor's time horizon. A unique attribute of the funds is a daily lock-in feature that allows investors to receive the highest daily value during the life of the fund if they remain fully invested in the fund until its target end date.
BMO Capital Markets
As explained, results were affected by losses in our commodities business. Our other businesses increased net income in the third quarter by $90 million or 45% from a year ago. In those businesses, revenue increased $163 million or 24%. There was favourable performance in many product areas. There were strong increases in equity underwriting activity and merger and acquisition fees, each of which more than doubled from a year ago, while debt underwriting revenues were up 95%. There was also strong growth in trading revenues and commission revenues and higher revenues from increased corporate banking assets. Growth was lowered by reduced net investment securities gains and the impact of the weaker U.S. dollar.
Adjusted for the impact of the losses in our commodities business in both periods, net income rose $4 million or 1.5% from the second quarter on good revenue growth in other product areas including trading revenues, merger and acquisition fees and debt underwriting activity. Growth was lowered by reductions in collections on previously-impaired loans, equity underwriting and net investment securities gains as well as the impact of the weaker U.S. dollar.
During the quarter, BMO Capital Markets continued to demonstrate its Canadian leadership in high-return fee businesses. Although volumes were down slightly from previous quarters, our market share increased. We participated in 112 new issues including 19 corporate debt deals, 2 issues of preferred shares, 69 common equity transactions and 22 government debt issues, raising a total of $34.2 billion. We also acted as financial advisor on several significant M&A transactions.
Performance Targets
Given the significance of the losses incurred in our commodities business this year, it will be extremely challenging to achieve most of our annual financial targets. We will continue to monitor our performance relative to our annual targets, but will also monitor performance on a basis that excludes the impact of the announced commodities losses, to provide a checkpoint on the success of growing our businesses and meeting our strategic objectives.
| The data in the above table are non-GAAP amounts or non-GAAP measures, except provision for credit losses data. Please see footnote 2 to the preceding Operating Highlights and the Non-GAAP Measures section that follows, which outline the use of non-GAAP measures in this document. |
The preceding section and above table contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Economic Outlook & Market Environment
We now anticipate that the Canadian economy will grow at a moderate rate of 2.4% in 2007, though recent volatility in financial markets and stress in credit markets raise the risk of weaker growth. Relatively low interest rates and high resource prices should continue to support consumer and business spending, while the strong Canadian dollar and softer U.S. economy will likely weigh on exports. Housing market activity is expected to remain healthy, though it will likely moderate in response to past increases in interest rates. Growth in consumer spending and personal credit should be supported by recent solid gains in employment. Companies will likely continue to invest to expand productive capacity, which should support business loan growth. Canadian interest rates are not expected to change significantly in the year ahead, presuming the current turbulence in capital markets subsides.
The economies of central and eastern Canada should continue to lag the resource-producing western provinces as the strong Canadian dollar restrains manufacturing activity. The Canadian dollar had appreciated 9% against the U.S. dollar in 2007 through the end of July, and we expect it to remain strong over the balance of the year.
The U.S. economy is now projected to grow at a modest rate of 1.9% in 2007. The implementation of tighter lending practices has prolonged the correction in housing markets and will likely continue to dampen demand for residential mortgages. Consumer spending remains moderate, though it is at risk of weakening if home prices continue to fall. Business investment has picked up recently and exports remain strong. The Federal Reserve could reduce rates if the recent stress in capital markets persists. The Midwest economy is anticipated to strengthen modestly as manufacturers should benefit from a weak U.S. dollar and strong global demand.
There has been significant volatility in capital markets recently. Concerns over U.S. subprime mortgages, non-bank-sponsored asset-backed commercial paper and other factors have contributed to a shift toward lower risk financial products and reduced liquidity. BMO Financial Group has very little direct retail exposure with subprime characteristics and our exposure through bonds, where the underlying assets are collateralized debt obligations, is not material. We have in our trading portfolio approximately $400 million of Canadian third-party asset-backed commercial paper, or approximately 0.1% of our assets, which may result in some mark-to-market exposure. None of the Canadian money market funds offered by BMO Mutual Funds and GGOF Guardian Group of Funds has exposure in their portfolios to asset-backed commercial paper issued by non-bank-sponsored conduits.
