News Releases
TORONTO, ONTARIO--(Marketwire - May 25, 2011) - BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal -
Second Quarter 2011 Report to Shareholders ---------------------------------------------------------------------------- BMO Financial Group Reports Good Second Quarter Results, Earning $800 Million of Net Income Financial Results Highlights: Reported results for the quarter - Net income of $800 million, up $55 million from a year ago - EPS(1) of $1.34, up 6.3% from a year ago - ROE of 16.7%, up from 16.4% a year ago - Provisions for credit losses of $145 million (including the benefit of a $42 million reduction in the general allowance), down $104 million from a year ago - Specific provisions for credit losses of $187 million, down $62 million from a year ago - Common Equity Ratio remains strong, at 10.67% Adjusted results(2) for the quarter - Adjusted net income of $804 million, up $52 million from a year ago - Adjusted EPS of $1.35, up 5.5% from a year ago
For the second quarter ended April 30, 2011, BMO Financial Group reported net income of $800 million or $1.34 per share.
Today, BMO announced a third quarter dividend of $0.70 per common share, unchanged from the preceding quarter and equivalent to an annual dividend of $2.80 per common share.
"Earnings of $800 million in the quarter and strong year-to-date results in the operating groups have pushed BMO's net income for the first six months of the year to almost $1.6 billion," said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "We continue to see the benefit from investments in customer experience contributing to top-line growth and customer loyalty. We are encouraged by the generally improving trend we are seeing with respect to loan losses and our rising return on equity, which reached 16.7% in the quarter on a very strong capital base.
"As we see the signs of a business-led recovery in both Canada and the United States, we believe that banks like ours have a unique institutional responsibility to play in that recovery. Our consistent approach to lending, in good times and more challenging times, continues to pay off with ongoing strength in P&C Canada commercial loans balances and market share, while maintaining our disciplined approach to risk management. With a Common Equity Ratio of 10.67%, BMO remains very well-capitalized relative to our global peers and has a strong balance sheet.
"Last week, shareholders of Marshall & Ilsley Corporation approved its acquisition by BMO. On every level, we are seeing a very positive response from employees of both BMO and M&I. Integration planning is moving forward and we are committed to delivering a seamless transition for customers. We look forward to welcoming M&I shareholders as BMO shareholders upon closing, which we continue to anticipate taking place in the third fiscal quarter.
"During the quarter, we completed the acquisition of Hong Kong-based Lloyd George Management, a highly regarded investment manager specializing in Asian and global emerging markets. In addition, we launched a referral arrangement with Agricultural Bank of China, providing our respective clients with access to cross-border private banking financial services.
"Notwithstanding some continuing uncertainty over global economic developments, BMO's sustained momentum and the success of our initiatives to focus on the customer experience are serving us well. Our outlook remains positive," concluded Mr. Downe.
(1) All Earnings per Share (EPS) measures in this document refer to diluted
EPS unless specified otherwise.
(2) Results and measures in the MD&A are presented on a GAAP basis. They
are also presented on an adjusted basis that excludes the impact of
certain items. Items excluded from second quarter 2011 results in the
determination of adjusted results include an $11 million ($8 million
after tax) charge to revenue for the hedge of foreign currency risk on
the offer to purchase Marshall & Ilsley Corporation (M&I), costs of
$25 million ($17 million after tax) for M&I integration planning, a $10
million ($9 million after tax) charge for amortization of acquisition-
related intangible assets and a $42 million ($30 million after tax)
decrease in the general allowance for credit losses. Management assesses
performance on both a GAAP basis and adjusted basis and considers both
bases to be useful in assessing underlying, ongoing business
performance. Presenting results on both bases provides readers with an
enhanced understanding of how management views results and may enhance
readers' analysis of performance. Adjusted results and measures are non-
GAAP and are detailed in the Net Income section and in the Non-GAAP
Measures section at the end of Management's Discussion and Analysis
(MD&A), where such non-GAAP measures and their closest GAAP counterparts
are disclosed.
Operating Segment Overview
P&C Canada
Net income was $401 million, up $7 million or 1.7% from a year ago. Reported results reflect provisions for credit losses in BMO's operating groups on an expected loss basis. On a basis that adjusts reported results to reflect provisions on an actual loss basis, P&C Canada's net income growth was strong, increasing $55 million or 16% to $391 million. There was good revenue growth, driven by volume growth across most products. Expense growth was higher this quarter, as expected, due to initiative spending and higher employment levels in the frontline sales force as we continued to invest in our strategic priorities.
We are proud of the improvements that we have made in enhancing the customer experience. We continue to invest in the capabilities of our workforce, improving processes and leveraging our performance management discipline, leading to broader and deeper conversations and relationships with our customers. As a result, customer loyalty, as measured by net promoter score, has improved in both our personal and commercial businesses and we have seen an increase in the average number of product categories used by both personal and commercial customers.
In personal banking, we continue to improve the productivity of our sales and distribution network. New branch openings and renovations continue, as we opened three new branches and redeveloped five in the first half of the year. We rolled out free coin-counting machines in new and renovated branches across Canada so customers and potential customers can trade in their coins and talk with us about any of their financial needs. We also made it more convenient for our customers to access their banking information via web-enabled mobile phones with the launch of BMO Mobile Banking in April. Consistent with our ongoing commitment to simplifying financial matters, we launched BMO SmartSteps for Parents, an online interactive hub to help parents educate their children on money management.
In commercial banking, our market share for loans to small and medium-sized businesses increased year over year and we continue to rank second in Canadian business lending market share. In March, we launched Online Banking for Business, which provides customers with a comprehensive view of their financial information, accounts and banking services, in an integrated, secure, user-friendly environment. In addition, to better serve the unique personal and business needs of Canadian entrepreneurs, we have added 60 small business bankers and are planning to have a total of 150 in our branches across Canada by the end of the year. These dedicated banking specialists understand the unique challenges of the small business owner. They can help them choose the right banking products for their businesses and advise them on the selection of specially bundled banking solutions and the use of tools such as BMO SmartSteps for Business. Our goal is to become the bank of choice for businesses across Canada, by providing the knowledge, advice and guidance our business customers want. More frequent interactions with our customers have improved the quality of our customer conversations, driving higher commercial banking revenues.
P&C U.S. (all amounts in US$)
Net income of $43 million decreased $2 million or 2.8% from $45 million a year ago. The benefit of the Rockford, Illinois-based bank transaction and organic revenue growth was more than offset by a higher provision for credit losses under BMO's expected loss provisioning methodology and an increase in the impact of impaired loans. Solid revenue growth was largely attributable to improved net interest margin, which was primarily driven by improved loan and deposit spreads, coupled with deposit balance growth.
On a basis that adjusts for the impact of impaired loans, a reduction in the Visa litigation accrual and acquisition integration costs, net income was $63 million, an increase of $2 million or 4.1% from a year ago.
Harris was recently ranked as the most reputable U.S. bank by Reputation Institute in its study conducted in collaboration with American Banker. This is the second year the study has been conducted and Harris improved on its top 10 ranking of the previous year.
We continue to focus on the customer experience, as reflected in our high loyalty scores. Our personal net promoter score was 42 for the second quarter of 2011, up from 41 in the preceding quarter, and remains very strong compared to the scores of our major competitors.
During the quarter, we were proud to participate in Money Smart Week, a promotion coordinated by the Federal Reserve Bank of Chicago and various partner organizations. We hosted financial education sessions in many locations throughout Illinois and Northwest Indiana as part of a series of free classes and activities designed to help consumers better manage their personal finances. We also contributed to the scholarship prizes for the Money Smart Kid Essay Contest winners in select districts.
As part of our Harris Helpful Steps program, we recently launched Harris Helpful Steps for small business. The program is designed to help small businesses achieve success by helping them focus on their individual and unique financial needs.
Our commercial bank segment is seeing opportunities to further expand the business and is making progress toward establishing Harris as the premier commercial bank in the Midwest. The performance of select commercial banking segments has been strong, including corporate finance, business banking and the food and consumer segments. Commercial banking continues to add high quality new clients to its client base in fiscal 2011 with a focus on larger clients and high-return relationships. The current revenue pipeline is strong, particularly in diversified industries, corporate finance, financial institutions and the food and consumer sectors.
Private Client Group (PCG)
Net income was $101 million, down $14 million or 13% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, increased $29 million or 41% to $100 million as we continue to see growth across all other PCG businesses. Insurance net income was $1 million for the quarter, down $43 million from a year ago. Insurance income was lowered by the $47 million after-tax impact of unusually high claims related to the earthquakes in Japan and New Zealand.
Revenue was $582 million, up $24 million or 4.5% from the prior year, and up 13% adjusted for the earthquake-related reinsurance claims. PCG revenue, excluding the insurance business, was up 15%, with all non-insurance businesses increasing revenue as we remain focused on continuing to deliver the high level of service and advice that our clients expect. Insurance revenue was down significantly as higher net premium revenue was more than offset by higher reinsurance claims related to the earthquakes that decreased revenue by $50 million.
Assets under management and administration of $284 billion improved by $35 billion or 14%, after adjusting to exclude the impact of the weaker U.S. dollar.
During the quarter, BMO's Exchange Traded Fund (ETF) business reached $2 billion in assets under management, achieving this milestone in less than two years. This rapid growth speaks to the rising demand among Canadian investors for innovative, transparent, low-cost investment options. In 2009, BMO began offering ETFs and has since led the industry in introducing innovative ETF products to meet investor needs, currently offering a total of 40 ETFs in its broad product line-up.
During the quarter, World Finance magazine named BMO Harris Private Banking as Best Private Bank in Canada for 2011, recognizing the quality of the customer service and support that set BMO apart from its competitors.
On April 28, 2011, we completed the acquisition of Lloyd George Management (LGM), an independent investment manager specializing in Asian and global emerging markets. The acquisition bolsters our portfolio management capabilities in Asian and emerging markets and added $5 billion to our assets under management.
BMO Capital Markets
Net income for the quarter of $235 million decreased $25 million or 9.4% from a year ago. Return on equity was 21.4%, compared with 24.9% a year ago. Revenue decreased by $84 million from the very strong levels of a year ago to $836 million, primarily due to a more challenging trading environment. However, mergers and acquisitions and debt underwriting revenues continued to rebound from a year ago and have benefited from consistent performance through the first half of the year.
BMO Capital Markets has achieved improved results on a year-to-date basis. Building on our performance of the first six months of 2011 and the continued momentum from our strategic initiatives, we believe we are well positioned for the remainder of the year.
During the quarter, BMO Capital Markets was recognized for its focus on client service by being named the world's Best Metals & Mining Investment Bank for the second year in a row by Global Finance magazine, an acknowledgment of our experience and deep sector knowledge.
BMO Capital Markets participated in 156 new issues in the quarter including 52 corporate debt deals, 33 government debt deals, 65 common equity transactions and six issues of preferred shares, raising $50 billion.
Corporate Services
Corporate Services net income in the quarter was $21 million, an improvement of $91 million from the prior year. Revenues were $148 million better, primarily due to higher interest on the settlement of certain income tax matters, a lower group teb offset, the favourable impact of hedging activities relative to a year ago and higher securitization-related revenues mainly due to a credit card securitization in the current quarter. Expenses were $88 million higher, mainly due to increased technology investment spending, costs relating to planning for the M&I integration and higher employee costs. Provisions for credit losses were better by $86 million, contributing $60 million to Corporate Services improved net income, as a result of lower provisions charged to Corporate under BMO's expected loss provisioning methodology, including a $42 million reduction in the general allowance in the current quarter. BMO employs a methodology for segmented reporting purposes whereby expected credit losses are charged to the client operating groups, and the difference between expected losses and actual losses is charged (or credited) to Corporate Services.
Acquisition of Marshall & Ilsley Corporation
During the first quarter, we announced the signing of a definitive agreement to acquire Marshall & Ilsley Corporation (M&I), a Milwaukee, Wisconsin-based bank holding company with consolidated assets of approximately US$50 billion, in a common stock-for-common stock transaction that valued M&I at approximately Cdn$4.1 billion at the time of the announcement. In addition, a subsidiary has entered into an agreement with the U.S. Treasury Department to purchase the Troubled Asset Relief Program ("TARP") preferred shares and warrant issued by M&I. The transaction is expected to close in the third quarter of fiscal 2011, subject to customary closing conditions including regulatory approvals. M&I's shareholders approved the transaction on May 17.
The combination of M&I with our existing U.S. operations, which will operate on a combined basis as BMO Harris Bank, would more than double our U.S. branch count to almost 700 and grow assets under management and administration to US$300 billion. Our U.S. on-balance sheet assets would increase by approximately 41% (based on average assets) and annual U.S. revenues would be approximately US$5 billion. The combined U.S. businesses would create the 12th largest commercial bank in the United States as ranked by assets. Pro-forma financial positions and results are as at or for the quarters ended April 30, 2011 for BMO and March 31, 2011 for M&I. The pro-forma commercial bank ranking uses March 31, 2011 data for BMO's U.S. business as well as for M&I and the other commercial banks, based on filings with U.S. regulators.
The acquisition provides an excellent strategic, financial, and cultural fit, transforming and strengthening our U.S. retail and commercial banking and wealth management businesses by increasing scale and providing a strong entry point into new and attractive markets. The six Midwest states where we will have a significant footprint together have GDP and a population comparable to Canada's and, as such, our U.S. market will be as large as our Canadian domestic market. Our U.S. customers and communities will benefit from the combination of two organizations with complementary businesses and capabilities, a comparable focus on providing an excellent customer experience and a long history of supporting their shareholders' interests. The strengths of the two operations are complementary and leveraging the greater strengths of each provides the opportunity to benefit from the greater capability across the combined business.
Both organizations have considerable experience with integrating acquired businesses. Preparation for integration is well underway and is being overseen by a dedicated project integration management office. At the time of the announcement, we indicated that we anticipated cost savings of US$250 million, but now expect that annual cost savings will exceed US$300 million. We also expect there to be opportunities to add to revenues through expanded access to existing and new markets with increased brand awareness and a better ability to compete in the market.
We anticipate that in fiscal 2011, M&I will contribute modestly positive net income to BMO's consolidated results, excluding restructuring and integration costs. As previously disclosed, we may complete a common share offering of less than $400 million prior to the closing of the transaction.
Caution
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Management's Discussion and Analysis
MD&A commentary is as of May 25, 2011. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP). The MD&A should be read in conjunction with the unaudited consolidated financial statements for the period ended April 30, 2011, included in this document, and the annual MD&A for the year ended October 31, 2010, included in BMO's 2010 Annual Report. The material that precedes this section comprises part of this MD&A.
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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, together with
its subsidiaries.
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Summary Data
(Unaudited) Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income 1,620 98 6% (7) -
Non-interest revenue 1,597 70 5% (122) (7%)
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Revenue 3,217 168 6% (129) (4%)
Specific provision for credit
losses 187 (62) (25%) (61) (25%)
Decrease in the general
allowance (42) (42) nm (42) nm
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Total provision for credit
losses 145 (104) (42%) (103) (42%)
Non-interest expense 2,023 193 11% (23) (1%)
Provision for income taxes 231 24 12% (27) (10%)
Non-controlling interest in
subsidiaries 18 - - - -
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Net income 800 55 7% 24 3%
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Adjusted net income(1) 804 52 7% 20 3%
Earnings per share - basic ($) 1.35 0.08 6% 0.04 3%
Earnings per share - diluted ($) 1.34 0.08 6% 0.04 3%
Adjusted earnings per share -
diluted ($)(1) 1.35 0.07 5% 0.03 2%
Return on equity (ROE) 16.7% 0.3% 1.0%
Adjusted ROE(1) 16.8% 0.2% 0.9%
Productivity ratio 62.9% 2.9% 1.7%
Adjusted productivity ratio(1) 61.6% 1.9% 0.7%
Operating leverage (5.0%) nm nm
Adjusted operating leverage(1) (3.3%) nm nm
Net interest margin on earning
assets 1.89% 0.01% 0.07%
Effective tax rate 22.0% 0.6% (2.5%)
Capital Ratios:
Tier 1 Capital Ratio 13.82% 0.55% 0.80%
Common Equity Ratio 10.67% 0.84% 0.52%
Net income:
Personal and Commercial Banking 443 3 1% (43) (9%)
P&C Canada 401 7 2% (43) (10%)
P&C U.S. 42 (4) (9%) - -
Private Client Group 101 (14) (13%) (52) (34%)
BMO Capital Markets 235 (25) (9%) (22) (9%)
Corporate Services, including
Technology and Operations (T&O) 21 91 +100% 141 +100%
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BMO Financial Group Net Income 800 55 7% 24 3%
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(Unaudited) Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
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Net interest income 3,247 193 6%
Non-interest revenue 3,316 296 10%
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Revenue 6,563 489 8%
Specific provision for credit
losses 435 (147) (25%)
Decrease in the general
allowance (42) (42) nm
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Total provision for credit
losses 393 (189) (33%)
Non-interest expense 4,069 400 11%
Provision for income taxes 489 105 27%
Non-controlling interest in
subsidiaries 36 (1) (3%)
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Net income 1,576 174 12%
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Adjusted net income(1) 1,588 172 12%
Earnings per share - basic ($) 2.65 0.25 10%
Earnings per share - diluted ($) 2.64 0.26 11%
Adjusted earnings per share -
diluted ($)(1) 2.66 0.25 10%
Return on equity (ROE) 16.2% 0.9%
Adjusted ROE(1) 16.3% 0.8%
Productivity ratio 62.0% 1.6%
Adjusted productivity ratio(1) 61.2% 1.1%
Operating leverage (2.8%) nm
Adjusted operating leverage(1) (2.0%) nm
Net interest margin on earning
assets 1.86% (0.01%)
Effective tax rate 23.3% 2.2%
Capital Ratios:
Tier 1 Capital Ratio 13.82% 0.55%
Common Equity Ratio 10.67% 0.84%
Net income:
Personal and Commercial Banking 929 35 4%
P&C Canada 845 48 6%
P&C U.S. 84 (13) (13%)
Private Client Group 254 28 12%
BMO Capital Markets 492 20 4%
Corporate Services, including
Technology and Operations (T&O) (99) 91 49%
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BMO Financial Group Net Income 1,576 174 12%
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(1) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP
Measures section at the end of the MD&A, which outlines the use of non-
GAAP measures in this document.
nm - not meaningful.
Management's Responsibility for Financial Information
Bank of Montreal's Chief Executive Officer and Chief Financial Officer have signed certifications relating to the appropriateness of the financial disclosures in our interim MD&A and unaudited interim consolidated financial statements for the period ended April 30, 2011 and relating to the design of our disclosure controls and procedures and internal control over financial reporting. Bank of Montreal's management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at April 30, 2011, of Bank of Montreal's disclosure controls and procedures (as defined in the rules of the Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.
Bank of Montreal's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of BMO; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with Canadian generally accepted accounting principles and the requirements of the Securities and Exchange Commission in the United States, as applicable; ensure receipts and expenditures of BMO are being made only in accordance with authorizations of management and directors of Bank of Montreal; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of BMO assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes in our internal control over financial reporting during the quarter ended April 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As in prior quarters, Bank of Montreal's audit committee reviewed this document, including the unaudited interim consolidated financial statements, and Bank of Montreal'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 in BMO's 2010 Annual Report, which can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.
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 harbour 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; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; 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 markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.
With respect to the M&I transaction, such factors include, but are not limited to: the possibility that the proposed transaction does not close when expected or at all because required regulatory, or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all; the terms of the proposed transaction may need to be modified to satisfy such approvals or conditions; the anticipated benefits from the proposed transaction such as it being accretive to earnings and other impacts on earnings, expanding our North American presence and synergies are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which M&I operates; the ability to promptly and effectively integrate the businesses of M&I and BMO; reputational risks and the reaction of M&I's customers to the transaction; diversion of management time on merger-related issues; and increased exposure to exchange rate fluctuations. A significant amount of M&I's business involves making loans or otherwise committing resources to specific companies, industries or geographic areas. Unforeseen events affecting such borrowers, industries or geographic areas could have a material adverse effect on the performance of our integrated U.S. operations.
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 Bank of Montreal'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 statements, whether written or oral, that may be made, from time to time, by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial 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 April 30 or as close to April 30 as was practical. The impacts of the changes from IFRS are based on our analysis to date, as set out in Transition to International Financial Reporting Standards in the Future Changes in Accounting Policies - IFRS section in our 2010 Annual Report and later in this document. In calculating the impact of M&I 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.
In determining the impact of reductions to overdraft fees and interchange fees in the U.S. Legislative Developments section, we have assumed that business volumes remain consistent with our expectations, that the rules on interchange fees are adopted as currently proposed and that certain management actions are implemented that will modestly reduce the impact of the rules on our revenues.
Assumptions about the performance of the Canadian and U.S. economies 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.
Regulatory Filings
Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators' website at www.sedar.com and on the EDGAR section of the SEC's website at www.sec.gov.
Economic Outlook and Review
Canada's economy strengthened in the past two calendar quarters, on continued growth in business investment, healthy consumer spending and a pickup in exports. Underpinned by high commodity prices, low interest rates and improved U.S. demand, the economy is expected to grow at a moderately strong rate of 2.9% in 2011, down only modestly from the 3.1% rate of last year. A strong Canadian dollar and a shift toward more restrictive monetary and fiscal policies are expected to restrain economic growth to 2.7% in 2012. Higher interest rates and stricter mortgage qualifying rules will likely temper activity in the housing market, slowing growth in residential mortgages. However, robust business investment, especially in the resource-producing regions, should support commercial loan demand. An expected resumption of interest rate increases by the Bank of Canada later this year, along with high commodity prices, should keep the Canadian dollar trading above parity with the U.S. dollar in the year ahead.
The U.S. economic expansion is continuing as a result of expansive monetary and fiscal policies, healthy global demand and a weaker currency, though it has been held back by municipal spending reductions. Improved job growth and an easing in automobile financing conditions have supported consumer spending and led to an upturn in demand for consumer credit. Business investment in new machinery continues to expand briskly. However, the housing market remains weak, restrained by restrictive mortgage lending standards and an overhang of unsold properties. The U.S. economy is projected to grow at a moderate rate of 2.7% in 2011, down from 2.9% last year, then strengthen to 3.1% in 2012. Despite firmer growth and higher inflation, the Federal Reserve will likely maintain its low-interest rate policy until early next year amid still-high unemployment and an expected stabilization in commodity prices. The improved economy and low interest rates should support capital markets activity this year.
In the Midwest, where the bulk of our U.S. operations are located, the economy continues to improve amid rising exports and manufacturing activity and higher agricultural prices. Growth is expected to strengthen moderately in the year ahead, at a pace consistent with the overall U.S. economy, supporting consumer and business loan demand. Improved job growth should lead to a moderate increase in home sales and residential mortgage demand later this year.
This Economic Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were decreased relative to the second quarter of 2010 and first quarter of 2011 by the weakening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate, expressed in terms of the Canadian dollar cost of a U.S. dollar, fell by 6.3% from a year ago and by 4.5% from the average of the first quarter of 2011. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results
(Canadian $ in millions, Q2-2011 YTD-2011 vs. except as noted) vs. Q2-2010 vs. Q1-2011 YTD-2010 ---------------------------------------------------------------------------- Canadian/U.S. dollar exchange rate (average) Current period 0.9623 0.9623 0.9852 Prior period 1.0274 1.0074 1.0433 Increased (decreased) revenue (50) (35) (88) Decreased (increased) expense 33 23 58 Decreased (increased) provision for credit losses 5 4 12 Decreased (increased) income taxes and non- controlling interest in subsidiaries 5 3 5 ---------------------------------------------------------------------------- Increased (decreased) net income (7) (5) (13) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
At the start of each quarter, BMO assesses whether to enter into hedging transactions that are expected to partially offset the pre-tax effects of exchange rate fluctuations in the quarter on our expected U.S.-dollar-denominated net income for that quarter. As such, these activities partially mitigate the impact of exchange rate fluctuations, but only within that quarter. As a result, the sum of the hedging gains/losses for the four quarters in a year is not directly comparable to the impact of year-over-year exchange rate fluctuation on earnings for the year. Over the course of the current quarter, the U.S. dollar weakened, as the exchange rate decreased from Cdn$1.0015 per U.S. dollar at January 31, 2011 to an average of Cdn$0.9623. Hedging transactions resulted in an after-tax gain of $4 million for the quarter and $3 million for the year to date. The gain or loss from hedging transactions in future periods will be determined by both future currency fluctuations and the amount of underlying future hedging transactions, since the transactions are entered into each quarter in relation to expected U.S.-dollar-denominated net income for the next three months.
The effect of currency fluctuations on our investments in foreign operations is discussed in the Income Taxes section.
Other Value Measures
BMO's average annual total shareholder return for the five-year period ended April 30, 2011 was 4.4%.
Net economic profit (NEP) was $293 million, compared with $255 million in the first quarter and $264 million in the second quarter of 2010. NEP is a non-GAAP measure. NEP of $293 million represents the net income that is available to common shareholders ($766 million), plus the after-tax amortization of intangible assets ($9 million), net of a charge for capital ($482 million), and is considered an effective measure of added economic value. Please see the Non-GAAP Measures section at the end of the MD&A for a discussion on the use and limitations of non-GAAP measures.
Net Income
Q2 2011 vs Q2 2010
Net income was $800 million for the second quarter of 2011, up $55 million or 7.5% from a year ago. Earnings per share were $1.34, up 6.3% from $1.26 a year ago.
Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Adjusted results for the second quarter of 2011 exclude the following items:
- charge to revenue for hedge of foreign currency risk on the offer to purchase M&I of $11 million ($8 million after tax);
- costs relating to planning for the M&I integration of $25 million ($17 million after tax);
- amortization of acquisition-related intangible assets of $10 million ($9 million after tax); and
- decrease in the general allowance of $42 million ($30 million after tax).
Adjusted net income was $804 million for the second quarter of 2011, up $52 million or 6.9% from a year ago. Adjusted earnings per share were $1.35, up 5.5% from $1.28 a year ago. Adjusted results and measures are non-GAAP. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the GAAP and Related Non-GAAP Results and Measures Used in the MD&A section at the end of the MD&A.
There was solid revenue growth across each of the operating groups, except in BMO Capital Markets which had stronger trading revenues a year ago, and improved revenues in Corporate Services. Non-interest revenue and net income in Private Client Group were reduced by $50 million ($47 million after tax) of reinsurance claims related to the earthquakes in Japan and New Zealand. Expenses were higher, with all operating groups except BMO Capital Markets up relative to a year ago. There was increased performance-based compensation, in line with higher revenues, and expense growth due to continued investment spending, acquisitions and costs relating to planning for the M&I integration.
Provisions for credit losses in the current quarter were $104 million lower, including the impact of a $42 million reduction in the general allowance for credit losses in the current quarter. The U.S. credit environment was weaker a year ago and credit quality in the loan portfolios is more favourable than a year ago.
Q2 2011 vs Q1 2011
Net income increased $24 million or 3.3% from the first quarter and earnings per share increased $0.04 or 3.1% from $1.30. Revenue decreased and there was a modest reduction in expenses. The provision for credit losses was lower than in the first quarter due in part to the reduction in the general allowance for credit losses. Income taxes in the first quarter were elevated by a provision for prior periods' income taxes in the U.S. segment of BMO Capital Markets.
Q2 YTD 2011 vs Q2 YTD 2010
Net income increased $174 million or 12% to $1,576 million. Adjusted net income increased $172 million or 12% to $1,588 million. There was strong growth in revenue and reduced provisions for credit losses, with an increase in expense for the reasons outlined above. There was increased net income in each of the operating groups except P&C U.S.
Revenue
BMO analyzes consolidated revenues on a GAAP basis. However, like many banks, BMO analyzes the revenues of its operating groups and associated ratios computed using revenue on a taxable equivalent basis (teb). This basis includes an adjustment that increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt items to a level equivalent to amounts that would incur tax at the statutory rate. The offset to the group teb adjustments is reflected in Corporate Services revenues and income tax provisions.
Total revenue for the second quarter of 2011 increased $168 million or 5.5% from a year ago. Adjusted revenue increased $179 million or 5.9%. The reinsurance claims related to the earthquakes and the weaker U.S. dollar each decreased revenue growth by $50 million or 1.6 percentage points. There was solid growth in net interest income and also in non-interest revenue, the latter of which was reduced by the earthquake-related claims.
Revenue decreased $129 million or 3.8% from the first quarter. The reduction in revenue was largely due to lower non-interest revenue, including the impact of earthquake-related reinsurance claims. There were reduced revenues across each of the operating groups with a significant increase in Corporate Services. The impact of three fewer days in the second quarter lowers both net interest and non-interest revenue relative to the first quarter. The weaker U.S. dollar decreased revenue growth by $35 million or 1.0 percentage points.
Changes in net interest income and non-interest revenue are reviewed in the sections that follow.
Net Interest Income
Net interest income increased $98 million or 6.4% from a year ago, with solid growth in P&C Canada, P&C U.S., Private Client Group and Corporate Services. Higher average earning assets drove the overall increase.
BMO's overall net interest margin increased by 1 basis point year over year to 1.89%. There was a modest increase in P&C Canada and solid increases in each of the other groups, except BMO Capital Markets. Higher net interest income in Corporate Services also contributed to the overall increase in net interest margin. Increased margin in P&C Canada was primarily driven by higher spreads in personal lending products. In P&C U.S., the increase was mainly due to higher loan and deposit spreads, coupled with deposit balance growth. In Private Client Group, the increase was due to higher deposit balances and spreads in our brokerage businesses, as well as higher loan and deposit balances in Canadian private banking. The reduction in net interest margin in BMO Capital Markets was primarily attributable to lower trading net interest income.
Average earning assets increased $20.3 billion or 6.1% relative to a year ago, and adjusted to exclude the impact of the weaker U.S. dollar, increased by $28.2 billion. Higher asset levels were attributable to loan growth in P&C Canada, increased trading assets in BMO Capital Markets and increases in personal loans in Private Client Group's Canadian private banking business. There were also higher cash balances, representing increased deposits with the U.S. Federal Reserve. P&C U.S. average earning assets were lower as credit and economic conditions continue to affect credit utilization. There was improved commercial loan utilization in certain categories but client loan run-off and new mortgage originations sold in the secondary market offset the effects of new originations and the Rockford transaction.
Relative to the first quarter, net interest income decreased $7 million or 0.4%. Decreases in BMO Capital Markets and P&C Canada were partially offset by higher net interest income in Private Client Group and Corporate Services.
BMO's overall net interest margin increased 7 basis points from the first quarter to 1.89% due to increased net interest income in Corporate Services and improved spreads in P&C U.S., partially offset by decreased spreads in P&C Canada and BMO Capital Markets. The margin improvement in P&C U.S. was due to improved deposit spreads and a favourable change in mix of loan balances, partially offset by a decrease in deposit balances. The improvement in Private Client Group was due to higher balances in the brokerage and private banking businesses. Net interest margin in P&C Canada decreased 7 basis points due to continued low interest rates in the competitive environment, resulting in lower mortgage, commercial loan and term deposit spreads. The reduction was also attributable to the impact of unfavourable mix from a lower proportion of card balances and deposits. BMO Capital Markets spread declined, mainly due to lower dividend income.
Average earning assets decreased $2.2 billion or 0.6% from the first quarter but adjusted to exclude the impact of the weaker U.S. dollar, increased $2.6 billion. The reduction was primarily attributable to a decrease in BMO Capital Markets due to lower trading assets and loan balances. P&C Canada average earning assets increased 6.0% year over year and 1.0% quarter over quarter.
Year to date, net interest income increased $193 million or 6.3%, due to higher revenues in Corporate Services, related to a reduced teb offset, and margin improvement in P&C Canada, P&C U.S. and Private Client Group. P&C Canada also benefited from asset growth. These increases were partially offset by lower trading net interest income in BMO Capital Markets.
BMO's overall net interest margin decreased by 1 basis point to 1.86% for the year to date. The margin increase in P&C Canada was due to higher spreads in personal lending products. P&C U.S. margin increased due to improved deposit spreads and balances and a favourable change in mix of loan balances. Private Client Group margin increased primarily due to deposit balance growth and wider spreads in the brokerage businesses, partially offset by growth in insurance assets, which have no net interest income impact. BMO Capital Markets experienced lower trading spreads and together with Corporate Services held higher deposits with the U.S. Federal Reserve.
Average earning assets for the year to date increased $22.7 billion or 6.9% relative to a year ago, or by $29.9 billion adjusted to exclude the impact of the weaker U.S. dollar. On a Canadian dollar basis, there was organic growth in P&C Canada, Private Client Group and BMO Capital Markets, combined with an increase in Corporate Services. In P&C U.S., there was improved commercial loan utilization in certain categories but client loan run-off and new mortgage originations sold in the secondary market offset the effects of new originations and the Rockford acquisition. Private Client Group had earning asset growth across most lines of business and in BMO Capital Markets there was growth in trading assets. Higher cash resources, primarily deposits with the U.S. Federal Reserve, accounted for the majority of the increase in Corporate Services.
Net Interest Margin (teb)(i)
Increase Increase Increase
(In basis (Decrease) (Decrease) (Decrease)
points) Q2-2011 vs. Q2-2010 vs. Q1-2011 YTD-2011 vs. YTD-2010
----------------------------------------------------------------------------
P&C Canada 293 2 (7) 297 4
P&C U.S. 430 75 26 417 72
----------------------------------------------------------------------------
Personal and
Commercial
Client Group 315 12 (2) 316 13
Private Client
Group 310 30 18 301 21
BMO Capital
Markets 76 (25) (4) 78 (19)
Corporate
Services,
including
Technology and
Operations
(T&O)(ii) nm nm nm nm nm
----------------------------------------------------------------------------
Total BMO 189 1 7 186 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Canadian
Retail(iii) 295 3 (7) 298 5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Net interest margin is disclosed and computed with reference to
average earning assets, rather than total assets. This basis provides
a more relevant measure of margins, and changes in margins. Operating
group margins are stated on a teb basis while total BMO margin is
stated on a GAAP basis.
(ii) Corporate Services net interest income is negative and lowered BMO's
overall net interest margin to a greater degree in 2010 than in 2011.
(iii) Total Canadian retail margin represents the net interest margin of
the combined Canadian business of P&C Canada and Private Client Group.
nm - not meaningful
Non-Interest Revenue
Non-interest revenue is detailed in the attached summary unaudited consolidated financial statements. Non-interest revenue in the current quarter increased $70 million or 4.6% from a year ago. The growth was mostly attributable to an increase in Corporate Services, partially offset by decreases in the other operating groups. Private Client Group non-interest revenue was modestly higher but had strong growth excluding the impact of earthquake-related reinsurance claims.
Non-interest revenue in Corporate Services increased due to the favourable impact of hedging activities relative to a year ago, which increased other non-interest revenue, and higher securitization revenues largely related to a credit card loan securitization in the current quarter. In the quarter, we securitized $1.3 billion of credit card loans and $1.4 billion of residential mortgage loans. There was strong growth in securities commissions. There were also healthy increases in mutual fund revenues and underwriting and advisory fees. There were reductions in trading revenues, due to a challenging trading environment and reduced client activity, and insurance income due to the earthquake-related reinsurance claims.
Relative to the first quarter, non-interest revenue decreased $122 million or 7.0%. The reduction was attributable to significant decreases in BMO Capital Markets and Private Client Group, partially offset by increases in Corporate Services. There were large decreases in trading and insurance revenues, the latter driven by the earthquake-related reinsurance claims and the adverse effects of unfavourable market movements on policyholder liabilities relative to the prior quarter. Non-interest revenue increased in Corporate Services primarily due to higher securitization revenues mainly due to the credit card loan securitization in the current quarter.
Year to date, non-interest revenue increased $296 million or 9.8%. There was very strong growth in BMO Capital Markets non-interest revenue due to increases in underwriting and advisory fees and securities commissions. Private Client Group non-interest revenue benefited from growth in securities commissions and mutual fund revenues, while good growth in insurance revenue was more than offset by the earthquake-related reinsurance claims. P&C Canada non-interest revenue growth was driven by the inclusion of two more months of Diners Club North American franchise results in the current year and higher mutual fund revenue. Growth in Corporate Services non-interest revenue was largely due to the favourable impact of hedging activities relative to a year ago, which increased other non-interest revenue.
Non-Interest Expense
Non-interest expense is detailed in the attached summary unaudited consolidated financial statements. Non-interest expense for the second quarter of 2011 increased $193 million or 10.5% from a year ago to $2,023 million. Adjusted non-interest expense increased $166 million or 9.2% from a year ago to $1,988 million. Adjusted expense excludes the amortization of acquisition-related intangible assets and costs relating to planning for the M&I integration. There were increases in employee compensation, due in part to higher performance-based compensation, in line with improved revenues. There were also continued investments in the business including staffing increases across groups and higher costs from acquisitions, including the Rockford-based bank, and from costs of planning for the integration of M&I, including increased professional fees. Computer and equipment costs, professional fees and travel expense also increased. The weaker U.S. dollar reduced expense growth by $33 million or 1.8 percentage points, but the harmonized sales tax, implemented in both Ontario and British Columbia on July 1, 2010, increased expenses year over year by approximately two-thirds of that amount.
Relative to the first quarter, non-interest expense decreased $23 million or 1.1%, a decrease equivalent to the impact of the weaker U.S. dollar. There were increases in computer and equipment costs and professional fees. Employee compensation decreased due largely to the annual cost of stock-based compensation for employees eligible to retire that is expensed in the first quarter.
Non-interest expense for the year to date increased $400 million or 10.9%. Adjusted non-interest expense increased $372 million or 10.2%. There was growth in employee compensation, including performance-based costs in line with improved results, increased computer and equipment costs, and higher professional fees and travel and entertainment expense. Expense growth was due in part to continued investment in our P&C businesses including technology development initiatives and the addition of employees in Canada, as well the effects of our acquisitions of certain assets and liabilities of the Rockford, Illinois-based bank and the Diners Club North American franchise. Expenses were also increased by the impact of the harmonized sales tax. The weaker U.S. dollar reduced expenses by $58 million.
Risk Management
Although the economies of North America are improving, with easing bankruptcy rates, improving delinquencies and fewer business failures, the pace of the economic recovery has been slowed by high unemployment, continued weakness in real estate markets and reduced consumer spending, particularly in the United States. Political unrest in the North African and West Asian regions, natural disasters in Asia and North America and ongoing concerns about sovereign debt in euro-zone countries have put a damper on the pace of the global recovery.
Provisions for credit losses totalled $145 million in the second quarter of 2011. Specific provisions for credit losses were $187 million or an annualized 42 basis points of average net loans and acceptances, compared with $248 million or 56 basis points in the first quarter and $249 million or 59 basis points in the second quarter of 2010. There was a $42 million reduction in the general allowance in the current quarter, and none in the comparable quarters.
On a geographic basis, specific provisions in Canada and other countries (excluding the United States) were $97 million in the second quarter of 2011, $116 million in the first quarter of 2011 and $126 million in the second quarter of 2010. Provisions in the United States for the comparable periods were $90 million, $132 million and $123 million, respectively.
BMO employs a methodology for segmented reporting purposes whereby credit losses are charged to the client operating groups quarterly, based on their share of expected credit losses. The difference between quarterly charges based on expected losses and required quarterly provisions based on actual losses is charged (or credited) to Corporate Services. The following paragraphs outline credit losses by client operating group based on actual credit losses, rather than their share of expected credit losses.
Actual credit losses in the second quarter of 2011 were: $151 million in P&C Canada; $79 million in P&C U.S.; $5 million in Private Client Group and $nil in BMO Capital Markets. The P&C Canada losses of $151 million include credit losses of $48 million related to securitized assets, which are not included in BMO's $187 million of specific provisions.
Actual credit losses in the first quarter of 2011 were: $160 million in P&C Canada; $131 million in P&C U.S.; $3 million in PCG; and $nil in BMO Capital Markets. The P&C Canada losses of $160 million include credit losses of $46 million related to securitized assets, which are not included in BMO's $248 million of specific provisions.
Actual credit losses in the second quarter of 2010 were: $205 million in P&C Canada; $101 million in P&C U.S.; $2 million in PCG; and a recovery of $4 million in BMO Capital Markets. The P&C Canada losses of $205 million include credit losses of $55 million related to securitized assets, which are not included in BMO's $249 million of specific provisions.
Impaired loan formations totalled $147 million in the current quarter, down from $283 million in the first quarter of 2011 and $366 million a year ago (excluding purchased impaired loans acquired a year ago as discussed below). Consistent with recent quarters, U.S.-related formations represented over half of BMO's total formations in the quarter.
Total gross impaired loans were $2,792 million at the end of the current quarter, down from $3,066 million in the first quarter and from $3,405 million a year ago. Impaired loans in the second quarter of 2011 include $291 million of the loans acquired in the Rockford, Illinois-based bank transaction completed in the second quarter of 2010, compared with $289 million of such loans in the first quarter of 2011 and $437 million a year ago. Under the terms of the transaction, the Federal Deposit Insurance Corporation (FDIC) absorbs 80% of losses on the acquired loans.
BMO's liquidity and funding, market and insurance risk management practices and key measures are outlined on pages 82 to 88 of BMO's 2010 Annual Report.
There were no significant changes to our level of liquidity and funding risk over the quarter. We remain satisfied that our liquidity and funding management framework provides us with a strong liquidity position.
In December 2010, the Basel Committee on Banking Supervision finalized the Basel III international framework for liquidity risk measurement, standards and monitoring for implementation between 2015 and 2018. In February 2011, the Office of the Superintendent of Financial Institutions Canada (OSFI) announced it will update its liquidity framework during 2011 to align with the Basel framework.
Trading and Underwriting Market Value Exposure (MVE) rose quarter over quarter due to increased activity in fixed income businesses. Exposure in the bank's available-for-sale (AFS) portfolios decreased through the period as mainly U.S. dollar-denominated assets were sold.
There were no significant changes in our structural market risk management practices during the quarter. Structural MVE is outlined on the following page and is driven by rising interest rates. The exposure has increased modestly since the prior quarter, reflecting the impact of mortgage and loan customers extending maturity term. Structural earnings volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans re-pricing lower.
There were no significant changes in the risk management practices or risk levels of our insurance business during the quarter.
This Risk Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Provisions for Credit Losses
(Canadian $ in millions,
except as noted) Q2-2011 Q1-2011 Q2-2010 YTD-2011 YTD-2010
----------------------------------------------------------------------------
New specific provisions 258 330 358 588 759
Reversals of previously
established allowances (21) (24) (68) (45) (91)
Recoveries of loans
previously written-off (50) (58) (41) (108) (86)
----------------------------------------------------------------------------
Specific provision for
credit losses 187 248 249 435 582
Decrease in the general
allowance (42) - - (42) -
----------------------------------------------------------------------------
Provision for credit losses
(PCL) 145 248 249 393 582
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Specific PCL as a % of
average net loans and
acceptances (annualized) 0.42% 0.56% 0.59% 0.49% 0.69%
PCL as a % of average net
loans and acceptances
(annualized) 0.33% 0.56% 0.59% 0.45% 0.69%
Changes in Gross Impaired Loans and Acceptances (GIL)
(Canadian $ in millions,
except as noted)
----------------------------------------------------------------------------
GIL, Beginning of Period 3,066 3,221 3,134 3,221 3,297
Additions to impaired loans
& acceptances 147 283 366 430 822
Additions to (reductions
in) impaired loans due to
acquisitions(1) - - 437 - 437
Reductions in impaired
loans & acceptances(2) (139) (149) (242) (288) (507)
Write-offs (282) (289) (290) (571) (644)
----------------------------------------------------------------------------
GIL, End of Period(1) 2,792 3,066 3,405 2,792 3,405
----------------------------------------------------------------------------
----------------------------------------------------------------------------
GIL as a % of gross loans &
acceptances (excluding
acquisitions) 1.42% 1.55% 1.73% 1.42% 1.73%
GIL as a % of gross loans &
acceptances (including
acquisitions) 1.58% 1.71% 1.98% 1.58% 1.98%
GIL as a % of equity and
allowance for credit
losses (excluding
acquisitions)(3) 10.38% 11.63% 13.25% 10.38% 13.25%
GIL as a % of equity and
allowances for credit
losses (including
acquisitions)(3) 11.58% 12.84% 15.20% 11.58% 15.20%
----------------------------------------------------------------------------
(1) The U.S. portfolio acquired in Q2 2010 included impaired loans with an
estimated value of $437 million, reduced to $327 million in Q3.
Subsequent changes in impaired loan balances on this portfolio are
included in "Additions to" or "Reductions in impaired loans &
acceptances", on a basis consistent with our other loans. All loans in
the acquired portfolio are covered by a loss-sharing agreement, with the
FDIC absorbing 80% of loan losses. There were $291 million of GIL on
this portfolio in Q2 2011 ($289 million in Q1 2011).
(2) Includes impaired amounts returned to performing status, loan sales,
repayments, the impact of foreign exchange fluctuations and offsets for
consumer write-offs which have not been recognized as formations ($156
million in Q2 2011; $170 million in Q1 2011; and $204 million in Q2
2010).
(3) Effective Q4 2010, the calculation excludes non-controlling interest in
subsidiaries. Prior periods were restated to reflect this change.
Total Trading and Underwriting Market Value Exposure (MVE) Summary
($ millions)(i)
As at As at
For the quarter ended April 30, 2011 January October
(Pre-tax 31, 2011 31, 2010
Canadian Quarter- Quarter- Quarter-
equivalent) end Average High Low end end
-------------------------------------------------------- --------- ---------
Commodity VaR (0.1) (0.2) (0.3) (0.1) (0.2) (0.1)
Equity VaR (4.0) (4.2) (5.3) (3.4) (4.6) (7.5)
Foreign Exchange
VaR (1.8) (3.0) (4.4) (1.8) (3.4) (0.6)
Interest Rate VaR
(Mark-to-Market) (10.9) (10.6) (12.9) (8.6) (8.3) (7.5)
Diversification 5.8 7.3 nm nm 6.6 4.8
------------------------------------- --------- ---------
Trading Market
VaR (11.0) (10.7) (12.5) (9.1) (9.9) (10.9)
Trading &
Underwriting
Issuer Risk (4.1) (3.7) (4.5) (2.8) (3.5) (2.7)
------------------------------------- --------- ---------
Total Trading &
Underwriting MVE (15.1) (14.4) (16.1) (12.9) (13.4) (13.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest Rate VaR
(AFS) (13.1) (16.2) (19.2) (13.1) (16.6) (7.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) One-day measure using a 99% confidence interval. Losses are in brackets
and benefits are presented as positive numbers.
nm- not meaningful
Structural Balance Sheet Market Value Exposure and Earnings Volatility
($ millions)(i)
April 30 Jan. 31 Oct. 31
(Canadian equivalent) 2011 2011 2010
----------------------------------------------------------------------------
Market value exposure (MVE) (pre-tax) (612.9) (596.0) (564.1)
12-month earnings volatility (EV) (after-
tax) (78.8) (79.2) (63.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Losses are in brackets. Measured at a 99% confidence interval.
Structural Balance Sheet Earnings and Value Sensitivity to Changes in
Interest Rates ($ millions)(i)(ii)
Economic Earnings sensitivity
value over the
sensitivity next 12 months
(Canadian equivalent) (Pre-tax) (After-tax)
----------------------------------------------------------------------------
Apr. 30 Jan. 31 Oct. 31 Apr. 30 Jan. 31 Oct. 31
2011 2011 2010 2011 2011 2010
----------------------------------------------------------------------------
100 basis point
increase (430.9) (414.3) (380.5) 12.0 18.6 20.9
100 basis point
decrease 356.1 335.7 322.3 (74.8) (77.6) (70.3)
200 basis point
increase (887.6) (866.0) (815.1) 12.4 22.0 33.4
200 basis point
decrease 745.1 688.0 738.2 5.9 (6.3) (12.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Losses are in brackets and benefits are presented as positive numbers.
(ii) For BMO's Insurance businesses, a 100 basis point increase in interest
rates at April 30, 2011 results in an increase in earnings after tax of
$81 million and an increase in before tax economic value of $237
million ($80 million and $255 million, respectively, at January 31,
2010). A 100 basis point decrease in interest rates at April 30, 2011
results in a decrease in earnings after tax of $76 million and a
decrease in before tax economic value of $245 million ($74 million and
$270 million, respectively, at January 31, 2010). These impacts are not
reflected in the table above.
Income Taxes
As explained in the Revenue section, management assesses BMO's consolidated results and associated provisions for income taxes on a GAAP basis. We assess the performance of the operating groups and associated income taxes on a taxable equivalent basis and report accordingly.
The provision for income taxes of $231 million increased $24 million from the second quarter of 2010 and decreased $27 million from the first quarter of 2011. The effective tax rate for the quarter was 22.0%, compared with 21.4% in the second quarter of 2010 and 24.5% in the first quarter of 2011. The lower effective tax rate in the current quarter, as compared to the first quarter of 2011, was primarily due to a provision for prior periods' income taxes recorded in the U.S. business segment of BMO Capital Markets in the first quarter of 2011. The higher effective tax rate in the current quarter, as compared to the second quarter of 2010, was primarily due to lower tax-exempt income, partially offset by higher recoveries of prior periods' income taxes and a reduction in the statutory Canadian income tax rate in 2011.
As explained at the end of the Q2 2011 Regulatory Capital Review section, to manage the impact of foreign exchange rate changes on BMO's investments in foreign operations and their effect on the bank's capital ratios to acceptable levels, BMO may partially or fully hedge foreign exchange risk by partially or fully funding its foreign investment in U.S. dollars. Under this program, the gain or loss from hedging and the unrealized gain or loss from translation of the investments in U.S. operations are charged or credited to shareholders' equity. For income tax purposes, the gain or loss on the hedging activities results in an income tax charge or credit in the current period in shareholders' equity, while the associated unrealized gain or loss on the investments in U.S. operations does not incur income taxes until the investments are liquidated. The income tax charge or benefit arising from a hedging gain or loss is a function of the fluctuation in the Canadian/U.S. exchange rate from period to period. Hedging of the investments in U.S. operations has given rise to an income tax charge in shareholders' equity of $116 million for the quarter and $180 million for the year to date. Refer to the Consolidated Statement of Changes in Shareholders' Equity included in the summary unaudited consolidated financial statements for further details.
