P&C Canada Continues to Deliver Strong Performance with Good Revenue Growth
BMO Capital Markets Results Reflect a More Challenging Capital Markets Environment
Provisions for Credit Losses Continue to Improve
Tier 1 Capital Ratio Remains Strong, at 13.55%
Financial Results Highlights:
Third Quarter 2010 Compared with Third Quarter 2009:
- Net income of $669 million, up $112 million from a year ago
- EPS1 of $1.13 and cash EPS2 of $1.14, both up $0.16 from a year ago
- Return on equity of 13.7%, compared with 12.1% a year ago
- Provisions for credit losses of $214 million, down $203 million from a year ago
Year-to-Date 2010 Compared with a Year Ago:
- Net income of $2,071 million, compared with $1,140 million in 2009
- EPS of $3.51 compared with $1.97 and cash EPS of $3.55 compared with $2.01
For the third quarter ended July 31, 2010, BMO Financial Group reported net income of $669 million or $1.13 per share. Canadian personal and commercial banking continued to deliver strong performance, with net income of $426 million, up $64 million or 17% from a year ago.
Today, BMO announced a fourth 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.
“The focus we are maintaining on helping our customers succeed and our strategic investments in businesses with good growth potential have translated into a solid year-over-year increase in earnings, adding to our already strong capital position,” said Bill Downe, President and Chief Executive Officer, BMO Financial Group. “Our results underline the benefit of the bank’s diversified business mix.”
“P&C Canada continues to set the pace for the company, with net income of $426 million, up 17% from a year ago. Revenue was up a healthy 9.3%, driven by volume growth across most products. We have seen year-over-year increases in the average number of product categories used by both personal and commercial customers.
“Our commercial business investments have bolstered our success in meeting the needs of our customers and driven both revenue growth and a growing market share for commercial loans, which now stands at more than 20%, rising from a year ago and the preceding quarter.
“Results in BMO Capital Markets this quarter reflected a more difficult capital markets environment, with significantly lower trading results and fewer opportunities across many businesses. We are continuing to build our capabilities and have made recent hires to help position us for growth across key sectors as the market environment improves.
“PCG’s net income was down slightly as results a year ago included a recovery of prior periods’ taxes. Results were better in most businesses as we continue to deliver the high level of service and advice that our clients expect.
“P&C U.S. is focused on customer acquisition and retention. In personal banking, we’re replicating strong offers across the company. We’ve launched Harris Helpful Steps, patterned after BMO’s SmartSteps program, and we’ve successfully completed the integration of the transferred U.S. mid-market clients into our commercial banking model, organizing the business by specialized sectors.
“In summary, our businesses are focused on the promise of delivering great customer experience and we are producing good results, given the current operating environment. While there are some signs of slower economic growth on both sides of the border, we are encouraged that provisions for credit losses improved again this quarter.”
Mr. Downe also noted that, “This quarter, BMO became carbon neutral with respect to energy and transportation worldwide. This fulfills – on schedule – a commitment we made to our customers and shareholders nearly two years ago. Sustainability and success go hand in hand, and we are proud to be doing our part.”
1 All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise.
2 The adjustments that change results under generally accepted accounting principles (GAAP) to cash results are outlined 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 outlined.
Operating Segment Overview
Net income was a strong $426 million, up $64 million or 17% from a year ago. There were revenue increases across each of our personal, commercial and cards businesses, driven by volume growth across most products, the inclusion of Diners Club in our financial results and an improved net interest margin. Good revenue growth together with effective management of operating expenses resulted in strong cash operating leverage of 5.5%. We continue to invest strategically to improve our competitive position while managing our operating expenses prudently.
Our goal is to be the bank that defines great customer experience. We continue to identify what customers want and need and to maintain our commitment to listen, understand and provide guidance to our customers, resulting in year-over-year increases in the average number of product categories used by both personal and commercial customers.
In personal banking, our mortgage balances increased this quarter for the first time since exiting the broker market. Our Spring Home Financing Campaign was launched in March and is designed to give the right advice to help customers make the right home financing decisions. We provide customers with a full suite of attractive products to meet their needs, including our Homeowner ReadiLine and our new, straightforward low fixed-rate mortgage.
In commercial banking, we continue to offer BMO SmartSteps for Business to provide small business owners convenient access to advice on how to manage their business. During the quarter we demonstrated our continued support for the agriculture segment with the launch of AgriInvest and the Prairies Financial Flood Relief Program. We continue to rank second in Canadian business lending market share and our goal is to become the bank of choice for businesses across Canada.
We are the largest MasterCard issuer in Canada as measured by transaction volumes. We are growing our cards business, while maintaining prudent credit management and have had significantly better credit loss rates than the average of our peers. During the quarter, BMO introduced two new credit card offerings that give small business owners low rates, low fees and simple choices. These new cards feature complimentary membership in the BMO Premium BizAssist program that helps busy small business owners run and protect their business, while delivering significant savings through enhanced rewards and the elimination of an annual card fee.
