BMO Financial Group Reports Good Third Quarter Results, Contributing to Strong Year-to-Date Performance
Financial Results Highlights:
Third Quarter 2011 Compared with Third Quarter 2010:
• Reported net income of $793 million, up 18% or $124 million from a year ago
• Adjusted net income1 of $843 million, up 24% or $165 million from a year ago
• Reported EPS2 of $1.27, up 12% from a year ago
• Adjusted EPS1,2 of $1.36, up 19% from a year ago
• ROE of 14.7%, up from 13.7% a year ago
• Provisions for credit losses of $174 million, down $40 million from a year ago
• Common Equity Ratio remains strong, at 9.11%
Year-to-Date 2011 Compared with Year-to-Date 2010:
• Reported net income of $2,369 million, up 14% or $298 million from a year ago
• Adjusted net income1 of $2,431 million, up 16% or $337 million from a year ago
PDF format of entire Third Quarter 2011 Report to Shareholders/News Release including Financial Results Highlights, Management’s Discussion and Analysis and Unaudited Financial Statements: http://www2.bmo.com/bmo/files/news%20release/4/1/Q32011PR_logoEN.pdf
Toronto - For the third quarter ended July 31, 2011, BMO Financial Group reported net income of $793 million or $1.27 per share. On an adjusted basis, net income was $843 million or $1.36 per share.
"BMO continues to perform well, with adjusted earnings of $843 million for the quarter and more than $2.4 billion for the first nine months of the year,” said Bill Downe, President and Chief Executive Officer, BMO Financial Group. “The investments we are making continue to contribute to top-line growth and this remains our priority as we steadily introduce new initiatives that further enhance the experience of our customer.”
During the quarter, BMO completed the acquisition of Marshall & Ilsley Corporation (M&I). Over 26 days, M&I’s operations added $117 million of revenue to BMO’s third quarter results and $32 million of adjusted net income, which excludes integration and related costs.
“This purchase is transforming our U.S. presence by adding scale and providing a strong entry into attractive new markets,” said Mr. Downe. “We have more than doubled our U.S. branch count to 688 branches and are competing from a position of strength in a contiguous six-state area with a population and GDP greater than Canada’s. The closing process was on time and efficient. Integration efforts are moving forward as planned as we welcome M&I shareholders as shareholders of BMO.
“In addition, the transaction almost triples the size of our U.S. wealth businesses as measured by assets under management and administration, and our U.S. private banking presence now operates from twice as many outlets.
“Banks succeed when customers succeed. We are focused on deepening customer relationships and developing new ones. We are growing commercial loan balances in Canada. In the United States, our goal is to be the leading commercial lender in the Midwest. And we’re competing aggressively in every market in which we do business. We have committed to making an additional US$5 billion available to small and medium-sized businesses over the next two years to play our part in supporting the economic recovery by spurring business investment and job creation.
“Global economic conditions have given us every reason to be cautious. We have been vigilant and continue to be vigilant by moderating the pace of investment. At the same time, we remain confident in our ability to grow and deliver an experience to customers that stands out, while maintaining our well-earned reputation for disciplined risk management,” concluded Mr. Downe.
Concurrent with the release of results, BMO announced a fourth quarter dividend of $0.70 per common share, unchanged from the preceding quarter and equivalent to an annual dividend of $2.80 per common share.
1 Results and measures in the MD&A are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Items excluded from third quarter 2011 results in the determination of adjusted results totalled $50 million after tax, comprised of $53 million ($32 million after tax) of costs for the integration of the Marshall & Ilsley Corporation (M&I) acquisition including integration planning, a $17 million ($12 million after tax) charge for amortization of acquisition-related intangible assets and $9 million ($6 million after tax) of charges for the hedge of foreign currency risk on the purchase of M&I. Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Presenting results on both bases provides readers with an enhanced understanding of how management views results and may enhance readers’ analysis of performance. Adjusted results and measures are non-GAAP and are detailed in the Adjusted Net Income section, the Net Income section, and in the Non-GAAP Measures section of Management’s Discussion and Analysis (MD&A) where such non-GAAP measures and their closest GAAP counterparts are disclosed.
2 All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise.
Operating Segment Overview
Net income was $432 million, up $8 million or 1.8% from a year ago. Volume growth continued across most products but growth has slowed while net interest margin has declined slightly. Revenue increased 3.6% from the second quarter while expense growth moderated to 1.1%, as we manage our expenses prudently while investing in our strategic priorities.
We continue to make improvements in enhancing the customer experience through investment in our workforce, improved processes and leveraging our performance management discipline. Customer loyalty, as measured by net promoter score, continues to improve in both our personal and commercial businesses and we have seen an increase in the average number of product categories used by both personal and commercial customers.
