BMO Financial Group Reports Good Results for the Third Quarter of 2013
Financial Results Highlights:
Third Quarter 2013 Compared with Third Quarter 2012:
-- Net income of $1,137 million, up 17%; adjusted net income(1) of $1,136million, up 12%
-- EPS(2) of $1.68, up $0.26 or 18%; adjusted EPS(1,2) of $1.68, up $0.19 or 13%
-- ROE of 15.6%, compared with 14.5%; adjusted ROE(1) of 15.6%, compared with 15.2%
-- Provisions for credit losses of $77 million, compared with $237 million; adjusted provisions for credit losses(1) of $13 million, compared with $116 million
-- Basel III Common Equity Ratio is strong at 9.6%
Year-to-Date 2013 Compared with Year-to-Date 2012:
-- Net income of $3,160 million, up 2%; adjusted net income(1) of $3,174million, up 7%
-- EPS(2) of $4.63, up 2%; adjusted EPS(1,2) of $4.65, up 7%
-- ROE of 14.9%, compared with 15.9%; adjusted ROE(1) of 15.0%, compared with 15.2%
-- Provisions for credit losses of $400 million, compared with $573 million; adjusted provisions for credit losses(1) of $219 million, compared with $358 million
For the third quarter ended July 31, 2013, BMO Financial Group reported net income of $1,137 million or $1.68 per share on a reported basis and net income of $1,136 million or $1.68 per share on an adjusted basis.
“BMO‘s third quarter results confirm the strength of the bank’s performance to date in 2013 and reflect the benefits of our disciplined growth strategy, which is well diversified by geography and business mix,” said Bill Downe, President and Chief Executive Officer, BMO Financial Group. "Operating results are underpinned by the successful execution of well-established strategies across all our businesses.
"Canadian retail businesses were particularly strong in the quarter with both Personal & Commercial Banking Canada and traditional wealth earnings reaching new highs. Our focus on deepening customer relationships and maintaining industry-leading loyalty continues to boost our ability to attract new customers and expand share in personal banking.
"Similarly, building on BMO's advantaged market share positions, our large commercial businesses are doing well on both sides of the border. In Canada, there was strong growth in commercial loans and deposits again this quarter. The U.S. commercial portfolio saw good sequential growth with continued strength in core commercial and industrial.
"Private Client Group posted record earnings in traditional wealth, up 37% year over year. Insurance results, where interest rate declines have affected financial performance over a number of quarters, benefited from changes in long-term rates.
"Good earnings performance in Capital Markets reflects the benefits of our diversified client-centric business model.
"Good credit performance continues to highlight our prudent approach to risk management and our focus on attracting high-quality earning assets. We repurchased 4 million shares under our normal course issuer bid during the quarter and maintained strong capital ratios, while providing an attractive dividend.
“Looking forward, we see opportunities for growth in each of our businesses in an improving North American economy led by the United States, and this gives us confidence we're well positioned heading into 2014,” concluded Mr. Downe.
Note: All ratios and percentage changes in this document are based on unrounded numbers.
Concurrent with the release of results, BMO announced a fourth quarter 2013 dividend of $0.74 per common share, unchanged from the preceding quarter and up $0.02 per share from a year ago, equivalent to an annual dividend of $2.96 per common share.
Our complete Third Quarter 2013 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended July 31, 2013, is available online at www.bmo.com/investorrelations and at www.sedar.com.
Operating Segment Overview
P&C Canada
Net income was $497 million, up $38 million or 9% from a year ago. Adjusted net income was $500 million, up $38 million or 8% from the prior year. Revenue increased $58 million or 4% year over year to $1,620 million, driven by higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin. Provisions for credit losses fell $21 million or 14% mainly due to lower provisions in the consumer portfolio. Expenses were up $31 million or 4% to $821 million, as we continue to invest in the business, including adding front-line resources across a number of roles. So far this year, we expanded our branch network by opening or upgrading 49 locations across the country.
We are executing on our strategy resulting in strong balance sheet growth and increasing revenues. This momentum, combined with our focus on process simplification, is expected to drive future net income growth.
In personal banking, there was strong loan growth of 10% and consistent deposit growth. We are focused on attracting new customers and deepening relationships with existing customers through our recent Spring Home Financing Campaign and our ‘Make the BMOst of Summer’ Campaign. We continue to have top-tier performance in customer loyalty, as measured by the net promoter score.
In commercial banking, momentum continues with strong year-over-year growth in commercial loans of 12% and deposits of 15%. Our focus on meeting the needs of our customers, at every stage of their business cycle, with the products, services and advice they value continues to generate positive results. We remain second in Canadian business banking loan market share for small and medium-sized loans. In April we tied for first place among the big banks in the Canadian Federation of Independent Business report Battle of the Banks, based on a 2012 survey of almost 13,000 small and medium-sized enterprise (SME) owners to assess how well banks are serving their SME customers.
P&C U.S. (all amounts in US$)
Net income of $147 million increased $10 million or 7% from $137 million in the third quarter a year ago. Adjusted net income was $160 million, an increase of $7 million or 4% from a year ago due to lower provisions for credit losses and reduced expenses. Revenue was 5% lower as the effect of loan growth was more than offset by the effects of lower net interest margin, reductions in certain loan portfolios and lower deposit fees.
Total loans continued to grow, with year-over-year and sequential increases in average loans, led by continued strong growth in the core commercial and industrial (C&I) loan portfolio. The core C&I portfolio increased by $3.9 billion from a year ago to $23.0 billion.
Deposits grew from the prior year in our commercial business and personal chequing and savings accounts, despite our planned reductions in higher cost deposit products.
The annual American Banker/Reputation Institute Survey of Bank Reputations showed the confidence customers have in BMO Harris Bank. BMO Harris Bank ranked number one out of 30 major U.S. banks in long-term trust, outscoring the field when consumers were asked whether they would give their bank the benefit of the doubt when the next financial crisis hit. We also ranked number five in overall bank reputation.
For the third year in a row, BMO Harris Bank received the Community Service Leadership Award from The Financial Services Roundtable in recognition of our dedication and service to the communities in which we operate. We were specifically recognized for our implementation of financial literacy projects, collective volunteer efforts from our employees and monetary contributions - all which helped to improve the vitality of our communities.
Private Client Group
Private Client Group (PCG) produced strong results for the quarter. Net income of $218 million doubled from a year ago. Adjusted net income of $225 million increased $111 million or 97% from a year ago. Adjusted net income in our traditional wealth businesses was a record $131 million, up $35 million or 37% from a year ago. Results reflect growth in client assets, increased transaction volumes and a continued focus on productivity. Adjusted net income in Insurance was $94 million, up $76 million from a year ago. The increase was due to a $42 million after-tax benefit from increases in long-term interest rates in the current quarter relative to a $45 million after-tax charge a year ago, partially offset by benefits from changes in our investment portfolio to improve asset-liability management in the prior year. The underlying Insurance business continues to perform well.
Assets under management and administration grew by $63 billion or 13% from a year ago to $527 billion, with assets under management up 11% year over year, driven mainly by growth in new client assets coupled with market appreciation.