Summary Quarterly Results Trends (Canadian $ in millions, except Q2- Q1- Q4- Q3- Q2- Q1- Q4- Q3- as noted) 2011 2011 2010 2010 2010 2010 2009 2009 ---------------------------------------------------------------------------- Total revenue 3,217 3,346 3,229 2,907 3,049 3,025 2,989 2,978 Provision for credit losses - specific 187 248 253 214 249 333 386 357 Provision for (recovery of) credit losses - general (42) - - - - - - 60 Non-interest expense 2,023 2,046 2,023 1,898 1,830 1,839 1,779 1,873 Net income 800 776 739 669 745 657 647 557 Adjusted net income 804 784 748 678 752 664 690 609 ---------------------------------------------------------------------------- Basic earnings per share ($) 1.35 1.31 1.25 1.13 1.27 1.12 1.12 0.97 Diluted earnings per share ($) 1.34 1.30 1.24 1.13 1.26 1.12 1.11 0.97 Adjusted diluted earnings per share ($) 1.35 1.32 1.26 1.14 1.28 1.13 1.18 1.05 Net interest margin on earning assets (%) 1.89 1.82 1.89 1.88 1.88 1.85 1.73 1.74 Effective income tax rate (%) 22.0 24.5 20.6 13.4 21.4 20.8 19.2 16.4 Canadian/U.S. dollar exchange rate (average) 0.96 1.01 1.04 1.05 1.03 1.06 1.08 1.11 Net income: P&C Canada 401 444 419 425 394 403 402 366 P&C U.S. 42 42 39 40 46 51 52 58 ---------------------------------------------------------------------------- Personal and Commercial Banking 443 486 458 465 440 454 454 424 Private Client Group 101 153 129 105 115 111 106 114 BMO Capital Markets 235 257 214 130 260 212 259 309 Corporate Services, including T&O 21 (120) (62) (31) (70) (120) (172) (290) ---------------------------------------------------------------------------- BMO Financial Group 800 776 739 669 745 657 647 557 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
BMO's quarterly earning trends were reviewed in detail on pages 94 and 95 of the 2010 Annual Report. Readers are encouraged to refer to that review for a more complete discussion of trends and factors affecting past quarterly results including the modest impact of seasonal variations in results. The above table outlines summary results for the third quarter of fiscal 2009 through the second quarter of fiscal 2011.
Results in the past year have been strengthening, generally, reflecting a trend toward stronger revenues, reduced provisions for credit losses and increased net income. Expenses have been growing, reflecting acquisitions, initiative spending and business growth.
P&C Canada benefited from strong volume growth in 2010 with favourable movements in market share in a number of key businesses. P&C Canada has performed well with generally increasing revenues and profitability, and good revenue increases in both personal and commercial businesses, driven by volume growth across most products and improved net interest margin. Current period results are modestly higher than a year ago but lower than in the prior quarter due to fewer days in the quarter and a lower net interest margin. Results include the impact of the Diners Club North American franchise effective in the first quarter of 2010.
P&C U.S. has operated in a difficult economic environment since 2007 and results determined using our expected loss provisioning methodology in 2009 through the second quarter of 2011 have increasingly been impacted by the effect of impaired loans, which negatively impacts both revenues and expenses. Results in 2010 were also affected by acquisition integration costs. The economic environment in 2010 led to a drop in loan utilization, which affected revenue growth and net income. Commencing in the second quarter of 2010, P&C U.S. results reflect the acquisition of certain assets and liabilities of a Rockford, Illinois-based bank.
Private Client Group results in recent quarters reflected growth in most businesses. In the most recent quarter, the insurance business was impacted by reinsurance claims of $47 million after tax related to the earthquakes in Japan and New Zealand. The group's asset levels remained low in the first half of 2009 but improved somewhat in the latter half of 2009 and have increased over the course of 2010 and into 2011 as equity markets strengthened. Insurance results in the third quarter of 2009 included a $23 million recovery of prior periods' income taxes.
BMO Capital Markets results in 2009 were very strong as the trading environment was particularly favourable. In 2010, results varied by quarter, with strong results in the second quarter and particularly weak net income in the third quarter. In the first quarter of 2011, results were strong, reflecting increases in trading revenue, mergers and acquisitions activity and underwriting fees, but were also lowered by a provision for prior periods' income taxes. Results for the most recent quarter were down due primarily to a less favourable trading environment and reduced client activity.
Corporate Services results showed continued improvement throughout 2010 due to decreased provisions for credit losses and better revenues. Results in the third quarter of 2009 were affected by a $60 million increase in the general allowance for credit losses. Net income improved in each consecutive quarter of 2009 and 2010 until the fourth quarter. Results in the first quarter of 2011 were affected by an increase in credit provisions and reduced revenues. Results in the most recent quarter benefited from reduced provisions for credit losses, including a $42 million reduction in the general allowance, and higher revenues.
The effective income tax rate can vary as it depends on the timing of resolution of certain tax matters, recoveries of prior periods' income taxes and the relative proportion of earnings attributable to the different jurisdictions in which we operate.
The U.S. dollar has generally weakened over the past two years. A weaker U.S. dollar lowers the translated values of BMO's U.S.-dollar-denominated revenues and expenses.
Balance Sheet
Total assets of $413.2 billion increased $1.6 billion from October 31, 2010. The weaker U.S. dollar decreased the translated value of U.S.-dollar-denominated assets by $2.4 billion. The $1.6 billion increase reflects increases in cash and cash equivalents and interest bearing deposits with banks of $7.2 billion, mainly due to excess short-term funds placed on deposit with the Federal Reserve, and an increase in securities borrowed or purchased under resale agreements of $4.9 billion as a result of an increase in client demand. These factors were partially offset by decreases in derivative assets of $5.5 billion, securities of $2.8 billion, net loans and acceptances of $1.9 billion and other assets of $0.3 billion.
The $5.5 billion decrease in derivative assets was primarily in interest rates contracts, partially offset by higher foreign exchange contracts. Volatility in exchange and interest rates increases the value of derivative assets and liabilities, usually comparably.
The $1.9 billion decrease in net loans and acceptances balances was due to a reduction in loans to businesses and governments of $2.2 billion, as more corporate clients have accessed the debt market and have used those funds to pay down bank facilities, and a decrease in credit card loans of $1.4 billion, due mainly to higher levels of securitization activity. These declines were offset in part by increases of $0.8 billion in residential mortgages and $1.0 billion in consumer instalment and other personal loans, primarily due to growth in home equity loans. P&C Canada's commercial loan balances increased.
Liabilities and shareholders' equity increased $1.6 billion from October 31, 2010. The weaker U.S. dollar decreased liabilities and shareholders' equity by $2.4 billion. The $1.6 billion increase primarily reflects growth in securities sold but not yet purchased of $7.2 billion, deposits of $4.1 billion, subordinated debt of $1.4 billion and shareholders' equity of $0.5 billion. These factors were partially offset by a decrease in derivative financial liabilities of $6.8 billion, securities lent or sold under repurchase agreements of $3.2 billion, other liabilities of $0.8 billion, acceptances of $0.4 billion and capital trust securities of $0.4 billion.
The $7.2 billion increase in securities sold but not yet purchased was mainly driven by increased client activities.
The $3.2 billion decrease in securities lent or sold under repurchase agreements was due to a less favourable market that resulted in lower client-driven trading activities.
Deposits by businesses and governments, which account for 53% or $135.2 billion of total deposits, increased $4.5 billion with increases in both wholesale deposits and customer deposits. Deposits by individuals, which account for 39% or $99.2 billion of total deposits, increased $0.2 billion and were offset by a $0.5 billion decrease in deposits by banks, which account for the remaining 8% or $19.0 billion of total deposits.
The increase in subordinated debt was due to a $1.5 billion issuance during the quarter.
The increase in shareholders' equity of $0.5 billion reflects a $0.3 billion issuance of preferred shares and an increase in retained earnings, partially offset by an increase in accumulated other comprehensive loss due mainly to a net loss on translation of our net investment in foreign operations.
The decrease in capital trust securities was due to the $400 million redemption of all of the outstanding Trust Capital Securities Series B ("BMO BOaTS - Series B") in the first quarter.
Contractual obligations by year of maturity are outlined in Table 20 on page 106 of BMO's 2010 Annual Report. There have been no material changes to contractual obligations that are outside the ordinary course of our business.
Capital Management
Q2 2011 Regulatory Capital Review
BMO remains well-capitalized, with a Basel II Tier 1 Capital Ratio of 13.82% as at April 30, 2011. Tier 1 capital was $21.9 billion and risk-weighted assets (RWA) were $158.7 billion. The Tier 1 Ratio increased 37 basis points from 13.45% at October 31, 2010, as a result of higher Tier 1 capital and lower RWA, as explained below, and increased 80 basis points from 13.02% in the first quarter. The Basel II Common Equity Ratio was 10.67% as at April 30, 2011. Regulatory common equity was $16.9 billion. The Common Equity Ratio increased 41 basis points from 10.26% at October 31, 2010 as a result of higher regulatory common equity and lower RWA. The current ratios reflect the impact of the acquisition of Lloyd George Management (LGM) that closed on April 28, 2011.
In the first quarter of 2011, the Office of the Superintendent of Financial Institutions (Canada) approved BMO's application to use the Advanced Internal Ratings Based Approach (AIRB) to determine credit risk RWA for Harris Bancorp, Inc. The change in methodology increased Basel II capital deductions for expected losses in excess of allowances, reduced the portion of the general allowance that can be included in Tier 2 capital, and increased RWA.
Tier 1 capital increased $254 million from October 31, 2010. The increase was due to growth in common shareholders equity and the issuance of $290 million of 3.90% Preferred Shares Series 25 on March 11, 2011. These factors were partially offset by the redemption of $400 million of BMO BOaTS-Series B in the first quarter and higher Basel II capital deductions, as noted above.
RWA decreased $2.5 billion from October 31, 2010, primarily due to the impact of the strengthening Canadian dollar on U.S. dollar-denominated RWA and to lower corporate and securitization RWA, partially offset by the adoption of the AIRB approach for Harris Bancorp Inc., as outlined above.
BMO's Basel II Total Capital Ratio was 17.03% at April 30, 2011. The ratio increased 112 basis points from 15.91% at the end of 2010. Total capital increased $1.4 billion to $27.0 billion as at April 30, 2011, primarily due to the impact of $1.5 billion of 3.979% Series G Medium Term Notes First Tranche subordinated indebtedness issued on March 2, 2011 and growth in Tier 1 capital, partially offset by higher Basel II capital deductions and the adoption of the AIRB approach for Harris Bancorp Inc., as noted above.
BMO's investments in U.S. operations are primarily denominated in U.S. dollars. Foreign exchange gains or losses on the translation of the investments in foreign operations to Canadian dollars are reported in shareholders' equity, which, when coupled with the foreign exchange impact of U.S. dollar-denominated RWA on Canadian dollar-equivalent RWA, can create volatility in the bank's capital ratios. To manage the impact of foreign exchange rate changes on the bank's capital ratios to acceptable levels, BMO may partially or fully hedge this foreign exchange risk by partially or fully funding its foreign investment in U.S. dollars.
Potential Impacts of Proposed Regulatory Capital Changes and Conversion to IFRS
The rules on Basel III capital requirements have now been largely outlined and BMO's Basel III Capital Ratios are strong. We consider the Common Equity Ratio and the Tier 1 Capital Ratio to be the primary capital ratios under Basel III. Based on our analysis and assumptions, BMO's pro-forma April 30, 2011 Common Equity Ratio and Tier 1 Capital Ratio would be 8.6% and 11.5%, respectively, up from our pro-forma estimates at January 31, 2011 of 8.2% and 10.7%, respectively. The improvements were primarily due to the quarter-over-quarter changes in Basel II capital and RWA and to refined estimates for certain Basel III impacts.
Qualifying Regulatory Capital
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions) Q2-2011 Q4-2010
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Gross regulatory common shareholders' equity 19,209 18,753
Non-cumulative preferred shares 2,861 2,571
Innovative Tier 1 Capital Instruments 2,124 2,542
Non-controlling interest in subsidiaries 23 23
Goodwill and excess intangible assets (1,584) (1,619)
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Net Tier 1 Capital 22,633 22,270
Securitization-related deductions (165) (165)
Expected loss in excess of allowance - AIRB
approach (113) -
Substantial investments/Investments in insurance
subsidiaries (422) (427)
Other deductions (1) -
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Adjusted Tier 1 Capital (Tier 1 Capital) 21,932 21,678
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Subordinated debt 5,208 3,776
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on
available-for-sale equity securities 15 10
Eligible general allowance for credit losses 32 292
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Total Tier 2 Capital 6,055 4,878
Securitization-related deductions (18) (29)
Expected loss in excess of allowance - AIRB
approach (113) -
Substantial Investments/Investment in insurance
subsidiaries (833) (890)
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Adjusted Tier 2 Capital 5,091 3,959
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Total Capital 27,023 25,637
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Risk-Weighted Assets
(Canadian $ in millions) Q2-2011 Q4-2010
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Credit risk 132,646 136,290
Market risk 5,273 5,217
Operational risk 20,754 19,658
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Total risk-weighted assets 158,673 161,165
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Outstanding Shares and Securities Convertible into Common Shares
Number of shares or
As at May 18, 2011 dollar amount
----------------------------------------------------------------------------
Common shares 569,691,000
Class B Preferred Shares
Series 5 $ 200,000,000
Series 13 $ 350,000,000
Series 14 $ 250,000,000
Series 15 $ 250,000,000
Series 16 $ 300,000,000
Series 18 $ 150,000,000
Series 21 $ 275,000,000
Series 23 $ 400,000,000
Series 25 $ 290,000,000
Convertible into common shares:
Class B Preferred Shares (1)
Series 10 US$ 300,000,000
Stock options
- vested 7,046,000
- non-vested 7,755,000
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(1) Convertible preferred shares may be exchanged for common shares on
specific dates on a pro-rata basis based on 95% of the average trading
price of common shares for the 20 days ending four days prior to the
exchange date.
Details on share capital are outlined in the 2010 Annual Report in Note
20 to the audited financial statements on pages 145 to 146.
Under Basel III, the bank's regulatory common equity would decrease by approximately $1.7 billion from $16.9 billion to $15.2 billion as at April 30, 2011, and its Tier 1 capital would decrease by approximately $1.7 billion from $21.9 billion to $20.2 billion. Pro-forma regulatory common equity and Tier 1 capital decrease relative to reported April 30, 2011 Basel II results primarily because of the impact of the adoption of International Financial Reporting Standards (IFRS) on retained earnings, as well as new Basel III capital deductions. These factors are partially offset by the removal of certain existing Basel II deductions from capital and their conversion to higher levels of RWA.
Our RWA as at April 30, 2011 would increase by approximately $16.7 billion from $158.7 billion to $175.4 billion, primarily due to higher counterparty credit risk RWA ($11.0 billion) and, to a lesser extent, higher market risk RWA, as well as the conversion of certain existing Basel II capital deductions to RWA ($5.7 billion), as noted above.
BMO's pro-forma Total Capital Ratio and Leverage Ratio also exceed Basel III minimum requirements.
The preceding pro-forma ratios do not include the impact of the pending M&I acquisition, which is expected to close in the third quarter. The estimated impact of the acquisition on our capital ratios is described in the Other Capital Developments section that follows.
The pro-forma calculations and statements in this section and the sections that follow assume full implementation of announced Basel III regulatory capital requirements and include the potential impact of certain key changes associated with the adoption of IFRS. The impacts of the changes from IFRS are based on our analysis to date, as set out in Transition to International Financial Reporting Standards in the Future Changes in Accounting Policies - IFRS section in both our 2010 Annual Report and starting on the following page of this document. In calculating the Basel III Tier 1 Capital Ratio and commenting on the bank's Basel III Total Capital Ratio and Leverage Ratio, we also assumed existing non-common share Tier 1 and Tier 2 capital instruments are fully included in regulatory capital. These instruments do not meet Basel III capital requirements and will be subject to the grandfathering provisions outlined in our 2010 Annual Report. We expect to be able to refinance non-common share capital instruments as and when necessary to meet applicable non-common share capital requirements.
The Basel III pro-forma ratios do not reflect future management actions that may be taken to mitigate the impact of the changes, the benefit of retained earnings growth over time that could be available to meet these requirements, or factors beyond the control of management.
Other Capital Developments
In the first quarter, we announced an agreement to acquire M&I.
After incorporating the estimated capital requirements for M&I at closing, the resulting share exchange with M&I shareholders, and assuming no common equity is raised, the bank's pro-forma Basel II Common Equity Ratio and Tier 1 Capital Ratio would be approximately 9.4% and 11.9%, respectively, as at April 30, 2011. After incorporating the estimated capital requirements for M&I at closing, the resulting share exchange with M&I shareholders, and assuming no common equity is raised, the bank's pro-forma Basel III Common Equity Ratio and Tier 1 Capital Ratio would be approximately 6.9% and 9.2%, respectively, as at April 30, 2011. If the pro-forma ratios were calculated assuming a $400 million common share issuance, the pro-forma ratios would be approximately 20 basis points higher. BMO's pro-forma Total Capital Ratio and Leverage Ratio would also continue to exceed Basel III minimum requirements assuming no common equity is raised. BMO's pro-forma Basel III capital ratios are strong after considering the acquisition and the bank is well-positioned to meet Basel III capital requirements in the near term.
During the quarter, 1,902,000 shares were issued through the Shareholder Dividend Reinvestment and Share Purchase Plan and the exercise of stock options. We did not repurchase any Bank of Montreal common shares under our common share repurchase program during the quarter.
On May 25, 2011, BMO announced that the Board of Directors declared a quarterly dividend payable to common shareholders of $0.70 per share, unchanged from a year ago and from the preceding quarter. The dividend is payable August 26, 2011, to shareholders of record on August 2, 2011. Common shareholders may elect to have their cash dividends reinvested in common shares of the bank in accordance with the bank's Shareholder Dividend Reinvestment and Share Purchase Plan ("Plan"). Under the Plan, the Board of Directors determines whether the common shares will be purchased in the secondary market or issued by the bank from treasury. At this time, the common shares purchased under the Plan will be issued from treasury without discount from the average market price of the common shares (as defined in the Plan).
This Capital Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation, BMO designates all dividends paid or deemed to be paid on both its common and preferred shares as "eligible dividends", unless indicated otherwise.
Credit Rating
The credit ratings assigned to BMO's senior debt securities by external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access the capital markets at competitive pricing levels. Should our credit ratings materially decrease, our cost of funds would likely increase significantly and our access to funding and capital through capital markets could be reduced. A material downgrade of our rating could have additional consequences, including those set out in Note 10 to our annual consolidated financial statements.
BMO's senior debt credit ratings were unchanged in the quarter. All four ratings are indicative of high-grade, high-quality issues. The ratings are as follows: DBRS (AA); Fitch Ratings (AA-); Moody's Investors Service (Aa2); and Standard & Poor's Ratings Services (A+). These credit ratings are also disclosed in the Financial Highlights section located near the beginning of this document.
During the first quarter, Moody's placed its rating under review for downgrade following the announcement of our intention to acquire M&I, citing execution risks and the scope of the integration work with this major transaction. The other three ratings agencies continue to maintain their ratings with a stable outlook.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our directors and executives and their affiliated entities, joint ventures and equity-accounted investees on the same terms that we offer to our customers for those services. A select suite of customer loan and mortgage products is offered to our employees at rates normally made available to our preferred customers. We also offer employees a fee-based subsidy on annual credit card fees.
Stock options and deferred share units granted to directors and preferred rate loan agreements for executives, relating to transfers we initiate, are both discussed in Note 27 to the audited consolidated financial statements on page 159 of the 2010 Annual Report.
Off-Balance-Sheet Arrangements
BMO enters into a number of off-balance-sheet arrangements in the normal course of operations. The most significant of these are Credit Instruments, Variable Interest Entities and Guarantees, which are described on pages 64 to 66 and 68 to 70 of the 2010 Annual Report as well as in Notes 4 and 6 to the attached unaudited interim consolidated financial statements. See the Select Financial Instruments section for comments on any significant changes to our off-balance-sheet arrangements during the quarter ended April 30, 2011.
Accounting Policies and Critical Accounting Estimates
The notes to BMO's October 31, 2010 audited consolidated financial statements outline our significant accounting policies.
Pages 68 to 70 of the 2010 Annual Report contain a discussion of certain accounting estimates that are considered particularly important as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to review that discussion.
Select Financial Instruments
Pages 63 to 67 of BMO's 2010 Annual Report provide enhanced disclosure relating to select financial instruments that, commencing in 2008, markets had come to regard as carrying higher risk. Readers are encouraged to review that disclosure to assist in understanding the nature and extent of BMO's exposures. We follow a practice of reporting on significant changes, if any, in our interim MD&A.
The amount drawn on the liquidity facilities BMO provides to the Structured Investment Vehicles (SIVs) was lowered to US$3.2 billion and EUR313 million at the end of the quarter, down from US$3.8 billion and EUR417 million at the end of the first quarter and US$4.3 billion and EUR478 million at the end of fiscal 2010. The decreases were attributable to asset sales and asset maturities. The book values of the subordinated capital notes at quarter end were US$514 million and EUR113 million for Links and Parkland, respectively, compared with US$689 million and EUR141 million at the end of fiscal 2010.
Select Geographic Exposures
In the euro zone, BMO's direct credit exposures in Greece, Ireland, Italy, Spain and Portugal totalled approximately $189 million at quarter end. Of this amount, our direct credit exposures in Greece, Ireland and Portugal (the three countries that have negotiated or are in the process of negotiating bailout packages) were $4 million, $3 million and $79 million, respectively, and were primarily to banks for trade finance, lending and trading products. In addition, our Irish subsidiary is required to maintain reserves with the Irish central bank. These reserves totalled approximately $174 million at quarter end.
The BMO-managed SIVs had exposure with a par value of approximately $55 million to counterparties in Ireland, with no exposure in Greece, Italy, Spain and Portugal. This exposure was comprised of approximately $38 million of government guaranteed Irish bank senior debt and approximately $17 million of subordinated debt of an Irish insurance company, relatively unchanged from the preceding quarter.
BMO's direct credit exposures in the North African countries of Egypt, Libya, Morocco, Algeria and Tunisia consist solely of trade finance products with bank counterparties. Exposures in these countries amounted to approximately $65 million at quarter end, including counterparty exposure of approximately $10 million in Egypt and negligible amounts in Libya and Tunisia. BMO has no direct credit exposure in the Middle Eastern countries of Syria and Yemen.
We do not expect any losses related to the Japanese earthquake other than those in our insurance operations that have been discussed in this document.
Future Changes in Accounting Policies
Transition to International Financial Reporting Standards
Canadian public companies will be required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), for fiscal years beginning on or after January 1, 2011. Effective November 1, 2011, we will adopt IFRS as the basis for preparing our consolidated financial statements. We will report our financial results for the quarter ended January 31, 2012 prepared on an IFRS basis. We will also provide comparative data on an IFRS basis, including an opening balance sheet as at November 1, 2010 (transition date).
Our enterprise-wide project to transition to IFRS remains on track. We have completed our diagnostic review and assessment phase. Our implementation and education phase is substantially completed, and we have entered the third and final phase of our transition. This final phase includes the development of controls and procedures necessary to restate our 2011 opening balance sheet and financial results on an IFRS basis in preparation for our transition to IFRS in 2012, and finalizing our choices on the policy decisions available under IFRS.
Based on our analysis to date, the main accounting changes that will result from the adoption of IFRS are expected to be in the areas of pension and other employee future benefits, asset securitization, consolidation and accumulated other comprehensive loss on translation of foreign operations. The differences between the bank's accounting policies and IFRS requirements associated with these areas, combined with our decisions on the optional exemptions from retroactive application of IFRS, will result in measurement and recognition differences when we transition to IFRS. The net impact of these differences will be recorded in opening retained earnings, affecting shareholders' equity. These impacts will also extend to our capital ratios, with the exception of the change related to accumulated other comprehensive loss on translation of foreign operations, which will have no impact on our capital ratios.
The main accounting changes listed should not be considered a comprehensive list of the impacts of adopting IFRS, but rather the most significant of certain key changes based on our analysis to date. Precisely quantifying all of the impacts that will result from adopting IFRS will be dependent on the completion of all our project workstreams, finalization of all decisions where choices of accounting policies are available, including optional exemptions from retroactive restatement available under IFRS, and the prevailing market conditions and economic circumstances at the time of transition. Other significant differences may be identified prior to our transition to IFRS.
Pension and Other Employee Future Benefits
On transition to IFRS, we can choose to recalculate pension and other future employee benefits expense back to inception of the plans as though we had always applied the IFRS employee benefits requirements, or to record market-related amounts that exist on November 1, 2010 directly in retained earnings (the fresh start method). Market related amounts include unrealized market-related gains or losses on pension fund assets and the impact of changes in discount rates on pension obligations. We have not yet finalized our decision on whether to elect the fresh start method as permitted under IFRS.
Asset Securitization
In 2010, we substantially completed our assessment of the accounting treatment under IFRS of loans and mortgages sold to the bank's securitization vehicles and to the Canada Mortgage Bond program. Our preliminary conclusion is that the loans and mortgages sold by the bank to these securitization programs will remain on our balance sheet. Under Canadian GAAP, the mortgages and loans sold through these programs are removed from our balance sheet.
We expect to complete our assessment of the asset securitization activity associated with selling the bank's Canadian mortgage loans to the National Housing Act Mortgage-Backed Securities program in the third quarter of 2011.
Additional information on our asset securitizations is included in Note 8 on page 126 of the consolidated financial statements in our 2010 Annual Report.
