EX-99.1 2 d796989dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

BMO Financial Group Reports Fourth Quarter and Fiscal 2019 Results

 

Fourth Quarter 2019 Earnings Release

Financial Results Highlights

Fourth Quarter 2019 Compared With Fourth Quarter 2018:

 

•  

Net income4,5 of $1,194 million, down 30%, reflecting a restructuring charge in the current quarter ($357 million after-tax) and a benefit from the remeasurement of an employee benefit liability in the prior year ($203 million after-tax); adjusted net income1 of $1,607 million, up 5%

 

•  

EPS2 of $1.78, down 31%; adjusted EPS1 of $2.43, up 5%

 

•  

Revenue, net of CCPB3,4, of $5,752 million, up 5%; revenue, net of adjusted CCPB1, of $5,777 million, up 5%

 

•  

Provision for credit losses (PCL) of $253 million compared with $175 million in the prior year; includes PCL on performing loans of $22 million

 

•  

ROE of 9.9%, compared with 16.1%; adjusted ROE1 of 13.5%, compared with 14.5%

 

•  

Common Equity Tier 1 Ratio of 11.4%

 

•  

Dividend increased $0.03 to $1.06, up 6% from the prior year

Fiscal 2019 Compared With Fiscal 2018:

 

•  

Net income4,5 of $5,758 million, up 6%; adjusted net income1 of $6,249 million, up 4%

 

•  

EPS2 of $8.66, up 6%; adjusted EPS1 of $9.43, up 5%

 

•  

Revenue, net of CCPB3,4, of $22,774 million, up 6%

 

•  

PCL of $872 million compared with $662 million in the prior year; includes PCL on performing loans of $121 million

 

•  

ROE of 12.6% compared with 13.3%; adjusted ROE1 of 13.7% compared with 14.6%

Toronto, December 3, 2019 – For the fourth quarter ended October 31, 2019, BMO Financial Group recorded net income of $1,194 million or $1.78 per share on a reported basis, and net income of $1,607 million or $2.43 per share on an adjusted basis.

“BMO finished the year with very strong performance, delivering $1.6 billion in adjusted earnings and adjusted earnings per share of $2.43 in the fourth quarter, up 5% year-over-year, with pre-provision pre-tax earnings growth of 11%, driven by positive operating leverage in all businesses and particularly strong operating performance in Personal and Commercial banking in both Canada and the U.S.,” said Darryl White, Chief Executive Officer, BMO Financial Group.

“Our results for the year reflect the strength and quality of our diversified businesses. Adjusted earnings per share were $9.43, up 5% from last year. We continued to make significant progress on our strategic priorities and delivered annual earnings growth of 23% in our U.S. business. With a clear bank-wide focus on disciplined expense management, we continued to improve our overall efficiency ratio with 130 basis points of improvement in the past two years and good momentum throughout the year. We have a number of initiatives underway, including today’s announcement of a restructuring charge, that will serve to accelerate our momentum and help us meet our efficiency objectives. In addition, we gained market share in key areas, including commercial lending and retail deposits, in Canada and the U.S. Our credit performance remains good and we ended the year with a strong CET1 capital ratio of 11.4%.”

“Looking ahead to 2020, we will continue to execute on our clearly articulated strategic priorities and objectives. We remain focused on building on the foundation of our integrated North American platform to grow our customer base and broaden our customer relationships. I am confident that we are well-positioned to deliver sustainable and resilient profitability through an evolving economic environment,” concluded Mr. White.

 

(1)

Results and measures in this document are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Adjusted results and measures are non-GAAP and are detailed for all reported periods in the Non-GAAP Measures section, where such non-GAAP measures and their closest GAAP counterparts are disclosed.

(2)

All Earnings per Share (EPS) measures in this document refer to diluted EPS, unless specified otherwise. EPS is calculated using net income after deducting total dividends on preferred shares and distributions on other equity instruments.

(3)

On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue.

(4)

Q4-2019 reported net income included a $357 million after-tax ($484 million pre-tax) restructuring charge, related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. The current quarter reported net income also included a $25 million (pre-tax and after-tax) net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. The restructuring charge was included in non-interest expense in Corporate Services and the reinsurance adjustment was included in CCPB in BMO Wealth Management.

(5)

In fiscal 2018, we recorded a $425 million (US$339 million) charge related to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act in the first quarter; a $192 million after-tax ($260 million pre-tax) restructuring charge, primarily related to severance, in the second quarter; and a benefit of $203 million after-tax ($277 million pre-tax) from the remeasurement of an employee benefit liability, as a result of an amendment to our other employee future benefits plan for certain employees, in the fourth quarter. The second quarter charge and fourth quarter benefit were included in non-interest expense in Corporate Services. For more information on the tax charge, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.

Note: All ratios and percentage changes in this document are based on unrounded numbers.

Reported net income in the current quarter included a restructuring charge of $357 million after-tax ($484 million pre-tax), related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. Reported net income also included a $25 million pre-tax and after-tax reinsurance adjustment for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business.

