BMO Financial Group Reports Strong Net Income for the First Quarter of 2013
First Quarter 2013 Compared with First Quarter 2012:
- Net income of $1,048 million, down 5%; adjusted net income(1) of $1,041 million, up 7%
- EPS(2) of $1.53, down 6%; adjusted EPS(1), (2) of $1.52, up 7%
- ROE of 14.9%, compared with 17.2%; adjusted ROE(1) of 14.8%, compared with 15.0%
- Provisions for credit losses of $178 million, compared with $141 million; adjusted provisions for credit losses(1) of $96 million, compared with $91 million
- Basel III Common Equity Ratio is strong at 9.4%
- Dividend Increased by $0.02 or 3% to $0.74 per Common Share
For the first quarter ended January 31, 2013, BMO Financial Group reported net income of $1,048 million or $1.53 per share on a reported basis and net income of $1,041 million or $1.52 per share on an adjusted basis.
“BMO had a strong first quarter, with momentum in each of our businesses and a strong capital position. Looking ahead, we are well-positioned to leverage our North American platform and deliver sustained earnings growth,” said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Adjusted net income was over $1 billion for the third consecutive quarter.
"With our U.S. retail platform consolidated under the BMO Harris Bank brand - supported by our largest U.S. advertising campaign to date - P&C U.S. posted good net income growth and good total loan growth.
"In the quarter, we demonstrated continued momentum in commercial banking on both sides of the border. Commercial banking is an important contributor to the performance of the bank, positioning us well in an environment of business expansion.
“As we look ahead to the rest of the year, we will continue our focus on delivering industry-leading customer experience, helping businesses expand and customers control their financial lives - allowing them to make better decisions with better information and have confidence in the choices they make. At the same time, we will maintain prudent risk management and improve efficiency,” concluded Mr. Downe.
Concurrent with the release of results, BMO announced a second quarter 2013 dividend of $0.74 per common share, up $0.02 per share from the preceding quarter and equivalent to an annual dividend of $2.96 per common share. The increase in our dividend reflects our strong capital position and the success of our business strategies.
Our complete First Quarter 2013 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended January 31, 2013, is available online at www.bmo.com/investorrelations and at www.sedar.com.
(1) Results and measures in this document are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Items excluded from first quarter 2013 results in the determination of adjusted results totalled net income of $7 million after tax, comprised of a $79 million after tax net benefit of credit-related items in respect of the acquired Marshall & Ilsley Corporation (M&I) performing loan portfolio; costs of $92 million ($57 million after tax) for the integration of the acquired business; a benefit on run-off structured credit activities of $7 million before and after tax; and a $31 million ($22 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions. Adjusted results and measures are non-GAAP and are detailed in the Adjusted Net Income section, and (for all reported periods) in the Non-GAAP Measures section, where such non-GAAP measures and their closest GAAP counterparts are disclosed.
(2) All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise. EPS is calculated using net income after deductions for net income attributable to non-controlling interest in subsidiaries and preferred share dividends.
Note: All ratios and percentage changes in this document are based on unrounded numbers.
Operating Segment Overview
Commencing in the first quarter of 2013, we changed the way in which we evaluate our operating segments to reflect the provisions for credit losses on an actual credit loss basis. The change in allocation methodology enhances the assessment of performance against our peer group. Previously, we had charged the groups with credit losses based on an expected loss provisioning methodology whereby Corporate Services was charged (or credited) with differences between the periodic provisions for credit losses charged to the operating group segments under our expected loss provisioning methodology and the periodic provisions required under GAAP. Prior period results have been restated accordingly. Provisions for the purchased performing and purchased credit impaired loan portfolios continue to be evaluated and reported in Corporate Services.
P&C Canada
Net income was $458 million, up $17 million or 4% from a year ago. Results reflect the combination of good volume growth across most products and the impact of lower net interest margin, together with lower provisions for credit losses. There was year-over-year loan growth of 9% and deposit growth of 4%. Expenses were up modestly, with growth of 1% reflecting good expense management as we continue to invest in our business.
We are focused on making money make sense for our customers, offering simplified products and exceptional customer service. Customers have more options than ever as to how to bank with BMO. We expanded our network by opening or upgrading nine locations this quarter and have continued to invest in our online and mobile banking services. These investments in online and mobile capabilities are making a difference as increasing numbers of customers are using technologies such as eStatements, email and text alerts, online appointment booking and Mobile Paypass. We continue to have top-tier performance in customer loyalty, as measured by the net promoter score.
Personal banking continues to see momentum and improved sales force productivity. We are leveraging the success of our home financing campaigns and offering products that fit the needs of our customers. The average number of products held by our customers continues to grow, as we develop stronger relationships with our current customers and attract new ones. In the quarter, we enhanced our Smart Saver Account by paying interest on every dollar of savings with no minimum required, providing our customers with a competitive offer and an easy to understand product. We also introduced a compelling Tax Free Savings Account offer which is generating strong early results.
In commercial banking, our sales force is focused on offering solutions, advice and integrated products and services suited to the needs of our diverse commercial customer base. Our award-winning Online Banking for Business platform helps customers manage their businesses more effectively. Customers continue to recognize us with top-tier customer loyalty, as measured by commercial net promoter score. With our ongoing success in these areas, we continue to rank #2 in Canadian business banking loan market share for small and medium-size loans.
P&C U.S. (all amounts in US$)
Net income of $183 million increased $26 million or 17% from $157 million in the first quarter a year ago. Adjusted net income was $197 million, up $23 million or 13% from a year ago due to the benefit of reduced expenses and lower provisions for credit losses. Revenue was 3% lower as higher gains on the sale of newly originated mortgages and increased commercial lending fees were more than offset by the effect of lower net interest margin, a decline in securities gains and lower deposit fees.
Relative to the fourth quarter of 2012, net income increased 30% and adjusted net income increased 25%. There was quarter-over-quarter growth in average loans as growth in the core commercial and industrial loan portfolio remains strong. This portfolio has increased $3.3 billion or 18% from a year ago with continued quarterly sequential growth.
We added 131 new commercial relationships during the quarter and continue to look for expansion opportunities into new geographic areas and specialties that align with our growth strategy. Additionally, we added a seasoned team of bankers and launched a franchise finance specialty lending group with the expectation of capturing a portion of this growing sector of the U.S. economy.
During the quarter, we were awarded 16 competitive Affordable Housing Program projects by the Federal Home Loan Bank of Chicago (FHLBC). These projects allow us to support our communities through the development of affordable housing, and also provide us with opportunities to cross-sell our products and services. We were also awarded the FHLBC 2012 Community First Partnership Award in conjunction with the DuPage County Habitat for Humanity. This award recognizes outstanding achievement in affordable housing and community economic development between partnering FHLBC member institutions and non-profit organizations.
Private Client Group
Net income was $163 million, up $59 million or 56% from a year ago. Adjusted net income was $169 million, up $60 million or 54% from a year ago. Adjusted net income in Private Client Group (PCG), excluding Insurance, was $105 million, up $8 million or 8% from a year ago. Results reflect higher revenue, driven by growth in client assets, and focused cost management. The prior year's results benefited from higher than usual asset management revenue from a strategic investment. Adjusted net income in Insurance was $64 million, up $52 million, as revenues improved significantly due to the reduced impact of movements in long-term interest rates in the current quarter relative to a year ago and continued premiums growth in both creditor and life insurance businesses.
Assets under management and administration grew by $44 billion or 10% from a year ago to $479 billion, due to market appreciation and new client assets.
In late January, we completed the acquisition of a Hong Kong and Singapore-based wealth management services provider. Operating as BMO Private Bank in Asia, this acquisition will provide private banking services to high net worth individuals in the Asia-Pacific region, and supports BMO's plans to create a truly global service for wealthy individuals looking to manage their Asian and North American investments.
BMO InvestorLine was named the top bank-owned online brokerage firm in Canada for the second consecutive year in the 14th annual Globe and Mail ranking of online brokers. BMO InvestorLine ranked among the top three leading online brokerages in Canada.
BMO Global Asset Management U.S. received three Wall Street Journal Category King rankings. Its BMO TCH Corporate Income Fund and BMO TCH Core Plus Bond Fund ranked in the top ten in terms of one-year performance in 2012 out of more than 600 funds and its BMO Intermediate Tax-free Fund's one-year performance in 2012 ranked in the top ten out of nearly 400 funds.
BMO Capital Markets
Net income for the current quarter was a very strong $310 million, up $86 million or 38% from a year ago. This performance was supported by our strategy of continuing to operate with a diversified portfolio of businesses and a strong client focus. These factors, coupled with an improving economic outlook, resulted in very good revenue performance in both the investment and corporate banking businesses, as well as the trading products business. In particular, there was good growth in mergers and acquisition activity and higher debt underwriting fees across our North American platform, as well as increases in trading revenue. Revenue increased $129 million or 17% from a year ago to $904 million.