In June, BMO Global Asset Management announced the intended expansion of its international footprint through the opening of a new office in Australia. Once open, the office will focus on sales and serving the needs of Australia's institutional investors.
BMO Global Asset Management was named one of Pensions & Investments Top 100 Money Managers based on worldwide assets under management, ranking 75th internationally on this prestigious list. In 2012, the firm ranked 85th.
BMO Capital Markets
Net income was $280 million, up $30 million or 12% from the prior year, driven by good performance across our diversified businesses in general, with increases in trading revenue and equity underwriting.
We were recognized during the quarter with a number of awards, reflecting our ongoing commitment to our clients. BMO Capital Markets was selected as a 2013 Greenwich Quality and Share Leader in Canadian equities by Greenwich Associates, reflecting client recognition for providing the industry‘s best coverage in equity research/advisory vote and trading share and high service quality for equity sales and trading. In the Global Custodian Magazine 2013 Prime Brokerage Survey, BMO Capital Markets ranked Best in Class for our Prime Brokerage business in 9 of 12 categories, and was the recipient of Trade Finance Magazine’s Best Trade Bank in Canada award for the fourth consecutive year.
BMO Capital Markets participated in 136 new issues in the quarter including 55 corporate debt deals, 45 government debt deals, 28 common equity transactions and eight issues of preferred shares, raising $56 billion.
Corporate Services
Corporate Services net loss for the quarter was $11 million, compared with net income of $13 million a year ago. On an adjusted basis, the net loss was $35 million, compared with net income of $32 million a year ago. The decrease in reported results was smaller than the decrease in adjusted results primarily due to lower integration costs in the reported results in the current year. Adjusting items are detailed in the Adjusted Net Income section and in the Non-GAAP Measures section. Adjusted revenues were lower primarily due to a higher group taxable equivalent basis (teb) offset. Adjusted non-interest expenses were higher primarily due to higher technology costs. Adjusted recoveries of credit losses increased, primarily due to higher recoveries on the Marshall & Ilsley (M&I) purchased credit impaired loan portfolio.
Adjusted Net Income
Adjusted net income was $1,136 million for the third quarter of 2013, up $123 million or 12% from a year ago. Adjusted earnings per share were $1.68, up 13% from $1.49 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 third quarter 2013 results in the determination of adjusted results totalled $1 million of net income and had no impact on EPS, and were comprised of:
-- the $68 million after-tax net benefit for credit-related items in
respect of the M&I purchased performing loan portfolio, consisting of
$154 million for the recognition in net interest income of a portion of
the credit mark on the portfolio (including $55 million for the release
of the credit mark related to early repayment of loans), net of a $44
million specific provision for credit losses and related income taxes of
$42 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 M&I purchased performing loan portfolio;
-- costs of $49 million ($30 million after tax) for the integration of M&I
including amounts related to system conversions, restructuring and other
employee-related charges, consulting fees and marketing costs related to
rebranding activities;
-- an increase in the collective allowance for credit losses of $20 million
($15 million after tax) on loans other than the M&I purchased loan
portfolio;
-- the $1 million before and after-tax benefit from run-off structured
credit activities; and
-- the amortization of acquisition-related intangible assets of $32 million
($23 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
This Operating Segment Overview section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements that follows.
This Operating Segment Overview section contains 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 August 27, 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. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 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.
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, U.S. and international 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.
Effective the first quarter of 2013, our 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 (including capital deductions and qualifying and grandfathered ineligible capital), risk-weighted assets 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 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 refer to these items as previously estimated.
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 Bank of Montreal included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges into which Bank of Montreal 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 Review and Outlook section of this interim MD&A.
Economic Review and Outlook
The Canadian economy is growing modestly, held back by slower household borrowing, a moderation in housing market activity and tighter fiscal policies. Weak global demand and a strong currency continue to impact exports. The Eurozone economy is showing some signs of emerging from its lengthy recession, while China's economy has weakened in response to government policies to restrain credit growth and reduce the risk of financial imbalances. In the year ahead, Canadian consumer spending is projected to grow moderately, while residential construction should decline somewhat further. However, exports are expected to increase as U.S. demand improves, while business investment should strengthen in response to low commercial real estate vacancy rates and ongoing development of energy resources. Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages. GDP growth is expected to increase from 1.6% in 2013 to 2.3% in 2014. The unemployment rate is projected to decline to 6.8% next year, below the average of the past decade. The Canadian dollar will likely trade below parity with the U.S. dollar this year, held back by the sizeable trade deficit. Modest growth and low inflation should encourage the Bank of Canada to keep overnight lending rates at 1% until the second half of 2014.
The U.S. economy has been restrained by restrictive fiscal policies. However, private domestic demand is improving, with automobile and home sales at a five-year high and job growth firming. Improved household finances, easier credit conditions and pent-up replacement demand for motor vehicles should lead to stronger economic growth in the second half of 2013. Increased shale-energy output will continue to support activity in several states, including Texas and North Dakota, while the impact of fiscal restraint should diminish as the federal budget deficit declines. GDP growth is projected to increase from 1.8% in 2013 to 3.0% in 2014. The unemployment rate is expected to decline from 7.5% this year to 6.8% next year. The Federal Reserve will likely maintain its low interest-rate policy until mid-2015, while continuing to purchase fixed-income securities, albeit at a slower pace, into next year to supress long-term interest rates.
Similar to the national economy, the U.S. Midwest economy is growing modestly. It is expected to strengthen in response to rising automotive production, a rebound in agricultural output following last year's drought, and, indirectly, a resurgent energy sector.
This Economic Review and Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Other Value Measures
BMO's average annual total shareholder returns for the one-year, three-year and five-year periods ending July 31, 2013, were 16.5%, 5.4% and 11.7%, respectively.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, recoveries of credit losses and income taxes were increased relative to the second quarter of 2013, the third quarter of 2012 and the prior year to date by the strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by 2.0% from a year ago and from the average of the second quarter. The average rate for the year to date increased by 0.9% from a year ago. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
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, U.S. and international 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.
Effective the first quarter of 2013, our 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 (including capital deductions and qualifying and grandfathered ineligible capital), risk-weighted assets 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 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 refer to these items as previously estimated.
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 Bank of Montreal included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges into which Bank of Montreal 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 Review and Outlook section of this interim MD&A.
Economic Review and Outlook
The Canadian economy is growing modestly, held back by slower household borrowing, a moderation in housing market activity and tighter fiscal policies. Weak global demand and a strong currency continue to impact exports. The Eurozone economy is showing some signs of emerging from its lengthy recession, while China's economy has weakened in response to government policies to restrain credit growth and reduce the risk of financial imbalances. In the year ahead, Canadian consumer spending is projected to grow moderately, while residential construction should decline somewhat further. However, exports are expected to increase as U.S. demand improves, while business investment should strengthen in response to low commercial real estate vacancy rates and ongoing development of energy resources. Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages. GDP growth is expected to increase from 1.6% in 2013 to 2.3% in 2014. The unemployment rate is projected to decline to 6.8% next year, below the average of the past decade. The Canadian dollar will likely trade below parity with the U.S. dollar this year, held back by the sizeable trade deficit. Modest growth and low inflation should encourage the Bank of Canada to keep overnight lending rates at 1% until the second half of 2014.