Return on equity (ROE) was 9.9%, compared with 16.1% in the prior year and adjusted ROE was 13.5%, compared with 14.5% in the prior year. Return on tangible common equity (ROTCE) was 11.9%, compared with 19.5% in the prior year and adjusted ROTCE was 15.7%, compared with 17.3% in the prior year.

Concurrent with the release of results, BMO announced a first quarter 2020 dividend of $1.06 per common share, up $0.03 per share or 3% from the prior quarter and up $0.06 per share or 6% from the prior year. The quarterly dividend of $1.06 per common share is equivalent to an annual dividend of $4.24 per common share.

BMO’s 2019 audited annual consolidated financial statements and accompanying Management Discussion and Analysis (MD&A) are available online at www.bmo.com/investorrelations and at www.sedar.com.

 

 

Fourth Quarter Operating Segment Overview

Canadian P&C

Reported net income was $716 million, an increase of $42 million or 6% and adjusted net income was $716 million, an increase of $41 million or 6% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Results reflect strong revenue growth, partially offset by higher provisions for credit losses and higher expenses.

During the quarter, we launched a new digital lending solution, the first of its kind from a major Canadian financial institution. Customers are now able to apply for a personal line of credit by completing a short, user-friendly digital application and receive a decision on their loan application in minutes. We also became the first Canadian financial institution to offer retail credit card customers the option to report a lost or stolen card through online banking. These new digital services and innovations reflect BMO’s commitment to creating digital solutions that better support our customers.

U.S. P&C

Reported net income was $393 million, an increase of $21 million or 6% and adjusted net income was $404 million, an increase of $21 million or 5% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets.

Reported net income was US$297 million, an increase of US$12 million or 4% and adjusted net income was US$305 million, an increase of US$11 million or 4%, primarily due to higher revenue and lower provisions for credit losses, partially offset by a favourable U.S. tax item in the prior year and higher expenses.

During the quarter, the Federal Deposit Insurance Corporation released its annual deposit market share report. We improved our market share ranking within our core footprint, which includes Illinois, Kansas, Wisconsin, Missouri, Indiana and Minnesota, from fourth to third place and maintained our strong ranking of second place in the Chicago and Milwaukee markets.

BMO Wealth Management

Reported net income was $267 million, an increase of $48 million or 22% and adjusted net income was $301 million, an increase of $72 million or 31% from the prior year. Adjusted net income in the current quarter excludes the net impact of major reinsurance claims and the amortization of acquisition-related intangible assets in both the current and prior year. Traditional Wealth reported net income was $237 million, an increase of $45 million or 24% and adjusted net income was $246 million, an increase of $44 million or 22%, due to the impact of a legal provision in the prior year, higher deposit and loan revenue and higher fee-based revenue. Insurance reported net income was $30 million, an increase of $3 million or 9%, and adjusted net income of $55 million increased $28 million, primarily due to benefits from changes in investments to improve asset liability management.

For the second consecutive year, BMO Global Asset Management was named the best manager in liability-driven investment by Financial News.

BMO Capital Markets

Reported net income was $269 million, compared with $298 million and adjusted net income was $280 million, compared with $309 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Higher revenue was more than offset by higher provisions for credit losses and higher expenses.

On September 25, 2019, BMO Capital Markets celebrated the 15th anniversary of the Equity Through Education Trading Day, a BMO Capital Markets initiative that donates all institutional equity trading commissions earned that day across North America and Europe to charities helping underprivileged students through scholarships, bursaries and other academic programs. This year, we raised $1.6 million, bringing the total amount raised since the introduction of the program in 2005 to more than $21 million, and helping over 5,000 students. This is one of the many initiatives that continue to highlight BMO’s Purpose to Boldly Grow the Good in business and life.

 

BMO Financial Group Fourth Quarter Report 2019 1

Corporate Services

Reported net loss was $451 million, compared with a reported net income of $134 million in the prior year. Adjusted net loss was $94 million, compared with an adjusted net loss of $65 million in the prior year. Adjusted results in the current quarter exclude a restructuring charge of $357 million after-tax. Adjusted results in the prior year exclude a $203 million after-tax benefit from the remeasurement of an employee benefit liability and acquisition integration costs. Adjusted results decreased, primarily due to lower revenue excluding taxable equivalent basis (teb) adjustments, partially offset by lower expenses.

Adjusted results in this Fourth Quarter Operating Segment Overview section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Capital

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at October 31, 2019. The CET1 Ratio was unchanged from the prior quarter as retained earnings growth, which absorbed the restructuring charge, was offset by higher risk-weighted assets from business growth.

Provision for Credit Losses

Total provision for credit losses was $253 million, an increase of $78 million from the prior year. The provision for credit losses ratio was 23 basis points, compared with 18 basis points in the prior year. The provision for credit losses on impaired loans of $231 million increased $54 million from $177 million in the prior year, primarily due to higher provisions in BMO Capital Markets and our P&C businesses. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 18 basis points in the prior year. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $2 million recovery of credit losses on performing loans in the prior year. The year-over-year increase in the provision for credit losses on performing loans was as a result of negative migration in the current quarter, compared with positive migration in the prior year, and higher provisions in the current quarter from changes in scenario weights, partially offset by lower provisions in the current quarter from changes in the economic outlook.