Demonstrating our success at focusing on core clients, during the quarter BMO Capital Markets was named 2012 Best Equity House, Canada in International Financing Review, a Thomson Reuters publication. This award is a testament to our ability to develop innovative solutions for our clients' most complex problems, while executing at a consistently high standard.
BMO Capital Markets participated in 169 new issues in the quarter including 55 corporate debt deals, 48 government debt deals, 58 common equity transactions and eight issues of preferred shares, raising $57 billion.
Corporate Services
Corporate Services net loss for the quarter was $65 million, compared with net income of $181 million a year ago. The decrease in reported results was significantly larger than the decrease in adjusted results. The difference was primarily due to high revenues from run-off structured credit activities in reported results a year ago. On an adjusted basis, the net loss was $94 million, compared with net income of $20 million a year ago. Adjusting items are detailed in the Adjusted Net Income section and in the Non-GAAP Measures section. Adjusted expenses were $80 million higher primarily due to increased benefit costs including pension costs, the timing of technology investment spending and higher severance costs in the current quarter. Adjusted recoveries of credit losses decreased $72 million to a recovery of $51 million, due to an $83 million reduction in the recoveries on the M&I purchased credit impaired loan portfolio. Adjusted revenues decreased $58 million due to lower securities gains, a higher taxable equivalent basis (teb) group offset in the current quarter and lower revenue from a variety of items, including treasury-related items, none of which were individually significant.
Adjusted Net Income
Adjusted net income was $1,041 million for the first quarter of 2013, up $69 million or 7% from a year ago. Adjusted earnings per share were $1.52, up 7% from $1.42 a year ago.
Management has designated certain amounts as adjusting items and has adjusted GAAP results so that we can discuss and present financial results without the effects of adjusting items to facilitate understanding of business performance and related trends. Management assesses performance on a GAAP basis and on an adjusted basis and considers both to be useful in the assessment of underlying business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. Adjusted results and measures are non-GAAP and, together with items excluded in determining adjusted results, are disclosed in more detail in the Non-GAAP Measures section, along with comments on the uses and limitations of such measures. Items excluded from first quarter 2013 results in the determination of adjusted results totalled $7 million of net income or $0.01 per share and were comprised of:
·the $79 million after-tax net benefit for credit-related items in respect of the acquired M&I performing loan portfolio, consisting of $210 million for the recognition in net interest income of a portion of the credit mark on the portfolio (including $65 million for the release of the credit mark related to early repayment of loans), net of an $82 million specific provision for credit losses and related income taxes of $49 million. These credit-related items in respect of the acquired M&I performing loan portfolio can significantly impact both net interest income and the provision for credit losses in different periods over the life of the acquired M&I performing loan portfolio;
·costs of $92 million ($57 million after tax) for integration of the acquired business including amounts related to system conversions, restructuring and other employee-related charges, consulting fees and marketing costs related to rebranding activities;
·the $7 million before after-tax benefit from run-off structured credit activities (our credit protection vehicle and structured investment vehicle). These vehicles are consolidated on our balance sheet and results primarily reflect valuation changes associated with these activities that have been included in trading revenue; and
·the amortization of acquisition-related intangible assets of $31 million ($22 million after tax).
All of the above adjusting items were recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is charged to the operating groups.
The impact of adjusting items for comparative periods is summarized in the Non-GAAP Measures section.
Caution
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements that follows.
The foregoing sections contain adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.
Management's Discussion and Analysis
Management‘s Discussion and Analysis (MD&A) commentary is as of February 26, 2013. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS, unless indicated otherwise. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2013, as well as the audited consolidated financial statements for the year ended October 31, 2012, and Management’s Discussion and Analysis for fiscal 2012. The material that precedes this section comprises part of this MD&A.
The annual MD&A includes a comprehensive discussion of our businesses, strategies and objectives, and 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.
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 January 31, 2013, 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 January 31, 2013, 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 accurately and fairly reflect the transactions and dispositions of the assets of BMO in reasonable detail; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated 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 consolidated 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 January 31, 2013, 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 and Conduct Review Committee reviewed this document 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 2012 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.
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.
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.
Caution Regarding Forward-Looking Statements
Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2013 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, interest rate 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 and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; 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; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to anticipate and effectively manage risks associated with all of the foregoing factors.
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 below, 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, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.
Our first quarter 2013 regulatory capital, risk-weighted assets and regulatory capital ratios have been calculated pursuant to the Capital Adequacy Requirement (CAR) Guideline released by the Office of the Superintendent of Financial Institutions (OSFI) in December 2012 to implement the Basel III Accord in Canada. When calculating the pro-forma impact of Basel III on our regulatory capital, risk-weighted assets (including Counterparty Credit Risk and Market Risk) and regulatory capital ratios in prior periods, we assumed that our interpretation of OSFI's draft implementation guideline of rules and amendments announced by the Basel Committee on Banking Supervision (BCBS), and our models used to assess those requirements, were consistent with the final requirements that would be promulgated by OSFI. We 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 would be adopted by OSFI as proposed by BCBS, unless OSFI had expressly advised otherwise. We also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in the relevant pro-forma calculations. We have not recalculated our pro-forma Basel III regulatory capital, risk-weighted assets or capital ratios based on the CAR Guideline and references to Basel III pro-forma items referred to these items as previously estimated. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.
Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality, risk of default and losses on default of the underlying assets of the structured investment vehicle were material factors we considered when establishing our expectations regarding the structured investment vehicle discussed in this interim MD&A, including the adequacy of first-loss protection. Key assumptions included that assets will continue to be sold with a view to reducing the size of the structured investment vehicle, under various asset price scenarios, and that the level of default and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding continuing difficult market conditions.
Assumptions about the level of default and losses on default were material factors we considered when establishing our expectations regarding the future performance of the transactions into which our credit protection vehicle has entered. Among the key assumptions were that the level of default and losses on default will be consistent with historical experience. Material factors that were taken into account when establishing our expectations regarding the future risk of credit losses in our credit protection vehicle and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges into which BMO has entered.
Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our 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. See the Economic Outlook and Review section of this interim MD&A.
Economic Outlook and Review
The Canadian economy continues to grow modestly, held back by a strong Canadian dollar, elevated household debt and fiscal restraint. In addition, activity in the housing market has slowed in response to tighter mortgage rules and reduced affordability in some regions. Although consumer spending and the housing market are expected to grow moderately in 2013, economic growth should improve in the second half of the year in response to a pickup in global demand. Moreover, business investment should strengthen amid elevated commodity prices and low commercial real estate vacancy rates, extending a recent upturn in business loan growth. The major resource-producing provinces of Newfoundland & Labrador, Alberta and Saskatchewan should lead the economic expansion. The unemployment rate is expected to remain near 7% in 2013 and inflation should stay below 2%. The Canadian dollar is expected to trade close to parity with the U.S. dollar, encouraging the central bank to hold overnight rates at 1% for a third consecutive year.
The U.S. economy is gradually improving. Although real GDP stalled in the latter part of 2012, this weakness was primarily due to a decline in defence spending and a drawdown in business inventories due to Hurricane Sandy. Meantime, strong gains in business spending and residential construction, as well as a pickup in consumer spending, indicate good momentum in domestic demand. However, tighter fiscal policy will likely restrain the expansion in 2013. Although lawmakers averted most of the tax increases that were scheduled to take effect on January 1, 2013, increases in payroll taxes and higher rates on upper-income earners will likely dampen household spending. In addition, widespread cutbacks in federal spending are scheduled to take effect this year, and political uncertainty related to government funding could temper business spending and hiring. However, assuming a resolution of the political issues, business investment and job growth should subsequently strengthen. Together with improved household finances and pent-up demand for housing and motor vehicles, this should encourage stronger economic growth in the second half of the year and reduce the unemployment rate to a five-year low of 7.5%. Despite the improving economy, the Federal Reserve will likely maintain a near-zero interest-rate policy for a fifth consecutive year, and continue to purchase debt securities for some time to come.
The U.S. Midwest economy is growing at a comparable rate to the rest of the country despite a restrictive fiscal policy, supported by rising automotive production. The economy is expected to gain momentum this year as the housing recovery strengthens, the manufacturing industry benefits from a pickup in global demand and the agricultural industry rebounds from a drought-ravaged year.
This Economic Outlook and Review 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 first quarter of 2012 by the weakening of the U.S. dollar, and were increased by a strengthening of the U.S. dollar relative to the fourth quarter of 2012. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, decreased by 1.8% from a year ago and increased by 0.6% from the average of the fourth quarter. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Other Value Measures
BMO's average annual total shareholder return for the three-year period ended January 31, 2013, was 11.8%.