The U.S. economy has been restrained by restrictive fiscal policies. However, private domestic demand is improving, with automobile and home sales at a five-year high and job growth firming. Improved household finances, easier credit conditions and pent-up replacement demand for motor vehicles should lead to stronger economic growth in the second half of 2013. Increased shale-energy output will continue to support activity in several states, including Texas and North Dakota, while the impact of fiscal restraint should diminish as the federal budget deficit declines. GDP growth is projected to increase from 1.8% in 2013 to 3.0% in 2014. The unemployment rate is expected to decline from 7.5% this year to 6.8% next year. The Federal Reserve will likely maintain its low interest-rate policy until mid-2015, while continuing to purchase fixed-income securities, albeit at a slower pace, into next year to supress long-term interest rates.
Similar to the national economy, the U.S. Midwest economy is growing modestly. It is expected to strengthen in response to rising automotive production, a rebound in agricultural output following last year's drought, and, indirectly, a resurgent energy sector.
This Economic Review and Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Other Value Measures
BMO's average annual total shareholder returns for the one-year, three-year and five-year periods ending July 31, 2013, were 16.5%, 5.4% and 11.7%, respectively.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, recoveries of credit losses and income taxes were increased relative to the second quarter of 2013, the third quarter of 2012 and the prior year to date by the strengthening of the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by 2.0% from a year ago and from the average of the second quarter. The average rate for the year to date increased by 0.9% from a year ago. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
Non-Interest Revenue
Non-interest revenue increased $251 million or 15% from the third quarter a year ago to $1,904 million. Adjusted non-interest revenue increased $234 million or 14% to $1,899 million. Adjusting items in non-interest revenue relate to the run-off of structured credit activities, which are reflected in trading revenues recorded in Corporate Services. There were significant increases in insurance revenues, due to favourable movements in long-term interest rates and increases in trading and mutual fund revenues. Most other types of non-interest revenue were also up, with the exception of underwriting fees, and there were no securities gains in the current quarter.
Relative to the second quarter, non-interest revenue increased $58 million or 3%, and adjusted non-interest revenue increased $63 million or 3%. Insurance revenues were up $79 million, primarily due to favourable movements in long-term interest rates. There were also increases in most other types of non-interest revenue. Non-interest trading revenues were lower, despite higher overall trading revenues, and there were no securities gains in the current quarter.
Year to date, non-interest revenue increased $324 million or 6% to $5,615 million. Adjusted non-interest revenue increased $518 million or 10% to $5,592 million. There were significant increases in trading revenues, insurance revenues, mutual fund revenues and lending fees. Most other categories of non-interest revenue were also up, with the exception of deposit and payment service charges and securities gains.
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 $58 million or 2% from the third quarter a year ago to $2,542 million. Adjusted non-interest expense increased $116 million or 5% to $2,458 million primarily due to higher employee-related costs, including continued investment in the business with increases in front-line roles, higher revenue-based costs in line with revenue growth, and higher severance and technology costs. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.
Relative to the second quarter, non-interest expense decreased $26 million or 1%. Adjusted non-interest expense increased $56 million or 2%, primarily due to three more days and higher employee-related costs, including continued investment in the business and growth in revenue-based costs. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.
Year-over-year operating leverage on a reported basis was 2.2% and adjusted operating leverage was 0.9%. Quarter-over-quarter operating leverage on a reported basis was 3.7% and adjusted operating leverage was 1.2%.
Non-interest expense for the year to date increased $163 million or 2% to $7,700 million. Adjusted non-interest expense increased $247 million or 3% to $7,324 million, primarily due to higher employee-related costs, including higher revenue-based costs in line with revenue growth, and higher benefit and pension costs. We continued to invest in the business, including increased technology costs. These factors were partially offset by benefits from a continued focus on productivity. The stronger U.S. dollar increased adjusted non-interest expense growth by less than 1%.
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.
Income Taxes
The provision for income taxes of $294 million increased $107 million from the third quarter of 2012 and increased $38 million from the second quarter of 2013. The effective tax rate for the quarter was 20.6%, compared with 16.2% a year ago and 20.8% in the second quarter.
The adjusted provision for income taxes of $285 million increased $79 million from a year ago and increased $35 million from the second quarter. The adjusted effective tax rate was 20.1% in the current quarter, compared with 16.9% in the third quarter of 2012 and 20.0% in the second quarter of 2013. The higher adjusted tax rate in the current quarter relative to the third quarter of 2012 was primarily due to lower recoveries of prior periods' income taxes and a change in Ontario statutory tax rates that resulted in a positive revaluation of deferred tax assets in 2012. 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.
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
Q3 2013 vs Q3 2012
The provision for credit losses (PCL) was $77 million, a decrease of $160 million from the prior year. Adjusted PCL was $13 million, a decrease of $103 million. Adjusting items this quarter included a $44 million specific provision on the M&I purchased performing loan portfolio and a $20 million increase in the collective allowance related to the Canadian loan portfolios. The decrease in adjusted PCL was mainly due to lower provisions in P&C Canada and P&C U.S., coupled with higher recoveries of credit losses on the M&I purchased credit impaired loan portfolio in Corporate Services.
P&C Canada provisions of $126 million decreased by $21 million mainly due to lower provisions in the consumer portfolio. PCG provisions decreased by $6 million due to higher recoveries of previously written-off amounts. BMO Capital Markets provisions were relatively stable year over year. P&C U.S. provisions of $40 million decreased by $36 million, due to lower provisions in the commercial portfolio resulting from lower new reservations and higher recoveries of previously written-off amounts. Corporate Services adjusted recoveries of credit losses increased $42 million, including higher recoveries on the M&I purchased credit impaired loan portfolio.
Q3 2013 vs Q2 2013
The PCL decreased $68 million from the prior quarter. Adjusted PCL was down $97 million from the prior quarter mainly due to lower provisions in P&C Canada and P&C U.S., coupled with higher recoveries of credit losses on the M&I purchased credit impaired loan portfolio in Corporate Services.
P&C Canada provisions decreased by $28 million, with lower provisions in both the consumer and commercial portfolios. PCG provisions were relatively stable quarter over quarter. BMO Capital Markets provisions increased by $8 million. P&C U.S. provisions decreased by $15 million, primarily due to lower provisions in the commercial portfolio, driven by lower new reservations and higher recoveries from previously written-off amounts. Corporate Services adjusted recoveries of credit losses increased $60 million including higher recoveries on the M&I purchased credit impaired loan portfolio.
Impaired Loans
Total gross impaired loans were $2,650 million at the end of the current quarter, down from $2,848 million in the second quarter of 2013 and from $2,867 million a year ago. The stronger U.S. dollar raised gross impaired loans by $35 million relative to the second quarter of 2013 and $43 million relative to a year ago. Included in the amount above at the end of the quarter was $1,020 million of gross impaired loans related to acquired portfolios, of which $151 million is subject to a loss-sharing agreement with the Federal Deposit Insurance Corporation 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 $399 million in the current quarter, up from $347 million in the second quarter of 2013 and down from $405 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $211 million in the current quarter, compared with $248 million in the second quarter of 2013 and $386 million a year ago.