Caution

The foregoing sections contain forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Regulatory Filings

Our continuous disclosure materials, including our interim filings, annual Management’s Discussion and Analysis and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular, are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators’ website at www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov.

 

 

Bank of Montreal uses a unified branding approach that links all of the organization’s member companies. Bank of Montreal, together with its subsidiaries, is known as BMO Financial Group. As such, in this document, the names BMO and BMO Financial Group mean Bank of Montreal, together with its subsidiaries.

 

 

 

2 BMO Financial Group Fourth Quarter Report 2019

Financial Review

Management’s Discussion and Analysis (MD&A) commentary is as at December 3, 2019. The material that precedes this section comprises part of this MD&A. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2019, included in this document, as well as the audited consolidated financial statements for the year ended October 31, 2019, and the MD&A for fiscal 2019, contained in our 2019 Annual Report.

BMO’s 2019 Annual Report 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.

 

 

Table of Contents

 

4   Financial Highlights   13     Review of Operating Groups’ Performance
5   Non-GAAP Measures      13    Personal and Commercial Banking (P&C)
6   Caution Regarding Forward-Looking Statements         14    Canadian Personal and Commercial Banking (Canadian P&C)
7   Foreign Exchange         15    U.S. Personal and Commercial Banking (U.S. P&C)
7   Net Income      17    BMO Wealth Management
8   Revenue      19    BMO Capital Markets
9   Provision for Credit Losses      20    Corporate Services
10   Impaired Loans   20    Risk Management
10   Insurance Claims, Commissions and Changes in Policy Benefit Liabilities   21    Interim Consolidated Financial Statements
10   Non-Interest Expense      21    Consolidated Statement of Income
10   Income Taxes      22    Consolidated Statement of Comprehensive Income
11   Capital Management      23    Consolidated Balance Sheet
       24    Consolidated Statement of Changes in Equity
    25    Investor and Media Information

 

 

Bank of Montreal’s management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at October 31, 2019, of Bank of Montreal’s disclosure controls and procedures (as defined in the rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2019, which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of inherent limitations, disclosure controls and procedures and internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.

As in prior quarters, Bank of Montreal’s Audit and Conduct Review Committee reviewed this document and Bank of Montreal’s Board of Directors approved the document prior to its release.

 

BMO Financial Group Fourth Quarter Report 2019 3

Financial Highlights

 

(Canadian $ in millions, except as noted)

      Q4-2019       Q3-2019        Q4-2018       Fiscal 2019       Fiscal 2018  

 

Summary Income Statement

            

Net interest income (1)

      3,364       3,217        3,015       12,888       11,438  

Non-interest revenue (1)(2)

      2,723       3,449        2,878       12,595       11,467  

Revenue (2)

      6,087       6,666        5,893       25,483       22,905  

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

      335       887        390       2,709       1,352  

Revenue, net of CCPB

      5,752       5,779        5,503       22,774       21,553  

Provision for (recovery of) credit losses on impaired loans

      231       243        177       751       700  

Provision for (recovery of) credit losses on performing loans

      22       63        (2 )      121       (38 ) 

Total provision for credit losses

      253       306        175       872       662  

Non-interest expense (2)

      3,987       3,491        3,193       14,630       13,477  

Provision for income taxes (3)

      318       425        438       1,514       1,961  

Net income attributable to equity holders of the bank

      1,194       1,557        1,697       5,758       5,453  

Adjusted net income

      1,607       1,582        1,531       6,249       5,982  

Common Share Data ($, except as noted)

            

Earnings per share

      1.78       2.34        2.58       8.66       8.17  

Adjusted earnings per share

      2.43       2.38        2.32       9.43       8.99  

Earnings per share growth (%)

      (30.7 )      1.0        42.4       6.0       3.3  

Adjusted earnings per share growth (%)

      4.8       0.8        19.7       4.9       10.3  

Dividends declared per share

      1.03       1.03        0.96       4.06       3.78  

Book value per share

      71.54       70.88        64.73       71.54       64.73  

Closing share price

      97.50       98.80        98.43       97.50       98.43  

Number of common shares outstanding (in millions)

            

      End of period

      639.2       639.0        639.3       639.2       639.3  

      Average diluted

      640.4       640.4        641.8       640.4       644.9  

Total market value of common shares ($ billions)

      62.3       63.1        62.9       62.3       62.9  

Dividend yield (%)

      4.2       4.2        3.9       4.2       3.8  

Dividend payout ratio (%)

      57.6       43.9        37.2       46.8       46.1  

Adjusted dividend payout ratio (%)

      42.3       43.2        41.3       43.0       41.9  

Financial Measures and Ratios (%)

            