Net economic profit (NEP) was $318 million, compared with $361 million in the fourth quarter and $434 million in the first quarter of 2012. Adjusted NEP was $289 million, compared with $380 million in the fourth quarter and $273 million in the first quarter of 2012. Changes in adjusted NEP relative to the first quarter of 2012 were attributable to the combination of increased capital and increased earnings. NEP of $318 million represents the net income that is attributable to shareholders ($1,030 million), less preferred share dividends ($33 million), plus the after-tax amortization of intangible assets ($22 million), net of a charge for capital ($701 million), and is considered an effective measure of added economic value. Adjusted NEP is calculated in the same manner using adjusted net income rather than reported net income and excluding the addition of the amortization of intangible assets.
NEP and adjusted NEP are non-GAAP measures. Please see the Non-GAAP Measures section for a discussion on the use and limitations of non-GAAP measures.
Net Income
Q1 2013 vs Q1 2012
Net income was $1,048 million for the first quarter of 2013, down $61 million or 5% from a year ago. Earnings per share were $1.53, down 6% from $1.63 a year ago.
Adjusted net income was $1,041 million, up $69 million or 7% from a year ago. Adjusted earnings per share were $1.52, up 7% from $1.42 a year ago. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the preceding Adjusted Net Income section and in the Non-GAAP Measures section, together with comments on the uses and limitations of such measures.
On an adjusted basis, revenues increased by more than expenses, with particularly strong growth in non-interest revenue. BMO Capital Markets adjusted net income was significantly higher due to more favourable market conditions that contributed to strong investment banking and trading revenues. Private Client Group (PCG) results also increased significantly due to improvements in its Insurance results and growth in client assets. P&C U.S. adjusted net income improved from a year ago due to the benefits of reduced expenses and lower provisions for credit losses. P&C Canada's results were higher due to reduced provisions for credit losses and increased volumes across most products, offset in part by lower net interest margin. Corporate Services adjusted results were worse than a year ago, due to a lower recovery of provisions for credit losses on the M&I purchased credit impaired loan portfolio, higher expenses and lower revenues. BMO results benefited from a lower effective tax rate.
Q1 2013 vs Q4 2012
Net income decreased $34 million or 3% from the fourth quarter and earnings per share decreased $0.06 or 4%. Adjusted net income decreased $84 million or 7% and adjusted earnings per share decreased $0.13 or 8%.
Results in the current quarter were lower relative to the fourth quarter due to the $73 million cost of performance-based compensation in respect of employees that are eligible to retire that is expensed in the first quarter of each year, as well as increased employee benefits costs, which are typically higher in the first quarter of the year. On an adjusted basis, there was significant growth in P&C U.S. and more modest growth in P&C Canada, while results in PCG were unchanged. BMO Capital Markets net income was slightly lower due to a higher income tax recovery in the preceding quarter. Corporate Services adjusted results decreased due to lower revenue from a variety of items, including treasury-related items, none of which were individually significant. In addition, there were less favourable recoveries of credit losses, as discussed above, and increased expenses, including higher benefit costs and higher performance-based compensation in respect of employees eligible to retire, which are both typically higher in the first quarter of each year.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Revenue
Total revenue decreased $36 million or 1% from the first quarter a year ago to $4,081 million. Adjusted revenue increased $118 million or 3% to $3,861 million. There was strong growth in BMO Capital Markets, as favourable market conditions generated strong investment banking and trading results, and in PCG due largely to higher Insurance results as well as growth in client assets. P&C Canada revenues were unchanged, reflecting the combination of increases in volumes across most products and lower net interest margin. P&C U.S. revenues decreased due to reductions in net interest margin, securities gains and deposit fees, partially offset by increases in gains on sale of newly originated mortgages and commercial lending fees. Corporate Services' adjusted revenues also decreased, due to reduced securities gains, a higher teb group offset in the current quarter and lower revenue from a variety of items, including treasury-related items, none of which were individually significant. The weaker U.S. dollar decreased adjusted revenue growth by $22 million or 1%.
Revenue decreased $95 million or 2% from the fourth quarter. Adjusted revenue decreased $59 million or 2%. There was modest growth across all the operating groups with the exception of PCG, where revenue growth in wealth businesses was more than offset by reduced Insurance revenue. There was reduced revenue in Corporate Services, due primarily to lower revenue from a variety of items, as discussed above. The stronger U.S. dollar increased adjusted revenue growth by $7 million.
Changes in net interest income and non-interest revenue are reviewed in the sections that follow.
This section contains adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.
Net Interest Income
Net interest income decreased $102 million or 4% from a year ago to $2,216 million in the first quarter of 2013. Reported net interest income includes amounts for the recognition of a portion of the credit mark on the M&I purchased performing loan portfolio. Adjusted net interest income decreased $88 million or 4% to $2,004 million. On an adjusted basis, there were reductions in PCG, P&C U.S., P&C Canada and Corporate Services, with an increase in BMO Capital Markets.
BMO‘s overall net interest margin decreased by 20 basis points year over year to 1.85%. Adjusted net interest margin decreased by 18 basis points to 1.67% with decreases in each of the operating groups. Changes are discussed in the Review of Operating Groups’ Performance section.
Average earning assets in the first quarter of 2013 increased $26 billion or 6% relative to a year ago, including a $3 billion decrease as a result of the weaker U.S. dollar. There was growth in each operating group. The major increases were in BMO Capital Markets, due to increased trading securities as a result of investment opportunities, and P&C Canada, driven by volume growth across most products.
Relative to the fourth quarter, net interest income increased $71 million or 3%. Adjusted net interest income increased $48 million or 2%. There was a strong increase in BMO Capital Markets due to a charge on the termination of a contract in the U.S. business in the previous quarter, as well as increases in PCG, P&C Canada and P&C U.S.
BMO's overall net interest margin and adjusted net interest margin were relatively unchanged from the fourth quarter. On an adjusted basis, decreases in the P&C businesses were offset by increases in PCG and BMO Capital Markets.
Average earning assets increased $9 billion or 2% from the fourth quarter, including a $1 billion increase as a result of the stronger U.S. dollar. There was good growth across each of the operating groups.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Non-Interest Revenue
Non-interest revenue increased $66 million or 4% from the first quarter a year ago to $1,865 million. Adjusting items in non-interest revenue relate to the run-off of structured credit activities, which are reflected in trading revenues. Adjusted non-interest revenue increased $206 million or 13% to $1,857 million. There was a significant improvement in underwriting and advisory fees, primarily mergers and acquisitions and debt underwriting fees. Insurance revenues also improved significantly, due to the reduced impact of movements in long-term interest rates in the current quarter relative to a year ago and business growth. There was good growth in mutual fund revenues and lending fees, with more modest increases in card services and adjusted trading revenues.
Relative to the fourth quarter, non-interest revenue decreased $166 million or 8%, and adjusted non-interest revenue decreased $107 million or 5%. Insurance revenues were lower, and there were also decreases in securities gains and adjusted trading revenues. Other revenue was down from the higher level in the fourth quarter. The above reductions were partly offset by a large increase in underwriting and advisory fees, primarily mergers and acquisitions and debt underwriting fees, as well as improved mutual fund revenues and lending fees.
Non-interest revenue is detailed in the unaudited interim consolidated financial statements.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Non-Interest Expense
Non-interest expense increased $36 million or 1% from the first quarter a year ago to $2,590 million. Adjusted non-interest expense increased $86 million or 4% to $2,464 million mainly due to higher employee costs and increased performance-based compensation, given improved revenue. The weaker U.S. dollar decreased adjusted expense growth by $15 million or 1%.
Relative to the fourth quarter, non-interest expense decreased $111 million or 4%. Adjusted non-interest expense increased $28 million or 1%. Adjusted expense includes $73 million of performance-based compensation in respect of employees that are eligible to retire, which is expensed each year in the first quarter, and increased employee benefits costs, which are typically higher in the first quarter of the year. The above were mostly offset by continued cost management initiatives. The stronger U.S. dollar increased adjusted expense growth by $5 million. The quarter-over-quarter operating leverage on a reported basis was 1.8% and the adjusted operating leverage was negative 2.7%. On a basis that adjusts for the current quarter stock-based compensation mentioned above, the quarter-over-quarter adjusted operating leverage was 0.3%.
Non-interest expense is detailed in the unaudited interim consolidated financial statements.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Risk Management
Our risk management practices and key measures have not changed significantly from those outlined on pages 75 to 92 of BMO's 2012 annual MD&A.
Provisions for Credit Losses
In the first quarter of 2013, the provision for credit losses was $178 million and the adjusted provision for credit losses was $96 million. Adjusting items included an $82 million specific provision on the M&I purchased performing loan portfolio. There was no change in the collective allowance for either the M&I purchased performing or other loan portfolios. The adjusted provision for credit losses of $96 million represents an annualized 16 basis points of average net loans and acceptances, compared with $113 million or an annualized 20 basis points in the fourth quarter of 2012 and $91 million or an annualized 17 basis points in the first quarter of 2012. Included in the adjusted specific provision for credit losses is a recovery of $59 million related to the M&I purchased credit impaired loans this quarter, compared with recoveries of $132 million in the fourth quarter of 2012 and $142 million a year ago.