Impaired Loans
Total gross impaired loans were $2,650 million at the end of the current quarter, down from $2,848 million in the second quarter of 2013 and from $2,867 million a year ago. The stronger U.S. dollar raised gross impaired loans by $35 million relative to the second quarter of 2013 and $43 million relative to a year ago. Included in the amount above at the end of the quarter was $1,020 million of gross impaired loans related to acquired portfolios, of which $151 million is subject to a loss-sharing agreement with the Federal Deposit Insurance Corporation 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 $399 million in the current quarter, up from $347 million in the second quarter of 2013 and down from $405 million a year ago. Impaired loan formations related to the M&I purchased performing loan portfolio were $211 million in the current quarter, compared with $248 million in the second quarter of 2013 and $386 million a year ago.
Liquidity and Funding Risk
Liquidity and funding risk is managed under a robust 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. As at July 31, 2013, BMO owned liquid assets were $178 billion, compared with $176 billion as at April 30, 2013. The slight increase in liquid assets from April 30, 2013, was primarily attributable to higher security balances offset by lower cash balances. BMO’s cash and securities as a percentage of total assets was 30.8% as at July 31, 2013, compared with 30.1% as at April 30, 2013.
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, BMO may pledge certain cash and security holdings as collateral to support its trading activities and participation in clearing and payment systems. In addition, BMO may receive highly liquid assets as collateral and may re-pledge these assets in exchange for cash or as collateral for trading activities. Net unencumbered liquid assets, defined as BMO owned cash and securities plus eligible collateral received less collateral encumbered, totalled $153 billion at July 31, 2013, compared with $161 billion at April 30, 2013. BMO may also pledge mortgage and loan assets to raise secured long-term funding.
Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets be longer term (typically maturing in two to ten years) to better match the term to maturity for these assets. Wholesale secured and unsecured funding for liquid trading assets is generally shorter term (maturing in less than one year), and is aligned with the liquidity of the assets being funded. Trading assets are subject to haircuts in order to reflect the potential for lower market values during times of market stress. Supplemental liquidity pools are funded with a mix of wholesale term funding to prudently balance the benefits of holding supplemental liquid assets against the cost of funding.
Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. During the third quarter, BMO issued $7.0 billion of wholesale term funding in Canada and internationally. Total wholesale term funding outstanding was $81.6 billion at July 31, 2013, compared with $77.0 billion at April 30, 2013. The increase was used to refinance upcoming wholesale term funding maturities and fund net asset growth. 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.
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.
The credit ratings assigned to BMO‘s senior debt by the rating agencies 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+).
We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The incremental collateral required is based on mark-to-market exposure, collateral valuations and collateral threshold arrangements, as applicable. As at July 31, 2013, the bank would be required to provide additional collateral to counterparties totalling $106 million and $322 million under a one-notch and two-notch downgrade, respectively.
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.
Information Management and Security Risk
As described in the Operational Risk section on pages 88 to 89 of BMO's 2012 annual MD&A, information security risks for financial institutions like BMO have increased in recent years. Our operations include online and mobile financial services that feature the secure processing, transmission and storage of confidential information. Given our use of the Internet and reliance on digital technologies, we face cyber security risks, which could include information security risk such as threats of hacking, identity theft and corporate espionage, and denial of service risk such as threats targeted at causing system failure and service disruption. BMO maintains systems and procedures to prevent, monitor, react to and manage cyber security threats. It is possible that we, or those with whom we do business, may not anticipate or implement effective measures against all such security threats because the techniques used change frequently and can originate from a wide variety of sources, which have become increasingly sophisticated. In the event of such an occurrence, BMO may experience losses or reputational damage.
Derivative Transactions
As discussed in the Select Financial Instruments section, the Enhanced Disclosure Task Force has recommended enhanced disclosures in a numbers of areas including counterparty credit risk arising from derivative transactions. With limited exceptions, we utilize the International Swaps and Derivatives Association (ISDA) Master Agreement to document our contractual trading relationships for over-the-counter (OTC) derivatives with our counterparties. ISDA Master Agreements set out the legal framework and standard terms that apply to all the derivative transactions entered into bilaterally between the parties. In addition to providing “Events of Default” and “Termination Events”, which can lead to the early termination of transactions prior to their maturity date, ISDA Master Agreements also contain rules for the calculation and netting of termination values (also known as “Close-out Amounts”) for transactions between counterparties to produce a single net aggregate amount payable by one party to the other.
Credit Support Annexes (CSAs) are commonly included with ISDA Master Agreements to provide for the exchange of collateral between the parties where one party's OTC derivatives exposure to the other party exceeds an agreed amount (Threshold). The purpose of collateralization is to mitigate counterparty credit risk. Collateral can be exchanged as initial margin and/or variation margin. CSAs outline, among other things, provisions setting out acceptable collateral types (e.g. government treasuries and cash) and how they will be valued (discounts are often applied to the market values), as well as Thresholds, whether or not the collateral can be re-pledged by the recipient and how interest is calculated. The following table represents the notional amounts of our OTC derivative contracts comprised of those which are centrally cleared and settled through a designated clearing house and those which are non-centrally cleared. The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.
Caution
This Risk Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this Risk Management 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 14 outlines summary results for the fourth quarter of fiscal 2011 through the third 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. In the first quarter of fiscal 2013, 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 late 2011 and 2012, but conditions have improved overall and quarterly adjusted results have generally trended higher over the past two years.
P&C Canada third quarter results continued to benefit from strong volume growth in both the personal and commercial segments, improving provisions for credit losses and this quarter, stable net interest margins with higher fee income. The net income trend in previous quarters has been relatively consistent. Revenue and net income were lower in the second quarter of each year due to three fewer days. In previous quarters, net interest margin was declining due to lower deposit spreads in the low-rate environment, and changes in mix including loan growth exceeding deposit growth. Expense increases have been modest, reflecting continued investment in the business.
PCG produced strong results for the quarter. Recent quarterly results in PCG traditional wealth businesses have grown on a relatively consistent basis, driven by growth in client assets and benefits from a continued focus on productivity. Quarterly results in Insurance have been subject to variability, resulting primarily from changes in long-term interest rates.
BMO Capital Markets results are influenced by market factors that can contribute to variability in results. In 2012, results were good in the first three quarters, but the fourth quarter results were significantly stronger, driven by a recovery of prior periods' income taxes and higher revenue due to an improved market environment. This trend has continued in 2013 with good results in each quarter.
P&C U.S. results have benefited from 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. P&C U.S. had very strong results in the first quarter of 2013 and has been relatively stable in the second and third quarters with good core commercial and industrial loan growth and lower expenses compared to the prior year's results. Net interest margin has been declining primarily due to lower deposit spreads given the low-rate environment and loan spreads due to competitive pricing, and growth in lower spread assets.