In personal banking, the productivity of our sales and distribution network continues to strengthen. New branch openings and renovations continue, as we opened seven new branches and redeveloped nine in the first nine months of the year. We have enhanced our online banking features that make it more convenient for customers to access their banking information and apply for products online. Early indicators demonstrate that our investments in our business are having an impact. There were more than 10 times the number of youth accounts opened in the first three months of our BMO SmartSteps for Parents campaign as were opened in the same timeframe last year. Online sales are up 14% year over year across all retail product categories and in the three months following our online bank account application upgrade, chequing and savings account sales were up almost 50%. We are confident that we are well positioned for future growth.
In commercial banking, we continue to rank second in market share for loans to small and medium-sized businesses with market share remaining stable year over year. In June, BMO was the only Canadian bank recognized in the top international information technology awards announced in International Data Group’s CIO magazine. The award recognized BMO for its Online Banking for Business platform, a multi-channel, global commercial online banking solution that allows our customers to manage all of their global cash management, foreign exchange and card services online in a secure environment. In addition, earlier this year we launched a new mobile banking service that enables our business banking customers to make payments anytime and anywhere over mobile devices safely and securely. This is consistent with our ongoing investment in delivering a great customer experience to our business banking customers. We are committed to providing seamless, simple, and personalized access to all of their business banking services from one platform. Our goal is to become the bank of choice for businesses across Canada, by providing the knowledge, advice and guidance our customers want.
P&C U.S. (all amounts in US $)
Net income of $95 million increased $45 million or 94% from $50 million a year ago, with the acquired M&I business contributing $27 million of the increase. M&I results included in P&C U.S. reflect an $18 million charge for expected credit losses on the M&I portfolio, determined on a basis consistent with BMO’s methodologies and in the same manner as expected losses are determined for other loans in P&C U.S. Differences between expected losses and actual losses on the portfolio are charged (or credited) to Corporate Services.
Excluding the M&I business, net income increased $18 million or 39%, primarily due to increased revenue from improved net interest margin and higher securities gains, partially offset by lower fee revenue. Revenue increased by 47% on a reported basis and by 8.1% excluding M&I. Higher provisions for credit losses under BMO’s expected loss provisioning methodology were offset by lower expenses.
During the quarter, certain impaired real estate secured assets, primarily commercial real estate loans, were transferred to Corporate Services to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior period loan balances, revenues and expenses have been restated to reflect the transfer. Similar assets acquired in the M&I transaction have also been included in Corporate Services.
The M&I acquisition substantially increases our market presence in the Midwest. We have an enviable market position that will enable us to compete aggressively everywhere we do business. We plan to increase our focus on developing new customer relationships and deepening existing relationships across our businesses, and we are making an additional $5 billion in credit available to small and medium-sized businesses in our markets over the next two years.
We continue to focus on the customer experience, as reflected in our high loyalty scores. Our personal retail net promoter score of 43 continues to improve, and with three quarters of sequential growth and an increase of one point from 42 in the prior quarter, our score remains very strong compared to the scores of our major competitors. The preceding scores do not reflect any adjustments for the M&I acquisition and M&I loyalty scores.
Private Client Group (PCG)
Net income was $120 million, up $15 million or 14% from the same quarter a year ago. Private Client Group net income, excluding the insurance business, increased $30 million or 43% to $101 million as we continue to see growth across all of these businesses. Included in the current quarter is $4 million of earnings from the wealth businesses relating to M&I. As well, the current quarter includes results of Lloyd George Management (LGM), an acquisition that was completed on April 28, 2011 and was net income neutral in the quarter. Insurance net income was $19 million for the quarter, down $15 million or 45% from a year ago, primarily due to the effect of unfavourable long-term interest rate movements on policyholder liabilities relative to the prior year.
Revenue was $617 million, up $73 million or 13% from the prior year with growth across all of our businesses as we remain focused on continuing to deliver the high level of service and advice that our clients expect. The LGM acquisition and M&I wealth businesses together added $39 million to revenue. The productivity ratio of 74.7% increased by 30 basis points from the prior year.
Assets under management and administration improved by $177 billion to $429 billion as the M&I and LGM acquisitions brought $153 billion in client assets to our business. Assets in our U.S. wealth business increased from US$77 billion to US$239 billion. On a basis that excludes the impact of the M&I and LGM acquisitions and the weaker U.S. dollar, assets under management and administration grew $30 billion or 12% from a year ago.
As a result of the M&I acquisition, we have almost doubled our U.S. private banking footprint. Our Global Asset Management business is a multi-asset management firm that now manages over $100 billion in combined assets and is one of the 100 largest investment managers worldwide as measured by assets under management. By continuing to provide an exceptional client experience, we are building a strong foundation and positioning ourselves for expansion of our business.