On a geographic basis, specific provisions in Canada and all other countries (excluding the United States) were $128 million in the current quarter, $143 million in the fourth quarter of 2012 and $153 million a year ago. Specific provisions in the United States were $50 million in the current quarter, $73 million in the fourth quarter of 2012 and a $31 million recovery a year ago. On an adjusted basis, there were recoveries in the United States for the comparable periods of $32 million, $30 million and $62 million, respectively.
Commencing in the first quarter of 2013, provisions for credit losses in the operating groups are reported on an actual loss basis, rather than on an expected loss basis. Prior period results have been restated accordingly. Provisions by operating group are outlined in Tables 6 and 13.
The provision for credit losses in P&C Canada and Private Client Group declined quarter over quarter by $18 million and $9 million, respectively. P&C U.S. provisions decreased by $43 million from last quarter to $32 million in the current quarter. In BMO Capital Markets, the provision for credit losses improved quarter over quarter due to higher recoveries of previously written-off amounts. On an adjusted basis, Corporate Services recovery was $51 million compared with a $115 million recovery last quarter, due to the decline in recoveries related to the M&I purchased credit impaired loans.
Impaired Loans
Total gross impaired loans, on a basis that excludes the purchased credit impaired loans, were $2,912 million at the end of the current quarter, down from $2,976 million in the fourth quarter of 2012 and up from $2,657 million a year ago. Included in the amount above at the end of the quarter, were $991 million of gross impaired loans related to acquired portfolios, of which $128 million is subject to a loss-sharing agreement that expires in 2015 for commercial loans and in 2020 for retail loans.
Impaired loan formations (excluding the M&I purchased performing loan portfolio) totalled $355 million in the current quarter, down from $428 million in the fourth quarter of 2012 and $392 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $275 million in the current quarter, compared with $359 million in the fourth quarter of 2012 and $232 million a year ago.
Residential mortgage and home equity line of credit (Heloc) exposures are areas of interest in the current environment. BMO regularly performs stress testing on its mortgage and Heloc portfolios to evaluate the potential impact of tail events. These stress tests incorporate moderate to severe adverse scenarios. The resulting credit losses vary depending on the severity of the scenario and are considered to be manageable.
Market Risk
Total Trading VaR declined slightly over the quarter due to reduced exposure in equity and interest rate risk factors, coupled with increased diversification. Enhanced risk capture was the main driver behind the moderately higher AFS (Available-For-Sale) VaR. The Credit VaR calculation was amended consistent with our Debt Specific Risk model, which has been submitted for approval for use as a regulatory capital internal model. Total Trading VaR and Stressed VaR figures have been restated for October 31, 2012. For Total Trading VaR, the Credit and Interest Rate VaR figures have been restated with general credit risk reclassified from Interest Rate VaR to Credit VaR. Total AFS VaR has been amended to include specific credit risk. Stressed VaR figures have been restated due to new calibration models implemented in relation to the internal model submission.
There were no significant changes in our structural market risk management practices during the quarter. Structural Market Value Exposure (MVE) is driven by rising interest rates and primarily reflects a lower market value for fixed-rate loans.
Structural Earnings Volatility (EV) is driven by falling interest rates and primarily reflects the risk of prime-based loans repricing at lower rates. MVE decreased from the prior quarter primarily due to lower modelled volatility. EV and earnings exposures under falling interest rate scenarios decreased from the prior quarter largely due to reduced deposit floors. Earnings benefits under rising interest rate scenarios increased from the prior quarter primarily due to wider modelled spreads on deposits and higher asset sensitivity. BMO‘s market risk management practices and key measures are outlined on pages 82 to 86 of BMO’s 2012 Annual Report.
Liquidity and Funding Risk
Liquidity and funding risk is managed under an appropriate management framework. There were no material changes in the framework during the quarter.
BMO‘s liquid assets are primarily held in our trading businesses and in supplemental liquidity pools that are maintained for contingency purposes. Liquid assets include high-quality assets that are marketable, can be pledged as security for borrowings and can be converted to cash in a time frame that meets our liquidity and funding requirements. They do not include potential liquidity that could be realized under borrowing programs with central banks or other market sources. As at January 31, 2013, liquid assets were $227 billion, compared with $211 billion as at October 31, 2012. The increase in liquid assets was primarily attributable to an increase in cash on deposit at central banks and higher reverse repo balances. BMO’s cash and securities as a percentage of total assets was 30.6% as at January 31, 2013, compared with 29.4% as at October 31, 2012.
Liquid assets are primarily held at the parent bank level, in our U.S. legal entity BMO Harris Bank, and in BMO's broker/dealer operations in Canada and internationally. In some cases, a portion of those liquid assets have been pledged by certain entities to others in exchange for funding.
In the ordinary course of the bank's day-to-day business activities, a portion of cash, securities and securities borrowed or purchased under resale agreements is pledged as collateral to support trading activities and participation in clearing and payment systems. BMO may also pledge assets to raise secured funding or to secure deposits from select counterparties. Unencumbered liquid assets, defined as total liquid assets less pledged liquid assets, totalled $161 billion compared with $145 billion at October 31, 2012, due to the factors mentioned above. As at January 31, 2013, pledged assets totalled $107 billion, compared with $109 billion at October 31, 2012. Pledged assets decreased slightly in the first quarter primarily due to secured term funding maturities. As at January 31, 2013, pledged assets totalled 19.8% of total assets.
Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets is longer term (typically maturing in two to ten years) to better match the term to maturity for these assets.
Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. During the first quarter, BMO issued $7.2 billion of wholesale term funding in Canada and internationally. Total wholesale term funding outstanding was $74.6 billion at January 31, 2013, compared with $72.1 billion at October 31, 2012. The increase was used to fund net asset growth and refinance upcoming wholesale term funding maturities. The bank expects to continue accessing the wholesale term funding markets in 2013, primarily to refinance wholesale term funding maturities and net asset growth that may occur over the course of the year. BMO‘s liquidity and funding management practices and key measures are outlined on pages 86 to 88 of BMO’s 2012 annual Report.
Insurance Risk
There were no significant changes in the risk management practices or risk levels of our insurance business during the quarter. BMO‘s insurance risk management practices are outlined on page 89 of BMO’s 2012 Annual Report.
Caution
This Risk Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Income Taxes
The provision for income taxes of $265 million decreased $48 million from the first quarter of 2012 and increased $64 million from the fourth quarter of 2012. The effective tax rate for the quarter was 20.2%, compared with 22.0% a year ago and 15.7% in the fourth quarter.
The adjusted provision for income taxes of $260 million decreased $42 million from a year ago and increased $14 million from the fourth quarter. The adjusted effective tax rate was 19.9% in the current quarter, compared with 23.7% in the first quarter of 2012 and 17.9% in the fourth quarter of 2012.
The lower adjusted effective tax rate in the current quarter relative to the first quarter of 2012 was primarily due to higher recoveries of prior periods‘ income taxes and higher tax exempt earnings. The higher adjusted effective tax rate in the current quarter relative to the fourth quarter of 2012 was primarily due to lower recoveries of prior periods’ income taxes. The adjusted tax rate is computed using adjusted net income rather than net income in the determination of income subject to tax.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Summary Quarterly Earnings Trends (Cont'd.)
BMO‘s quarterly earnings trends were reviewed in detail on pages 96 and 97 of BMO’s 2012 annual MD&A. 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. Table 13 outlines summary results for the second quarter of fiscal 2011 through the first quarter of fiscal 2013.
Periodically, certain business lines and units within the business lines are transferred between client operating groups to more closely align BMO‘s organizational structure with its strategic priorities. Comparative figures have been restated to conform to the current presentation. This quarter, we commenced charging provisions for credit losses to the bank’s operating groups based on actual credit losses incurred. Previously we had charged the groups with credit losses based on an expected loss provisioning methodology. Prior period results have been restated accordingly.
We have remained focused on embracing a culture that places the customer at the centre of everything we do. Economic conditions were at times challenging for some of our businesses in 2011 and 2012, but conditions have improved overall and quarterly adjusted results have generally trended higher over the past two years. In recent quarters, we have become more focused on improving our productivity.
P&C Canada had good volume growth across most products in both personal and commercial segments. Net income has generally trended higher in 2012 and into the first quarter of 2013, with revenue and expense growth moderating and provisions for credit losses decreasing during that period. Growth in earnings and revenue has been affected by reduced net interest margin as a result of the low interest rate environment.