BMO's overall provisions for credit losses measured as a percentage of loans and acceptances continued to trend lower in recent quarters relative to 2012 and the fourth quarter of 2011. 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 the second quarter of 2013 and lower than in the fourth quarter of 2011, primarily due to recoveries of provisions on the purchased credit impaired loan portfolio and an improvement in the U.S. credit environment. Adjusted provisions declined significantly in the third quarter of 2013, mainly due to lower provisions in P&C Canada and P&C U.S., coupled with higher recoveries of credit losses on the M&I purchased credit impaired loan portfolio in Corporate Services.
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 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 that quarter. These recoveries increased in the second and third quarters, increasing net income.
Movements in exchange rates in 2012 and for 2013 to date have been subdued. A stronger U.S. dollar increases 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.
Caution
This Summary Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this Summary Quarterly Earnings Trends section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Balance Sheet
Total assets of $549.3 billion at July 31, 2013, increased $23.9 billion from October 31, 2012, including a $3.5 billion increase as a result of the stronger U.S. dollar. The increase primarily reflects growth in net loans and acceptances of $18.5 billion, cash and cash equivalents and interest bearing deposits with banks of $14.3 billion and securities borrowed or purchased under resale agreements of $6.7 billion, partially offset by a decrease in derivative financial assets of $16.4 billion. All remaining assets increased by a combined $0.8 billion.
The $18.5 billion increase in net loans and acceptances was primarily due to an increase in residential mortgages, primarily in P&C Canada, and an increase in loans to businesses and governments in both P&C Canada and P&C U.S.
The $14.3 billion increase in cash and cash equivalents and interest bearing deposits with banks was primarily due to increased balances held with central banks.
The $6.7 billion increase in securities borrowed or purchased under resale agreements was mainly due to increased client-driven activities.
The $16.4 billion decrease in derivative financial assets and the $15.8 billion decrease in derivative financial liabilities were primarily due to declines in the fair value of interest rate contracts as a result of rising interest rates.
Liabilities and equity increased $23.9 billion from October 31, 2012. The change primarily reflects increases in deposits of $34.5 billion, securities lent or sold under repurchase agreements of $7.9 billion and shareholders' equity of $1.0 billion, partially offset by decreases in derivative financial liabilities of $15.8 billion and securities sold but not yet purchased of $2.4 billion. All remaining liabilities and equity decreased by a combined $1.3 billion.
The $34.5 billion increase in deposits was largely driven by a $26.6 billion increase in business and government deposits due to increased U.S. dollar deposits and wholesale funding issuances. Deposits by individuals increased $4.6 billion, largely driven by increased retail operating deposits in P&C Canada, while deposits by banks increased $3.3 billion.
Contractual obligations by year of maturity are outlined in Note 18 to the unaudited interim consolidated financial statements.
Capital Management
Third Quarter 2013 Regulatory Capital Review
BMO's Basel III capital position is strong, with a Common Equity Tier 1 (CET1) Ratio of 9.6% at July, 31, 2013, down from 9.7% at the end of the preceding quarter, up from a pro-forma estimate of 8.7% at October 31, 2012, and well in excess of the expectation of the Office of the Superintendent of Financial Institutions (OSFI) 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 in 2013, other than the phase-out of non-qualifying capital, (also referred to as the ’all-in' requirements) 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. On March 26, 2013, OSFI announced that, effective 2016, BMO and five other domestic systemically important banks (D-SIBs) would each be required to hold a 1% CET1 buffer, in addition to the 2.5% capital conservation buffer, to reduce the probability of D-SIB failure.
The CET1 Ratio decreased by less than 10 basis points from the second quarter, due primarily to higher risk-weighted assets (RWA), as discussed below, and the impact of share repurchases under our normal course issuer bid (NCIB), largely offset by higher CET1 capital, as discussed below. The CET1 ratio increased by approximately 90 basis points from our pro-forma estimate at October 31, 2012, due to higher CET1 capital and lower RWA, as described below.
CET1 capital at July 31, 2013, was $20.6 billion, up $0.4 billion from the second quarter and up $1.3 billion from the pro-forma CET1 capital estimate 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, partly offset by the purchase and cancellation of common shares under the bank's NCIB share repurchase program.
The Basel III RWA of $214 billion at July 31, 2013, was up $6 billion from the second quarter, primarily due to model methodology and calibration changes and the impact of foreign exchange on our U.S.-dollar-denominated RWA. The RWA increase from new loan originations was offset by paydowns of higher risk-weighted loans and positive credit migration. Our July 31, 2013 RWA was $8 billion lower than the Basel III pro-forma estimate of $222 billion at October 31, 2012. Compared to October 31, 2012, the decrease in RWA was due mainly to lower Credit Valuation Adjustment (CVA) RWA, lower risk in certain portfolios and better risk assessments. 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. This delay improved our CET1 Ratio, at July 31, 2013, by approximately 35 basis points.
OSFI advised banks in a letter dated August 21, 2013, that it will begin phasing in the CVA risk capital charge for Canadian banks in the first quarter of 2014. The CET1 CVA risk capital charge applicable to BMO during fiscal 2014 will be 57% of the fully-implemented charge, and this will increase each year until it reaches 100% by 2019. BMO estimates that its third quarter 2013 CET1 Ratio would be reduced by approximately 20 basis points if the 2014 CVA risk capital charge was currently in effect.
The bank‘s Basel III Tier 1 and Total Capital Ratios were 11.2% and 13.5%, respectively, at July 31, 2013, compared with 11.3% and 13.7%, respectively, in the second quarter and 10.5% and 12.9%, respectively, on a pro-forma basis at October 31, 2012. These ratios declined from the second quarter primarily due to the same factors that caused the decline in the CET1 Ratio from the second quarter. These ratios improved from the pro-forma estimates at October 31, 2012, 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 by the redemption of $200 million Class B Preferred Shares Series 5 and US$250 million Exchangeable Preferred Stock, Series A during the second quarter.
BMO‘s Assets-to-Capital Multiple (ACM), a leverage ratio monitored by OSFI and calculated using the transitional total capital prescribed by OSFI, was 16.2 at July 31, 2013. BMO’s ACM decreased from 16.3 in the second quarter, primarily due to increased capital, and 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 foreign 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 hedge this risk of foreign exchange gains or losses by funding its foreign investments in U.S. dollars or, alternatively, to offset the impact of foreign exchange rate changes on the bank’s capital ratios, may enter into derivative contracts, such as forward currency contracts, or elect to fund its investment in Canadian dollars.
Other Capital Developments
In the third quarter, we purchased four million shares under the bank's NCIB share repurchase program, for an aggregate repurchase of eight million shares since the inception of the program in February 2013. 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 only initiates purchases under the program after consulting with OSFI.
During the quarter, 951,000 common shares were issued through the DRIP and the exercise of stock options.