Return on equity

      9.9       13.2        16.1       12.6       13.3  

Adjusted return on equity

      13.5       13.5        14.5       13.7       14.6  

Return on tangible common equity

      11.9       15.8        19.5       15.1       16.2  

Adjusted return on tangible common equity

      15.7       15.8        17.3       16.1       17.5  

Net income growth

      (29.6 )      1.3        38.6       5.6       2.1  

Adjusted net income growth

      5.0       1.1        17.1       4.5       8.8  

Revenue growth

      3.3       15.1        5.0       11.3       3.6  

Revenue growth, net of CCPB

      4.5       4.6        9.1       5.7       4.8  

Non-interest expense growth

      24.9       3.9        (4.4 )      8.6       2.2  

Adjusted non-interest expense growth

      1.2       4.1        6.2       5.0       3.5  

Efficiency ratio, net of CCPB

      69.3       60.4        58.0       64.2       62.5  

Adjusted efficiency ratio, net of CCPB

      60.0       59.9        62.2       61.4       61.9  

Operating leverage, net of CCPB

      (20.4 )      0.7        13.5       (2.9 )      2.6  

Adjusted operating leverage, net of CCPB

      3.8       0.5        2.9       0.8       1.3  

Net interest margin on average earning assets

      1.71       1.67        1.68       1.70       1.67  

Effective tax rate (3)

      21.0       21.5        20.6       20.8       26.5  

Adjusted effective tax rate

      22.0       21.5        19.7       21.1       20.7  

Total PCL-to-average net loans and acceptances (annualized)

      0.23       0.28        0.18       0.20       0.17  

PCL on impaired loans-to-average net loans and acceptances (annualized)

      0.21       0.22        0.18       0.17       0.18  

Balance Sheet (as at, $ millions, except as noted)

            

Assets

      852,195       839,180        773,293       852,195       773,293  

Gross loans and acceptances

      451,537       444,390        404,215       451,537       404,215  

Net loans and acceptances

      449,687       442,588        402,576       449,687       402,576  

Deposits

      568,143       553,383        520,928       568,143       520,928  

Common shareholders’ equity

      45,728       45,295        41,381       45,728       41,381  

Cash and securities-to-total assets ratio (%)

      28.9       28.3        29.9       28.9       29.9  

Capital Ratios (%)

            

CET1 Ratio

      11.4       11.4        11.3       11.4       11.3  

Tier 1 Capital Ratio

      13.0       13.0        12.9       13.0       12.9  

Total Capital Ratio

      15.2       15.3        15.2       15.2       15.2  

Leverage Ratio

      4.3       4.3        4.2       4.3       4.2  

Foreign Exchange Rates ($)

            

As at Canadian/U.S. dollar

      1.3165       1.3198        1.3169       1.3165       1.3169  

Average Canadian/U.S. dollar

      1.3240       1.3270        1.3047       1.3290       1.2878  

 

(1)

Effective Q1-2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related ratios have been reclassified to conform with the current period’s presentation.

(2)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, certain out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.

(3)

Q1-2018 reported net income included a $425 million charge due to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act. For more information, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.

Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy.

Adjusted results are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

4 BMO Financial Group Fourth Quarter Report 2019

Non-GAAP Measures

Results and measures in this document are presented on a GAAP basis. 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. They are also presented on an adjusted basis that excludes the impact of certain items, as set out in the table below. Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on our U.S. segment are non-GAAP measures. Please refer to the Foreign Exchange section on page 7 for a discussion of the effects of changes in exchange rates on our results. Management assesses performance on a reported basis and on an adjusted basis, and considers both to be useful in assessing underlying ongoing business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. It also permits readers to assess the impact of certain specified items on results for the periods presented, and to better assess results excluding those items that may not be reflective of ongoing results. As such, the presentation may facilitate readers’ analysis of trends. Except as otherwise noted, management’s discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results. Adjusted results and measures are non-GAAP and as such do not have standardized meanings 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.

Non-GAAP Measures

 

(Canadian $ in millions, except as noted)

                Q4-2019                 Q3-2019                 Q4-2018                 Fiscal 2019                 Fiscal 2018  

 

Reported Results

           

Revenue

      6,087       6,666       5,893       25,483       22,905  

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

      (335 )      (887 )      (390 )      (2,709 )      (1,352 ) 

Revenue, net of CCPB

      5,752       5,779       5,503       22,774       21,553  

Total provision for credit losses

      (253 )      (306 )      (175 )      (872 )      (662 ) 

Non-interest expense

      (3,987 )      (3,491 )      (3,193 )      (14,630 )      (13,477 ) 

Income before income taxes

      1,512       1,982       2,135       7,272       7,414  

Provision for income taxes

      (318 )      (425 )      (438 )      (1,514 )      (1,961 ) 

Net income

      1,194       1,557       1,697       5,758       5,453  

EPS ($)

      1.78       2.34       2.58       8.66       8.17  

 

Adjusting Items (Pre-tax) (1)

           

Acquisition integration costs (2)

      (2 )      (3 )      (18 )      (13 )      (34 ) 

Amortization of acquisition-related intangible assets (3)

      (38 )      (29 )      (31 )      (128 )      (116 ) 

Restructuring costs (4)

      (484 )      -       -       (484 )      (260 ) 

Reinsurance adjustment (5)

      (25 )      -       -       (25 )      -  

Benefit from the remeasurement of an employee benefit liability (6)

      -       -       277       -       277  

Adjusting items included in reported pre-tax income

      (549 )      (32 )      228       (650 )      (133 ) 

 

Adjusting Items (After tax) (1)