Consolidation
In 2010, we substantially completed our assessment of whether we are required to consolidate our credit protection vehicle Apex Trust ("Apex") and our structured investment vehicles ("SIVs") when we transition to IFRS. Our preliminary conclusion is that the bank would be required to consolidate Apex and the SIVs. Under Canadian GAAP, we are not required to consolidate Apex and the SIVs.
In the current quarter, we substantially completed our assessment of whether we are required to consolidate our U.S. customer securitization vehicle. We assessed the consolidation requirement based on whether the bank would in substance control the vehicle, as determined under the criteria contained in the IFRS consolidated and separate financial statements standard (IAS 27) and, where appropriate, SIC-12 (an interpretation of IAS 27). Our analysis considered whether the activities of the vehicle are conducted on behalf of the bank, the bank's exposure to the risks and benefits of the vehicle, its decision-making power over the vehicle, and whether these considerations demonstrate that the bank, in substance, controls the vehicle and therefore must consolidate it. Our preliminary conclusion is that the bank would be required to consolidate the vehicle, as our analysis indicates that the bank, in substance, controls the vehicle, based on the definition of control under IFRS. Under Canadian GAAP, we are not required to consolidate our U.S. customer securitization vehicle.
Consolidation of our U.S. customer securitization vehicle would impact the bank's balance sheet, increasing assets and liabilities by approximately $3 billion on November 1, 2010, the beginning of our comparative year. The risk-weighted assets of this vehicle are already included in the current determination of the bank's risk-weighted assets. In addition, we do not expect the consolidation of the vehicle would result in any significant adjustment to opening retained earnings. As a result, we do not expect that consolidation of the vehicle would have a significant impact on the calculation of our Tier 1 Capital Ratio.
We expect to complete our assessment of our Canadian customer securitization vehicles and other less significant VIEs in the third quarter of 2011. Information on all our VIEs, including total assets, our exposure to loss and our assessment of the consolidation requirement under Canadian GAAP, is included in Note 9 on page 128 of the consolidated financial statements in our 2010 Annual Report.
Accumulated other Comprehensive Loss on Translation of Foreign Operations
On transition to IFRS, we can either recalculate translation differences on an IFRS basis as through we had always applied the IFRS requirements or reset the accumulated other comprehensive loss on translation of net foreign operations to zero. We expect to elect to reset our accumulated other comprehensive loss on translation of net foreign operations to zero.
Quantification of the impact of certain key differences
Pages 71 through 73 of our 2010 Annual Report contain discussions on the key elements of our transition plan, approximate impacts to our 2011 opening balance sheet and capital ratios of certain key differences, and our assessment of the optional exemptions from retroactive application of IFRS. Readers are encouraged to review these discussions for more details.
This Transition to International Financial Reporting Standards section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
U.S. Legislative Developments
On July 21, 2010, President Obama signed into law the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act is broad in scope and we continue to assess the impact of the legislation on our operations. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate at this time the overall financial impact on our operations or the financial industry more generally. The change to overdraft fees as a result of Regulation E (which came into effect in the summer of 2010), together with the proposed reductions to interchange fees under Dodd-Frank is expected to lower P&C U.S. net income on an annual basis by approximately US$30 to US$40 million. We also anticipate an increase in regulatory costs, and will be focused on managing the complexity and breadth of the regulatory changes.
The Financial Crisis Responsibility Fee that the Obama Administration has proposed levying on U.S. financial institutions that have assets exceeding a certain threshold was re-proposed in the Administration's 2012 budget. Although the details of the proposed fee have not been fully released, the proposed fee, if implemented, could apply to some or all of our U.S. operations. The proposed fee will not become law unless approved by the President and the United States Congress.
Review of Operating Groups' Performance
Operating Groups' Summary Income Statements and Statistics for Q2-2011
Q2-2011
-----------------------------------------------
Corporate
(Canadian $ in millions, including Total
except as noted) P&C PCG BMO CM T&O BMO
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Net interest income (teb)(1) 1,342 108 297 (127) 1,620
Non-interest revenue 482 474 539 102 1,597
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Total revenue (teb)(1) 1,824 582 836 (25) 3,217
Provision for credit losses 171 2 30 (58) 145
Non-interest expense 1,027 437 468 91 2,023
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Income before income taxes
and non-controlling interest
in subsidiaries 626 143 338 (58) 1,049
Income taxes (recovery)
(teb)(1) 183 42 103 (97) 231
Non-controlling interest in
subsidiaries - - - 18 18
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Net income Q2-2011 443 101 235 21 800
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Net income Q1-2011 486 153 257 (120) 776
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Net income Q2-2010 440 115 260 (70) 745
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Other statistics
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Net economic profit 249 68 114 (138) 293
Return on equity 24.5% 32.5% 21.4% nm 16.7%
Operating leverage (3.0%) (4.2%) (8.9%) nm (5.0%)
Productivity ratio (teb) 56.3% 75.0% 56.0% nm 62.9%
Net interest margin on
earning assets (teb) 3.15% 3.10% 0.76% nm 1.89%
Average common equity 7,112 1,251 4,271 6,194 18,828
Average earning assets
($ billions) 174.8 14.3 161.1 1.5 351.7
Full-time equivalent
employees 20,785 4,907 2,043 10,980 38,715
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YTD-2011
-----------------------------------------------
Corporate
(Canadian $ in millions, including Total
except as noted) P&C PCG BMO CM T&O BMO
----------------------------------------------------------------------------
Net interest income (teb)(1) 2,741 211 633 (338) 3,247
Non-interest revenue 973 1,032 1,166 145 3,316
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Total revenue (teb)(1) 3,714 1,243 1,799 (193) 6,563
Provision for credit losses 344 4 60 (15) 393
Non-interest expense 2,061 896 961 151 4,069
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Income before income taxes
and non-controlling interest
in subsidiaries 1,309 343 778 (329) 2,101
Income taxes (recovery)
(teb)(1) 380 89 286 (266) 489
Non-controlling interest in
subsidiaries - - - 36 36
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Net income Q2-2011 929 254 492 (99) 1,576
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Net income Q2-2010 894 226 472 (190) 1,402
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Other statistics
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Net economic profit 527 189 241 (409) 548
Return on equity 24.9% 40.5% 21.6% nm 16.2%
Operating leverage (2.0%) 0.7% (0.3%) nm (2.8%)
Productivity ratio (teb) 55.5% 72.1% 53.4% nm 62.0%
Net interest margin on
earning assets (teb) 3.16% 3.01% 0.78% nm 1.86%
Average common equity 7,210 1,248 4,350 5,958 18,766
Average earning assets
($ billions) 175.0 14.1 163.4 0.4 352.8
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nm - not meaningful
(1) Operating group revenues, income taxes and net interest margin are
stated on a taxable equivalent basis (teb). The group teb adjustments
are offset in Corporate, and Total BMO revenue, income taxes and net
interest margin are stated on a GAAP basis.
The following sections review the financial results of each of our operating segments and operating groups for the second quarter of 2011.
Periodically, certain business lines and units within the business lines are transferred between client groups to more closely align BMO's organizational structure with its strategic priorities. Results for prior periods are restated to conform to the current presentation.
Corporate Services is generally charged (or credited) with differences between the periodic provisions for credit losses charged to the client groups under our expected loss provisioning methodology and the periodic provisions required under GAAP.
Personal and Commercial Banking (P&C)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income (teb) 1,342 93 7% (57) (4%)
Non-interest revenue 482 (13) (3%) (9) (2%)
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Total revenue (teb) 1,824 80 5% (66) (4%)
Provision for credit losses 171 19 13% (2) (1%)
Non-interest expense 1,027 71 7% (7) (1%)
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Income before income taxes 626 (10) (2%) (57) (8%)
Income taxes (teb) 183 (13) (7%) (14) (8%)
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Net income 443 3 1% (43) (9%)
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Return on equity 24.5% (3.1%) (0.8%)
Operating leverage (3.0%) nm nm
Productivity ratio (teb) 56.3% 1.5% 1.6%
Net interest margin on earning
assets (teb) 3.15% 0.12% (0.02%)
Average earning assets
($ billions) 174.8 5.5 3% (0.3) -
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Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
----------------------------------------------------------
Net interest income (teb) 2,741 209 8%
Non-interest revenue 973 - -
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Total revenue (teb) 3,714 209 6%
Provision for credit losses 344 41 13%
Non-interest expense 2,061 152 8%
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Income before income taxes 1,309 16 1%
Income taxes (teb) 380 (19) (5%)
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Net income 929 35 4%
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Return on equity 24.9% (2.4%)
Operating leverage (2.0%) nm
Productivity ratio (teb) 55.5% 1.0%
Net interest margin on earning
assets (teb) 3.16% 0.13%
Average earning assets
($ billions) 175.0 6.2 4%
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nm - not meaningful
Personal and Commercial Banking (P&C) represents the sum of our two retail and business banking operating segments, Personal and Commercial Banking Canada (P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.). These operating segments are reviewed separately in the sections that follow.
Personal and Commercial Banking Canada (P&C Canada)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income (teb) 1,059 69 7% (50) (5%)
Non-interest revenue 416 (2) (1%) (3) (1%)
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Total revenue (teb) 1,475 67 5% (53) (4%)
Provision for credit losses 136 15 13% - -
Non-interest expense 780 58 8% 7 1%
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Income before income taxes 559 (6) (1%) (60) (10%)
Income taxes (teb) 158 (13) (8%) (17) (10%)
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Net income 401 7 2% (43) (10%)
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Personal revenue 920 40 5% (36) (4%)
Commercial revenue 555 27 5% (17) (3%)
Operating leverage (3.3%) nm nm
Productivity ratio (teb) 52.8% 1.6% 2.2%
Net interest margin on earning
assets (teb) 2.93% 0.02% (0.07%)
Average earning assets
($ billions) 148.1 8.3 6% 1.5 1%
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Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
----------------------------------------------------------
Net interest income (teb) 2,168 160 8%
Non-interest revenue 835 23 3%
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Total revenue (teb) 3,003 183 6%
Provision for credit losses 272 31 13%
Non-interest expense 1,553 120 8%
----------------------------------------------------------
Income before income taxes 1,178 32 3%
Income taxes (teb) 333 (16) (5%)
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Net income 845 48 6%
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Personal revenue 1,876 102 6%
Commercial revenue 1,127 81 8%
Operating leverage (1.9%) nm
Productivity ratio (teb) 51.7% 0.9%
Net interest margin on earning
assets (teb) 2.97% 0.04%
Average earning assets
($ billions) 147.4 9.0 7%
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nm - not meaningful
Q2 2011 vs Q2 2010
P&C Canada net income of $401 million was up $7 million or 1.7% from a year ago.
Revenue increased $67 million or 4.7%, driven by volume growth across most products and an improved net interest margin. Net interest margin increased by 2 basis points, driven primarily by higher spreads in personal lending products.
In the personal banking segment, revenue increased $40 million or 4.5%, driven by volume growth and higher spreads in personal lending products. Total personal lending balances (including mortgages, Homeowner ReadiLine and other consumer lending products) increased 6.6% year over year. Total personal lending market share was unchanged year over year. Our goal is to grow market share and we continue to focus on improving the total personal lending business through investment in the sales force and achieving productivity gains while remaining attentive to the credit quality of the portfolio.
Personal cards loan balances increased 0.3%.
Personal deposits balances increased 0.4% year over year with an increase in retail operating deposits and a reduction in term deposits. Market share for both retail operating deposits and term deposits decreased year over year in the highly competitive environment.
In the commercial banking segment, revenue increased $27 million or 4.9% year over year. The effects of volume growth, favourable product mix and net investment securities gains were partially offset by lower cards revenue.
Commercial loan balances grew 7.1% and our market share increased year over year. We continue to rank second in Canadian business banking market share of small and mid-sized business loans.
Commercial cards balances decreased 3.9%, primarily due to attrition in Diners Club balances, as expected.
Commercial deposit balances grew 10.3%. We continue to invest in the size and capabilities of our commercial workforce to provide more and better advice to our customers.
Provisions for credit losses on an expected loss basis increased $15 million or 13% due to growth in the portfolio.
Non-interest expense increased $58 million or 8.0% due to higher initiatives spending, higher salaries and benefits from increased employment levels and annual salary increases, and higher professional fees and advertising expense. The group's operating leverage was negative 3.3%, as we continue to invest strategically to improve our competitive position.
Average current loans and acceptances, including securitized loans, increased $8.9 billion or 6.3% from a year ago and personal and commercial deposits grew $3.4 billion or 3.4%.
Q2 2011 vs Q1 2011
Net income decreased $43 million or 9.6%.
Revenue decreased $53 million or 3.5%, driven by fewer days in the quarter, and a lower net interest margin. Net interest margin decreased 7 basis points due to continued low interest rates in the competitive environment, resulting in lower mortgage, commercial loan and term deposit spreads. The margin reduction was also attributable to the impact of unfavourable mix from a lower proportion of card balances and deposits.
Non-interest expense increased $7 million or 0.7%, primarily due to higher initiatives spending and higher employee costs as a result of higher employment levels and annual salary increases. These factors were partially offset by the impact of three fewer days, the benefit of a sales tax recovery in the second quarter and the impact of a sales tax expense and stock-based compensation costs for employees eligible to retire that were recognized in the first quarter.
Average current loans and acceptances, including securitized loans, increased $1.6 billion or 1.1% from the preceding quarter, while personal and commercial deposits were unchanged.
Q2 YTD 2011 vs Q2 YTD 2010
Net income increased $48 million or 5.9% to $845 million. Revenue increased $183 million or 6.5%, driven by volume growth, an improved net interest margin, the inclusion of two more months of results of the Diners Club business in the current year and higher mutual fund revenues. Net interest margin improved by 4 basis points primarily due to higher spread in personal lending products.
Non-interest expense increased $120 million or 8.4%, primarily due to higher initiatives spending, higher employee costs from increased staff levels in the sales force, the inclusion of two more months of results of the Diners Club North American franchise business in the current year and higher professional fees.
Average current loans and acceptances, including securitized loans, increased $9.5 billion or 6.8%, while personal and commercial deposits increased $3.0 billion or 3.1%.
Personal and Commercial Banking U.S. (P&C U.S.)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income (teb) 283 24 9% (7) (3%)
Non-interest revenue 66 (11) (14%) (6) (8%)
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Total revenue (teb) 349 13 4% (13) (4%)
Provision for credit losses 35 4 13% (2) (5%)
Non-interest expense 247 13 6% (14) (5%)
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Income before income taxes 67 (4) (5%) 3 3%
Income taxes (teb) 25 - - 3 10%
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Net income 42 (4) (9%) - -
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Operating leverage (1.6%) nm nm
Productivity ratio (teb) 70.9% 1.1% (1.1%)
Net interest margin on earning
assets (teb) 4.30% 0.75% 0.26%
Average earning assets
($ billions) 26.7 (2.9) (10%) (1.8) (6%)
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U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 294 42 17% 6 2%
Non-interest revenue 69 (6) (9%) (2) (4%)
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Total revenue (teb) 363 36 11% 4 1%
Non-interest expense 257 28 13% (2) (1%)
Net Income 43 (2) (3%) 1 5%
Average earning assets (US$
billions) 27.7 (1.0) (4%) (0.6) (2%)
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Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
----------------------------------------------------------
Net interest income (teb) 573 49 10%
Non-interest revenue 138 (23) (15%)
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Total revenue (teb) 711 26 4%
Provision for credit losses 72 10 15%
Non-interest expense 508 32 7%
----------------------------------------------------------
Income before income taxes 131 (16) (11%)
Income taxes (teb) 47 (3) (5%)
----------------------------------------------------------
Net income 84 (13) (13%)
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Operating leverage (2.9%) nm
Productivity ratio (teb) 71.5% 2.0%
Net interest margin on earning
assets (teb) 4.17% 0.72%
Average earning assets
($ billions) 27.6 (2.8) (9%)
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U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 582 80 16%
Non-interest revenue 140 (15) (10%)
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Total revenue (teb) 722 65 10%
Non-interest expense 516 59 13%
Net Income 85 (8) (8%)
Average earning assets
(US$ billions) 28.0 (1.1) (4%)
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nm - not meaningful
Q2 2011 vs Q2 2010
Net income of Cdn$42 million decreased Cdn$4 million or 9.2%, of which Cdn$2 million was due to the effects of currency translation. Amounts in the rest of this section are in U.S dollars. Net income of $43 million was down $2 million or 2.8% from $45 million a year ago.
The benefit of the Rockford, Illinois-based bank transaction and organic revenue growth was more than offset by a higher provision for credit losses, under BMO's expected loss provisioning methodology, and an increase in the impact of impaired loans. The inclusion of assets and liabilities acquired on the Rockford transaction increased revenue by $19 million and expense by $15 million (including acquisition integration costs of $1.5 million pre-tax and $1.0 million after-tax).
On a basis that adjusts for the impact of impaired loans, a reduction in the Visa litigation accrual and acquisition integration costs, net income was $63 million, an increase of $2 million or 4.1% from a year ago.
Revenue of $363 million increased $36 million or 11%. Adjusting for the impact of the Rockford, Illinois-based bank transaction and impaired loans, revenue increased $11 million or 3.1%, primarily due to the effect of higher loan and deposit spreads and higher deposit balances, partially offset by lower lending and cash management fees.
Net interest margin of 4.30% increased 75 basis points due to higher loan and deposit spreads coupled with deposit balance growth.
Non-interest expense of $257 million was $28 million or 13% higher. Adjusting for the impact of the Rockford transaction, increased costs of managing impaired loans and changes in the Visa litigation accrual, expenses increased $4 million or 1.9%, primarily due to increases in advertising costs and deposit insurance premiums.
Q2 2011 vs Q1 2011
Net income was unchanged on a Canadian dollar basis. Amounts in the rest of this section are stated in U.S. dollars. Net income increased $1 million or 4.6% from the prior quarter as results reflected increased revenue and decreased expense.
Revenue increased $4 million or 1.0%, reflecting increased spreads on deposits and loans, which more than offset the impact of lower loan and deposit balances and decreased lending and cash management fees.
Net interest margin increased 26 basis points due to improved deposit spreads and a favourable change in mix of loan balances, partially offset by a decrease in deposit balances.
Non-interest expense decreased $2 million or 0.6%, primarily due to a reduction in the Visa litigation accrual.
Q2 YTD 2011 vs Q2 YTD 2010
Net income decreased Cdn$13 million or 13% from the prior year to Cdn$84 million. Amounts in the rest of this section are outlined in U.S. dollars. On a U.S. dollar basis, net income was $85 million, down $8 million or 8.2% from the prior year.
On a basis that adjusts for the impact of impaired loans, changes in the Visa litigation accrual and acquisition integration costs, net income was $126 million, up $2 million or 1.9% from results of a year ago on a comparably-adjusted basis. Adjusted on this basis, the productivity ratio was 63.7%.
Revenue of $722 million was $65 million or 10% higher. Adjusting for the impact of the Rockford transaction and impaired loans, revenue increased $25 million or 3.9%. The effect of loan and deposit spread improvement and higher deposit balances more than offset a decline in personal loan balances and decreased lending and cash management fees.
Net interest margin of 4.17% increased 72 basis points due to improved deposit spreads and balances and a favourable change in the mix of loan balances.
Provisions for credit losses, on an expected loss basis, increased $14 million or 22%, primarily due to increases in expected losses on commercial loans.
Non-interest expense increased $59 million or 13%. Adjusting for the impact of the Rockford transaction, increased costs of managing impaired loans and changes in the Visa litigation accrual, expenses increased $12 million or 3.7%. The increase was primarily due to growth in deposit insurance premiums and advertising costs.
Private Client Group (PCG)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income (teb) 108 21 25% 5 5%
Non-interest revenue 474 3 1% (84) (15%)
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Total revenue (teb) 582 24 5% (79) (12%)
Provision for credit losses 2 - - - -
Non-interest expense 437 35 9% (22) (5%)
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Income before income taxes 143 (11) (6%) (57) (28%)
Income taxes (teb) 42 3 13% (5) (8%)
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Net income 101 (14) (13%) (52) (34%)
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Return on equity 32.5% (5.1%) (15.8%)
Operating leverage (4.2%) nm nm
Productivity ratio (teb) 75.0% 2.9% 5.5%
Net interest margin on earning 3.10% 0.30% 0.18%
assets (teb)
Average earning assets 14,300 1,633 13% 357 3%
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U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 67 8 12% 3 4%
Non-interest expense 56 2 4% (2) (3%)
Net income 6 3 +100% 2 80%
Average earning assets 1,907 (188) (9%) (21) (1%)
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Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
----------------------------------------------------------
Net interest income (teb) 211 37 21%
Non-interest revenue 1,032 98 11%
----------------------------------------------------------
Total revenue (teb) 1,243 135 12%
Provision for credit losses 4 - -
Non-interest expense 896 92 11%
----------------------------------------------------------
Income before income taxes 343 43 14%
Income taxes (teb) 89 15 21%
----------------------------------------------------------
Net income 254 28 12%
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Return on equity 40.5% 4.9%
Operating leverage 0.7% nm
Productivity ratio (teb) 72.1% (0.4%)
Net interest margin on earning 3.01% 0.21%
assets (teb)
Average earning assets 14,119 1,623 13%
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U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 131 10 8%
Non-interest expense 114 6 6%
Net income 10 2 33%
Average earning assets 1,917 (206) (10%)
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nm - not meaningful
Q2 2011 vs Q2 2010
Net income was $101 million, down $14 million or 13% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, was $100 million, up $29 million or 41% as we continue to see growth across all of our businesses. Insurance net income was $1 million for the quarter, down $43 million from a year ago, primarily due to unusually high reinsurance claims as a result of the earthquakes in Japan and New Zealand that reduced second quarter net income by $47 million.
Revenue increased $24 million or 4.5% from the prior year, or by 13% adjusted for the earthquake-related reinsurance claims. Revenue of PCG, excluding insurance, increased 15%, driven by improvement in client assets under management and administration, as we remain focused on delivering the high level of service and advice that our clients expect. Revenue from the insurance business was down significantly year over year as growth in net premium revenue was more than offset by the $50 million impact of earthquake-related reinsurance claims. For the remainder of fiscal 2011, any further reinsurance losses resulting from natural catastrophes are limited to $40 million pre-tax, inclusive of the exposure from a reinsurance treaty renewed in the second quarter. Net interest income grew from the prior year primarily due to higher deposit spreads in our brokerage businesses, as well as higher deposit balances in Canadian private banking. The weaker U.S. dollar lowered revenue by $5 million or 0.9%.
Non-interest expense increased $35 million or 8.7%, primarily due to higher revenue-based costs associated with the revenue growth in PCG, excluding insurance, and investments to benefit future revenue growth. The weaker U.S. dollar reduced expenses by $4 million or 0.9%. The productivity ratio of 75.0% increased 290 basis points from the prior year and the operating leverage was negative 4.2% in the current quarter. Adjusted for the earthquake-related reinsurance claims, the productivity ratio improved 300 basis points to 69.1% and the operating leverage ratio was 4.7% for the quarter.
Assets under management and administration of $284 billion grew $35 billion or 14%, after adjusting to exclude the impact of the weaker U.S. dollar, benefiting from attracting new client assets, improved equity market conditions and the acquisition of Lloyd George Management, which added $5 billion in assets under management.
Q2 2011 vs Q1 2011
Net income decreased $52 million or 34% from the first quarter. PCG net income, excluding the insurance business, was up $19 million or 24% with growth in most businesses. Insurance net income was down $71 million due primarily to the earthquake-related reinsurance claims and the adverse effect of unfavourable market movements on policyholder liabilities relative to the prior quarter. The earthquake-related reinsurance claims reduced second quarter net income by $47 million.
Revenue decreased $79 million or 12%, or by 4.4% adjusted for the earthquake-related reinsurance claims. Revenue in PCG, excluding insurance, increased 0.7% with growth in most of our non-insurance businesses, partially offset by the effect of three fewer days in the current quarter. Insurance revenue decreased significantly, primarily due to the higher claims discussed above and the adverse effect of unfavourable market movements on policyholder liabilities relative to the prior quarter. Net interest income grew, largely due to higher balances in the brokerage and private banking businesses. The weaker U.S. dollar lowered revenue by $3 million or 0.5%.
Non-interest expense decreased $22 million or 4.9%, as we continue to focus on expense management. Results in the first quarter included stock-based compensation costs for employees eligible to retire. The weaker U.S. dollar reduced expenses by $3 million or 0.6%.
Assets under management and administration increased by $12 billion or 4.5% after adjusting to exclude the impact of the weaker U.S. dollar, benefiting from attracting new client assets, improved equity market conditions and the acquisition of Lloyd George Management.
Q2 YTD 2011 vs Q2 YTD 2010
Net income increased $28 million or 12% from the prior year. PCG net income, excluding the insurance business, was up $43 million or 31% with growth in all of the underlying businesses. Insurance net income was down $15 million or 17%, as growth in net premium revenue and a net benefit from the effects of favourable market movements on policyholder liabilities was more than offset by the $47 million impact of the earthquake-related reinsurance claims.
Revenue increased $135 million or 12%, or by 17% adjusted for the earthquake-related reinsurance claims. Revenue in PCG, excluding insurance, increased by 15% with growth in all of our businesses, largely driven by the brokerage businesses and mutual funds. Insurance revenue declined as growth in net premium revenues and a net benefit from the effects of favourable market movements on policyholder liabilities was more than offset by higher earthquake-related reinsurance claims. Net interest income grew, largely due to higher deposit spreads in the brokerage businesses and higher balances in private banking. The weaker U.S. dollar lowered revenue by $8 million or 0.8%.