On July 22, 2013, the Bank announced that it did not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 16 (Series 16 Preferred Shares) of the Bank on August 25, 2013. As a result, subject to certain conditions, the holders of the Series 16 Preferred Shares had the right, at their option, to elect by August 12, 2013, to convert all or part of their Series 16 Preferred Shares on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 17 (Series 17 Preferred Shares) of the Bank, effective August 26, 2013. As a result, approximately 6.3 million Series 16 and approximately 5.7 million Series 17 Preferred Shares will be outstanding for the 5-year period commencing on August 26, 2013, and ending on August 25, 2018. The reset dividend rate on the Series 16 Preferred Shares for the next 5 years will be 3.39% and the initial quarterly dividend rate on the Series 17 Preferred Shares will be 2.669%, in each case a reduction from the original 5.2% rate. In 2018, BMO may decide to call the Series 16 and Series 17 Preferred Shares (subject to regulatory approval) or to reset the fixed rate for another five years; if BMO elects to reset, the holders of the Series 16 and Series 17 Preferred Shares will again have the right to elect to hold either fixed rate Series 16 Preferred Shares or floating rate Series 17 Preferred Shares.
On August 27, 2013, BMO announced that the Board of Directors had declared a quarterly dividend payable to common shareholders of $0.74 per common share, unchanged from the preceding quarter and up $0.02 per share from a year ago. The dividend and share repurchases reflect our strong capital position and the success of our business strategies.
The dividend is payable November 26, 2013, to shareholders of record on November 1, 2013. Common shareholders may elect to have their cash dividends reinvested in common shares of the bank in accordance with the DRIP.
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.
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.
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.
The Bank‘s policies and procedures for related party transactions did not materially change from October 31, 2012, as described in Note 27 to the audited consolidated financial statements on pages 168 and 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 July 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
BMO monitors the potential changes proposed by the International Accounting Standards Board (IASB) and analyses the effect that changes in the standards may have on BMO‘s financial reporting and accounting policies. New standards and amendments to existing standards, which are effective for the Bank in the future, can be found in Note 1 to the audited consolidated financial statements on pages 126 and 127 of BMO’s 2012 Annual Report.
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 are now subject to a comprehensive regulatory regime. Certain swaps are currently required to be centrally cleared and will soon be required to be traded on an exchange. As a registered swap dealer in the United States, BMO is now subject to swap reporting and business conduct requirements. Capital and margin requirements relating to swaps are currently being reviewed by U.S. and international regulators.
In December 2012, the Federal Reserve Board (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 proposed requirements applicable to BMO Financial Corp. (BFC) are similar to those that already apply to BFC and its subsidiaries as domestic U.S. banks and bank holding companies. The proposed rule would also affect BMO's U.S. branches. The FRB has indicated the requirements would be effective July 1, 2015.
On July 2, 2013, the Federal Reserve Board approved a final rule to help ensure banks maintain strong capital positions, with increased minimum requirements for both the quantity and quality of capital held by banking organizations. The phase in period for the requirements applicable to BFC will not begin until January 1, 2015.
Based on our interpretation of the final Basel III capital rule in the U.S., BFC is well positioned to meet the pending U.S. regulatory requirements.
In order to implement the Durbin Amendment portion of the Dodd Frank Act, the Federal Reserve has issued a rule that, among other things, sets standards for debit card interchange fees, including maximum fees of approximately $0.21 per transaction. On July 31, 2013, a federal district court invalidated the interchange transaction fee standards and certain other aspects of the rule, but granted a stay of its order. The Federal Reserve has announced it will appeal the ruling. BMO is monitoring the developments, however, based on currently available information, the ultimate resolution is not expected to be material to BMO.
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.
On October 29, 2012, the Enhanced Disclosure Task Force of the Financial Stability Board 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, other than the liquidity facility provided to our structured investment vehicle was fully paid off in the current quarter.
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 July 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 17 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 18 to 20. We also provide a summary of our April 30, 2013, and 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 21. 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.
The following sections review the financial results of each of our operating segments and operating groups for the third 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, run-off structured credit activities and changes in the collective allowance 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 rather than on an expected loss basis. Provisions for the purchased performing and purchased credit impaired loan portfolios continue to be evaluated and reported in Corporate Services.
During the first quarter of 2013 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 third quarter of 2013 totalled $120 million, up from $71 million in the second quarter of 2013, and up from $66 million in the third quarter of 2012.
The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and business banking operating segments, Personal and Commercial Banking Canada (P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.). These operating segments are reviewed separately in the sections that follow.
Q3 2013 vs Q3 2012
P&C Canada net income of $497 million increased $38 million or 9% from a year ago. Revenue was up $58 million or 4% from the prior year to $1,620 million, driven by higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin. Provisions for credit losses fell $21 million or 14% mainly due to lower provisions in the consumer portfolio.
Non-interest expense increased $31 million or 4% due to continued investment in the business, including increases in front-line roles.
In the personal banking segment, revenue increased $39 million or 4% year over year due to the effects of higher balances and fee 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 10% year over year. Total personal lending (excluding credit cards) market share was up 19 basis points and would have increased even more except for the impact from two recent acquisitions by competitors.
Personal deposit balances increased 4% year over year mainly due to increased retail operating deposits.
In the commercial banking segment, revenue increased $19 million or 3% due to the effects of higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin.
Commercial loan balance growth was good with 12% year over year growth. Commercial deposit balances increased 15% year over year, marking the fourth straight quarter of increasing growth.
Net interest margin decreased 18 basis points to 2.58% due to lower deposit spreads in the low-rate environment, and changes in mix including loan growth exceeding deposit growth.
Average current loans and acceptances increased $16 billion or 10% from a year ago and deposits increased $8 billion or 8%.
Q3 2013 vs Q2 2013
Net income increased $67 million or 16% from last quarter. Revenue increased $88 million or 6% due to the effects of higher balance and fee volumes across most products and three more days in the current quarter. Net interest margin was relatively stable, down 1 basis point due to mix with loan and deposit spreads essentially unchanged.
Personal revenue increased $47 million or 5% due to higher balance and fee volumes across most products and three more days, partially offset by lower net interest margin. Personal lending market share was up 19 basis points.
Commercial revenue increased $41 million or 7% due to the effects of higher balance and fee volumes across most products and three more days.
Commercial lending market share for small and medium-sized loans was consistent with last quarter, while commercial deposits market share increased 50 basis points.
Provisions for credit losses fell $28 million with decreases in both the consumer and commercial portfolios.
Non-interest expense of $821 million increased $27 million or 3% due to three more days and continued investment in the business, including higher employee-related costs.
Average current loans and acceptances increased $5 billion or 3% from last quarter, while deposits increased $3 billion or 3%.
Q3 YTD 2013 vs Q3 YTD 2012
Net income increased $52 million or 4% year to date. Revenue increased $61 million or 1% due to the effects of higher balance and fee volumes across most products, partially offset by the impact of lower net interest margin.
Provisions for credit losses fell $61 million or 13%, with decreases mainly in the consumer portfolio.
Non-interest expense increased $55 million or 2% primarily due to continued investment in the business, including higher employee-related costs with increases in front-line roles.
Average current loans and acceptances increased $15 billion or 10%, while deposits increased $7 billion or 6%.
Q3 2013 vs Q3 2012 (in U.S. $)
Net income of $147 million increased $10 million or 7% from $137 million in the third quarter a year ago. Adjusted net income was $160 million, an increase of $7 million or 4% from a year ago due to lower provisions for credit losses and reduced expenses.
Revenue of $705 million decreased $39 million or 5% from a year ago, as the effect of loan growth was more than offset by the effects of lower net interest margin, reductions in certain loan portfolios and lower deposit fees.