P&C U.S. net income increased. Results started to improve significantly late in the third quarter of 2011, due to the benefits of the M&I acquisition as well as increases in commercial loan balances, which had seen minimal growth since the economic downturn that started in 2007.
PCG operating results have been strong in recent quarters. Quarterly results in PCG, excluding Insurance, have grown on a relatively consistent basis, driven by growth in client assets as market conditions improved. In the third quarter of 2011, PCG's results began to reflect the acquisition of the M&I wealth management business. Quarterly results in Insurance have been subject to variability.
BMO Capital Markets results in the first nine months of 2011 were very strong, but fell in the fourth quarter of that year due to a difficult market environment. Results in the first nine months of 2012 were generally good, but were down from the levels recorded in 2011 due to less favourable market conditions. Results in the final quarter of 2012 were stronger, due to increased revenues and a recovery of prior periods' income taxes, and net income for 2012 was better than in 2011. Results for the most recent quarter also reflect high net income, due to more favourable market conditions that contributed to very strong investment banking activity and trading revenues.
BMO's overall provisions for credit losses measured as a percentage of loans and acceptances were lower in 2012 than in 2011, and that has continued in 2013 to date. Adjusted provisions, which exclude provisions on the M&I purchased performing loan portfolio and changes in the collective allowance, were relatively consistent throughout 2012 and into 2013 and lower than in 2011, due in part to recoveries of provisions on the M&I purchased credit impaired loan portfolio and an improvement in the U.S. credit environment.
Corporate Services quarterly net income can vary, in large part due to the inclusion of the adjusting items, which are largely recorded in Corporate Services. Adjusted results in Corporate Services were relatively steady in 2012 and better than in 2011. This was primarily due to a reduction in the adjusted provision for credit losses recorded in Corporate Services in 2012, reflecting the significant recoveries of provisions on the M&I purchased credit impaired loan portfolio. These recoveries can vary and reduced recoveries in the first quarter of 2013 together with lower revenues and increased expenses lowered Corporate Services results in the quarter.
The U.S. dollar weakened in the first half of 2011 before strengthening in the fourth quarter and reaching a level close to parity. Movements in exchange rates in 2012 and for 2013 to date were more subdued. A weaker U.S. dollar lowers the translated value of U.S.-dollar-denominated revenues, expenses, provisions for credit losses, income taxes and net income.
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 adjusted effective rate was lower in 2012 than in 2011 due in large part to a 1.6 percentage point reduction in the statutory Canadian income tax rate in 2012 and higher recoveries of prior periods’ income taxes. The rate increased in 2013 due to reduced recoveries.
Caution
This Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Balance Sheet
Total assets of $542.3 billion at January 31, 2013, increased $16.8 billion from October 31, 2012, with minimal impact from the stronger U.S. dollar. The increase primarily reflects growth in cash and cash equivalents and interest bearing deposits with banks of $11.4 billion, securities borrowed or purchased under resale agreements of $5.9 billion and net loans and acceptances of $5.3 billion, partly offset by decreases in the remaining assets of $5.8 billion.
The $11.4 billion increase in cash and cash equivalents and interest bearing deposits with banks was primarily due to increased balances held with central banks.
The $5.9 billion increase in securities borrowed or purchased under resale agreements was mainly due to increased client-driven activities.
The $5.3 billion increase in net loans and acceptances was primarily due to an increase in loans to businesses and governments in both P&C U.S. and P&C Canada and an increase in residential mortgages, primarily in P&C Canada.
The $5.8 billion decrease in the remaining assets was primarily related to a decline in derivative financial assets, primarily in interest rate contracts. There was a comparable decrease in derivative financial liabilities.
Liabilities and equity increased $16.8 billion from October 31, 2012. The change primarily reflects increases in deposits of $27.2 billion, partly offset by decreases in derivative financial liabilities of $5.2 billion, securities lent or sold under repurchase agreements of $2.0 billion, securities sold but not yet purchased of $2.0 billion and other liabilities of $2.2 billion. All remaining liabilities and equity increased by a combined $1.0 billion.
The $27.2 billion increase in deposits was largely driven by a $17.1 billion increase in business and government deposits due to increased U.S. deposits and U.S. dollar wholesale funding. Deposits by individuals increased $5.5 billion, while deposits by banks increased $4.6 billion.
Contractual obligations by year of maturity were outlined in Table 23 on page 113 of BMO's 2012 Annual Report. There have been no material changes to contractual obligations that are outside the ordinary course of our business. Note 19 to the unaudited interim consolidated financial statements provides further details on contractual maturities of assets and liabilities at the end of the quarter.
Capital Management
Q1-2013 Regulatory Capital Review
BMO‘s Basel III capital position is strong, with a Common Equity Tier 1 (CET1) Ratio of 9.4% at January 31, 2013, well in excess of the Office of the Superintendent of Financial Institutions’ (OSFI's) expectation that banks attain a 7% target, as discussed in the following paragraph.
Effective the first quarter of 2013, regulatory capital requirements for BMO are determined on a Basel III basis. In 2013, the minimum required Basel III capital ratios are a 3.5% CET1 Ratio, 4.5% Tier 1 Ratio and 8% Total Capital Ratio, such ratios being calculated using a five year phase-in of regulatory adjustments and nine year phase-out of instruments that no longer qualify as regulatory capital under the Basel III rules. However, OSFI‘s guidance requires Canadian deposit-taking institutions to meet the 2019 Basel III capital requirements, other than the phase-out of non-qualifying capital (also referred to as the ’all-in' requirements) in 2013 and expects them to attain a target Basel III CET1 Ratio of at least 7% (4.5% minimum plus 2.5% capital conservation buffer) by January 31, 2013.
The CET1 Ratio increased by approximately 75 basis points from our pro-forma ratio at October 31, 2012, due to higher CET1 capital and lower risk-weighted assets (RWA), as described below.
CET1 capital at January 31, 2013, was $19.9 billion, or $0.6 billion higher than the pro-forma CET1 capital of $19.3 billion at October 31, 2012, due mainly to retained earnings growth and the issuance of common shares through the Shareholder Dividend Reinvestment and Share Purchase Plan (DRIP) and the exercise of stock options.
The Basel III RWA of $211 billion at January 31, 2013, was $11 billion lower than the Basel III pro-forma estimate of $222 billion at October 31, 2012, due mainly to lower Credit Valuation Adjustment (CVA) RWA. The lower CVA RWA resulted from OSFI‘s decision, announced in December 2012, to delay the effective date for the imposition of the CVA risk capital charge until January 2014. The delay is intended to synchronize Canada’s implementation of the CVA risk capital charge with Basel III implementation in the United States and European Union countries. This delay improved our CET1 Ratio at January 31, 2013, by approximately 35 basis points.
The bank‘s Basel III Tier 1 and Total Capital Ratios were 11.1% and 13.4%, respectively, at January 31, 2013, compared with 10.5% and 12.9%, respectively, on a pro-forma basis at October 31, 2012. The ratios improved due to higher CET1 capital and lower RWA, as described above, partly offset by the phase-out of non-common instruments that do not meet OSFI’s Basel III requirements, including the non-viability contingent capital requirements, and the $200 million preferred share redemption announced in January 2013.
BMO‘s transitional Assets-to-Capital Multiple (ACM), a leverage ratio monitored by OSFI, was 16.1 at January 31, 2013. BMO’s ACM increased from 15.2 at October 31, 2012, on a Basel II basis primarily due to balance sheet growth and Basel III transitional modifications.
Additional details on the Basel III regulatory capital changes can be found in the Enterprise-Wide Capital Management section on pages 60 to 64 of BMO's 2012 Annual Report.
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 (although they do not attract tax until realized). When coupled with the foreign exchange impact of U.S.-dollar-denominated RWA on Canadian-dollar equivalent RWA, and with the impact of U.S.-dollar-denominated capital deductions on our Canadian dollar capital, this may result in volatility in the bank‘s capital ratios. BMO may partially hedge this foreign exchange risk by funding its foreign investment in U.S. dollars and, to reduce the impact of foreign exchange rate changes on the bank’s capital ratios, may enter into derivatives contracts, such as forward currency contracts, or elect to fund its investment in Canadian dollars.
Other Capital Developments
During the quarter, 1,280,000 common shares were issued through the DRIP and the exercise of stock options. On January 30, 2013, we announced that we had received approvals from the Toronto Stock Exchange (TSX) and OSFI to proceed with a normal course issuer bid through the facilities of the TSX to purchase, for cancellation, up to 15 million of BMO's common shares commencing February 1, 2013, and ending January 31, 2014. The timing and amount of purchases under the program are subject to management discretion based on factors such as market conditions and capital adequacy. The bank will only initiate any purchases under the bid after consulting with OSFI.