Non-interest expense increased $92 million or 11%, primarily due to higher revenue-based costs associated with the revenue growth in PCG, excluding insurance, and select investments to benefit future revenue growth. The weaker U.S. dollar reduced expenses by $7 million or 0.8%.
BMO Capital Markets (BMO CM)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
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Net interest income (teb) 297 (83) (22%) (39) (12%)
Non-interest revenue 539 (1) - (88) (14%)
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Total revenue (teb) 836 (84) (9%) (127) (13%)
Provision for credit losses 30 (37) (55%) - -
Non-interest expense 468 (1) - (25) (5%)
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Income before income taxes 338 (46) (12%) (102) (23%)
Income taxes (teb) 103 (21) (17%) (80) (43%)
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Net income 235 (25) (9%) (22) (9%)
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Trading Products revenue 486 (130) (21%) (109) (18%)
Investment and Corporate Banking
revenue 350 46 15% (18) (5%)
Return on equity 21.4% (3.5%) (0.5%)
Operating leverage (8.9%) nm nm
Productivity ratio (teb) 56.0% 5.0% 4.8%
Net interest margin on earning
assets (teb) 0.76% (0.25%) (0.04%)
Average earning assets
($ billions) 161.1 6.7 4% (4.5) (3%)
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U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 251 12 5% (20) (8%)
Non-interest expense 195 9 5% - -
Net Income 25 22 +100% 44 +100%
Average earning assets
(US$ billions) 54.7 9.4 21% (1.0) (2%)
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Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
-----------------------------------------------------------
Net interest income (teb) 633 (108) (15%)
Non-interest revenue 1,166 144 14%
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Total revenue (teb) 1,799 36 2%
Provision for credit losses 60 (72) (55%)
Non-interest expense 961 21 2%
-----------------------------------------------------------
Income before income taxes 778 87 13%
Income taxes (teb) 286 67 30%
-----------------------------------------------------------
Net income 492 20 4%
-----------------------------------------------------------
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Trading Products revenue 1,081 (63) (6%)
Investment and Corporate Banking
revenue 718 99 16%
Return on equity 21.6% 0.1%
Operating leverage (0.3%) nm
Productivity ratio (teb) 53.4% 0.1%
Net interest margin on earning
assets (teb) 0.78% (0.19%)
Average earning assets
($ billions) 163.4 9.6 6%
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U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 522 9 2%
Non-interest expense 390 42 12%
Net Income 6 (48) (88%)
Average earning assets
(US$ billions) 55.2 9.1 20%
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nm - not meaningful
Q2 2011 vs Q2 2010
Net income was $235 million, down $25 million or 9.4% from results in the strong market environment of a year ago. Revenue decreased, primarily due to weaker trading revenue, and there was a reduction in the provision for credit losses. Provisions for credit losses are charged to the operating groups on an expected loss basis.
Revenue decreased $84 million or 9.2% to $836 million. The largest reduction was in trading revenue, which was down from the very strong levels of a year ago. The trading environment was more challenging, with lower market volatility and lower client activity. Mergers and acquisitions fees showed continued strength, increasing significantly over the previous year. Securities commissions and debt underwriting fees also increased considerably. The weaker U.S. dollar decreased revenue by $19 million relative to a year ago. Net interest income decreased due to lower trading net interest income. Net interest margin decreased by 25 basis points to 0.76%, largely as a result of lower trading net interest income.
Non-interest expense was relatively unchanged. Employee costs decreased due to higher severance costs in the prior year, but the impact was offset by increases in other operating expenses. The weaker U.S. dollar decreased expenses by $10 million relative to a year ago.
Q2 2011 vs Q1 2011
Net income decreased $22 million or 8.6% from a strong first quarter.
Revenue was $127 million or 13% lower, due to weaker trading revenue in a more challenging trading environment. Lower revenues relative to the first quarter were partially attributable to less volatile markets and reduced client activity. The weaker U.S. dollar decreased revenues by $13 million relative to the previous quarter.
Non-interest expense decreased $25 million mainly due to lower variable compensation costs, in line with revenue performance. The weaker U.S. dollar decreased expenses by $7 million.
Results in the first quarter were lowered by a provision for prior periods' income taxes in the U.S. segment.
Q2 YTD 2011 vs Q2 YTD 2010
Net income increased $20 million or 4.3% to $492 million.
Revenue increased $36 million or 2.0% due to an increase in investment banking fees, securities commissions and revenues from our interest-rate-sensitive businesses. Although overall revenues improved from the prior year, trading revenues decreased due to a less favourable trading environment. There was also a decrease in the provision for credit losses.
Non-interest expense was $21 million higher than in the prior year, mainly due to an increase in other operating expenses. Results for the current period were lowered by a provision for prior periods' income taxes in the U.S. segment.
Corporate Services, Including Technology and Operations
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q2-2011 vs. Q2-2010 vs. Q1-2011
----------------------------------------------------------------------------
Net interest income before teb
offset (74) 15 18% 76 51%
Group teb offset (53) 52 49% 8 14%
----------------------------------------------------------------------------
Net interest income (teb) (127) 67 35% 84 40%
Non-interest revenue 102 81 +100% 59 +100%
----------------------------------------------------------------------------
Total revenue (teb) (25) 148 86% 143 86%
Provision for credit losses (58) (86) (+100%) (101) (+100%)
Non-interest expense 91 88 +100% 31 56%
----------------------------------------------------------------------------
Loss before income taxes and
non-controlling
interest in subsidiaries 58 (146) (72%) (213) (79%)
Income taxes recovery (teb) 97 (55) (36%) (72) (42%)
Non-controlling interest in
subsidiaries 18 - - - -
----------------------------------------------------------------------------
Net income for the quarter and
net loss for the year 21 91 +100% 141 +100%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) (38) (19) (+100%) 33 48%
Provision for credit losses 21 (14) (44%) (52) (73%)
Non-interest expense 24 37 +100% 41 +100%
Income tax recovery (teb) 58 43 +100% (18) (27%)
Net loss 29 (1) (2%) (27) (49%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, YTD- (Decrease)
except as noted) 2011 vs. YTD-2010
----------------------------------------------------------
Net interest income before teb
offset (224) (1) -
Group teb offset (114) 56 33%
----------------------------------------------------------
Net interest income (teb) (338) 55 14%
Non-interest revenue 145 54 59%
----------------------------------------------------------
Total revenue (teb) (193) 109 36%
Provision for credit losses (15) (158) (+100%)
Non-interest expense 151 135 +100%
----------------------------------------------------------
Loss before income taxes and
non-controlling
interest in subsidiaries 329 (132) (29%)
Income taxes recovery (teb) 266 (42) (13%)
Non-controlling interest in
subsidiaries 36 (1) (2%)
----------------------------------------------------------
Net income for the quarter and
net loss for the year 99 (91) (49%)
----------------------------------------------------------
----------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 109 (55) (+100%)
Provision for credit losses 94 (48) (34%)
Non-interest expense 7 40 +100%
Income tax recovery (teb) 134 (70) (+100%)
Net loss 85 (23) (21%)
----------------------------------------------------------
----------------------------------------------------------
Corporate Services
Corporate Services consists of the corporate units that provide enterprise-wide expertise and governance support in a variety of areas, including strategic planning, risk management, finance, legal and compliance, communications and human resources. Operating results reflect the impact of certain securitization and asset-liability management activities, the elimination of teb adjustments and the impact of our expected loss provisioning methodology.
BMO's practice is to charge loss provisions to the client operating groups each year, using an expected loss provisioning methodology based on each group's share of expected credit losses. Corporate Services is generally charged (or credited) with differences between the periodic provisions for credit losses charged to the client operating groups under our expected loss provisioning methodology and provisions required under GAAP.
Technology and Operations
Technology and Operations (T&O) manages, maintains and provides governance over information technology, operations services, real estate and sourcing for BMO Financial Group. T&O focuses on enterprise-wide priorities that improve service quality and efficiency to deliver an excellent customer experience.
Financial Performance Review
Technology and Operations operating results are included with Corporate Services for reporting purposes. However, the costs of T&O services are transferred to the three operating groups (P&C, PCG and BMO Capital Markets) and only minor amounts are retained in T&O results. As such, results in this section largely reflect the corporate activities outlined in the preceding description of the Corporate Services unit.
Corporate Services' net income in the quarter was $21 million, an improvement of $91 million from the prior year. Revenues were $148 million better, primarily due to higher interest on the settlement of certain income tax matters, a lower group teb offset, the favourable impact of hedging activities relative to a year ago and higher securitization-related revenues largely related to a credit card securitization in the current quarter.
Expenses were $88 million higher, mainly due to higher technology investment spending, costs relating to planning for the M&I integration and higher employee costs.
Provisions for credit losses were better by $86 million, contributing $60 million to Corporate Services improved net income, as a result of lower provisions charged to Corporate under BMO's expected loss provisioning methodology, including a $42 million reduction in the general allowance in the current quarter.
Net income in the current quarter improved $141 million from the first quarter, reflecting improved revenues primarily due to higher interest on the settlement of certain income tax matters, a lower group teb offset and higher securitization-related revenues largely related to a credit card securitization in the current quarter. There were also lower provisions charged to Corporate under BMO's expected loss provisioning methodology, including the $42 million reduction in the general allowance.
The net loss for the year to date was $99 million, an improvement of $91 million from a year ago. The improvement was attributable to significantly improved revenues and a large reduction in provisions for credit losses on an expected loss basis. Improved revenues were largely due to the same factors driving the current quarter's year-over-year improvement.
GAAP and Related Non-GAAP Results and Measures used in the MD&A (Canadian $ in millions, YTD- YTD- except as noted) Q2-2011 Q1-2011 Q2-2010 2011 2010 ---------------------------------------------------------------------------- Reported Results Revenue 3,217 3,346 3,049 6,563 6,074 Non-interest expense (2,023) (2,046) (1,830) (4,069) (3,669) ---------------------------------------------------------------------------- Pre-provision, pre-tax earnings 1,194 1,300 1,219 2,494 2,405 Provision for credit losses (145) (248) (249) (393) (582) Provision for income taxes (231) (258) (207) (489) (384) Non-controlling interest in subsidiaries (18) (18) (18) (36) (37) ---------------------------------------------------------------------------- Net Income 800 776 745 1,576 1,402 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Reported Measures EPS ($) 1.34 1.30 1.26 2.64 2.38 Net income growth (%) 7.5 18.1 100+ 12.5 +100 EPS growth (%) 6.3 16.8 100+ 10.8 +100 Revenue growth (%) 5.5 10.6 14.8 8.1 19.2 Non-interest expense growth (%) 10.5 11.3 (3.1) 10.9 (1.6) Productivity ratio (%) 62.9 61.2 60.0 62.0 60.4 Operating leverage (%) (5.0) (0.7) 17.9 (2.8) 20.8 Return on equity (%) 16.7 15.7 16.4 16.2 15.3 ---------------------------------------------------------------------------- Adjusting Items Charges to net interest income Acquisition-related items - hedge of foreign currency risk on offer to purchase M&I (11) - - (11) - Charges to non-interest expense Acquisition-related items - costs of M&I integration planning (25) - - (25) - Amortization of acquisition- related intangible assets (10) (9) (8) (19) (16) Decrease in the general allowance for credit losses 42 - - 42 - Income tax benefit (charge) related to the above - 1 1 1 2 After-tax impact of Adjusting Items Acquisition-related items - hedge of foreign currency risk on offer to purchase M&I (8) - - (8) - Acquisition-related items - costs of M&I integration planning (17) - - (17) - Amortization of acquisition- related intangible assets (9) (8) (7) (17) (14) Decrease in the general allowance for credit losses 30 - - 30 - ---------------------------------------------------------------------------- Net Income (4) (8) (7) (12) (14) EPS ($) (0.01) (0.02) (0.02) (0.02) (0.03) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Adjusted Results (Note 1) Revenue 3,228 3,346 3,049 6,574 6,074 Non-interest expense (1,988) (2,037) (1,822) (4,025) (3,653) ---------------------------------------------------------------------------- Pre-provision, pre-tax earnings 1,240 1,309 1,227 2,549 2,421 Provision for credit losses (187) (248) (249) (435) (582) Provision for income taxes (231) (259) (208) (490) (386) Non-controlling interest in subsidiaries (18) (18) (18) (36) (37) ---------------------------------------------------------------------------- Net Income 804 784 752 1,588 1,416 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Adjusted Measures (Note 1) EPS ($) 1.35 1.32 1.28 2.66 2.41 Net income growth (%) 6.9 18.1 26.4 12.1 41.9 EPS growth (%) 5.5 16.4 22.2 10.6 35.1 Revenue growth (%) 5.9 10.6 6.2 8.2 9.2 Non-interest expense growth (%) 9.2 11.3 3.6 10.2 1.8 Productivity ratio (%) 61.6 60.9 59.7 61.2 60.1 Operating leverage (%) (3.3) (0.7) 2.6 (2.0) 7.4 Return on equity (%) 16.8 15.9 16.6 16.3 15.5 ---------------------------------------------------------------------------- Note 1: Adjusted results and measures are non-GAAP.
Non-GAAP Measures
Results and measures in the MD&A are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items as set out above. Management assesses performance on both a reported and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Presenting results on both bases provides readers with an enhanced understanding of how management views results. It also permits readers to assess the impact of the specified items on results for the periods presented and to better assess results excluding those items if they consider the items to not be reflective of ongoing results. As such, the presentation may facilitate readers' analysis of trends as well as comparisons with our competitors. Adjusted results and measures are non-GAAP and as such do not have standardized meaning under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from or as a substitute for GAAP results.
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2010 annual report, this quarterly news release, presentation materials and a supplementary financial information package online.
Quarterly Conference Call and Webcast Presentations
Interested parties are also invited to listen to our quarterly conference call on Wednesday, May 25, 2011, 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, August 22, 2011, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering passcode 6850310.
A live webcast of the call can be accessed on our website at www.bmo.com/investorrelations. A replay can be accessed on the site until Monday, August 22, 2011.
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 Andrew Chin, Senior Manager, andrew.chin@bmo.com, 416-867-7019 Chief Financial Officer Tom Flynn, Executive Vice-President and CFO tom.flynn@bmo.com, 416-867-4689 Corporate Secretary Blair Morrison, Senior Vice-President, Deputy General Counsel, Corporate Affairs and Corporate Secretary corp.secretary@bmo.com, 416-867-6785 ---------------------------------------------------------------------------- Shareholder Dividend Reinvestment and For other shareholder information, Share Purchase Plan please contact Average market price Bank of Montreal February 2011 $61.26 Shareholder Services March 2011 $62.39 Corporate Secretary's Department April 2011 $62.67 One First Canadian Place, 21st Floor Toronto, Ontario M5X 1A1 For dividend information, change in Telephone: (416) 867-6785 shareholder address or to advise of Fax: (416) 867-6793 duplicate mailings, please contact E-mail: corp.secretary@bmo.com Computershare Trust Company of Canada 100 University Avenue, 9th Floor For further information on this Toronto, Ontario M5J 2Y1 report, please contact Telephone: 1-800-340-5021 (Canada and Bank of Montreal the United States) Investor Relations Department Telephone: (514) 982-7800 P.O. Box 1, One First Canadian (international) Place, 18th Floor Fax: 1-888-453-0330 (Canada and the Toronto, Ontario M5X 1A1 United States) Fax: (416) 263-9394 (international) To review financial results online, E-mail: service@computershare.com please visit our website at www.bmo.com ---------------------------------------------------------------------------- (R) Registered trademark of Bank of Montreal Financial Highlights (Unaudited) (Canadian $ in millions, except as noted) For the three months ended ---------------------------------------------------------------------------- Change from April January October July April April 30, 2011 31, 2011 31, 2010 31, 2010 30, 2010 30, 2010 ---------------------------------------------------------------------------- Income Statement Highlights Total revenue $ 3,217 $ 3,346 $ 3,229 $ 2,907 $ 3,049 5.5% Provision for credit losses 145 248 253 214 249 (41.8) Non-interest expense 2,023 2,046 2,023 1,898 1,830 10.5 Net income 800 776 739 669 745 7.5 ---------------------------------------------------------------------------- Net Income by Operating Segment Personal & Commercial Banking Canada $ 401 $ 444 $ 419 $ 425 $ 394 1.7% Personal & Commercial Banking U.S. 42 42 39 40 46 (9.2) Private Client Group 101 153 129 105 115 (12.7) BMO Capital Markets 235 257 214 130 260 (9.4) Corporate Services(a) 21 (120) (62) (31) (70) 131.4 ---------------------------------------------------------------------------- Common Share Data ($) Diluted earnings per share $ 1.34 $ 1.30 $ 1.24 $ 1.13 $ 1.26 $ 0.08 Diluted adjusted earnings per share(b) 1.35 1.32 1.26 1.14 1.28 0.07 Dividends declared per share 0.70 0.70 0.70 0.70 0.70 - Book value per share 34.22 34.21 34.09 33.13 32.04 2.18 Closing share price 62.14 57.78 60.23 62.87 63.09 (0.95) Total market value of common shares ($ billions) 35.4 32.8 34.1 35.4 35.3 0.1 ---------------------------------------------------------------------------- For the six months ended ---------------------------------------------- Change from April April April 30, 2011 30, 2010 30, 2010 ---------------------------------------------- Income Statement Highlights Total revenue $ 6,563 $ 6,074 8.1% Provision for credit losses 393 582 (32.5) Non-interest expense 4,069 3,669 10.9 Net income 1,576 1,402 12.5 ---------------------------------------------- Net Income by Operating Segment Personal & Commercial Banking Canada $ 845 $ 797 5.9% Personal & Commercial Banking U.S. 84 97 (13.4) Private Client Group 254 226 12.1 BMO Capital Markets 492 472 4.3 Corporate Services(a) (99) (190) 48.5 ---------------------------------------------- Common Share Data ($) Diluted earnings per share $ 2.64 $ 2.38 $ 0.26 Diluted adjusted earnings per share(b) 2.66 2.41 0.25 Dividends declared per share 1.40 1.40 - Book value per share 34.22 32.04 2.18 Closing share price 62.14 63.09 (0.95) Total market value of common shares ($ billions) 35.4 35.3 0.1 ---------------------------------------------- As at ---------------------------------------------------------------------------- Change from April January October July April April 30, 2011 31, 2011 31, 2010 31, 2010 30, 2010 30, 2010 ---------------------------------------------------------------------------- Balance Sheet Highlights Assets $ 413,228 $ 413,244 $ 411,640 $ 397,386 $ 390,166 5.9% Net loans and acceptances 174,696 176,914 176,643 173,555 169,753 2.9 Deposits 253,387 251,600 249,251 242,791 239,260 5.9 Common shareholders' equity 19,494 19,422 19,309 18,646 17,944 8.6 ---------------------------------------------------------------------------- For the three months ended ------------------------------------------------------------------ April January October July April 30, 2011 31, 2011 31, 2010 31, 2010 30, 2010 ------------------------------------------------------------------ Financial Measures and Ratios (% except as noted)(c) Average annual five year total shareholder return 4.4 1.7 5.9 5.6 7.2 Diluted earnings per share growth 6.3 16.1 11.7 16.5 +100 Diluted adjusted earnings per share growth(b) 5.5 16.4 6.9 8.7 22.2 Return on equity 16.7 15.7 15.1 13.7 16.4 Adjusted return on equity(b) 16.8 15.9 15.3 13.9 16.6 Net economic profit (loss) ($ millions)(b) 293 255 225 158 264 Net economic profit (NEP) growth(b) 11.3 48.6 40.8 +100 +100 Operating leverage (5.0) (0.7) (5.7) (3.8) 17.9 Adjusted operating leverage(b) (3.3) (0.7) (7.4) (4.1) 2.6 Revenue growth 5.5 10.6 8.0 (2.4) 14.8 Non-interest expense growth 10.5 11.3 13.7 1.4 (3.1) Adjusted non-interest expense growth(b) 9.2 11.3 13.7 1.5 3.6 Non-interest expense-to -revenue ratio 62.9 61.2 62.6 65.3 60.0 Adjusted non-interest expense-to -revenue ratio(b) 61.6 60.9 62.3 65.0 59.7 Provision for credit losses-to -average loans and acceptances (annualized) 0.33 0.56 0.58 0.50 0.59 Effective tax rate 22.02 24.51 20.56 13.44 21.35 Gross impaired loans and acceptances-to -equity and allowance for credit losses 11.58 12.84 13.55 13.54 15.20 Cash and securities-to -total assets ratio 35.9 35.6 35.0 34.6 35.8 Common equity ratio 10.67 10.15 10.26 10.27 9.83 Tier 1 capital ratio 13.82 13.02 13.45 13.55 13.27 Total capital ratio 17.03 15.17 15.91 16.10 15.69 Credit rating(d) DBRS AA AA AA AA AA Fitch AA- AA- AA- AA- AA- Moody's Aa2 Aa2 Aa2 Aa2 Aa2 Standard & Poor's A+ A+ A+ A+ A+ Twelve month total shareholder return 3.2 16.6 26.4 22.4 68.7 Dividend yield 4.51 4.85 4.65 4.45 4.44 Price-to-earnings ratio (times) 12.4 11.7 12.7 13.6 14.1 Market-to-book value (times) 1.82 1.69 1.77 1.90 1.97 Return on average assets 0.80 0.74 0.72 0.67 0.78 Net interest margin on average earning assets 1.89 1.82 1.89 1.88 1.88 Non-interest revenue-to-total revenue 49.6 51.4 50.2 46.0 50.1 Equity-to-assets ratio 5.4 5.3 5.3 5.3 5.3 ----------------------------------------------------------------- ----------------------------------------------------------------- For the six months ended -------------------------------------- April April 30, 2011 30, 2010 -------------------------------------- Financial Measures and Ratios (% except as noted)(c) Average annual five year total shareholder return 4.4 7.2 Diluted earnings per share growth 10.9 +100 Diluted adjusted earnings per share growth(b) 10.6 35.1 Return on equity 16.2 15.3 Adjusted return on equity(b) 16.3 15.5 Net economic profit (loss) ($ millions)(b) 548 435 Net economic profit (NEP) growth(b) 26.0 +100 Operating leverage (2.8) 20.8 Adjusted operating leverage(b) (2.0) 7.4 Revenue growth 8.1 19.2 Non-interest expense growth 10.9 (1.6) Adjusted non-interest expense growth(b) 10.2 1.8 Non-interest expense-to -revenue ratio 62.0 60.4 Adjusted non-interest expense-to -revenue ratio(b) 61.2 60.1 Provision for credit losses-to -average loans and acceptances (annualized) 0.45 0.69 Effective tax rate 23.27 21.09 Gross impaired loans and acceptances-to -equity and allowance for credit losses 11.58 15.20 Cash and securities-to -total assets ratio 35.9 35.8 Common equity ratio 10.67 9.83 Tier 1 capital ratio 13.82 13.27 Total capital ratio 17.03 15.69 Credit rating(d) DBRS AA AA Fitch AA- AA- Moody's Aa2 Aa2 Standard & Poor's A+ A+ Twelve month total shareholder return 3.2 68.7 Dividend yield 4.51 4.44 Price-to-earnings ratio (times) 12.4 14.1 Market-to-book value (times) 1.82 1.97 Return on average assets 0.77 0.72 Net interest margin on average earning assets 1.86 1.87 Non-interest revenue -to-total revenue 50.5 49.7 Equity-to-assets ratio 5.4 5.3 -------------------------------------------------- -------------------------------------------------- All ratios in this report are based on unrounded numbers. (a) Corporate Services includes Technology and Operations. (b) These are non-GAAP measures. Refer to the Non-GAAP Measures section at the end of Management's Discussion and Analysis for an explanation of the use and limitations of Non-GAAP measures and detail on the items that have been excluded from results in the determination of adjusted measures. NEP, a non-GAAP measure, is explained in the Other Value Measures section in the MD&A. Earnings and other measures adjusted to a basis other than generally accepted accounting principles (GAAP) do not have standardized meanings under GAAP and are unlikely to be comparable to similar measures used by other companies. (c) For the period ended, or as at, as appropriate. (d) For a discussion of the significance of these credit ratings, see "Credit Rating" on p.15 of Management's Discussion and Analysis. Certain comparative figures have been reclassified to conform with the current period's presentation. Interim Consolidated Financial Statements Consolidated Statement of Income (Unaudited) (Canadian $ in millions, except as noted) For the three months ended ---------------------------------------------------------------------------- April 30, January 31, October 31, July 31, April 30, 2011 2011 2010 2010 2010 ---------------------------------------------------------------------------- Interest, Dividend and Fee Income Loans $ 1,907 $ 1,932 $ 1,925 $ 1,845 $ 1,737 Securities 597 634 563 543 510 Deposits with banks 34 21 23 18 16 ---------------------------------------------------------------------------- 2,538 2,587 2,511 2,406 2,263 ---------------------------------------------------------------------------- Interest Expense Deposits 639 679 666 610 527 Subordinated debt 38 33 32 30 28 Capital trust securities 6 12 14 18 19 Other liabilities 235 236 189 177 167 ---------------------------------------------------------------------------- 918 960 901 835 741 ---------------------------------------------------------------------------- Net Interest Income 1,620 1,627 1,610 1,571 1,522 Provision for credit losses (Note 2) 145 248 253 214 249 ---------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses 1,475 1,379 1,357 1,357 1,273 ---------------------------------------------------------------------------- Non-Interest Revenue Securities commissions and fees 309 302 266 258 261 Deposit and payment service charges 188 195 199 206 197 Trading revenues (losses) 137 208 166 (1) 213 Lending fees 138 149 144 148 138 Card fees 50 45 65 67 66 Investment management and custodial fees 95 92 91 90 86 Mutual fund revenues 158 154 144 139 134 Securitization revenues 179 167 188 167 151 Underwriting and advisory fees 143 152 135 91 97 Securities gains, other than trading 48 32 40 9 54 Foreign exchange, other than trading 33 23 22 22 28 Insurance income 40 122 83 70 86 Other 79 78 76 70 16 ---------------------------------------------------------------------------- 1,597 1,719 1,619 1,336 1,527 ---------------------------------------------------------------------------- Net Interest Income and Non- Interest Revenue 3,072 3,098 2,976 2,693 2,800 ---------------------------------------------------------------------------- Non-Interest Expense Employee compensation (Note 8) 1,131 1,210 1,120 1,062 1,071 Premises and equipment 376 343 379 337 319 Amortization of intangible assets 42 50 46 52 55 Travel and business development 90 86 109 85 77 Communications 61 60 60 61 58 Business and capital taxes 14 11 10 19 12 Professional fees 130 99 118 98 79 Other 179 187 181 184 159 ---------------------------------------------------------------------------- 2,023 2,046 2,023 1,898 1,830 ---------------------------------------------------------------------------- Income Before Provision for Income Taxes and Non-Controlling Interest in Subsidiaries 1,049 1,052 953 795 970 Provision for income taxes 231 258 196 107 207 ---------------------------------------------------------------------------- 818 794 757 688 763 Non-controlling interest in subsidiaries 18 18 18 19 18 ---------------------------------------------------------------------------- Net Income $ 800 $ 776 $ 739 $ 669 $ 745 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Preferred share dividends $ 34 $ 34 $ 34 $ 33 $ 34 Net income available to common shareholders $ 766 $ 742 $ 705 $ 636 $ 711 Average common shares (in thousands) 568,829 567,301 565,088 561,839 558,320 Average diluted common shares (in thousands) 571,407 569,938 568,083 565,196 561,868 ---------------------------------------------------------------------------- Earnings Per Share (Canadian $) (Note 12) Basic $ 1.35 $ 1.31 $ 1.25 $ 1.13 $ 1.27 Diluted 1.34 1.30 1.24 1.13 1.26 Dividends Declared Per Common Share 0.70 0.70 0.70 0.70 0.70 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Unaudited) (Canadian $ in millions, except as noted) For the six months ended ----------------------------------------- April 30, April 30, 2011 2010 ----------------------------------------- Interest, Dividend and Fee Income Loans $ 3,839 $ 3,500 Securities 1,231 1,028 Deposits with banks 55 33 ----------------------------------------- 5,125 4,561 ----------------------------------------- Interest Expense Deposits 1,318 1,086 Subordinated debt 71 57 Capital trust securities 18 39 Other liabilities 471 325 ----------------------------------------- 1,878 1,507 ----------------------------------------- Net Interest Income 3,247 3,054 Provision for credit losses (Note 2) 393 582 ----------------------------------------- Net Interest Income After Provision for Credit Losses 2,854 2,472 ----------------------------------------- Non-Interest Revenue Securities commissions and fees 611 524 Deposit and payment service charges 383 397 Trading revenues (losses) 345 339 Lending fees 287 280 Card fees 95 101 Investment management and custodial fees 187 174 Mutual fund revenues 312 267 Securitization revenues 346 323 Underwriting and advisory fees 295 219 Securities gains, other than trading 80 101 Foreign exchange, other than trading 56 49 Insurance income 162 168 Other 157 78 ----------------------------------------- 3,316 3,020 ----------------------------------------- Net Interest Income and Non- Interest Revenue 6,170 5,492 ----------------------------------------- Non-Interest Expense Employee compensation (Note 8) 2,341 2,182 Premises and equipment 719 627 Amortization of intangible assets 92 105 Travel and business development 176 149 Communications 121 108 Business and capital taxes 25 23 Professional fees 229 156 Other 366 319 ----------------------------------------- 4,069 3,669 ----------------------------------------- Income Before Provision for Income Taxes and Non-Controlling Interest in Subsidiaries 2,101 1,823 Provision for income taxes 489 384 ----------------------------------------- 1,612 1,439 Non-controlling interest in subsidiaries 36 37 ----------------------------------------- Net Income $ 1,576 $ 1,402 ----------------------------------------- ----------------------------------------- Preferred share dividends $ 68 $ 69 Net income available to common shareholders $ 1,508 $ 1,333 Average common shares (in thousands) 568,052 556,120 Average diluted common shares (in thousands) 570,660 559,552 ----------------------------------------- Earnings Per Share (Canadian $) (Note 12) Basic $ 2.65 $ 2.40 Diluted 2.64 2.38 Dividends Declared Per Common Share 1.40 1.40 ----------------------------------------- ----------------------------------------- The accompanying notes are an integral part of these interim consolidated financial statements. Interim Consolidated Financial Statements Consolidated Balance Sheet (Unaudited) (Canadian $ in millions) As at ---------------------------------------------------------------------------- April 30, January 31, October 31, July 31, April 30, 2011 2011 2010 2010 2010 ---------------------------------------------------------------------------- Assets Cash and Cash Equivalents $ 24,415 $ 20,717 $ 17,368 $ 15,083 $ 13,623 ---------------------------------------------------------------------------- Interest Bearing Deposits with Banks 3,336 3,522 3,186 3,121 2,741 ---------------------------------------------------------------------------- Securities Trading 73,215 74,377 71,710 66,300 70,978 Available-for- sale 46,276 47,367 50,543 51,899 50,886 Other 1,093 1,137 1,146 1,151 1,534 ---------------------------------------------------------------------------- 120,584 122,881 123,399 119,350 123,398 ---------------------------------------------------------------------------- Securities Borrowed or Purchased Under Resale Agreements 33,040 35,887 28,102 24,317 25,053 ---------------------------------------------------------------------------- Loans Residential mortgages 49,560 50,294 48,715 47,097 46,671 Consumer instalment and other personal 52,189 51,751 51,159 49,741 47,774 Credit cards 1,936 3,221 3,308 3,304 3,318 Businesses and governments 66,127 66,334 68,338 68,407 66,894 ---------------------------------------------------------------------------- 169,812 171,600 171,520 168,549 164,657 Customers' liability under acceptances 6,620 7,194 7,001 6,885 6,981 Allowance for credit losses (Note 2) (1,736) (1,880) (1,878) (1,879) (1,885) ---------------------------------------------------------------------------- 174,696 176,914 176,643 173,555 169,753 ---------------------------------------------------------------------------- Other Assets Derivative instruments 44,268 39,354 49,759 47,947 41,469 Premises and equipment 1,519 1,537 1,560 1,565 1,552 Goodwill 1,584 1,598 1,619 1,627 1,609 Intangible assets 848 822 812 748 749 Other 8,938 10,012 9,192 10,073 10,219 ---------------------------------------------------------------------------- 57,157 53,323 62,942 61,960 55,598 ---------------------------------------------------------------------------- Total Assets $ 413,228 $ 413,244 $ 411,640 $ 397,386 $ 390,166 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Liabilities and Shareholders' Equity Deposits (Note 10) Banks $ 18,957 $ 19,882 $ 19,435 $ 19,262 $ 24,399 Businesses and governments 135,233 133,084 130,773 123,882 115,251 Individuals 99,197 98,634 99,043 99,647 99,610 ---------------------------------------------------------------------------- 253,387 251,600 249,251 242,791 239,260 ---------------------------------------------------------------------------- Other Liabilities Derivative instruments 41,145 37,393 47,970 45,110 39,523 Acceptances 6,620 7,194 7,001 6,885 6,981 Securities sold but not yet purchased 23,631 22,152 16,438 18,424 16,475 Securities lent or sold under repurchase agreements 43,912 52,143 47,110 42,237 46,323 Other 16,570 16,656 17,414 16,175 16,257 ---------------------------------------------------------------------------- 131,878 135,538 135,933 128,831 125,559 ---------------------------------------------------------------------------- Subordinated Debt (Note 9) 5,208 3,713 3,776 3,747 3,682 ---------------------------------------------------------------------------- Capital Trust Securities (Note 10) 400 400 800 800 1,150 ---------------------------------------------------------------------------- Shareholders' Equity Share capital (Note 11) 9,951 9,572 9,498 9,311 9,161 Contributed surplus 102 102 92 90 88 Retained earnings 13,556 13,192 12,848 12,539 12,299 Accumulated other comprehensive loss (1,254) (873) (558) (723) (1,033) ---------------------------------------------------------------------------- 22,355 21,993 21,880 21,217 20,515 ---------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 413,228 $ 413,244 $ 411,640 $ 397,386 $ 390,166 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these interim consolidated financial statements. Interim Consolidated Financial Statements Consolidated Statement of Comprehensive Income (Unaudited) (Canadian $ For the three months For the six months in millions) ended ended ---------------------------------------------------------------------------- April 30, April 30, April 30, April 30, 2011 2010 2011 2010 ---------------------------------------------------------------------------- Net income $ 800 $ 745 $ 1,576 $ 1,402 Other Comprehensive Income Net change in unrealized losses on available-for- sale securities (21) (80) (115) (103) Net change in unrealized gains (losses) on cash flow hedges 6 (356) (150) (271) Net loss on translation of net foreign operations (366) (213) (431) (260) ---------------------------------------------------------------------------- Total Comprehensive Income $ 419 $ 96 $ 880 $ 768 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Consolidated Statement of Changes in Shareholders' Equity (Unaudited) (Canadian $ For the three months For the six months in millions) ended ended ---------------------------------------------------------------------------- April 30, April 30, April 30, April 30, 2011 2010 2011 2010 ---------------------------------------------------------------------------- Preferred Shares Balance at beginning of period $ 2,571 $ 2,571 $ 2,571 $ 2,571 Issued during the period (Note 11) 290 - 290 - ---------------------------------------------------------------------------- Balance at End of Period 2,861 2,571 2,861 2,571 ---------------------------------------------------------------------------- Common Shares Balance at beginning of period 7,001 6,368 6,927 6,198 Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan 42 131 92 257 Issued under the Stock Option Plan 47 91 71 135 ---------------------------------------------------------------------------- Balance at End of Period 7,090 6,590 7,090 6,590 ---------------------------------------------------------------------------- Contributed Surplus Balance at beginning of period 102 89 92 79 Stock option expense/exercised - (1) 10 9 ---------------------------------------------------------------------------- Balance at End of Period 102 88 102 88 ---------------------------------------------------------------------------- Retained Earnings Balance at beginning of period 13,192 11,981 12,848 11,748 Net income 800 745 1,576 1,402 Dividends - Preferred shares (34) (34) (68) (69) - Common shares (398) (393) (796) (782) Share issue expense (4) - (4) - ---------------------------------------------------------------------------- Balance at End of Period 13,556 12,299 13,556 12,299 ---------------------------------------------------------------------------- Accumulated Other Comprehensive Income on Available-for-Sale Securities Balance at beginning of period 421 457 515 480 Unrealized losses on available-for-sale securities arising during the period (net of income tax recovery of $11, $17, $50 and $26) (12) (27) (98) (48) Reclassification to earnings of gains in the period (net of income tax recovery of $5, $21, $9 and $22) (9) (53) (17) (55) ---------------------------------------------------------------------------- Balance at End of Period 400 377 400 377 ---------------------------------------------------------------------------- Accumulated Other Comprehensive Loss on Cash Flow Hedges Balance at beginning of period (94) 99 62 14 Gains (losses) on cash flow hedges arising during the period (net of income tax (provision) recovery of $(15), $135, $53 and $109) 30 (309) (153) (232) Reclassification to earnings of (gains) losses on cash flow hedges (net of income tax recovery of $10, $24, less than $1 and $18) (24) (47) 3 (39) ---------------------------------------------------------------------------- Balance at End of Period (88) (257) (88) (257) ---------------------------------------------------------------------------- Accumulated Other Comprehensive Loss on Translation of Net Foreign Operations Balance at beginning of period (1,200) (940) (1,135) (893) Unrealized loss on translation of net foreign operations (665) (644) (894) (785) Impact of hedging unrealized loss on translation of net foreign operations (net of income tax provision of $(116), $(181), $(180) and $(220)) 299 431 463 525 ---------------------------------------------------------------------------- Balance at End of Period (1,566) (1,153) (1,566) (1,153) ---------------------------------------------------------------------------- Total Accumulated Other Comprehensive Loss (1,254) (1,033) (1,254) (1,033) ---------------------------------------------------------------------------- Total Shareholders' Equity $ 22,355 $ 20,515 $ 22,355 $ 20,515 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these interim consolidated financial statements. Interim Consolidated Financial Statements Consolidated Statement of Cash Flows (Unaudited) (Canadian $ For the three months For the six months in millions) ended ended ---------------------------------------------------------------------------- April 30, April 30, April 30, April 30, 2011 2010 2011 2010 ---------------------------------------------------------------------------- Cash Flows from Operating Activities Net income $ 800 $ 745 $ 1,576 $ 1,402 Adjustments to determine net cash flows provided by (used in) operating activities Impairment write-down of securities, other than trading - 10 1 28 Net (gain) on securities, other than trading (48) (64) (81) (129) Net (increase) decrease in trading securities 51 (7,066) (3,169) (13,066) Provision for credit losses 145 249 393 582 (Gain) on sale of securitized loans (Note 3) (140) (125) (266) (247) Change in derivative instruments - (increase) decrease in derivative asset (4,584) 3,835 5,281 5,472 - increase (decrease) in derivative liability 4,007 (2,124) (5,779) (3,533) Amortization of premises and equipment 75 64 143 129 Amortization of intangible assets 42 55 92 105 Net (increase) decrease in future income tax asset (47) 73 (104) 94 Net (increase) decrease in current income tax asset (54) (403) 101 (1,063) Change in accrued interest - (increase) in interest receivable (167) (152) (8) (51) - increase (decrease) in interest payable 107 59 (48) (209) Changes in other items and accruals, net 198 (1,364) (1,966) (1,092) (Gain) on sale of land and buildings - - (1) (4) ---------------------------------------------------------------------------- Net Cash provided by (Used in) Operating Activities 385 (6,208) (3,835) (11,582) ---------------------------------------------------------------------------- Cash Flows from Financing Activities Net increase in deposits 7,056 1,741 9,814 7,313 Net increase in securities sold but not yet purchased 1,780 805 7,609 4,731 Net increase (decrease) in securities lent or sold under repurchase agreements (6,924) (2,896) (1,519) 1,331 Proceeds from issuance of covered bond deposit (Note 10) - - 1,500 - Repayment of subordinated debt (Note 9) - - - (500) Proceeds from issuance of subordinated debt (Note 9) 1,500 - 1,500 - Proceeds from issuance of preferred shares (Note 11) 290 - 290 - Proceeds from issuance of common shares 47 94 74 138 Redemption of Capital Trust Securities (Note 10) - - (400) - Share issue expense (4) - (4) - Cash dividends paid (390) (299) (775) (597) ---------------------------------------------------------------------------- Net Cash Provided by (Used In) Financing Activities 3,355 (555) 18,089 12,416 ---------------------------------------------------------------------------- Cash Flows from Investing Activities Net (increase) decrease in interest bearing deposits with banks (162) 944 (538) 683 Purchases of securities, other than trading (4,807) (7,363) (9,144) (15,408) Maturities of securities, other than trading 3,283 2,280 8,732 4,602 Proceeds from sales of securities, other than trading 3,082 7,336 4,960 10,133 Net (increase) in loans (4,614) (4,567) (6,670) (7,084) Proceeds from securitization of loans (Note 3) 2,633 1,510 3,336 1,843 Net (increase) decrease in securities borrowed or purchased under resale agreements 1,765 8,590 (6,307) 9,744 Proceeds from sales of land and buildings - - 1 5 Premises and equipment - net purchases (78) (16) (110) (70) Purchased and developed software - net purchases (51) (77) (118) (120) Acquisitions (Note 7) (86) (24) (106) (922) ---------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 965 8,613 (5,964) 3,406 ---------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (1,007) (568) (1,243) (572) ---------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 3,698 1,282 7,047 3,668 Cash and Cash Equivalents at Beginning of Period 20,717 12,341 17,368 9,955 ---------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 24,415 $ 13,623 $ 24,415 $ 13,623 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Represented by: Cash and non-interest bearing deposits with Bank of Canada and other banks $ 23,550 $ 12,334 $ 23,550 $ 12,334 Cheques and other items in transit, net 865 1,289 865 1,289 ---------------------------------------------------------------------------- $ 24,415 $ 13,623 $ 24,415 $ 13,623 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Amount of interest paid in the period $ 815 $ 687 $ 1,933 $ 1,726 Amount of income taxes paid in the period $ 298 $ 258 $ 275 $ 1,068 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these interim consolidated financial statements. Certain comparative figures have been reclassified to conform with the current period's presentation. Notes to Consolidated Financial Statements April 30, 2011 (Unaudited) ----------------------------------------------------------------------------
Note 1: Basis of Presentation
These interim consolidated financial statements should be read in conjunction with the notes to our annual consolidated financial statements for the year ended October 31, 2010 as set out on pages 114 to 168 of our 2010 Annual Report. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") using the same accounting policies and methods of computation as were used for our annual consolidated financial statements for the year ended October 31, 2010 and include all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for the periods presented.
Note 2: Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level that we consider adequate to absorb credit-related losses on our loans, customers' liability under acceptances and other credit instruments. The portion related to other credit instruments is recorded in other liabilities in our Consolidated Balance Sheet. As at April 30, 2011, there was a $23 million ($nil as at April 30, 2010) allowance for credit losses related to other credit instruments included in other liabilities.
A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions)
-----------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the three April 30, April 30, April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010 2011 2010
----------------------------------------------------------------------------
Specific
Allowance at
beginning of
period 65 37 56 56 477 510
Provision for
credit losses 20 26 109 143 68 80
Recoveries - 3 30 28 20 10
Write-offs (19) (27) (137) (173) (126) (90)
Foreign exchange
and other 2 - 1 - (12) (19)
----------------------------------------------------------------------------
Specific
Allowance at end
of period 68 39 59 54 427 491
----------------------------------------------------------------------------
General Allowance
at beginning of
period 28 23 379 334 832 928
Provision for
credit losses 2 (3) (25) (20) (11) 23
Foreign exchange
and other - - - - (38) (39)
----------------------------------------------------------------------------
General Allowance
at end of period 30 20 354 314 783 912
----------------------------------------------------------------------------
Total Allowance 98 59 413 368 1,210 1,403
----------------------------------------------------------------------------
Comprised of:
Loans 98 59 413 368 1,187 1,403
Other credit
instruments - - - - 23 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
--------------------------------------------------------
Customers'
liability
under acceptances Total
--------------------------------------------------------
For the three April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010
--------------------------------------------------------
Specific
Allowance at
beginning of
period 10 10 608 613
Provision for
credit losses (10) - 187 249
Recoveries - - 50 41
Write-offs - - (282) (290)
Foreign exchange
and other - - (9) (19)
--------------------------------------------------------
Specific Allowance
at end of period - 10 554 594
--------------------------------------------------------
General Allowance
at beginning of
period 46 45 1,285 1,330
Provision for
credit losses (8) - (42) -
Foreign exchange
and other - - (38) (39)
--------------------------------------------------------
General Allowance
at end of period 38 45 1,205 1,291
--------------------------------------------------------
Total Allowance 38 55 1,759 1,885
--------------------------------------------------------
Comprised of:
Loans 38 55 1,736 1,885
Other credit
instruments - - 23 -
--------------------------------------------------------
--------------------------------------------------------
----------------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the six April 30, April 30, April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010 2011 2010
----------------------------------------------------------------------------
Specific
Allowance at
beginning of
period 52 33 47 51 481 507
Provision for
credit losses 51 50 234 289 160 238
Recoveries 3 5 59 58 46 23
Write-offs (42) (49) (284) (344) (245) (251)
Foreign exchange
and other 4 - 3 - (15) (26)
----------------------------------------------------------------------------
Specific
Allowance at end
of period 68 39 59 54 427 491
----------------------------------------------------------------------------
General Allowance
at beginning of
period 22 18 340 266 891 968
Provision for
credit losses 8 2 14 24 (58) (17)
Foreign exchange
and other - - - 24 (50) (39)
----------------------------------------------------------------------------
General Allowance
at end of period 30 20 354 314 783 912
----------------------------------------------------------------------------
Total Allowance 98 59 413 368 1,210 1,403
----------------------------------------------------------------------------
Comprised of:
Loans 98 59 413 368 1,187 1,403
Other credit
instruments - - - - 23 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------------
Customers'
liability
under acceptances Total
---------------------------------------------------------
For the six April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010
---------------------------------------------------------
Specific
Allowance at
beginning of
period 10 5 590 596
Provision for
credit losses (10) 5 435 582
Recoveries - - 108 86
Write-offs - - (571) (644)
Foreign exchange
and other - - (8) (26)
---------------------------------------------------------
Specific
Allowance at end
of period - 10 554 594
---------------------------------------------------------
General Allowance
at beginning of
period 44 54 1,297 1,306
Provision for
credit losses (6) (9) (42) -
Foreign exchange
and other - - (50) (15)
---------------------------------------------------------
General Allowance
at end of period 38 45 1,205 1,291
---------------------------------------------------------
Total Allowance 38 55 1,759 1,885
---------------------------------------------------------
Comprised of:
Loans 38 55 1,736 1,885
Other credit
instruments - - 23 -
---------------------------------------------------------
---------------------------------------------------------
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Loans acquired as part of our acquisition of AMCORE Bank are subject to a loss share agreement with the Federal Deposit Insurance Corporation ("FDIC"). Under this agreement, the FDIC reimburses us for 80% of the net losses we incur on these loans.
Note 3: Securitization
The following tables summarize our securitization activity related to our assets and its impact on our Consolidated Statement of Income for the three and six months ended April 30, 2011 and 2010:
(Canadian $ in millions)
---------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
---------------------------------------------------------------------------
For the three April 30, April 30, April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Net cash
proceeds(1) 1,423 1,492 1,200 - 2,623 1,492
Investment in
securitization
vehicle(2) - - 81 - 81 -
Deferred
purchase price 39 66 36 - 75 66
Servicing
liability (8) (11) (5) - (13) (11)
---------------------------------------------------------------------------
1,454 1,547 1,312 - 2,766 1,547
Loans sold 1,444 1,520 1,284 - 2,728 1,520
---------------------------------------------------------------------------
Gain on sale of
loans from new
securitizations 10 27 28 - 38 27
---------------------------------------------------------------------------
Gain on sale of
loans sold to
revolving
securitization
vehicles 10 12 92 86 102 98
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Residential
mortgages Credit card loans Total
---------------------------------------------------------------------------
For the six April 30, April 30, April 30, April 30, April 30, April 30,
months ended 2011 2010 2011 2010 2011 2010
---------------------------------------------------------------------------
Net cash
proceeds(1) 2,122 1,823 1,200 - 3,322 1,823
Investment in
securitization
vehicle(2) - - 81 - 81 -
Deferred
purchase price 68 84 36 - 104 84
Servicing
liability (12) (14) (5) - (17) (14)
---------------------------------------------------------------------------
2,178 1,893 1,312 - 3,490 1,893
Loans sold 2,153 1,857 1,284 - 3,437 1,857
---------------------------------------------------------------------------
Gain on sale of
loans from new
securitizations 25 36 28 - 53 36
---------------------------------------------------------------------------
Gain on sale of
loans sold to
revolving
securitization
vehicles 22 30 191 181 213 211
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Net cash proceeds represent cash proceeds less issuance costs.
(2) Includes credit card securities retained on-balance sheet by the bank.
The key weighted-average assumptions used to value the deferred purchase
price for securitizations were as follows:
---------------------------------------------------------------------------
Residential mortgages Credit card loans
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
For the three months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted-average life
(years) 3.96 4.65 1.00 1.00
Prepayment rate (%) 25.46 16.00 35.36 34.05
Interest rate (%) 3.62 4.12 21.47 21.17
Expected credit losses (%)(1) - - 4.69 4.58
Discount rate (%) 2.15 2.73 9.40 9.09
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Residential mortgages Credit card loans
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
For the six months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted-average life
(years) 3.89 4.71 1.00 1.00
Prepayment rate (%) 22.46 16.00 36.53 35.33
Interest rate (%) 3.80 4.14 21.59 21.33
Expected credit losses (%)(1) - - 4.69 4.58
Discount rate (%) 2.24 2.77 9.31 9.16
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) As the residential mortgages are fully insured, there are no expected
credit losses.
Note 4: Variable Interest Entities
Total assets in our Variable Interest Entities ("VIEs") and our maximum exposure to losses are summarized in the following table. For additional information on our VIEs, refer to Note 9 on pages 128 to 130 of our 2010 Annual Report.