Net interest margin decreased by 41 basis points primarily due to lower deposit spreads given the low-rate environment and loan spreads due to competitive pricing, and growth in lower spread assets.
Provisions for credit losses were $39 million compared with $74 million a year ago.
Non-interest expense of $448 million decreased $20 million or 4%. Adjusted non-interest expense of $430 million was $14 million or 3% lower, primarily reflecting synergy-related savings, partially offset by the effects of selective investments in the business.
Average current loans and acceptances increased $1.2 billion year over year to $51 billion. The core commercial and industrial loan portfolio continues to grow, increasing by $3.9 billion from a year ago to $23.0 billion. As expected, there were decreases in certain loan portfolios and in our personal loan balances, due in part to the effects of our continued practice of selling most mortgage originations in the secondary market and active loan portfolio management.
Average deposits were essentially unchanged year over year at $59 billion, as growth in our commercial business and in our personal chequing and savings accounts was largely offset by a planned reduction in higher cost personal money market and time deposit accounts.
Q3 2013 vs Q2 2013 (in U.S. $)
Net income declined $5 million or 3% and adjusted net income decreased $3 million or 3% from the prior quarter.
Revenue decreased $13 million or 2% primarily due to a decline in net interest margin.
The decrease in net interest margin of 16 basis points was unusually high, primarily due to lower deposit spreads given the low-rate environment and lower loan spreads due to competitive loan pricing, including the repricing of one commercial portfolio, and growth in lower spread assets.
Provisions for credit losses declined $14 million primarily due to lower provisions in the commercial portfolio, driven by lower new reservations and higher recoveries from previously written-off amounts.
Non-interest expense and adjusted non-interest expense both increased $1 million or 1% from the prior quarter.
Average current loans and acceptances increased by $0.5 billion from the prior quarter, our third consecutive quarter of positive growth. Core commercial and industrial loans increased $0.9 billion or 4% from the previous quarter.
Average deposits decreased modestly by $0.5 billion from the prior quarter due to a planned reduction in higher cost deposits and normal fluctuations in our commercial clients' cash management activities.
Q3 YTD 2013 vs Q3 YTD 2012 (in U.S. $)
Net income of $482 million increased $45 million or 10%. Adjusted net income of $520 million increased $35 million or 7% due to reduced expenses and lower provisions for credit losses.
Revenue of $2,178 million decreased $87 million or 4%. The benefits of increased commercial loans and fees and higher gains on the sales of newly originated mortgages were more than offset by the effects of lower net interest margin and reductions in deposit fees and securities gains.
Net interest margin decreased by 30 basis points.
Provisions for credit losses of $125 million decreased $72 million or 37% year over year.
Non-interest expense of $1,346 million decreased $82 million or 6%. Adjusted non-interest expense of $1,290 million decreased $67 million or 5%. The decrease was primarily due to synergy-related savings in the current year, partially offset by the effects of selective investments in the business.
Average current loans and acceptances of $51 billion and deposits of $59 billion increased slightly from the prior year.
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.
Q3 2013 vs Q3 2012
PCG produced strong results for the quarter. Net income of $218 million doubled from a year ago. Adjusted net income of $225 million increased $111 million or 97% from a year ago. Adjusted net income in PCG traditional wealth businesses was a record $131 million, up $35 million or 37% from a year ago. Results reflect growth in client assets, increased transaction volumes and a continued focus on productivity. Adjusted net income in Insurance was $94 million, up $76 million from a year ago. The increase was due to a $42 million after-tax benefit from increases in long-term interest rates in the current quarter relative to a $45 million after-tax charge a year ago, partially offset by benefits from changes in our investment portfolio to improve asset-liability management in the prior year. The underlying Insurance business continues to perform well.
Revenue was $869 million, up $190 million or 28% from a year ago. Revenue in PCG traditional wealth businesses was $727 million, up 12% from a year ago due to growth in client assets, increased transaction volumes and the benefit of acquisitions. Insurance revenue was $142 million, up $110 million due to the factors mentioned above.
Non-interest expense was $585 million, up $39 million or 7% from a year ago. Adjusted non-interest expense was $576 million, up $38 million or 7% due to higher revenue-based costs, in line with revenue growth, and costs associated with recent acquisitions. Growth in expenses was offset in part by benefits from a continued focus on productivity.
Assets under management and administration grew by $63 billion or 13% from a year ago to $527 billion, with assets under management up 11% year over year, driven mainly by growth in new client assets coupled with market appreciation.
Q3 2013 vs Q2 2013
Net income was up $77 million or 54% and adjusted net income was up $77 million or 52% from the second quarter. Adjusted net income in PCG traditional wealth businesses was up $17 million or 16%. Adjusted net income in Insurance more than doubled, with an increase of $60 million, from the second quarter.
Revenue increased $104 million or 14%. Revenue in PCG traditional wealth businesses increased $25 million or 4% due to growth across most businesses. Insurance revenue more than doubled due to favourable movements in long-term interest rates relative to the second quarter and continued growth in both the creditor and life insurance businesses, partially offset by benefits from changes in our investment portfolio to improve asset-liability management in the second quarter.
Non-interest and adjusted non-interest expense were consistent with the second quarter as growth in revenue-based costs was offset by benefits from a continued focus on productivity.
Assets under management and administration grew by $5 billion or 1% due to the stronger U.S. dollar and growth in new client assets.
Q3 YTD 2013 vs Q3 YTD 2012
Net income was $522 million, up $162 million or 45% from a year ago. Adjusted net income was $542 million, up $166 million or 44% from a year ago. Adjusted net income in PCG traditional wealth businesses was $350 million, an increase of $56 million or 19%. Adjusted net income in Insurance of $192 million more than doubled, with an increase of $110 million from a year ago.
Revenue was $2,413 million, up $293 million or 14% from a year ago. Revenue in PCG traditional wealth businesses was $2,108 million, up $143 million or 7% due to growth across most businesses. Prior year results included higher than usual revenue from a strategic investment. Insurance revenue was $305 million, up $150 million or 97% due to favourable movements in long-term interest rates relative to a year ago, higher benefits from changes in our investment portfolio to improve asset-liability management and continued growth in both the creditor and life insurance businesses.
Non-interest expense was $1,740 million, up $83 million or 5% from a year ago. Adjusted non-interest expense was $1,713 million, up $78 million or 5%. The increase was due to higher revenue-based costs, in line with revenue growth, and costs of recent acquisitions, offset in part by benefits from a continued focus on productivity.
Adjusted results in the foregoing PCG sections are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.
Q3 2013 vs Q3 2012
Net income for the quarter increased $30 million or 12% from the prior year to $280 million, driven by good performance across our diversified businesses. ROE was 19.0% compared with 20.9% a year ago.
Revenue increased $61 million or 8% to $869 million. Increases in trading revenue and equity underwriting more than offset a decline in mergers and acquisitions and in interest-rate-sensitive businesses. The stronger U.S. dollar increased revenues by $7 million relative to a year ago.
Non-interest expense increased $32 million or 7%, primarily due to increased employee costs. The stronger U.S. dollar increased expenses by $4 million relative to a year ago.