On February 26, 2013, BMO announced that the Board of Directors had declared a quarterly dividend payable to common shareholders of $0.74 per common share, up $0.02 per share from the preceding quarter. The increase in our dividend reflects our strong capital position and the success of our business strategies.
The dividend is payable May 28, 2013, to shareholders of record on May 1, 2013. 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 bank has determined that the common shares will be issued by the bank from treasury.
Caution
The foregoing Capital Management sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
The foregoing Capital Management sections contain adjusted results and measures, which are non-GAAP. Please see the Non-GAAP Measures section.
Details on share capital are outlined in Note 20 to the audited consolidated financial statements on pages 156 and 157 of BMO's 2012 Annual Report.
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 short-term and senior long-term 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 experience a material downgrade, 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 ratings could have other consequences, including those set out in Note 10 to the audited consolidated financial statements on page 143 of BMO’s 2012 Annual Report.
On January 28, 2013, Moody‘s completed a review of most of Canada’s banks and lowered BMO‘s long-term debt ratings and that of the other banks that were under review by one notch. Moody’s also lowered the subordinated debt ratings of BMO and all our Canadian peers. The credit ratings assigned to BMO‘s senior debt credit ratings by the other three rating agencies were unchanged in the quarter and all four have a stable outlook. All four ratings are indicative of high-grade, high-quality issues. The ratings are as follows: DBRS (AA); Fitch (AA-); Moody’s (Aa3); and Standard & Poor's (S&P) (A+).
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our key management personnel, joint ventures and associates 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.
Share-based payments granted to key management personnel are discussed in Note 27 to the audited consolidated financial statements on pages 168 to 169 of BMO's 2012 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, Special Purpose Entities (SPEs), and Guarantees, which are described on pages 64, 65, 66 and 70 of BMO's 2012 Annual Report as well as in Notes 5 and 7 to the unaudited interim consolidated financial statements. We consolidate all of our SPEs, except for certain Canadian customer securitization and structured finance vehicles. See the Select Financial Instruments section for comments on any significant changes to these arrangements during the quarter ended January 31, 2013.
Accounting Policies and Critical Accounting Estimates
Significant accounting policies are described in the notes to our audited consolidated financial statements for the year ended October 31, 2012, together with 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.
Future Changes in Accounting Policies
Effective November 1, 2013, BMO will adopt new standards on Employee Benefits, Fair Value Measurement, Consolidated Financial Statements, Investment in Associates and Joint Ventures, Offsetting, and Disclosure of Interests in Other Entities. Additional information on the new standards and amendments to existing standards can be found in Note 1 to the audited consolidated financial statements on pages 124 to 127 of BMO's 2012 Annual Report.
The above Future Changes in Accounting Policies section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
U.S. Regulatory Developments
We continue to monitor and prepare for U.S. regulatory developments including financial reforms under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and highlight recent developments in this section. For a more comprehensive discussion, see the U.S. Regulatory Developments section on page 69 of BMO's 2012 annual MD&A.
Under the Dodd-Frank Act, swaps will be subject to a comprehensive regulatory regime. Certain swaps will be required to be centrally cleared or traded on an exchange. BMO registered as a swap dealer with the U.S. Commodity Futures Trading Commission on December 31, 2012. Swap reporting and business conduct requirements are scheduled to go into effect on a staggered basis over the next six months. Capital and margin requirements relating to swaps are currently being reviewed by U.S. and international regulators.
In December 2012, the FRB issued for comment a proposed rulemaking that would establish enhanced prudential standards and early remediation requirements for certain foreign banks with U.S. operations, including BMO. The proposal would establish new requirements for organizational structure, risk management, capital, liquidity, stress testing, and early remediation covering all U.S. operations of foreign banks. The requirements specific to BMO Financial Corp. are similar to those that apply to domestic U.S. banks. The Federal Reserve Board has indicated the requirements would be effective July 1, 2015. BMO is in the process of reviewing the proposal.
Caution
This U.S. Regulatory Developments section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Select Financial Instruments
Pages 64 to 66 of BMO‘s 2012 annual MD&A provide enhanced disclosure relating to select financial instruments that, commencing in 2008 and based on subsequent assessments, 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. In March 2011, the FSB published Thematic Review on Risk Disclosure Practices - Peer Review Report, which updated its views on disclosure practices. On October 29, 2012, the Enhanced Disclosure Task Force of the FSB published its report, Enhancing the Risk Disclosures of Banks. We currently comply with many of the recommendations, and we continue to review our disclosures for future filings and enhance them as appropriate.
We follow a practice of reporting on significant changes in the select financial instruments since year end, if any, in our interim MD&A. There have been no changes of substance from the disclosure in our annual MD&A.
Select Geographic Exposures
Select geographic disclosures were disclosed and discussed on pages 67, 68, 112 and 113 of BMO's 2012 Annual Report. Our exposure to select countries of interest, as at January 31, 2013, is set out in the tables that follow, which summarize our exposure to Greece, Ireland, Italy, Portugal and Spain (GIIPS) along with a broader group of countries of interest in Europe where our gross exposure is greater than $500 million. Our gross and net portfolio exposures are summarized in Table 16 for lending, securities (inclusive of credit default swaps (CDS) activity), repo-style transactions and derivatives. These totals are further broken down by counterparty type in Tables 17 to 19. We also provide a summary of the October 31, 2012, exposures for ease of comparison. There has been limited change in our exposures.
For greater clarity, BMO's CDS exposures in Europe are outlined separately in Table 20. As part of our credit risk management framework, purchased CDS risk is controlled through a regularly reviewed list of approved counterparties. The majority of CDS exposures are offsetting in nature, typically contain matched contractual terms and are attributable to legacy credit trading strategies that have been in run-off mode since 2008.
·BMO also has exposure to entities in a number of European countries through our credit protection vehicle, U.S customer securitization vehicle and structured investment vehicle. These exposures are not included in the tables due to the credit protection incorporated in their structures. ◦BMO has direct exposure to those credit structures, which in turn have exposures to loans or securities originated by entities in Europe. As noted on pages 65 and 66 of BMO's 2012 annual MD&A in the Credit Protection Vehicle and Structured Investment Vehicle sections, these structures all have first-loss protection and hedges are in place for our credit protection vehicle.
◦The notional exposure held in the credit protection vehicle to issuers in Greece, Italy and Spain represented 0.6%, 0.9% and 1.1%, respectively, of its total notional exposure. The credit protection vehicle had notional exposure to seven of the other 12 countries that share the euro currency. This exposure represented 11.2% of total notional exposure, of which 82.4% was rated investment grade by S&P (71.4% by Moody‘s). The notional exposure to the rest of Europe was 13.0% of total notional exposure, with 66.9% rated investment grade by S&P (61.1% by Moody’s). BMO is well protected as a result of both first-loss protection and hedges that are in place.
◦BMO has exposure to GIIPS and other European countries through our U.S. customer securitization vehicle, which has commitments that involve reliance on collateral of which 0.98% represents loans or securities originated by entities in Europe. At quarter end, exposure to Germany was the largest component at 0.25%. Exposure to Spain was approximately 0.11%, and there was no exposure to Italy, Ireland, Greece or Portugal.
◦The structured investment vehicle's par value exposure to entities in European countries totalled $471 million at January 31, 2013, of which $0.1 million was exposure to GIIPS, $204 million to the other Eurozone countries and $267 million to the rest of Europe. The largest exposures included the United Kingdom at $213 million and the Netherlands at $114 million. These amounts included exposure through collateralized bond obligation (CBO) and collateralized loan obligation (CLO) investments and residential mortgage-backed securities, which have credit exposures to borrowers or issuers operating in Europe.
·BMO has exposure to European supranational institutions totalling $0.5 billion, predominantly in the form of tradeable cash products.
·BMO's indirect exposure to Europe in the form of euro-denominated collateral to support trading activity was EUR880 million in securities issued by entities in European countries, of which EUR2 million was held in securities related to GIIPS and EUR282 million was in German securities. In addition, EUR281 million of cash collateral was also held at January 31, 2013.
·Indirect exposure by way of guarantees from entities in European countries totalled $421 million, of which $3 million was exposure to GIIPS, $198 million to the other Eurozone countries and $221 million to the rest of Europe.
The following sections review the financial results of each of our operating segments and operating groups for the first quarter of 2013.
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 results reflect certain items in respect of the acquired loan portfolio, including the recognition of a portion of the credit mark that is reflected in net interest income over the term of the purchased loans and provisions for credit losses on the acquired portfolio. Integration and restructuring costs are also included in Corporate Services.