(Canadian $ in millions) April 30, 2011
----------------------------------------------------------------------------
Total
Exposure to loss assets
-------------------------------------------------------------
Drawn
facilities Secur- Deriv-
Undrawn and loans ities ative
facilities(1) provided(2) held assets Total
----------------------------------------------------------------------------
Unconsolidated
VIEs in which
we have a
significant
variable
interest
Canadian
customer
securitization
vehicles(3) 2,272 - 89 6 2,367 2,070
U.S. customer
securitization
vehicle 4,077 139 - 5 4,221 3,610
Bank
securitization
vehicles(3) 5,100 - 705 41 5,846 9,469
Credit
protection
vehicle -
Apex(4)(5) 1,030 - 1,280 355 2,665 2,213
Structured
investment
vehicles(6) 89 3,457 - 28 3,574 3,680
Structured
finance
vehicles na na 7,168 - 7,168 9,734
Capital and
funding
trusts 43 12 2 - 57 1,279
----------------------------------------------------------------------------
Total 12,611 3,608 9,244 435 25,898 32,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
VIEs
Canadian
customer
securitization
vehicles(3)(7) 67 - 65 - 132 65
Capital and
funding
trusts 4,169 6,831 580 45 11,625 8,901
Structured
finance
vehicles - - 26 - 26 26
----------------------------------------------------------------------------
Total 4,236 6,831 671 45 11,783 8,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) October 31, 2010
----------------------------------------------------------------------------
Total
Exposure to loss assets
------------------------------------------------------
Drawn
facilities Secur- Deriv-
Undrawn and loans ities ative
facilities(1) provided(2) held assets Total
----------------------------------------------------------------------------
Unconsolidated
VIEs in which
we have a
significant
variable
interest
Canadian
customer
securitization
vehicles(3) 2,958 - 113 14 3,085 2,976
U.S. customer
securitization
vehicle 3,905 251 - 2 4,158 4,074
Bank
securitization
vehicles(3) 5,100 - 637 100 5,837 9,469
Credit
protection
vehicle -
Apex(4)(5) 1,030 - 1,128 669 2,827 2,208
Structured
investment
vehicles(6) 171 5,097 - 30 5,298 5,225
Structured
finance
vehicles na na 4,745 - 4,745 5,330
Capital and
funding
trusts 43 12 2 - 57 1,277
----------------------------------------------------------------------------
Total 13,207 5,360 6,625 815 26,007 30,559
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated
VIEs
Canadian
customer
securitization
vehicles(3)(7) 200 - 196 - 396 196
Capital and
funding
trusts 4,081 6,919 740 76 11,816 9,673
Structured
finance
vehicles - - 27 - 27 27
----------------------------------------------------------------------------
Total 4,281 6,919 963 76 12,239 9,896
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) These facilities include senior funding facilities provided to our
credit protection vehicle and structured investment vehicles as well as
backstop liquidity facilities provided to our bank securitization
vehicles, our Canadian customer securitization vehicles and our U.S.
customer securitization vehicle. None of the backstop liquidity
facilities provided to our Canadian customer securitization vehicles
related to credit support as at April 30, 2011 and October 31, 2010.
Backstop liquidity facilities provided to our U.S. customer
securitization vehicle include credit support and are discussed in Note
6.
(2) Amounts outstanding from backstop liquidity facilities and senior
funding facilities are classified as Loans - Businesses and governments.
(3) Securities held in our bank securitization vehicles are comprised of $63
million of asset-backed commercial paper classified as trading
securities ($105 million in 2010), $290 million of deferred purchase
price ($261 million in 2010) and $352 million of asset-backed securities
($271 million in 2010) classified as available-for-sale securities.
Securities held in our Canadian customer securitization vehicles are
comprised of asset-backed commercial paper and are classified as trading
securities. Assets held by all these vehicles relate to assets in
Canada.
(4) Derivatives held with this vehicle are classified as trading
instruments. Changes in the fair value of these derivatives are offset
by derivatives held with third-party counterparties that are also
classified as trading instruments.
(5) Securities held are classified as trading securities and have a face
value of $1,415 million. Our exposure to these securities has been
hedged through derivatives.
(6) Securities held are comprised of capital notes, classified as available-
for-sale securities. We have written these notes down to $nil as at
April 30, 2011 and October 31, 2010.
(7) Total assets held as at April 30, 2011 are comprised of a loan of $36
million ($135 million as at October 31, 2010) and $29 million of other
assets ($61 million as at October 31, 2010).
na - not applicable
Note 5: Financial Instruments
Change in Accounting Policy
On August 1, 2008, we elected to transfer from trading to available-for-sale those securities for which we had a change in intent to hold the securities for the foreseeable future rather than to exit or trade them in the short term due to market circumstances at that time.
A continuity of the transferred securities is as follows:
(Canadian $ in millions) ---------------------------------------------------------------------------- For the three April 30, January 31, October 31, July 31, April 30, months ended 2011 2011 2010 2010 2010 ---------------------------------------------------------------------------- Fair value of securities at beginning of period 387 435 606 791 1,038 Net sales/ maturities (82) (41) (175) (183) (227) Fair value change recorded in other comprehensive income 3 (3) (2) (5) 24 Other than temporary impairment recorded in income - - - - (8) Impact of foreign exchange (1) (4) 6 3 (36) ---------------------------------------------------------------------------- Fair value of securities at end of period 307 387 435 606 791 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ------------------------------------------ For the six April 30, April 30, months ended 2011 2010 ------------------------------------------ Fair value of securities at beginning of period 435 1,378 Net sales/ maturities (123) (570) Fair value change recorded in Other Comprehensive Income - 62 Other than temporary impairment recorded in income - (17) Impact of foreign exchange (5) (62) ------------------------------------------ Fair value of securities at end of period 307 791 ------------------------------------------ ------------------------------------------
Book Value and Fair Value of Financial Instruments
Set out in the following table are the amounts that would be reported if all of our financial instrument assets and liabilities were reported at their fair values. Refer to the notes to our annual consolidated financial statements on pages 117, 132 and 160 to 161 in our 2010 Annual Report for further discussion on the determination of fair value.
(Canadian $ in millions) April 30, 2011 October 31, 2010
----------------------------------------------------------------------------
Fair Fair
value value
over over
(under) (under)
Book Fair book Book Fair book
value value value value value value
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents 24,415 24,415 - 17,368 17,368 -
Interest bearing
deposits with
banks 3,336 3,336 - 3,186 3,186 -
Securities 120,584 120,671 87 123,399 123,433 34
Securities
borrowed or
purchased under
resale
agreements 33,040 33,040 - 28,102 28,102 -
Loans
Residential
mortgages 49,560 50,045 485 48,715 49,531 816
Consumer
instalment and
other personal 52,189 52,319 130 51,159 51,223 64
Credit cards 1,936 1,936 - 3,308 3,308 -
Business and
governments 66,127 65,858 (269) 68,338 68,084 (254)
----------------------------------------------------------------------------
169,812 170,158 346 171,520 172,146 626
Customers'
liability under
acceptances 6,620 6,618 (2) 7,001 6,998 (3)
Allowance for
credit losses (1,736) (1,736) - (1,878) (1,878) -
----------------------------------------------------------------------------
Total loans and
customers'
liability under
acceptances,
net of allowance
for credit
losses 174,696 175,040 344 176,643 177,266 623
Derivative
instruments 44,268 44,268 - 49,759 49,759 -
Premises and
equipment 1,519 1,519 - 1,560 1,560 -
Goodwill 1,584 1,584 - 1,619 1,619 -
Intangible assets 848 848 - 812 812 -
Other assets 8,938 8,938 - 9,192 9,192 -
----------------------------------------------------------------------------
413,228 413,659 431 411,640 412,297 657
----------------------------------------------------------------------------
Liabilities
Deposits 253,387 253,519 132 249,251 249,544 293
Derivative
instruments 41,145 41,145 - 47,970 47,970 -
Acceptances 6,620 6,620 - 7,001 7,001 -
Securities sold
but not yet
purchased 23,631 23,631 - 16,438 16,438 -
Securities lent
or sold under
repurchase
agreements 43,912 43,912 - 47,110 47,110 -
Other liabilities 16,570 16,640 70 17,414 17,504 90
Subordinated debt 5,208 5,382 174 3,776 3,947 171
Capital trust
securities 400 411 11 800 823 23
Shareholders'
equity 22,355 22,355 - 21,880 21,880 -
----------------------------------------------------------------------------
413,228 413,615 387 411,640 412,217 577
----------------------------------------------------------------------------
Total fair value
adjustment 44 80
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Certain comparative figures have been reclassified to conform with the
current period's presentation.
Financial Instruments Designated as Held for Trading
A portion of our structured note liabilities has been designated as trading under the fair value option and are accounted for at fair value, which better aligns the accounting result with the way the portfolio is managed. The change in fair value of these structured notes was a decrease of $1 million and an increase of $46 million in non-interest revenue, trading revenues, respectively, for the three and six months ended April 30, 2011 (increase of $30 million and $4 million, respectively, for the three and six months ended April 31, 2010). This includes a decrease of $11 million and $7 million, respectively, for the three and six months ended April 30, 2011 attributable to changes in our credit spread (increase of $17 million and $11 million, respectively, for the three and six months ended April 30, 2010). We recognized offsetting amounts on derivatives and other financial instrument contracts that are held to hedge changes in the fair value of these structured notes.
The change in fair value related to changes in our credit spread that has been recognized since they were designated as held for trading to April 30, 2011 was an unrealized loss of $36 million. Starting in 2009, we hedged the exposure to changes in our credit spreads.
The fair value and amount due at contractual maturity of these structured notes accounted for as held for trading as at April 30, 2011 were $4,161 million and $4,297 million, respectively ($3,976 million and $4,084 million, respectively, as at October 31, 2010).
We designate certain insurance investments as trading under the fair value option since the actuarial calculation of insurance liabilities is based on the fair value of the investments supporting them. Electing the fair value option for these investments better aligns the accounting result with the way the portfolio is managed. The fair value of these securities as at April 30, 2011 was $4,471 million ($4,153 million as at October 31, 2010). The impact of recording these as trading securities was an increase of $37 million and a decrease $25 million in non-interest revenue, insurance income, respectively, for the three and six months ended April 30, 2011 (increase of $36 million and $128 million, respectively, for the three and six months ended April 30, 2010). Changes in the insurance liability balances are also recorded in non-interest revenue, insurance income.
Fair Value Measurement
We use a fair value hierarchy to categorize the inputs we use in valuation techniques to measure fair value. The extent of our use of quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and internal models without observable market information as inputs (Level 3) in the valuation of securities, fair value liabilities, derivative assets and derivative liabilities was as follows:
(Canadian $ in millions) April 30, 2011
----------------------------------------------------------------------------
Valued Valued
using models using models
Valued using (with (without
quoted market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal
government 19,671 - -
Canadian provincial and
municipal governments 4,939 155 -
U.S. federal government 3,698 - -
U.S. states,
municipalities and
agencies 162 56 -
Other governments 1,864 - -
Mortgage-backed securities
and collateralized
mortgage obligations 779 198 -
Corporate debt 7,526 3,523 1,199
Corporate equity 28,400 1,045 -
----------------------------------------------------------------------------
67,039 4,977 1,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed by:
Canadian federal
government 13,636 - -
Canadian provincial and
municipal governments 1,407 265 -
U.S. federal government 4,684 - -
U.S. states,
municipalities and
agencies 516 3,185 12
Other governments 7,386 738 -
Mortgage-backed securities
and collateralized
mortgage obligations 549 8,061 -
Corporate debt 3,409 235 1,547
Corporate equity 122 182 342
---------------------------------------------------------------------------
31,709 12,666 1,901
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet
purchased 23,631 - -
Structured note liabilities - 4,161 -
---------------------------------------------------------------------------
23,631 4,161 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 17 22,385 136
Foreign exchange contracts 53 15,810 -
Commodity contracts 2,112 559 -
Equity contracts 1,815 586 3
Credit default swaps - 645 147
---------------------------------------------------------------------------
3,997 39,985 286
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 18 21,544 42
Foreign exchange contracts 17 14,718 -
Commodity contracts 1,562 226 -
Equity contracts 131 2,269 74
Credit default swaps - 542 2
---------------------------------------------------------------------------
1,728 39,299 118
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions) October 31, 2010
---------------------------------------------------------------------------
Valued Valued
using models using models
Valued using (with (without
quoted market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal
government 15,932 72 -
Canadian provincial and
municipal governments 3,910 5 -
U.S. federal government 8,060 - -
U.S. states,
municipalities and
agencies 849 205 -
Other governments 1,365 - -
Mortgage-backed securities
and collateralized
mortgage obligations 859 - 211
Corporate debt 7,419 3,595 1,358
Corporate equity 27,267 603 -
---------------------------------------------------------------------------
65,661 4,480 1,569
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed by:
Canadian federal
government 14,701 - -
Canadian provincial and
municipal governments 1,442 253 -
U.S. federal government 5,658 - -
U.S. states,
municipalities and
agencies - 4,237 20
Other governments 9,455 587 -
Mortgage-backed securities
and collateralized
mortgage obligations 688 8,204 20
Corporate debt 2,959 133 1,500
Corporate equity 139 178 369
---------------------------------------------------------------------------
35,042 13,592 1,909
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet
purchased 16,438 - -
Structured note liabilities - 3,976 -
---------------------------------------------------------------------------
16,438 3,976 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 24 33,862 217
Foreign exchange contracts 45 10,089 -
Commodity contracts 2,207 382 -
Equity contracts 1,028 617 8
Credit default swaps - 1,120 160
---------------------------------------------------------------------------
3,304 46,070 385
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 38 32,593 48
Foreign exchange contracts 20 9,517 -
Commodity contracts 2,087 501 -
Equity contracts 53 2,109 71
Credit default swaps - 930 3
---------------------------------------------------------------------------
2,198 45,650 122
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Valuation Techniques and Significant Inputs
We determine the fair value of publicly traded fixed maturity and equity securities using quoted market prices in active markets (Level 1) when these are available. When quoted prices in active markets are not available, we determine the fair value of financial instruments using models such as discounted cash flows with observable market data for inputs such as yield and prepayment rates or broker quotes and other third-party vendor quotes (Level 2). Fair value may also be determined using models where the significant market inputs are unobservable due to inactive or minimal market activity (Level 3). We maximize the use of market inputs to the extent possible.
Our Level 2 trading securities are primarily valued using discounted cash flow models with observable spreads or based on broker quotes. The fair value of Level 2 available-for-sale securities is determined using discounted cash flow models with observable spreads or third-party vendor quotes. Level 2 structured note liabilities are valued using models with observable market information. Level 2 derivative assets and liabilities are valued using industry standard models and observable market information.
Sensitivity analysis at April 30, 2011 for the most significant Level 3 instruments is provided below.
Within Level 3 trading securities is corporate debt of $1,176 million that relates to securities that are hedged with total return swaps and credit default swaps that are also considered a Level 3 instrument. The sensitivity analysis for the structured product is performed on an aggregate basis and is described as part of the discussion on derivatives below.
Within Level 3 available-for-sale corporate debt securities is the deferred purchase price of $630 million related to our off-balance sheet securitization activities. We have determined the valuation of the deferred purchase price (excess spread) based on expected future cash flows. The significant inputs for the valuation model include interest rate, weighted-average prepayment rate, weighted-average maturity, expected credit losses and weighted-average discount rate. The determination of interest rates has the most significant impact on the valuation of the deferred purchase price. The impact of assuming a 10 percent increase or decrease in the interest rate would result in a change in fair value of $83 million and $(83) million, respectively.
Within derivative assets and derivative liabilities as at April 30, 2011 was $282 million and $44 million, respectively, related to the mark-to-market of credit default swaps and total return swaps on structured products. We have determined the valuation of these derivatives and the related securities based on estimates of current market spreads for similar structured products. The impact of assuming a 10 basis point increase or decrease in that spread would result in a change in fair value of $(3) million and $3 million, respectively.
Significant Transfers
Transfers are made between the various fair value hierarchy levels due to changes in the availability of quoted market prices or observable market inputs due to changing market conditions. The following is a discussion of the significant transfers between Level 1, Level 2 and Level 3 balances for the three and six months ended April 30, 2011.
During the quarter ended April 30, 2011, $45 million of corporate debt securities within trading securities were transferred from Level 3 to Level 2 as values for these securities are now obtained through a third-party vendor and are based on market prices.
During the six months ended April 30, 2011, $207 million and $20 million of mortgage-backed securities and collateralized mortgage obligations were transferred from Level 3 to Level 2 within trading securities and available-for-sale securities, respectively, as values for these securities are now obtained through a third-party vendor and are based on a larger volume of market prices.
During the six months ended April 30, 2011, derivative assets of $6 million and derivative liabilities of $9 million were transferred from Level 3 to Level 2 as market information became available for certain over-the-counter equity contracts.
During the year ended October 31, 2010, a portion of the asset-backed commercial paper issued by the conduits known as the Montreal Accord were transferred from Level 3 to Level 2 within corporate debt trading securities because we are now valuing the notes based on broker quotes rather than internal models due to increased broker/dealer trading of these securities, resulting in improved liquidity. In addition, certain available-for-sale corporate debt securities that were previously valued using observable market information were transferred from Level 2 to Level 1 as values for these securities became available in active markets.
Changes in Level 3 Fair Value Measurements
The tables on the following page present a reconciliation of all changes in Level 3 financial instruments during the three and six months ended April 30, 2011, including realized and unrealized gains (losses) included in earnings and other comprehensive income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
------------------------
Included in
For the three Balance, Included other
months ended January 31, in comprehensive
April 30, 2011 2011 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading Securities
Corporate debt 1,302 (56) - - -
----------------------------------------------------------------------------
Total trading
securities 1,302 (56) - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed
by:
U.S. states,
municipalities and
agencies 18 - (1) - (5)
Corporate debt 1,429 55 24 88 (19)
Corporate equity 360 (1) (19) 3 (1)
----------------------------------------------------------------------------
Total available-for-
sale securities 1,807 54 4 91 (25)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 182 (8) - - -
Equity contracts 3 - - - -
Credit default swaps 141 3 - 3 -
----------------------------------------------------------------------------
Total derivative
assets 326 (5) - 3 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate
contracts 39 - - 3 -
Equity contracts 68 8 - - -
Credit default swaps 3 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 110 8 - 3 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
---------------------------------------------------------------------
Fair Value Unrealized
For the three Transfers as at Gains
months ended Maturities out of April 30, (losses)
April 30, 2011 (1) Level 3 2011 (2)
---------------------------------------------------------------------
Trading Securities
Corporate debt (2) (45) 1,199 (64)
---------------------------------------------------------------------
Total trading
securities (2) (45) 1,199 (64)
---------------------------------------------------------------------
---------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed
by:
U.S. states,
municipalities and
agencies - - 12 (1)
Corporate debt (30) - 1,547 24
Corporate equity - - 342 (19)
---------------------------------------------------------------------
Total available-for-
sale securities (30) - 1,901 4
---------------------------------------------------------------------
---------------------------------------------------------------------
Derivative Assets
Interest rate
contracts (38) - 136 136
Equity contracts - - 3 3
Credit default swaps - - 147 147
---------------------------------------------------------------------
Total derivative
assets (38) - 286 286
---------------------------------------------------------------------
---------------------------------------------------------------------
Derivative Liabilities
Interest rate
contracts - - 42 42
Equity contracts (2) - 74 74
Credit default swaps (1) - 2 2
---------------------------------------------------------------------
Total derivative
liabilities (3) - 118 118
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Includes cash settlement of derivative assets and derivative
liabilities.
(2) Unrealized gains or losses on trading securities, derivative assets and
derivative liabilities still held on April 30, 2011 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on April 30, 2011
are included in Accumulated Other Comprehensive Income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
-------------------------
Included in
For the six months Balance, Included other
ended April 30, October 31, in comprehensive
2011 2010 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 211 (4) - - -
Corporate debt 1,358 (59) - 42 (1)
----------------------------------------------------------------------------
Total trading
securities 1,569 (63) - 42 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed
by:
U.S. states,
municipalities and
agencies 20 1 (1) - (8)
Mortgage-backed
securities and
collateralized
mortgage
obligations 20 - - - -
Corporate debt 1,500 (5) 20 124 (27)
Corporate equity 369 (6) (25) 8 (4)
----------------------------------------------------------------------------
Total available-for-
sale securities 1,909 (10) (6) 132 (39)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 217 (13) - - -
Equity contracts 8 1 - - -
Credit default swaps 160 (7) - 3 -
----------------------------------------------------------------------------
Total derivative
assets 385 (19) - 3 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 48 - - 3 -
Equity contracts 71 14 - - -
Credit default swaps 3 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 122 14 - 3 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
---------------------------------------------------------------------
Fair Value Unrealized
For the six months Transfers as at Gains
ended April 30, Maturities out of April 30, (losses)
2011 (1) Level 3 2011 (2)
---------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations - (207) - -
Corporate debt (2) (139) 1,199 (65)
---------------------------------------------------------------------
Total trading
securities (2) (346) 1,199 (65)
---------------------------------------------------------------------
---------------------------------------------------------------------
Available-for-Sale
Securities
Issued or guaranteed
by:
U.S. states,
municipalities and
agencies - - 12 (1)
Mortgage-backed
securities and
collateralized
mortgage
obligations - (20) - -
Corporate debt (65) - 1,547 20
Corporate equity - - 342 (25)
---------------------------------------------------------------------
Total available-for-
sale securities (65) (20) 1,901 (6)
---------------------------------------------------------------------
---------------------------------------------------------------------
Derivative Assets
Interest rate
contracts (68) - 136 136
Equity contracts - (6) 3 3
Credit default swaps (9) - 147 147
---------------------------------------------------------------------
Total derivative
assets (77) (6) 286 286
---------------------------------------------------------------------
---------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts (9) - 42 42
Equity contracts (2) (9) 74 74
Credit default swaps (1) - 2 2
---------------------------------------------------------------------
Total derivative
liabilities (12) (9) 118 118
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Includes cash settlement of derivative assets and derivative
liabilities.
(2) Unrealized gains or losses on trading securities, derivative assets
and derivative liabilities still held on April 30, 2011 are included
in earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on April 30,
2011 are included in Accumulated Other Comprehensive Income.
Other Items Measured at Fair Value
Certain assets such as foreclosed assets are measured at fair value at initial recognition but are not required to be measured at fair value on an ongoing basis.
As at April 30, 2011, the bank held $151 million of foreclosed assets measured at fair value at inception, all of which were classified as Level 2. For the six months ended April 30, 2011, we recorded write-downs of $17 million on these assets.
Note 6: Guarantees
In the normal course of business we enter into a variety of guarantees. The most significant guarantees are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees represent our obligation to make payments to third parties on behalf of another party if that party is unable to make the required payments or meet other contractual requirements. The maximum amount payable under standby letters of credit and guarantees totalled $9,904 million as at April 30, 2011 ($10,163 million as at October 31, 2010). None of the standby letters of credit or guarantees had an investment rating as at April 30, 2011 or October 31, 2010. The majority have a term of one year or less. Collateral requirements for standby letters of credit and guarantees are consistent with our collateral requirements for loans. A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these commitments.
As at April 30, 2011, $23 million ($9 million as at October 31, 2010) was included in other liabilities related to guaranteed parties that were unable to meet their obligation to third parties (See Note 2). No other amount was included in our Consolidated Balance Sheet as at April 30, 2011 and October 31, 2010 related to those standby letters of credit and guarantees.
Backstop and Other Liquidity Facilities
Backstop liquidity facilities are provided to asset-backed commercial paper ("ABCP") programs administered by either us or third parties as an alternative source of financing in the event that such programs are unable to access ABCP markets or when predetermined performance measures of the financial assets owned by these programs are not met. The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy of the borrower. The facilities' terms are generally no longer than one year, but can be several years.
The maximum amount payable under these backstop and other liquidity facilities totalled $13,279 million as at April 30, 2011 ($14,009 million as at October 31, 2010), of which $11,259 million relates to facilities that are investment grade, $990 million that are non-investment grade and $1,030 million that are not rated ($11,036 million, $625 million and $2,348 million, respectively, as at October 31, 2010). As at April 30, 2011, $163 million was outstanding from facilities drawn in accordance with the terms of the backstop liquidity facilities ($292 million as at October 31, 2010), of which $139 million (US$147 million) ($251 million or US$246 million as at October 31, 2010) related to the U.S. customer securitization vehicle discussed in Note 4.
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities to transactions within ABCP programs administered by either us or third parties. Credit enhancement facilities are included in backstop liquidity facilities. These facilities include amounts that relate to our U.S. customer securitization vehicle discussed in Note 4.
Senior Funding Facilities
We also provide senior funding support to our structured investment vehicles ("SIVs") and our credit protection vehicle. As at April 30, 2011, $3,457 million had been drawn ($5,097 million as at October 31, 2010) in accordance with the terms of the funding facilities related to the SIVs. As at April 30, 2011, no amounts had been drawn down in accordance with the terms of the funding facility provided to our credit protection vehicle ($nil as at October 31, 2010) (See Note 4).
In addition to our investment in the notes subject to the Montreal Accord, we have provided a senior loan facility of $300 million. No amounts were drawn as at April 30, 2011 or October 31, 2010.
Derivatives
Certain of our derivative instruments meet the accounting definition of a guarantee when we believe they are related to an asset, liability or equity security held by the guaranteed party at the inception of a contract. In order to reduce our exposure to these derivatives, we enter into contracts that hedge the related risks.
Written credit default swaps require us to compensate a counterparty following the occurrence of a credit event in relation to a specified reference obligation, such as a bond or a loan. The maximum amount payable under credit default swaps is equal to their notional amount of $36,849 million as at April 30, 2011 ($40,650 million as at October 31, 2010), of which $34,690 million relates to swaps that are investment grade, $2,007 million are non-investment grade swaps and $152 million are not rated ($37,764 million, $2,622 million and $264 million, respectively, as at October 31, 2010). The terms of these contracts range from one day to 12 years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $544 million as at April 30, 2011 ($933 million as at October 31, 2010).