BMO’s Exchange Traded Fund (ETF) business has grown to $2.7 billion in assets under management. Since inception in June 2009, BMO’s ETF product portfolio has grown to 40 funds that offer numerous benefits to investors including lower costs, diversification and tax efficiencies, while providing investment exposure to a broad range of asset classes, sectors and regions.
BMO Capital Markets
Net income for the quarter was $279 million, an increase of $149 million from a year ago. Return on equity was 25.5%, compared with 11.8% a year ago. Revenue was $837 million, up $158 million or 23% from the prior year. Trading revenues have increased significantly, as the trading environment has improved from the challenging conditions of a year ago. Mergers and acquisitions revenues have also shown strong growth over the previous year. Results also benefited from a recovery of prior periods’ income taxes. BMO Capital Markets strategy remains focused on its core clients and businesses and remains on track to successfully deliver profitable growth over time.
As a testament to its expertise in trade finance, BMO Capital Markets has, for the second year in a row, been named as the winner of the “Best Trade Bank in Canada” award for excellence by Trade Finance magazine.
In the third quarter of 2011, BMO Capital Markets participated in 125 new issues, including 37 corporate debt deals, 32 government debt deals, 51 common equity transactions and five issues of preferred shares, raising $51 billion.
Corporate Services net loss in the quarter was $130 million, including a $38 million loss related to M&I integration planning and foreign exchange hedging costs, up from a loss of $42 million a year ago. Revenues were $28 million worse, primarily due to the impact of the M&I acquisition and a less favourable impact year over year from hedging activities, partly offset by a lower group teb offset (see the Revenue section for an explanation of teb). Expenses were $51 million higher, mainly due to costs relating to the M&I integration. Provisions for credit losses were better by $34 million, contributing $24 million to Corporate Services net income, as a result of lower provisions charged to Corporate Services under BMO’s expected loss provisioning methodology. BMO employs a methodology for segmented reporting purposes whereby expected credit losses are charged to the client operating groups, and the difference between expected losses and actual losses is charged (or credited) to Corporate Services.
Acquisition of Marshall & Ilsley Corporation (M&I)
On July 5, 2011, BMO completed the acquisition of M&I for consideration of approximately $4.0 billion in the form of approximately 67 million common shares issued to M&I shareholders. M&I Bank combined with Harris to form BMO Harris Bank. In addition, immediately prior to the closing of the transaction, a BMO subsidiary purchased from the U.S. Treasury all of M&I’s outstanding Troubled Asset Relief Program (TARP) preferred shares and warrants for cash consideration of approximately US$1.7 billion.
The acquisition of M&I added $29 billion of loans, after adjustment for future expected losses, and $34 billion of deposits. The allocation of the purchase price is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed. The acquisition together with our existing U.S. operations more than doubles our U.S. branch count to 688, adds approximately two million customers and increases BMO’s total assets under management and administration to over $530 billion.
We expect that annual cost savings from the integration of M&I and BMO will exceed US$300 million. We also expect there to be opportunities to add to revenues through expanded access to existing and new markets with increased brand awareness and a better ability to compete in the market. As previously indicated, we also anticipate that in fiscal 2011 M&I will contribute modestly positive net income to BMO’s consolidated results, excluding integration and restructuring costs.
Integration and restructuring costs are included in non-interest expense in Corporate Services and are expected to approximate a total of US$600 million over the next few years. We recorded $53 million of such expenses in the current quarter and $25 million in the immediately preceding quarter. These costs include amounts related to system conversions, severance and other employee-related charges as well as other integration amounts, such as consulting fees and marketing costs in connection with customer communications and rebranding activities.
M&I’s activities are primarily reflected in our P&C U.S., Private Client Group and Corporate Services segments, with a small amount included in BMO Capital Markets.
Prior to the close of the transaction, approximately US$1.0 billion of impaired real estate secured assets, comprised primarily of commercial real estate loans, were transferred from P&C U.S. to Corporate Services to allow our businesses to focus on ongoing customer relationships and leverage our risk management expertise in our special assets management unit. Prior period loan balances, revenues and expenses have been restated to reflect the transfer. In addition similar assets valued at approximately US$1.5 billion that were acquired on the M&I acquisition were included in Corporate Services for the same reasons.
Also included in Corporate Services are the fair value adjustments that we have established at this time for future expected losses on the M&I loan portfolio and for the valuation of loans, deposits and debt instruments at market rates on the closing date. Corporate Services results will include in the provisions for credit losses any changes in our estimate of future expected losses and will also include the adjustments to net interest income that will occur as a result of having valued assets and liabilities at market rates on the closing date. These items were not significant to Corporate Services results in the quarter. The operating groups’ results will reflect the provision for credit losses on an expected loss basis and net interest income based on the contractual rates for loans and deposits.