Commencing in the first quarter of 2013, we changed the way in which we evaluate our operating segments to reflect the provisions for credit losses on an actual credit loss basis. The change in allocation methodology enhances the assessment of performance against our peer group. Previously, we had charged the groups with credit losses based on an expected loss provisioning methodology whereby Corporate Services was charged (or credited) with differences between the periodic provisions for credit losses charged to the operating group segments under our expected loss provisioning methodology and the periodic provisions required under GAAP. As part of this change, the interest income resulting from the accretion of the net present value of impaired loans is also included in operating group net interest income. Prior period results have been restated accordingly. Provisions for the purchased performing and purchased credit impaired loan portfolios continue to be evaluated and reported in Corporate Services.
During the quarter we refined our methodology for the allocation of certain revenues in Corporate Services by geographic region. As a consequence, we have reallocated certain revenue of prior periods from Canada to the United States in Corporate Services.
BMO analyzes revenue at the consolidated level based on GAAP revenues reflected in the consolidated financial statements rather than on a taxable equivalent basis (teb), which is consistent with our Canadian peer group. Like many banks, we continue to analyze revenue on a teb basis at the operating group level. 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. The teb adjustments for the first quarter of 2013 totalled $64 million, down from $92 million in the fourth quarter of 2012, and up from $52 million in the first quarter of 2012.
Q1 2013 VS Q1 2012
P&C Canada net income of $458 million was up $17 million or 4%. Revenue was unchanged from a year ago, reflecting the combination of higher volumes across most products and lower net interest margin. Net interest margin declined 27 basis points to 2.65% primarily due to lower deposit spreads in the low rate environment and changes in mix, including loan growth exceeding deposit growth.
Provisions for credit losses fell $27 million to $128 million due to a combination of higher recoveries and lower provisions.
Non-interest expense increased by $5 million, reflecting prudent expense management while investing selectively in the business.
In the personal banking segment, revenue increased by $6 million year over year, with higher volumes across most products partially offset by the impact of lower net interest margin. Total personal lending balances (including mortgages, Homeowner ReadiLine and other consumer lending products but excluding credit cards) increased 9.5% year over year. Total personal lending (excluding credit cards) market share was up 8 basis points. Adjusting for the impact of a peer acquisition in the first quarter of 2013, total personal lending market share was up 39 basis points.
Our goal is to grow market share while remaining attentive to the credit quality of the portfolio. We continue to focus on strengthening the total personal lending business through focused investment and improved productivity in the sales force.
Personal deposit balances increased 3% year over year mainly in retail operating deposits. Market share for personal deposits decreased 27 basis points year over year due to slow growth in term deposits.
In the commercial banking segment, revenue decreased $6 million as the effects of higher volumes across most products were more than offset by the impact of lower net interest margin.
Commercial loan balances increased 9.4% year over year and commercial deposit balances grew 6%. We continue to rank second in Canadian business banking market share of small and medium-size business loans.
Average current loans and acceptances increased $14 billion or 9% from a year ago, and personal and commercial deposits grew $4 billion or 4%.
Q1 2013 vs Q4 2012
Net income increased $16 million or 3% from last quarter driven by lower provisions for credit losses. Revenue increased by $5 million due to higher volumes across most products, offset by the effect of lower net interest margin. Net interest margin decreased 3 basis points, primarily driven by changes in mix, including loan growth exceeding deposit growth, and lower deposit spreads in the low rate environment.
Provisions for credit losses fell $18 million due to lower net provisions across all products.
Non-interest expense increased by $3 million, due to stock-based compensation for employees eligible to retire, which is expensed in the first quarter of each year. We continue to manage expenses prudently while investing selectively in the business.
Personal revenue was essentially unchanged quarter over quarter. Personal lending market share was down 15 basis points. Adjusting for the impact of a peer acquisition in the first quarter of 2013, total personal lending market share was up 16 basis points. Personal deposits market share was down 13 basis points.
Commercial revenue increased by $5 million, driven by higher volumes across most products, partially offset by the effect of lower net interest margin.
Average current loans and acceptances increased $3 billion or 2% from last quarter, while personal and commercial deposits increased $2 billion or 2%.
Q1 2013 vs Q1 2012 (in U.S. $)
Net income of $183 million increased $26 million or 17% from $157 million in the first quarter a year ago. Adjusted net income was $197 million, up $23 million or 13% from a year ago due to the benefits of reduced expenses and lower provisions for credit losses.
Revenue of $755 million decreased $23 million or 3% from a year ago as higher gains on the sale of newly originated mortgages and increased commercial lending fees were more than offset by the effect of lower net interest margin, a decline in securities gains and lower deposit fees.
Net interest margin decreased by 26 basis points due to lower deposit spreads largely as a result of the low rate environment, as well as a decline in loan spreads.
Provisions for credit losses were $33 million, down from $62 million a year ago due primarily to better credit conditions, resulting in improved recoveries and reversals of previously recorded provisions on loans.
Non-interest expense of $451 million decreased $36 million or 7%. Adjusted non-interest expense of $431 million was $32 million or 7% lower, primarily reflecting the recognition of a litigation expense in the prior year, synergy-related savings in the current quarter and a number of smaller reductions in keeping with our overall efficiency initiative. These were partially offset by the effects of selective investments in the business.
Average current loans and acceptances were unchanged year over year at $51 billion. The core commercial and industrial loan portfolio continues to grow, increasing $3.3 billion or 18% from a year ago. As expected, there were decreases in certain loan portfolios and in our personal loan balances, due in part to the current economic environment and the effects of our continued practice of selling most mortgage originations in the secondary market.
Average deposits increased $1.3 billion or 2% year over year to $60 billion, as growth in our commercial business and in our personal chequing and savings accounts more than offset a decline in higher-cost personal money market and time-deposit accounts.
Q1 2013 vs Q4 2012 (in U.S. $)
Net income increased $42 million or 30% from the prior quarter. Adjusted net income increased $41 million or 25%. The increase was due to improved revenue, much lower provisions for credit losses and reduced expenses.
Revenue increased $5 million or 1%, due to higher fee revenue on the sale of newly originated mortgages and increases in commercial lending fees. Net interest income was unchanged as commercial loan growth was offset by reduced net interest margin.
Net interest margin decreased by 9 basis points primarily due to lower deposit spreads largely as a result of the low interest rate environment and changes in mix, as loan growth exceeded deposit growth.
Provisions for credit losses were down $43 million from the prior quarter. The prior quarter included additional provisions due to regulatory guidance on changes to impairment classification for certain consumer loans.
Non-interest expense decreased $16 million or 3% from the prior quarter. Adjusted non-interest expense decreased $13 million or 3%, primarily due to synergy-related savings, partially offset by selective investments in the business.
Average current loans and acceptances grew $0.8 billion or 2% as commercial banking loan growth in key segments was partially offset by decreases in personal banking loans and a reduction in certain other loan portfolios, as expected. Core commercial and industrial loans increased $1.4 billion or 7% from the previous quarter.
Average deposits increased modestly from the prior quarter, as increases in our commercial deposits outpaced decreases in money-market and time-deposit maturities in the low rate environment.
Adjusted results in the foregoing P&C U.S. sections are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Q1 2013 vs Q1 2012
Net income was $163 million, up $59 million or 56% from a year ago. Adjusted net income was $169 million, up $60 million or 54% from a year ago. Adjusted net income in PCG, excluding Insurance, was $105 million, up $8 million or 8% from a year ago. Results reflect higher revenue, driven by growth in client assets and focused cost management. The prior year's results benefited from higher than usual asset management revenue from a strategic investment. Adjusted net income in Insurance was $64 million, up $52 million, as revenues improved due to the significantly reduced impact of movements in long-term interest rates in the current quarter relative to a year ago and continued business growth in both creditor and life insurance businesses.
Revenue was $779 million, up $82 million or 12% from a year ago. Revenue in PCG, excluding Insurance, was up 2% from a year ago and Insurance revenue was up significantly, due to the factors mentioned above.
Non-interest expense was $569 million, up $11 million or 2%. Adjusted non-interest expense was $561 million, up $10 million or 2% due to higher revenue-based costs in line with revenue performance.
The adjusted Efficiency ratio of 71.9% improved significantly by 720 basis points from the prior year, reflecting the combination of higher revenue, driven by Insurance and growth in client assets, as well as a focus on productivity.
Assets under management and administration grew by $44 billion or 10% from a year ago to $479 billion, due to market appreciation and new client assets.
Q1 2013 vs Q4 2012
Net income and adjusted net income were relatively unchanged from the fourth quarter. Adjusted net income in PCG, excluding Insurance, increased $12 million or 14%. Adjusted Insurance net income decreased $12 million or 16%, as the prior quarter's revenue included the favourable impact of the annual review of actuarial assumptions.
Revenue decreased $6 million or 1% from the prior quarter. PCG revenue, excluding Insurance, increased 2%, driven by growth in client assets as market conditions improved. Insurance revenue decreased 18% from the prior quarter, mainly due to the factors mentioned above.
Adjusted non-interest expense increased $6 million or 1%. The current quarter's results included higher stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year, and lower initiative spending compared to the prior quarter.