Q3 2013 vs Q2 2013
Net income increased $5 million or 2% from the previous quarter. Revenue increased $19 million or 2%, driven by strong client-driven trading performance and better equity and debt underwriting, which more than offset a reduction in merger and acquisition revenues and lower investment securities gains. The stronger U.S. dollar increased revenue by $7 million relative to the previous quarter.
Non-interest expense increased $11 million or 2% from the previous quarter, primarily driven by higher employee costs. The stronger U.S. dollar increased expenses $4 million relative to the previous quarter.
Q3 YTD 2013 vs Q3 YTD 2012
Net income increased $158 million or 22% from the previous year to $865 million. Revenue was $248 million or 10% higher. Increases in both net income and revenue were driven by higher trading revenue and investment banking fees. The stronger U.S. dollar increased revenue by $10 million relative to the prior year.
Non-interest expense was $97 million or 7% higher than in the prior year, primarily due to increased employee costs, in line with better revenue performance, and higher technology and support costs. The stronger U.S. dollar increased expenses by $5 million relative to the prior year.
Corporate Services
Corporate Services consists of Corporate Units and Technology and Operations.
Corporate Units provide 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 largely transferred to the three client operating groups (P&C, PCG and BMO Capital Markets), and only relatively minor amounts are retained in Corporate Services results. As such, Corporate Services adjusted operating results largely reflect the impact of certain asset-liability management activities, the elimination of taxable equivalent adjustments, the results from certain impaired asset portfolios, the recovery of provisions for credit losses on the M&I purchased credit impaired loan portfolio and certain unallocated amounts. 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
Q3 2013 vs Q3 2012
Corporate Services net loss for the quarter was $11 million, compared with net income of $13 million a year ago. The adjusted net loss in the third quarter of 2013 was $35 million, compared with adjusted net income of $32 million a year ago. Adjusted revenues were lower driven primarily by a higher group teb offset. Adjusted non-interest expenses were higher primarily due to higher technology costs. Adjusted recoveries of credit losses increased in the current year primarily due to higher recoveries on the M&I purchased credit impaired loan portfolio.
Q3 2013 vs Q2 2013
Corporate Services net loss for the quarter was $11 million, compared with a net loss of $26 million in the second quarter. The adjusted net loss was $35 million, compared with a net loss of $26 million in the second quarter. Adjusted revenues were lower primarily due to a higher group teb offset. Adjusted non-interest expenses were higher primarily due to higher technology costs. Adjusted recoveries of credit losses increased primarily due to higher recoveries on the M&I purchased credit impaired loan portfolio.
Q3 YTD 2013 vs Q3 YTD 2012
Corporate Services net loss for the year to date was $102 million, compared with net income of $267 million a year ago. Adjusted net loss for the year to date was $155 million, compared with net income of $55 million from a year ago. Adjusted revenues were lower with half of the decrease due to a higher group teb offset and the remaining half due to lower revenue from a variety of items, none of which were individually significant. Adjusted non-interest expenses were higher primarily due to higher technology costs, and increased benefit costs, including pension. Adjusted recoveries of credit losses decreased primarily due to lower recoveries of credit losses on the M&I purchased credit impaired loan portfolio.
Loans and acceptances at the end of the current quarter were $695 million, down $865 million from the prior year and $300 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 29. 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 items have also been designated as adjusting items due to the fact that they can affect trend analysis. These include changes in the collective allowance and credit-related amounts in respect of the acquired M&I performing loan portfolio, M&I integration costs, run-off structured credit activities and restructuring costs. All of the above adjusting items are recorded in Corporate Services except the amortization of acquisition-related intangible assets, which is charged to the operating groups as outlined below.
Net economic profit represents net income available to common shareholders after deduction of a charge for capital, and is considered a reasonable 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 third quarter of 2013, adjusting items increased reported net income by $1 million after tax, comprised of a $68 million after-tax net benefit of credit-related items in respect of the M&I purchased performing loan portfolio (including $154 million in net interest income, net of a $44 million specific provision for credit losses and related income taxes of $42 million); costs of $49 million ($30 million after tax) for the integration of M&I; an increase in the collective allowance for credit losses of $20 million ($15 million after tax) on loans other than the M&I purchased loan portfolio; a $32 million ($23 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; and a benefit from run-off structured credit activities of $1 million before and after tax primarily included in trading revenue. Amortization of acquisition-related intangible assets was charged to the operating groups as follows: P&C Canada $3 million before and after tax; P&C U.S. $19 million ($12 million after tax); PCG $9 million ($7 million after tax); and BMO Capital Markets $1 million before and after tax.
In the second quarter of 2013, adjusting items decreased net income by $22 million after tax, comprised of a $73 million after-tax net benefit of credit-related items in respect of the M&I purchased performing loan portfolio (including $176 million in net interest income, net of a $57 million provision for credit losses and related income taxes of $46 million); costs of $50 million ($31 million after tax) for the integration of M&I; a restructuring charge of $82 million ($59 million after tax) to align our cost structure with the current and future business environment; a decrease in the collective allowance for credit losses of $22 million ($11 million after tax) on loans other than the M&I purchased loan portfolio; a $31 million ($22 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; and a benefit from run-off structured credit activities of $6 million before and after tax. The $57 million provision included in the credit-related items above included $65 million of specific provisions and an $8 million decrease in the collective allowance for credit losses on the acquired M&I performing loan portfolio. Amortization of acquisition-related intangible assets was charged to the operating groups as follows: P&C Canada $2 million ($1 million after tax); P&C U.S. $19 million ($13 million after tax); PCG $9 million ($7 million after tax); and BMO Capital Markets $1 million before and after tax.
In the third quarter of 2012, adjusting items decreased reported net income by $43 million after tax, comprised of a $47 million after-tax net benefit of credit-related items in respect of the M&I purchased performing loan portfolio (including $212 million in net interest income, net of a $136 million provision for credit losses and related income taxes of $29 million); costs of $105 million ($65 million after tax) for the integration of M&I; a decrease in the collective allowance for credit losses of $15 million ($14 million after tax) on loans other than the M&I purchased loan portfolio; a $33 million ($24 million after tax) charge for amortization of acquisition-related intangible assets on all acquisitions; and a loss on run-off structured credit activities of $15 before and after tax. The $136 million provision included in the credit-related items above included $113 million of specific provisions and a $23 million increase in the collective allowance for credit losses on the acquired M&I performing loan portfolio. Amortization of acquisition-related intangible assets was charged to the operating groups as follows: P&C Canada $3 million before and after tax; P&C U.S. $23 million ($16 million after tax); and PCG $7 million ($5 million after tax).
Our complete Third Quarter 2013 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended July 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, August 27, 2013, at 1:30 p.m. (EDT). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of the conference call can be accessed until Monday, December 2, 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.
*See whole press release at: http://www.marketwire.com/press-release/bmo-financial-group-reports-good-results-for-the-third-quarter-of-2013-tsx-bmo-1824621.htm
Website: http://www.bmo.com
Contact
Ralph Marranca
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416-867-3996
Ronald Monet, Montreal,
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514-877-1873
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2016년 2월 25일 08:29