While the acquisition of M&I adds scale and provides a strong entry into new markets, integration risk is a key focus for the organization. It includes risk of customer and employee retention and system integration. The risks are addressed by maintaining our program management office, along with experienced BMO and M&I staff focused on ensuring these risks are well managed. Both organizations have considerable experience with integrating acquired businesses and the integration is now well underway. Our first critical milestone, closing the transaction and opening the combined bank for business on July 6, was successfully completed.
Adjusted Net Income
Management assesses performance on both a GAAP basis and adjusted basis and considers both bases to be useful in assessing underlying, ongoing business performance. Adjusted results for the third quarter of 2011 exclude the following items:
• costs for M&I of $53 million ($32 million after tax) for integration costs such as professional fees for integration planning as well as costs for systems development and certain severance;
• amortization of acquisition-related intangible assets of $17 million ($12 million after tax); and
• a charge to revenue for the hedge of foreign currency risk on the purchase of M&I of $9 million ($6 million after tax).
Adjusted net income was $843 million for the third quarter of 2011, up $165 million or 24% from a year ago. Adjusted earnings per share were $1.36, up 19% from $1.14 a year ago. The adjusting items above were recorded in Corporate Services except for the amortization of acquisition-related intangibles, which is charged across the groups. Adjusted results and measures are non-GAAP. Adjusted results and items excluded in determining adjusted results are disclosed in more detail in the Non-GAAP Measures section at the end of the MD&A, together with comments on the uses and limitations of such measures.
The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Caution Regarding Forward-Looking Statements
Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the safe harbour provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2011 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital markets activities; the possible effects on our business of war or terrorist activities; disease or illness that affects local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.
With respect to the M&I transaction, such factors include, but are not limited to: the possibility that the anticipated benefits from the transaction such as it being accretive to earnings and other impacts on earnings, expanding our North American presence and synergies are not realized in the time frame anticipated or at all as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations (including changes to capital requirements) and their enforcement, and the degree of competition in the geographic and business areas in which the combined businesses now operate; the ability to promptly and effectively integrate the businesses of M&I and BMO; reputational risks and the reaction of M&I’s customers to the transaction; diversion of management time on integration and restructuring related issues; and increased exposure to exchange rate fluctuations. A significant amount of M&I’s business involved making loans or otherwise committing resources to specific companies, industries or geographic areas. Unforeseen events affecting such borrowers, industries or geographic areas could have a material adverse effect on the performance of our integrated U.S. operations.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 29, 30, 61 and 62 of BMO’s 2010 Annual Report, which outlines in detail certain key factors that may affect Bank of Montreal’s future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether written or oral, that may be made, from time to time, by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented and our strategic priorities and objectives, and may not be appropriate for other purposes.
In calculating the pro-forma impact of Basel III on our regulatory capital and regulatory capital ratios, we have assumed our interpretation of the proposed rules announced by the Basel Committee on Banking Supervision (BCBS) as of this date and our models used to assess those requirements are consistent with the final requirements that will be promulgated by BCBS and the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions, risk-weighted assets, the regulatory capital treatment for non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are adopted as proposed by BCBS and OSFI. We also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in such estimates. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at July 31 or as close to July 31 as was practical. The impacts of the changes from IFRS are based on our analysis to date, as set out in Transition to International Financial Reporting Standards in the Future Changes in Accounting Policies – IFRS section in our 2010 Annual Report and later in this document. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.
In determining the impact of reductions to interchange fees in the U.S. Legislative Developments section, we have assumed that business volumes remain consistent with our expectations and that certain management actions are implemented that will modestly reduce the impact of the rules on our revenues.
Assumptions about the performance of the Canadian and U.S. economies as well as overall market conditions and their combined effect on the bank’s business are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies.
To view the rest of this news release consisting of:
Financial Highlights: http://www2.bmo.com/bmo/files/news%20release/4/1/Q32011_financial_highlightsEN.pdf
Management’s Discussion and Analysis: http://www2.bmo.com/bmo/files/news%20release/4/1/Q32011mdaEN.pdf
Unaudited Financial Statements: http://www2.bmo.com/bmo/files/news%20release/4/1/Q32011fin_statementsEN.pdf
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2010 Annual Report, this quarterly news release, presentation materials and a supplementary financial information package online.
Quarterly Conference Call and Webcast Presentations
Interested parties are also invited to listen to our quarterly conference call on Tuesday, August 23, 2011, at 2:00 p.m. (EDT). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-695-9753 (from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of the conference call can be accessed until Monday, December 5, 2011, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering passcode 6850310.
A live webcast of the call can be accessed on our website at www.bmo.com/investorrelations. A replay can be accessed on the site until Monday, December 5, 2011.
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