           

Acquisition integration costs (2)

      (2 )      (2 )      (13 )      (10 )      (25 ) 

Amortization of acquisition-related intangible assets (3)

      (29 )      (23 )      (24 )      (99 )      (90 ) 

Restructuring costs (4)

      (357 )      -       -       (357 )      (192 ) 

Reinsurance adjustment (5)

      (25 )      -       -       (25 )      -  

Benefit from the remeasurement of an employee benefit liability (6)

      -       -       203       -       203  

U.S. net deferred tax asset revaluation (7)

      -       -       -       -       (425 ) 

Adjusting items included in reported net income after tax

      (413 )      (25 )      166       (491 )      (529 ) 

Impact on EPS ($)

      (0.65 )      (0.04 )      0.26       (0.77 )      (0.82 ) 

 

Adjusted Results

           

Revenue

      6,087       6,666       5,893       25,483       22,905  

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

      (310 )      (887 )      (390 )      (2,684 )      (1,352 ) 

Revenue, net of CCPB

      5,777       5,779       5,503       22,799       21,553  

Total provision for credit losses

      (253 )      (306 )      (175 )      (872 )      (662 ) 

Non-interest expense

      (3,463 )      (3,459 )      (3,421 )      (14,005 )      (13,344 ) 

Income before income taxes

      2,061       2,014       1,907       7,922       7,547  

Provision for income taxes

      (454 )      (432 )      (376 )      (1,673 )      (1,565 ) 

Net income

      1,607       1,582       1,531       6,249       5,982  

EPS ($)

      2.43       2.38       2.32       9.43       8.99  

 

(1)

Adjusting items are generally included in Corporate Services, with the exception of the amortization of acquisition-related intangible assets and certain acquisition integration costs, which are charged to the operating groups, and the reinsurance adjustment, which is included in BMO Wealth Management.

(2)

Acquisition integration costs related to the acquired BMO Transportation Finance business are charged to Corporate Services, since the acquisition impacts both Canadian and U.S. P&C businesses. KGS–Alpha acquisition integration costs are reported in BMO Capital Markets. Acquisition integration costs are recorded in non-interest expense.

(3)

These amounts were charged to the non-interest expense of the operating groups. Before-tax and after-tax amounts for each operating group are provided on pages 13, 14, 15, 17 and 19.

(4)

Q4-2019 reported net income included a restructuring charge of $357 million after-tax ($484 million pre-tax), related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. The restructuring charge in 2018 was also a result of a similar bank-wide program. Restructuring costs are included in non-interest expense in Corporate Services.

(5)

Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in claims, commissions and changes in policy benefit liabilities for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in BMO Wealth Management.

(6)

Q4-2018 reported net income included a benefit of $203 million after-tax ($277 million pre-tax) from the remeasurement of an employee benefit liability, as a result of an amendment to our other employee future benefits plan for certain employees. This amount was included in non-interest expense in Corporate Services.

(7)

Q1-2018 reported net income included a $425 million (US$339 million) charge related to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act. For more information, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.

Certain comparative figures have been reclassified to conform with the current period’s presentation.

Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.

 

BMO Financial Group Fourth Quarter Report 2019 5

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 in this document may include, but are not limited to, statements with respect to our objectives and priorities for fiscal 2020 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, the regulatory environment in which we operate and the results of or outlook for our operations or for the Canadian, U.S. and international economies, and include statements of our management. Forward-looking statements are typically identified by words such as “will”, “would”, “should”, “believe”, “expect”, “anticipate”, “project”, “intend”, “estimate”, “plan”, “goal”, “target”, “may” and “could”.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature. 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 – many of which are beyond our control and the effects of which can be difficult to predict – 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; the Canadian housing market; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal, or economic policy and tax legislation and interpretation; the level 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, and the effect of such changes on funding costs; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; failure of third parties to comply with their obligations to us; our ability to execute our strategic plans and to complete and integrate acquisitions, including obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks, including with respect to reliance on third parties; changes to our credit ratings; political conditions, including changes relating to or affecting economic or trade matters; global capital markets activities; the possible effects on our business of war or terrorist activities; outbreaks of disease or illness that affect local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; information, privacy and cyber security, including the threat of data breaches, hacking, identity theft and corporate espionage, as well as the possibility of denial of service resulting from efforts targeted at causing system failure and service disruption; and our ability to anticipate and effectively manage risks arising from all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding, operational, legal and regulatory, business, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section that begins on page 68 of BMO’s 2019 Annual Report, all of which outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. We do 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.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook section on page 18 of BMO’s 2019 Annual Report. 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 governments, historical relationships between economic and financial variables, and the risks to the domestic and global economy.

 

6 BMO Financial Group Fourth Quarter Report 2019

Foreign Exchange

The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars decreased relative to the third quarter of 2019 and increased relative to the fourth quarter of 2018 due to changes in the U.S. dollar. The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on our U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated amounts recorded outside BMO’s U.S. segment.

Changes in exchange rates will affect future results measured in Canadian dollars, and the impact on those results is a function of the periods in which revenue, expenses and provisions for (recoveries of) credit losses arise.