P&C U.S. (all amounts in U.S. $)
Net income was $38 million, down $14 million or 27% from a year ago. Lower earnings were primarily driven by higher provisions for credit losses on an expected loss basis, the impact of impaired loans and a valuation adjustment on our serviced mortgage portfolio due to lower long-term interest rates. The benefit of loan spread improvement and deposit balance growth was largely offset by the impacts of a decrease in commercial loan balances, due to lower client loan utilization, and deposit spread compression.
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 $54 million, down $11 million or 17% from a year ago. The cash productivity ratio was 72.6%. Adjusted on the same basis as above, the cash productivity ratio was 66.2%.
In the last quarter, we announced our acquisition of certain assets and liabilities of AMCORE Bank N.A., a Rockford, Illinois-based bank. Since the closing of the transaction, we have stabilized the acquired operations, made substantial progress towards major integration milestones and initiated a customer calling program to reach out to priority customers. We are on track to complete the conversion of the business to the Harris platform in the fourth quarter.
We are progressing on our objective of positioning P&C U.S. for growth through the consolidation of U.S. mid-market clients into our commercial banking model. To provide improved focus and superior advice to our clients, we have added additional resources to support select industry sectors. Leveraging the strong Harris reputation as well as the larger scale of this consolidated commercial banking business should allow us to acquire new customers and grow revenues at a faster pace while improving overall productivity.
In personal banking, we have developed Harris Helpful Steps. The program was launched in June and delivers five simple steps to help consumers save more, spend smarter and take control of their finances.
For the second consecutive year, the Harris Contact Center was certified as a Center of Excellence by BenchmarkPortal, in conjunction with Purdue University’s Center for Customer-Driven Quality (CCDQ). BenchmarkPortal is a recognized leader in benchmarking and certifying contact centers and only 10% of applicants earn the designation.
Private Client Group (PCG)
Net income was $108 million, a decrease of $5 million or 5.5% from the same quarter a year ago. Results a year ago included a $23 million recovery of prior periods’ income taxes.
PCG net income, excluding the insurance business, was $74 million, up a strong $28 million or 54% from a year ago as we continue to see growth across all of our businesses. Insurance net income was $34 million for the quarter, down $33 million or 48% largely due to last year’s tax recovery. The insurance business experienced solid growth in net premiums, the benefit of which was more than offset by the effects of unfavourable movements in interest rates and equity markets on policyholder liabilities.
PCG revenue grew by $23 million or 4.5% as there was solid growth across most of our businesses, driven by a 9.5% (11% in source currency) improvement in client assets under management and administration. Revenue from the insurance business was down overall, as growth from net premiums was more than offset by the effects of unfavourable market movements on policyholder liabilities. We remain focused on continuing to deliver the high level of service and advice that our clients expect, especially in the current economic environment.
PCG launched eight new Exchange Traded Funds (ETFs) in the quarter, expanding its product line to a total of 30 ETFs. These latest additions further diversify our offering in a number of areas, including the health care and oil and gas sectors. This expansion further demonstrates our commitment to being a leader in the growing Canadian ETF market and offering a full range of investment options to investors.
BMO Capital Markets
Net income was $130 million, a decrease of $180 million or 58% from a year ago. There were lower revenues this quarter after very strong performance in the favourable environments of the preceding four quarters. Lower revenues, both year over year and relative to the second quarter, were driven by a combination of the negative impact of widening credit spreads, lower trading margins and fewer trading opportunities. The weaker economic conditions for corporate banking also contributed to the year over year revenue decline. We are continuing to build our capabilities and have made recent hires to help position us for growth across key sectors as the market environment improves.
BMO Capital Markets was involved in 114 new issues in the quarter including 34 corporate debt deals, 32 government deals, 42 common equity transactions and six issues of preferred shares, raising $51 billion or $12 billion more than in the previous quarter.
Corporate Services incurred a net loss in the quarter of $35 million. Results were $251 million better than in the prior year due primarily to lower provisions for credit losses. Improved revenues were largely offset by higher expenses. Provisions for credit losses charged to Corporate Services were reduced by $272 million. 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.
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Caution Regarding Forward-Looking Statements
Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the safe 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 2010 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 32 and 33 of BMO’s 2009 Annual Report, which outlines in detail certain key factors that may affect BMO’s future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statement, whether written or oral, that may be made, from time to time, by the organization or on its behalf, except as 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 concluding that we will complete the conversion of the operations acquired through the second quarter Rockford, Illinois-based bank transaction, we have assumed that no competing priorities emerge that take a priority claim to the needed staffing and technical resources and that no serious systems problems arise on the conversion.
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, including those described under the heading Economic Outlook and Review, 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.
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INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2009 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 Tuesday, August 24, 2010, 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, December 6, 2010, by calling 416-695-5800 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering passcode 7878814.
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, December 6, 2010.
Investor Relations Contacts
Viki Lazaris, Senior Vice-President, [email protected], 416-867-6656
Steven Bonin, Director, [email protected], 416-867-5452
Andrew Chin, Senior Manager, [email protected], 416-867-7019
Chief Financial Officer
Russel Robertson, Chief Financial Officer
[email protected], 416-867-7360
Blair Morrison, Senior Vice-President, Deputy General Counsel,
Corporate Affairs and Corporate Secretary
[email protected], 416-867-6785