BMO has significant expertise in the management of bank-sponsored asset-backed commercial paper programs. We have good knowledge of the assets in the conduits that support the commercial paper issued. They are very high quality and are managed with the same rigour applied to BMO's assets. During the recent disruption in the third-party-sponsored asset-backed commercial paper market, we have supported our BMO-sponsored conduits and have facilitated trading to ensure the market for bank-sponsored asset-backed commercial paper continues to perform satisfactorily.
Recent market developments may impact our BMO Capital Markets group in the short term, potentially lowering equity underwriting and merger and acquisition activities, while market volatility and wider credit spreads may benefit our trading operations and corporate loan book. Subject to the effect that market volatility may have on the economy, we do not expect any impact on our other operating groups.
This Economic Outlook & Market Environment section contains forward-looking statements. Please see the Caution Regarding Forward-Looking 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 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 2007 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 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 28 and 29 of BMO's 2006 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.
Assumptions about the future performance of the Canadian and U.S. economies and how that will affect our businesses were material factors we considered when setting our strategic priorities and objectives and in determining our financial targets, including provisions for credit losses. Key assumptions included that the Canadian and U.S. economies would expand at a moderate pace in 2007 and that inflation would remain low. We also assumed that interest rates in 2007 would remain little changed in Canada but decline in the United States and that the Canadian dollar would hold onto its value relative to the U.S. dollar. The Canadian dollar has strengthened relative to the U.S. dollar and interest rates have increased in the United States, but we believe that our other assumptions remain valid. We have continued to rely upon those assumptions and the views outlined in the preceding Economic Outlook & Market Environment section in considering our ability to achieve our 2007 targets. 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. Tax laws in the countries in which we operate, primarily Canada and the United States, are material factors we consider when determining our sustainable effective tax rate.
Assumptions about the performance of the natural gas and crude oil commodities markets and how that will affect the performance of our commodities business were material factors we considered in making the forward-looking statements regarding the commodities portfolio set out in this document. Key assumptions included that commodities prices and implied volatility would be stable and our positions would continue to be managed with a view to lowering the size and risk level of the portfolio.
To view the rest of this news release consisting of:
| Financial Highlights | click here |
| Management's Discussion and Analysis | click here |
| Unaudited Financial Statements | click here |
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties 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 also invited to listen to our quarterly conference call on Tuesday, August 28, 2007 at 2:00 p.m. (EDT). 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 Monday, November 26, 2007 by calling 416-641-2196 (from within Toronto) or 1-888-742-2491 (toll-free outside Toronto) and entering passcode 7577.
A live webcast of the call can be accessed on our web site at www.bmo.com/investorrelations. A replay can be accessed on the site until Monday, November 26, 2007.
Media Relations Contacts
Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Ronald Monet, Montreal, ronald.monet@bmo.com, 514-877-1873
Investor Relations Contacts
Viki Lazaris, Senior Vice-President, viki.lazaris@bmo.com, 416-867-6656
Steven Bonin, Director, steven.bonin@bmo.com, 416-867-5452
Krista White, Senior Manager, krista.white@bmo.com, 416-867-7019
Chief Financial Officer
Karen Maidment, Chief Financial and Administrative Officer, karen.maidment@bmo.com, 416-867-6776
Corporate Secretary
Sharon Sandall, Acting Secretary, Corporate and Legal Affairs, corp.secretary@bmo.com, 416-867-6785
Annual Meeting 2008
The next Annual Meeting of Shareholders will be held on Tuesday, March 4, 2008 in Quebec City, Quebec.