Economically, our U.S. dollar income stream was unhedged to changes in foreign exchange rates during the current and prior year. We regularly determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on net income.

Refer to the Enterprise-Wide Capital Management section on page 59 of the 2019 Annual Report for a discussion of the impact that changes in foreign exchange rates can have on our capital position. Changes in foreign exchange rates will also affect accumulated other comprehensive income, primarily as a result of the translation of our investment in foreign operations.

This Foreign Exchange section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Effects of Changes in Exchange Rates on BMO’s U.S. Segment Reported and Adjusted Results

 

    Q4-2019  

(Canadian $ in millions, except as noted)

     vs. Q4-2018                        vs. Q3-2019  

Canadian/U.S. dollar exchange rate (average)

       

Current period

     1.3240               1.3240  

Prior period

     1.3047               1.3270  

Effects on U.S. segment reported results

       

Increased (decreased) net interest income

     17               (3)  

Increased (decreased) non-interest revenue

     11               (2)  

Increased (decreased) revenues

     28               (5)  

Decreased (increased) provision for credit losses

     (1)              -  

Decreased (increased) expenses

     (20)              3  

Decreased (increased) income taxes

     (1)              1  

Increased (decreased) reported net income

     6               (1)  

Impact on earnings per share ($)

     0.01               -  

Effects on U.S. segment adjusted results

       

Increased (decreased) net interest income

     17               (3)  

Increased (decreased) non-interest revenue

     11               (2)  

Increased (decreased) revenues

     28               (5)  

Decreased (increased) provision for credit losses

     (1)              -  

Decreased (increased) expenses

     (20)              3  

Decreased (increased) income taxes

     (1)              1  

Increased (decreased) adjusted net income

     6               (1)  

Impact on adjusted earnings per share ($)

     0.01               -  

 

Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

       

Net Income

Q4 2019 vs. Q4 2018

Reported net income was $1,194 million, compared with $1,697 million in the prior year, and adjusted net income was $1,607 million, an increase of $76 million or 5% from the prior year. Adjusted net income excludes a $357 million restructuring charge, related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business, as well as a $25 million reinsurance adjustment for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, and a $203 million benefit from the remeasurement of an employee benefit liability in the prior year. Reported EPS of $1.78 decreased $0.80 or 31% and adjusted EPS of $2.43 increased $0.11 or 5% from the prior year.

Results reflect good performance in our P&C businesses and higher net income in BMO Wealth Management, partially offset by a decrease in BMO Capital Markets and a higher net loss in Corporate Services. Prior year results included a favourable tax item in our U.S. segment.

Q4 2019 vs. Q3 2019

Reported net income decreased $363 million or 23% from the prior quarter and adjusted net income increased $25 million or 2%. Adjusted net income excludes the restructuring charge and reinsurance adjustment in the current quarter, and the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior quarter. Reported EPS decreased $0.56 or 24% and adjusted EPS increased $0.05 or 2% from the prior quarter.

Results reflect higher net income in our P&C businesses, with particularly strong performance in Canadian P&C, and in BMO Wealth Management, partially offset by a higher net loss in Corporate Services and a decrease in BMO Capital Markets.

Adjusted results in this Net Income section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

 

BMO Financial Group Fourth Quarter Report 2019 7

Revenue (1)(2)

Q4 2019 vs. Q4 2018

Revenue was $6,087 million, an increase of $194 million or 3% from the prior year and revenue, net of insurance claims, commissions and changes in policy benefit liabilities (CCPB), was $5,752 million, an increase of $249 million or 5%.

Results reflect good performance in our P&C businesses and increases in BMO Wealth Management and BMO Capital Markets, partially offset by a decrease in Corporate Services.

Net interest income was $3,364 million, an increase of $349 million or 12%, or 11% excluding the impact of the stronger U.S. dollar. On an excluding trading basis, net interest income was $2,979 million, an increase of $210 million or 8%, or 7% excluding the impact of the stronger U.S. dollar, largely due to higher loan and deposit balances across all operating groups, partially offset by lower loan margins.

Average earning assets were $778.4 billion, an increase of $66.7 billion or 9%, or $62.7 billion or 9% excluding the impact of the stronger U.S. dollar, due to loan growth, higher securities and higher securities borrowed or purchased under resale agreements. BMO’s overall net interest margin increased 3 basis points, primarily due to higher net interest income from trading activities and a higher margin in Canadian P&C, partially offset by a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, as well as a lower margin in U.S. P&C. On an excluding trading basis, net interest margin decreased 5 basis points, primarily due to a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.

Non-interest revenue, net of CCPB, was $2,388 million, a decrease of $100 million or 4%, and also 4% excluding the impact of the stronger U.S. dollar, due to lower trading non-interest revenue, partially offset by higher lending and deposit revenue. Non-interest revenue, net of adjusted CCPB, was $2,413 million, a decrease of $75 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar. On an excluding trading basis, net of adjusted CCPB, non-interest revenue was $2,434 million, an increase of $77 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar.