Written options include contractual agreements that convey to the purchaser the right, but not the obligation, to require us to buy a specific amount of a currency, commodity, debt or equity instrument at a fixed price, either at a fixed future date or at any time within a fixed future period. The maximum amount payable under these written options cannot be reasonably estimated due to the nature of these contracts. The terms of these contracts range from less than one month to eight years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $318 million as at April 30, 2011 ($599 million as at October 31, 2010), none of which had an investment rating (none of which had an investment rating as at October 31, 2010).
Written options also include contractual agreements where we agree to pay the purchaser, based on a specified notional amount, the difference between a market price or rate and the strike price or rate of the underlying instrument. The maximum amount payable under these contracts is not determinable due to their nature. The terms of these contracts range from 11 months to 25 years. The fair value of the related derivative liabilities included in derivative instruments in our Consolidated Balance Sheet was $85 million as at April 30, 2011 ($87 million as at October 31, 2010), none of which had an investment rating (none of which had an investment rating as at October 31, 2010).
Note 7: Acquisitions
We account for acquisitions of businesses using the purchase method. This involves allocating the purchase price paid for a business to the assets acquired, including identifiable intangible assets and the liabilities assumed based on their fair values at the date of acquisition. Any excess is then recorded as goodwill. The results of operations of acquired businesses are included in our consolidated financial statements beginning on the date of acquisition.
Lloyd George Management ("LGM")
On April 28, 2011, we completed the acquisition of all outstanding voting shares of Hong Kong-based Lloyd George Management, for cash consideration of $87 million subject to a post-closing adjustment based on working capital, plus contingent consideration based on meeting certain revenue thresholds over three years. Contingent consideration of approximately $13 million is expected to be paid in future years related to this acquisition. The acquisition of LGM allows us to expand our investment management capabilities in Asia and emerging markets to meet clients' growing demand for global investment strategies. As part of this acquisition, we acquired a customer relationship intangible asset which is being amortized on a straight-line basis over a period of 15 years. Goodwill related to this acquisition is not deductible for tax purposes. LGM is part of our Private Client Group reporting segment.
AMCORE Bank, N.A. ("AMCORE")
On April 23, 2010, we completed the acquisition of certain assets and liabilities of AMCORE from the FDIC for total consideration of $253 million, subject to a post-closing adjustment based on net assets. During the year ended October 31, 2010, we reduced the purchase price by $28 million based on a revaluation of the net assets acquired. As part of the acquisition, we had the option to purchase certain AMCORE branches after the close of the transaction. During the quarter ended January 31, 2011, we increased the purchase price by $20 million to $245 million as a result of the purchase of certain of these branches. The acquired assets and liabilities are included in our Personal and Commercial Banking U.S. reporting segment.
Future Acquisitions
Marshall & Ilsley Corporation ("M&I")
On December 17, 2010, we announced that we had reached a definitive agreement to purchase M&I in a common stock-for-common stock transaction. The purchase price will depend on the number of M&I common shares outstanding at the closing date and is estimated at $4.1 billion. In addition, we have agreed to purchase M&I's Troubled Asset Relief Program preferred shares and warrants from the U.S. Treasury. The acquisition of M&I will strengthen our competitive position in the U.S. Midwest markets. Subject to regulatory approval and shareholders' vote, the acquisition is expected to close in the third quarter of fiscal 2011. M&I will primarily be part of our Personal and Commercial Banking U.S. reporting segment.
The estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
---------------------------------------------------------------------------
LGM AMCORE
---------------------------------------------------------------------------
Cash resources(1) 3 420
Securities 2 10
Loans - 1,551
Premises and equipment - 20
Goodwill 50 86
Intangible assets 31 24
Other assets 4 494
---------------------------------------------------------------------------
Total assets 90 2,605
---------------------------------------------------------------------------
Deposits - 2,207
Other liabilities 3 153
---------------------------------------------------------------------------
Total liabilities 3 2,360
---------------------------------------------------------------------------
Purchase price 87 245
---------------------------------------------------------------------------
----------------------------------------------------------------------------
The allocation of the purchase price for LGM is subject to refinement as we
complete the valuation of the assets acquired and liabilities assumed.
(1) Cash resources, acquired through the AMCORE acquisition include cash and
cash equivalents and interest bearing deposits.
Note 8: Employee Compensation
Stock Options
During the six months ended April 30, 2011, we granted a total of 1,798,913 stock options (1,737,204 during the six months ended April 30, 2010). The weighted-average fair value of options granted during the six months ended April 30, 2011 was $10.60 per option ($9.97 during the six months ended April 30, 2010). The following weighted-average assumptions were used to determine the fair value of options on the date of grant:
For stock options granted April 30, April 30, during the six months ended 2011 2010 --------------------------------------------------------------------------- Expected dividend yield 4.7% 6.6% Expected share price volatility 24.0% 27.5% Risk-free rate of return 2.9% 2.9% Expected period until exercise (in years) 6.5 6.5 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Changes to the input assumptions can result in different fair value estimates.
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
---------------------------------------------------------------------------
Other
Pension employee future
benefit plans benefit plans
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
For the three months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Benefits earned by employees 39 31 5 5
Interest cost on accrued
benefit liability 63 64 13 14
Actuarial loss recognized
in expense 23 19 2 1
Amortization of plan
amendment costs 3 4 (2) (1)
Expected return on plan
assets (80) (74) (1) (1)
---------------------------------------------------------------------------
Benefits expense 48 44 17 18
Canada and Quebec pension
plan expense 23 18 - -
Defined contribution expense 3 3 - -
---------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses 74 65 17 18
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Other
Pension employee future
benefit plans benefit plans
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
For the six months ended 2011 2010 2011 2010
---------------------------------------------------------------------------
Benefits earned by employees 77 64 11 10
Interest cost on accrued
benefit liability 126 128 26 28
Actuarial loss recognized
in expense 44 37 3 2
Amortization of plan
amendment costs 7 8 (4) (3)
Expected return on plan
assets (162) (145) (2) (2)
---------------------------------------------------------------------------
Benefits expense 92 92 34 35
Canada and Quebec pension
plan expense 38 32 - -
Defined contribution
expense 5 5 - -
---------------------------------------------------------------------------
Total pension and other
employee future benefit
expenses 135 129 34 35
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Note 9: Subordinated Debt
During the quarter ended April 30, 2011, we issued $1.5 billion of subordinated debt under our Canadian Medium-Term Note Program. The issue, Series G Medium-Term Notes, First Tranche, is due July 8, 2021. Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a floating rate equal to the rate on three month Bankers' Acceptances plus 1.09%, paid quarterly, thereafter to maturity. This issue is redeemable at our option with the prior approval of the Office of Superintendent of Financial Institutions of Canada ("OSFI") at par commencing July 8, 2016.
During the quarter ended January 31, 2010, we redeemed all of our 4.00% Series C Medium-Term Notes, First Tranche, due 2015, totalling $500 million. The notes were redeemed at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to the redemption date.
Note 10: Deposits and Capital Trust Securities
Deposits
During the quarter ended January 31, 2011, we issued US$1.5 billion Covered Bonds - Series 3. This deposit pays interest of 2.625% and matures on January 25, 2016.
Capital Trust Securities
During the quarter ended January 31, 2011, we redeemed all of our BMO Capital Trust Securities - Series B ("BMO BOaTs - Series B") at a redemption amount equal to $1,000, for an aggregate redemption of $400 million, plus unpaid distributions.
Note 11: Share Capital
During the quarter ended April 30, 2011, we issued 11,600,000 3.9% Non-Cumulative 5-year Rate Reset Class B Preferred Shares, Series 25, at a price of $25.00 per share, representing an aggregate issue price of $290 million.
During the quarter ended April 30, 2010, we did not issue or redeem any preferred shares.
On December 13, 2010, we announced the renewal of our normal course issuer bid, which allows us to repurchase for cancellation up to 15,000,000 of our common shares during the period from December 16, 2010 to December 15, 2011.
We did not repurchase any common shares under the existing normal course issuer bid. We did not repurchase any common shares under our previous normal course issuer bid, which expired on December 1, 2010.
Share Capital Outstanding (a)
(Canadian $
in millions,
except as noted) April 30, 2011 October 31, 2010
---------------------------------------------------------------------------
Number of Number of
shares Amount shares Amount Convertible into...
---------------------------------------------------------------------------
Preferred Shares
- Classified as
Equity
Class B -
Series 5 8,000,000 200 8,000,000 200 -
Class B -
Series 10 (b) 12,000,000 396 12,000,000 396 common shares (c)
Class B -
Series 13 14,000,000 350 14,000,000 350 -
Class B -
Series 14 10,000,000 250 10,000,000 250 -
Class B -
Series 15 10,000,000 250 10,000,000 250 -
Class B - preferred shares -
Series 16 12,000,000 300 12,000,000 300 class B-series 17 (d)
Class B - preferred shares -
Series 18 6,000,000 150 6,000,000 150 class B-series 19 (d)
Class B - preferred shares -
Series 21 11,000,000 275 11,000,000 275 class B-series 22 (d)
Class B - preferred shares -
Series 23 16,000,000 400 16,000,000 400 class B-series 24 (d)
Class B - preferred shares -
Series 25 11,600,000 290 - - class B-series 26 (d)
---------------------------------------------------------------------------
2,861 2,571
Common Shares 569,675,638 7,090 566,468,440 6,927
---------------------------------------------------------------------------
Share Capital 9,951 9,498
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(a) For additional information refer to Notes 20 and 22 to our consolidated
financial statements for the year ended October 31, 2010 on pages 145
to 149 of our 2010 Annual Report.
(b) Face value is US$300 million.
(c) The number of shares issuable on conversion is not determinable until
the date of conversion.
(d) If converted, the holders have the option to convert back to the
original preferred shares on subsequent redemption dates.
(e) The stock options issued under stock option plan are convertible into
14,832,046 common shares as at April 30, 2011 (15,232,139 common shares
as at October 31, 2010).
Note 12: Earnings Per Share
The following tables present the bank's basic and diluted earnings per share:
Basic earnings per share
(Canadian $ in millions, For the three months For the six months
except as noted) ended ended
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income 800 745 1,576 1,402
Dividends on preferred shares (34) (34) (68) (69)
---------------------------------------------------------------------------
Net income available to
common shareholders 766 711 1,508 1,333
---------------------------------------------------------------------------
Average number of common
shares outstanding (in
thousands) 568,829 558,320 568,052 556,120
---------------------------------------------------------------------------
Basic earnings per share
(Canadian $) 1.35 1.27 2.65 2.40
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Diluted earnings per share
(Canadian $ in millions, For the three months For the six months
except as noted) ended ended
---------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income available to
common shareholders
adjusted for dilution
effect 766 711 1,508 1,333
---------------------------------------------------------------------------
Average number of common
shares outstanding (in
thousands) 568,829 558,320 568,052 556,120
---------------------------------------------------------------------------
Convertible shares 248 252 248 252
Stock options potentially
exercisable (1) 10,539 11,671 10,417 11,053
Common shares potentially
repurchased (8,209) (8,375) (8,057) (7,873)
---------------------------------------------------------------------------
Average diluted number of
common shares outstanding
(in thousands) 571,407 561,868 570,660 559,552
---------------------------------------------------------------------------
Diluted earnings per
share (Canadian $) 1.34 1.26 2.64 2.38
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) In computing diluted earnings per share we excluded average stock
options outstanding of 1,195,243 and 1,511,558, with a weighted-average
exercise price of $65.81 and $64.66, respectively, for the three months
and six months ended April 30, 2011 (2,421,479 and 3,134,100 with a
weighted-average exercise price of $61.34 and $59.98, respectively, for
the three months and six months ended April 30, 2010) as the average
share price for the period did not exceed the exercise price.
Note 13: Capital Management
Our objective is to maintain a strong capital position in a cost-effective structure that: meets our target regulatory capital ratios and internal assessment of risk-based capital; is consistent with our targeted credit ratings; underpins our operating groups' business strategies; and builds depositor confidence and long-term shareholder value.
We have met OSFI's stated minimum capital ratios requirement as at April 30, 2011. Our capital position as at April 30, 2011 is detailed in the Capital Management section on page 14 of Management's Discussion and Analysis of the Second Quarter Report to Shareholders.
Note 14: Risk Management
We have an enterprise-wide approach to the identification, measurement, monitoring and management of risks faced across the organization. The key financial instrument risks are classified as credit and counterparty, market, liquidity and funding risk.
Credit and Counterparty Risk
We are exposed to credit risk from the possibility that counterparties may default on their financial obligations to us. Credit risk arises predominantly with respect to loans, over-the-counter derivatives and other credit instruments. This is the most significant measurable risk that we face.
Market Risk
Market risk is the potential for a negative impact on the balance sheet and/or statement of income resulting from adverse changes in the value of financial instruments as a result of changes in certain market variables. These variables include interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and default. We incur market risk in our trading and underwriting activities and structural banking activities.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet financial commitments in a timely manner at reasonable prices as they fall due. It is our policy to ensure that sufficient liquid assets and funding capacity are available to meet financial commitments, including liabilities to depositors and suppliers, and lending, investment and pledging commitments, even in times of stress. Managing liquidity and funding risk is essential to maintaining both depositor confidence and stability in earnings.
Key measures as at April 30, 2011 are outlined in the Risk Management section on page 10 of Management's Discussion and Analysis of the Second Quarter Report to Shareholders.
Note 15: Operating and Geographic Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a distinct mandate. We determine our operating groups based on our management structure and therefore these groups, and results attributed to them, may not be comparable with those of other financial services companies. We evaluate the performance of our groups using measures such as net income, revenue growth, return on equity, net economic profit and non-interest expense-to-revenue (productivity) ratio, as well as adjusted operating leverage.
Personal and Commercial Banking
Personal and Commercial Banking ("P&C") is comprised of two operating segments: Personal and Commercial Banking Canada and Personal and Commercial Banking U.S.
Personal and Commercial Banking Canada
Personal and Commercial Banking Canada ("P&C Canada") offers a full range of consumer and business products and services, including everyday banking, financing, investing and credit cards, as well as a full suite of commercial and capital market products and financial advisory services, through a network of branches, telephone banking, online banking, mortgage specialists and automated banking machines.
Personal and Commercial Banking U.S.
Personal and Commercial Banking U.S. ("P&C U.S.") offers a full range of products and services to personal and business clients in select U.S. Midwest markets through branches and direct banking channels such as telephone banking, online banking and a network of automated banking machines.
Private Client Group
Private Client Group ("PCG"), our group of wealth management businesses, serves a full range of client segments, from mainstream to ultra-high net worth, as well as select institutional markets, with a broad offering of wealth management products and solutions. PCG operates in both Canada and the United States, as well as in China and the United Kingdom.
BMO Capital Markets
BMO Capital Markets ("BMO CM") combines all of our businesses serving corporate, institutional and government clients. In Canada and the United States, these clients span a broad range of industry sectors. BMO CM also serves clients in the United Kingdom, Europe, Asia and Australia. It offers clients complete financial solutions, including equity and debt underwriting, corporate lending and project financing, mergers and acquisitions, advisory services, merchant banking, securitization, treasury and market risk management, debt and equity research and institutional sales and trading.
Corporate Services
Corporate Services includes the corporate units that provide expertise and governance support in areas such as Technology and Operations ("T&O"), strategic planning, law, finance, internal audit, risk management, corporate communications, economics, corporate marketing, human resources and learning. Operating results include revenues and expenses associated with certain securitization activities, the hedging of foreign-source earnings, and activities related to the management of certain balance sheet positions and our overall asset liability structure.
T&O manages, maintains and provides governance over our information technology, operations services, real estate and sourcing. T&O focuses on enterprise-wide priorities that improve quality and efficiency to deliver an excellent customer experience.
Operating results for T&O are included with Corporate Services for reporting purposes. However, costs of T&O services are transferred to the three operating groups. As such, results for Corporate Services largely reflect the activities outlined above.
Corporate Services also includes residual revenues and expenses representing the differences between actual amounts earned or incurred and the amounts allocated to operating groups.
Basis of Presentation
The results of these operating segments are based on our internal financial reporting systems. The accounting policies used in these segments are generally consistent with those followed in the preparation of our consolidated financial statements as disclosed in Note 1 and throughout the consolidated financial statements. Notable accounting measurement differences are the taxable equivalent basis adjustment and the provisions for credit losses, as described below.
Taxable Equivalent Basis
We analyze net interest income on a taxable equivalent basis ("teb") at the operating group level. This basis includes an adjustment which increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt securities to a level that incurs tax at the statutory rate. The operating groups' teb adjustments are eliminated in Corporate Services.
During the year ended October 31, 2010, we changed the accounting for certain BMO CM transactions on a basis that reflects their teb. We believe these adjustments are useful and reflect how BMO CM manages its business, since it enhances the comparability of taxable revenues and tax-advantaged revenues. The change results in increases in net interest income and income taxes in BMO CM with offsetting amounts reflected in Corporate Services. There was no overall net income change in either of the two groups. Prior periods have been restated to reflect this reclassification.
Provisions for Credit Losses
Provisions for credit losses are generally allocated to each group based on expected losses for that group. Differences between expected loss provisions and provisions required under GAAP are included in Corporate Services.
Securitization Accounting
During the year ended October 31, 2010, we changed the manner in which we report securitized assets in our segmented disclosure. Previously, certain securitized mortgage assets were not reported in P&C Canada's balance sheet. We now report all securitized mortgage assets in P&C Canada, with offsetting amounts in Corporate Services, and net interest income earned on all securitized mortgage assets is included in P&C Canada net interest income. Previously, net interest income earned on certain securitized mortgage assets was included in P&C Canada non-interest revenue. Prior periods have been restated to conform to this new presentation.
U.S. Mid-Market Client Accounts
Effective in the year ended October 31, 2010, we identified U.S. mid-market client accounts that would be better served by a commercial banking model and transferred their balances to P&C U.S. from BMO CM. Prior periods have been restated to reflect this reclassification.
Inter-Group Allocations
Various estimates and allocation methodologies are used in the preparation of the operating groups' financial information. We allocate expenses directly related to earning revenue to the groups that earned the related revenue. Expenses not directly related to earning revenue, such as overhead expenses, are allocated to operating groups using allocation formulas applied on a consistent basis. Operating group net interest income reflects internal funding charges and credits on the groups' assets, liabilities and capital, at market rates, taking into account relevant terms and currency considerations. The offset of the net impact of these charges and credits is reflected in Corporate Services.
Geographic Information
We operate primarily in Canada and the United States but we also have operations in the United Kingdom, Europe, the Caribbean and Asia, which are grouped in Other countries. We allocated our results by geographic region based on the location of the unit responsible for managing the related assets, liabilities, revenues and expenses, except for the consolidated provision for credit losses, which is allocated based upon the country of ultimate risk.
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
For the three Total
months ended P&C P&C Corporate (GAAP
April 30, 2011 (2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 1,059 283 108 297 (127) 1,620
Non-interest revenue 416 66 474 539 102 1,597
----------------------------------------------------------------------------
Total Revenue 1,475 349 582 836 (25) 3,217
Provision for credit
losses 136 35 2 30 (58) 145
Amortization 36 17 8 7 49 117
Non-interest expense 744 230 429 461 42 1,906
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 559 67 143 338 (58) 1,049
Income taxes 158 25 42 103 (97) 231
Non-controlling
interest in
subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 401 42 101 235 21 800
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 152,659 29,392 15,501 204,413 9,733 411,698
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 120 946 407 109 2 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three Total
months ended P&C P&C Corporate (GAAP
April 30, 2010 (2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 990 259 87 380 (194) 1,522
Non-interest revenue 418 77 471 540 21 1,527
----------------------------------------------------------------------------
Total Revenue 1,408 336 558 920 (173) 3,049
Provision for credit
losses 121 31 2 67 28 249
Amortization 34 15 10 8 52 119
Non-interest expense 688 219 392 461 (49) 1,711
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 565 71 154 384 (204) 970
Income taxes 171 25 39 124 (152) 207
Non-controlling
interest in
subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 394 46 115 260 (70) 745
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 143,649 31,627 14,094 199,056 4,802 393,228
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 118 1,016 360 113 2 1,609
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-
For the six Total
months ended P&C P&C Corporate (GAAP
April 30, 2011 (2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 2,168 573 211 633 (338) 3,247
Non-interest revenue 835 138 1,032 1,166 145 3,316
----------------------------------------------------------------------------
Total Revenue 3,003 711 1,243 1,799 (193) 6,563
Provision for credit
losses 272 72 4 60 (15) 393
Amortization 70 36 17 14 98 235
Non-interest expense 1,483 472 879 947 53 3,834
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 1,178 131 343 778 (329) 2,101
Income taxes 333 47 89 286 (266) 489
Non-controlling
interest in
subsidiaries - - - - 36 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 845 84 254 492 (99) 1,576
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 151,979 30,425 15,242 207,194 9,995 414,835
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 120 946 407 109 2 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six Total
months ended P&C P&C Corporate (GAAP
April 30, 2010 (2) Canada U.S. PCG BMO CM Services(1) basis)
----------------------------------------------------------------------------
Net interest income 2,008 524 174 741 (393) 3,054
Non-interest revenue 812 161 934 1,022 91 3,020
----------------------------------------------------------------------------
Total Revenue 2,820 685 1,108 1,763 (302) 6,074
Provision for credit
losses 241 62 4 132 143 582
Amortization 67 31 19 17 100 234
Non-interest expense 1,366 445 785 923 (84) 3,435
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 1,146 147 300 691 (461) 1,823
Income taxes 349 50 74 219 (308) 384
Non-controlling
interest in
subsidiaries - - - - 37 37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 797 97 226 472 (190) 1,402
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 142,479 32,402 13,839 200,317 4,441 393,478
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 118 1,016 360 113 2 1,609
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis - see Basis of
Presentation section.
Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.
Our results and average assets, allocated by geographic region, are as
follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
Total
For the three months United Other (GAAP
ended April 30, 2011 Canada States countries basis)
----------------------------------------------------------------------------
Net interest income 1,251 340 29 1,620
Non-interest revenue 1,266 299 32 1,597
----------------------------------------------------------------------------
Total Revenue 2,517 639 61 3,217
Provision for credit losses 69 77 (1) 145
Amortization 88 28 1 117
Non-interest expense 1,360 496 50 1,906
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 1,000 38 11 1,049
Income taxes 241 (13) 3 231
Non-controlling interest
in subsidiaries 14 4 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 745 47 8 800
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 274,524 117,095 20,079 411,698
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 496 1,067 21 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-
Total
For the three months United Other (GAAP
ended April 30, 2010 Canada States countries basis)
----------------------------------------------------------------------------
Net interest income 1,174 319 29 1,522
Non-interest revenue 1,158 330 39 1,527
----------------------------------------------------------------------------
Total Revenue 2,332 649 68 3,049
Provision for credit losses 139 123 (13) 249
Amortization 89 29 1 119
Non-interest expense 1,221 449 41 1,711
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 883 48 39 970
Income taxes 192 17 (2) 207
Non-controlling interest
in subsidiaries 13 5 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 678 26 41 745
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 258,367 106,110 28,751 393,228
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 442 1,146 21 1,609
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
For the six months United Other (GAAP
ended April 30, 2011 Canada States countries basis)
----------------------------------------------------------------------------
Net interest income 2,507 688 52 3,247
Non-interest revenue 2,587 604 125 3,316
----------------------------------------------------------------------------
Total Revenue 5,094 1,292 177 6,563
Provision for credit losses 185 209 (1) 393
Amortization 176 57 2 235
Non-interest expense 2,756 976 102 3,834
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 1,977 50 74 2,101
Income taxes 465 16 8 489
Non-controlling interest
in subsidiaries 27 9 - 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,485 25 66 1,576
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 273,785 119,516 21,534 414,835
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 496 1,067 21 1,584
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
For the six months United Other (GAAP
ended April 30, 2010 Canada States countries basis)
----------------------------------------------------------------------------
Net interest income 2,323 666 65 3,054
Non-interest revenue 2,234 663 123 3,020
----------------------------------------------------------------------------
Total Revenue 4,557 1,329 188 6,074
Provision for credit losses 277 313 (8) 582
Amortization 176 56 2 234
Non-interest expense 2,477 874 84 3,435
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 1,627 86 110 1,823
Income taxes 360 18 6 384
Non-controlling interest
in subsidiaries 27 10 - 37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,240 58 104 1,402
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 257,737 108,398 27,343 393,478
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 442 1,146 21 1,609
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Prior periods have been restated to give effect to the current period's organizational structure and presentation changes.
Ralph Marranca, Toronto
416-867-3996
ralph.marranca@bmo.com
Ronald Monet, Montreal
514-877-1873
ronald.monet@bmo.com
Investor Relations Contacts
Viki Lazaris, Senior Vice-President
416-867-6656
viki.lazaris@bmo.com
Andrew Chin, Senior Manager
416-867-7019
andrew.chin@bmo.com
Chief Financial Officer
Tom Flynn, Executive Vice-President and CFO
416-867-4689
tom.flynn@bmo.com
Corporate Secretary
Blair Morrison, Senior Vice-President,
Deputy General Counsel, Corporate Affairs and
Corporate Secretary
416-867-6785
corp.secretary@bmo.com