Assets under management and administration grew by $14 billion or 3% due to market appreciation and new client assets.
Adjusted results in the foregoing PCG sections are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Q1 2013 vs Q1 2012
Net income was $310 million, an increase of $86 million or 38% from the previous year. A strong focus on clients and a more favourable market environment resulted in strength across our businesses for the quarter. ROE was 21.3%, up from 19.8% a year ago. Our U.S. segment also benefited from a recovery of prior periods' income taxes.
Revenue increased $129 million or 17% to $904 million, driven by higher non-interest revenue, which included a significant improvement in mergers and acquisitions and debt underwriting fees. Interest and equity trading revenues also improved. The weaker U.S. dollar decreased revenue by $7 million relative to a year ago.
In line with higher revenue, non-interest expense increased $31 million or 6%, mainly due to higher employee compensation costs, coupled with higher support costs. The weaker U.S. dollar decreased expense by $3 million relative to a year ago.
Q1 2013 vs Q4 2012
This quarter's results were very strong, declining a modest $4 million or 2% from the previous quarter.
Revenue was $3 million higher, reflecting increased investment banking activity, primarily in mergers and acquisitions and debt underwriting, offset by a decline in trading revenues.
Non-interest expense decreased $6 million or 1% mainly due to lower employee compensation. This decrease was lowered by stock-based compensation costs for employees eligible to retire, which are recognized in the first quarter of the year.
There was a lower income tax recovery in the current quarter. The current quarter results benefited from a recovery of prior periods' income taxes in the U.S. segment. The prior quarter benefited from a larger tax recovery in the Canadian segment.
Corporate Services
Corporate Services consists of Corporate Units and Technology and Operations.
Corporate Units provides enterprise-wide expertise and governance support in a variety of areas, including strategic planning, risk management, finance, legal and compliance, marketing, communications and human resources.
Technology and Operations (T&O) manages, maintains and provides governance over information technology, operations services, real estate and sourcing for BMO Financial Group.
The costs of Corporate Units and T&O services are transferred to the three client operating groups (P&C, PCG and BMO Capital Markets), and only minor amounts are retained in Corporate Services results. As such, Corporate Services adjusted operating results reflect the impact of certain asset-liability management activities, the elimination of taxable equivalent adjustments, the results from certain impaired asset portfolios and the recovery of provisions for credit losses on the M&I purchased credit impaired loan portfolio. Corporate Services reported results also reflect a number of items and activities that are excluded from BMO‘s adjusted results to help assess BMO’s performance. These adjusting items are not reflective of core operating results. They are itemized in the Non-GAAP Measures section. All adjusting items are recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is recorded in the operating groups.
Financial Performance Review
Corporate Services‘ net loss for the quarter was $65 million, compared with net income of $181 million a year ago. Corporate Services’ results reflect a number of items and activities that are excluded from BMO‘s adjusted results to help assess BMO’s performance. As discussed above, these adjusting items are not reflective of core operating results.
The adjusted net loss in the first quarter of 2013 was $94 million, compared with adjusted net income of $20 million a year ago. Adjusted expenses were $80 million higher primarily due to increased benefit costs including pension costs, the timing of technology investment spending and higher severance costs. Adjusted recoveries of credit losses decreased $72 million due to an $83 million reduction in the recoveries on the M&I purchased credit impaired loan portfolio. Adjusted revenues decreased $58 million due to lower securities gains, a higher group teb offset and lower revenue from a variety of items, including treasury-related items, none of which were individually significant.
Corporate Services net loss was $65 million in the current quarter, compared with net income of $22 million in the fourth quarter. The adjusted net loss was $94 million, compared with adjusted net income of $41 million. Adjusted revenues were $71 million lower due to a variety of items, including treasury-related items, none of which were individually significant. Adjusted recoveries of credit losses decreased $64 million, reflecting a $73 million reduction in recoveries of provisions for credit losses on the M&I purchased credit impaired loan portfolio. Adjusted expenses were $34 million higher, mainly due to higher benefit costs and higher performance-based compensation in respect of employees eligible to retire, which are both typically higher in the first quarter of each year.
Loans and acceptances at the end of the current quarter were $1,054 million, down $1,068 million from the prior year and $260 million from the preceding quarter, reflecting run-off in the impaired real-estate-secured loan portfolio.
Adjusted results in the foregoing Corporate Services section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Non-GAAP Measures (Cont'd.)
Results and measures in this 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 in Table 28. Management assesses performance on both a reported and an 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. Details of adjustments are also set out in the Adjusted Net Income section.
Certain of the adjusting items relate to expenses that arise as a result of acquisitions, including the amortization of acquisition-related intangible assets, and these expenses have been designated as adjusting items because the purchase decision may not consider the amortization of such assets to be a relevant expense. Certain other acquisition-related costs in respect of the acquired business have been designated as adjusting items due to the significance of the amounts and the fact that they can affect trend analysis. Certain other items have also been designated as adjusting items due to their effects on trend analysis. These include changes in the collective allowance and credit-related amounts in respect of the acquired M&I performing loan portfolio, structured credit run-off activities and restructuring costs.
Net economic profit represents net income available to common shareholders after deduction of a charge for capital, and is considered an effective measure of added economic value.
Pre-provision, pre-tax earnings is considered a useful measure of performance because it excludes the effects of credit losses and income taxes, which can at times mask performance because of their size and variability.
In the first quarter of 2013, adjusting items increased reported net income by $7 million after tax, comprised of a $79 million after-tax net benefit of credit-related items in respect of the M&I purchased performing loan portfolio (including $210 million in net interest income, net of an $82 million provision for credit losses and related income taxes of $49 million); costs of $92 million ($57 million after tax) for the integration of the acquired business; a $31 million ($22 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; and a benefit on run-off structured credit activities of $7 million before and after tax primarily included in trading revenue. Adjusting items were charged to Corporate Services with the exception of the amortization of acquisition-related intangible assets, which was charged to the operating groups as follows: P&C Canada $3 million ($3 million after tax); P&C U.S. $20 million ($13 million after tax); and Private Client Group $8 million ($6 million after tax).
In the fourth quarter of 2012, adjusting items decreased net income by $43 million after-tax, comprised of a $35 million after-tax net benefit of credit-related items in respect of the acquired M&I performing loan portfolio (including $185 million in net interest income, net of a $128 million provision for credit losses and related income taxes of $22 million); costs of $153 million ($95 million after tax) for the integration of the acquired business; a $34 million ($24 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; an increase in the collective allowance for credit losses of $49 million ($27 million after tax); the benefit from run-off structured credit activities of $67 million before and after tax; and a restructuring charge of $74 million ($53 million after tax). Adjusting items were included in Corporate Services with the exception of the amortization of acquisition-related intangible assets, which was charged to the operating groups as follows: P&C Canada $3 million ($2 million after tax); P&C U.S. $24 million ($16 million after tax); and Private Client Group $7 million ($6 million after tax).
In the first quarter of 2012, adjusting items increased reported net income by $137 million after tax, comprised of a $114 million after-tax net benefit of credit-related items in respect of the M&I purchased performing loan portfolio (including $234 million in net interest income, net of a $50 million provision for credit losses and related income taxes of $70 million); costs of $70 million ($43 million after tax) for the integration of the acquired business; a $34 million ($24 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; a benefit of $136 million before and after tax from the results of run-off structured credit activities, primarily included in trading revenue; and a restructuring charge of $68 million ($46 million after tax). Adjusting items were charged to Corporate Services with the exception of the amortization of acquisition-related intangible assets, which was charged to the operating groups as follows: P&C Canada $3 million ($2 million after tax); P&C U.S. $24 million ($17 million after tax); and Private Client Group $7 million ($5 million after tax).
Our complete First Quarter 2013 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended January 31, 2013, is available online at www.bmo.com/investorrelations and at www.sedar.com.
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2012 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, February 26, 2013, at 2:00 p.m. (EST). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of the conference call can be accessed until Tuesday, May 28, 2013, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering passcode 1254867.
A live webcast of the call can be accessed on our website at www.bmo.com/investorrelations. A replay can also be accessed on the site.
Website: http://www.bmo.com
Contact
Media Relations Contacts
Ralph Marranca, Toronto
416-867-3996
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Ronald Monet, Montreal
514-877-1873
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Investor Relations Contacts
Sharon Haward-Laird
Head, Investor Relations
416-867-6656
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Andrew Chin, Senior Manager
416-867-7019
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Chief Financial Officer
Tom Flynn
Executive Vice-President and CFO
416-867-4689
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Corporate Secretary
Barbara Muir, Senior Vice-President,
Deputy General Counsel, Corporate Affairs and
Corporate Secretary
416-867-6423
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This news is a press release provided by BMO Financial Group. Korea Newswire follows these editorial guidelines.
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2016년 2월 25일 08:29