Gross insurance revenue decreased $50 million from the prior year, due to lower annuity sales, offset by relatively unchanged long-term interest rates in the current quarter, compared with increases in long-term interest rates that decreased the fair value of investments in the prior year and stronger equity markets in the current quarter. These changes relate to annuity sales and fair value investments, which are largely offset by changes in policy benefit liabilities, which is reflected in CCPB, as discussed on page 10. We generally focus on analyzing revenue, net of CCPB, given the extent to which insurance revenue can vary and that this variability is largely offset in CCPB.

Q4 2019 vs. Q3 2019

Revenue decreased $579 million or 9% from the prior quarter. Revenue net of CCPB was relatively unchanged from the prior quarter.

Higher revenue in Canadian P&C and BMO Wealth Management were offset by lower revenue in BMO Capital Markets, while U.S. P&C revenue was relatively unchanged and Corporate Services revenue decreased from the prior quarter.

Net interest income increased $147 million or 5% from the prior quarter. On an excluding trading basis, net interest income of $2,979 million was relatively unchanged from the prior quarter, with higher deposit and loan volumes across all operating groups, offset by lower deposit spreads in U.S. P&C, due to rate decreases by the Federal Reserve, and lower net interest income in Corporate Services.

Average earning assets were $778.4 billion, an increase of $15.1 billion or 2%, primarily due to loan growth and increased cash resources. BMO’s overall net interest margin increased 4 basis points, primarily due to higher net interest income from trading activities and a higher margin in Canadian P&C, partially offset by higher assets in Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C. On an excluding trading basis, net interest margin decreased 6 basis points, primarily due to a higher volume of assets in Corporate Services and BMO Capital Markets, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.

Non-interest revenue, net of CCPB, decreased $174 million or 7%, primarily due to lower trading non-interest revenue and underwriting and advisory fee revenue. Non-interest revenue, net of adjusted CCPB, decreased $149 million or 6%. On an excluding trading basis, net of adjusted CCPB, non-interest revenue decreased $13 million or 1%.

Gross insurance revenue decreased $554 million from the prior quarter, primarily due to relatively unchanged long-term interest rates in the current quarter, compared with decreases in long-term interest rates that increased the fair value of investments in the prior quarter and lower annuity sales. The decrease in insurance revenue was largely offset by lower CCPB, as discussed on page 10.

Net interest income and non-interest revenue are detailed in the unaudited interim consolidated financial statements.

Adjusted results in this Revenue section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

 

(1)

Effective Q1-2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related ratios have been reclassified to conform to the current period’s presentation.

 

(2)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, certain out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.

 

8 BMO Financial Group Fourth Quarter Report 2019

Provision for Credit Losses

Q4 2019 vs. Q4 2018

Total provision for credit losses was $253 million, an increase of $78 million from the prior year. The provision for credit losses ratio was 23 basis points, compared with 18 basis points in the prior year. The provision for credit losses on impaired loans of $231 million increased $54 million from $177 million in the prior year, primarily due to higher provisions in BMO Capital Markets and our P&C businesses. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 18 basis points in the prior year. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $2 million recovery of credit losses on performing loans in the prior year. The $22 million provision for credit losses on performing loans in the current quarter was due to portfolio growth, negative migration and scenario weight change, partially offset by changes in economic outlook. The year-over-year increase in the provision for credit losses on performing loans was as a result of negative migration in the current quarter, compared with positive migration in the prior year, and higher provisions in the current quarter from changes in scenario weights, partially offset by lower provisions in the current quarter from changes in the economic outlook.

Q4 2019 vs. Q3 2019

Total provision for credit losses decreased $53 million from the prior quarter. The provision for credit losses ratio was 23 basis points, compared with 28 basis points in the prior quarter. The provision for credit losses on impaired loans decreased $12 million to $231 million, due to lower impaired loan provisions in Canadian P&C, partially offset by higher loan losses in BMO Capital Markets and U.S. P&C. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 22 basis points in the prior quarter. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $63 million provision for credit losses on performing loans in the prior quarter. The majority of the quarter-over-quarter decrease was due to a more favourable impact on credit losses on performing loans in the current quarter, resulting from changes in economic outlook, as well as a smaller impact from both balance growth and negative migration.

Provision for Credit Losses by Operating Group

 

(Canadian $ in millions)

      Canadian P&C        U.S. P&C        Total P&C      

 BMO Wealth

Management

  

 

    

 BMO Capital

Markets

  

 

    

 Corporate

Services

  

 

      Total Bank  

Q4-2019

                  

Provision for (recovery of) credit losses on impaired loans

      134        66        200       1       32       (2 )       231  

Provision for (recovery of) credit losses on performing loans

      11        4        15       (1 )      8       -        22  

Total provision for (recovery of) credit losses

      145        70        215       -       40       (2 )       253  

Q3-2019

                  

Provision for (recovery of) credit losses on impaired loans

      174        61        235       -       7       1        243  

Provision for (recovery of) credit losses on performing loans

      30        37        67       (2 )      3       (5 )       63  

Total provision for (recovery of) credit losses

      204        98        302       (2 )      10       (4 )       306  

Q4-2018

                  

Provision for (recovery of) credit losses on impaired loans

      118        61        179       2       (3 )      (1 )       177  

Provision for (recovery of) credit losses on performing loans

      (15 )       18        3       1       (4 )      (2 )       (2 ) 

Total provision for (recovery of) credit losses

      103        79        182       3       (7 )      (3 )       175  

 

Fiscal 2019

                  

Provision for (recovery of) credit losses on impaired loans

      544        160        704       2       52       (7 )       751  

Provision for (recovery of) credit losses on performing loans

      63        37        100       (2 )      28       (5 )       121  

Total provision for (recovery of) credit losses

      607        197        804       -       80       (12 )       872  

Fiscal 2018

                  

Provision for (recovery of) credit losses on impaired loans

      466        258        724       6       (17 )      (13 )       700  

Provision for (recovery of) credit losses on performing loans

      3        (38 )       (35 )      -       (1 )      (2 )       (38 ) 

Total provision for (recovery of) credit losses

      469        220        689       6       (18 )      (15 )       662  

Provision for Credit Losses Performance Ratios

      Q4-2019      Q3-2019      Q4-2018      Fiscal 2019      Fiscal 2018  

Total PCL-to-average net loans and acceptances (annualized) (%)

      0.23        0.28        0.18        0.20        0.17  

PCL on impaired loans-to-average net loans and acceptances (annualized) (%)

      0.21        0.22        0.18        0.17        0.18  

 

BMO Financial Group Fourth Quarter Report 2019 9

Impaired Loans

Total gross impaired loans (GIL) were $2,629 million at the end of the current quarter, up from $1,936 million in the prior year, with the largest increase in impaired loans in oil and gas. GIL increased $197 million from $2,432 million in the prior quarter.

Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the quarter totalled $799 million, up from $443 million in the prior year, and up from $679 million in the prior quarter.

Changes in Gross Impaired Loans (GIL) (1) and Acceptances

(Canadian $ in millions, except as noted)

              Q4-2019                Q3-2019                Q4-2018                Fiscal 2019                Fiscal 2018  

GIL, beginning of period

      2,432        2,335        2,076        1,936        2,220  

Classified as impaired during the period

      799        679        443        2,686        2,078  

Transferred to not impaired during the period

      (220 )       (132 )       (188 )       (604 )       (708 ) 

Net repayments

      (219 )       (232 )       (214 )       (800 )       (1,051 ) 

Amounts written-off

      (159 )       (138 )       (194 )       (528 )       (618 ) 

Recoveries of loans and advances previously written-off

      -        -        -        -        -  

Disposals of loans

      -        (57 )       (5 )       (57 )       (11 ) 

Foreign exchange and other movements

      (4 )       (23 )       18        (4 )       26  

GIL, end of period

      2,629        2,432        1,936        2,629        1,936  

GIL to gross loans and acceptances (%)

      0.58        0.55        0.48        0.58        0.48  

 

  (1)

GIL excludes purchased credit impaired loans.

Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Reported insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $335 million in the current quarter, a decrease of $55 million from $390 million in the prior year, and adjusted CCPB, which excludes a $25 million net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business, was $310 million, a decrease of $80 million from the prior year.

Adjusted CCPB decreased, due to the impact of lower annuity sales, offset by relatively unchanged long-term interest rates in the current year, compared with increases in long-term interest rates that decreased the fair value of policy benefit liabilities in the prior year and the impact of stronger equity markets in the current year. CCPB decreased $552 million from $887 million in the prior quarter, and adjusted CCPB decreased $577 million from the prior quarter, due to relatively unchanged long-term interest rates in the current quarter, compared with decreases in long-term interest rates that increased the fair value of policy benefit liabilities in the prior quarter, and the impact of lower annuity sales. The changes related to the fair value of policy benefit liabilities and annuity sales were largely offset in revenue.

Adjusted results in this CCPB section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

Non-Interest Expense

Reported non-interest expense of $3,987 million increased $794 million or 25% from the prior year. Adjusted non-interest expense of $3,463 million increased $42 million or 1%, and also 1%, excluding the impact of the stronger U.S. dollar, from the prior year. Adjusted non-interest expense excludes the restructuring charge in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, as well as the benefit from the remeasurement of an employee benefit liability in the prior year. The increase largely reflected higher technology and employee-related costs, including the impact of the acquisition of KGS-Alpha, partially offset by lower premises costs.

Reported non-interest expense increased $496 million from the prior quarter and adjusted non-interest expense, which excludes the restructuring charge in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, was relatively unchanged.

Reported operating leverage on a net revenue basis was negative 20.4%, compared with positive 13.5% in the prior year. Adjusted operating leverage on a net revenue basis was positive 3.8%, compared with positive 2.9% in the prior year.

The reported efficiency ratio was 65.5%, compared with 54.2% in the prior year and was 69.3% on a net revenue basis, compared with 58.0% in the prior year. The adjusted efficiency ratio was 56.9%, compared with 58.1% in the prior year and 60.0% on a net revenue basis, compared with 62.2% in the prior year.

Non-interest expense is detailed in the condensed consolidated financial statements.

Adjusted results in this Non-Interest Expense section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

Income Taxes

The provision for income taxes was $318 million, a decrease of $120 million from the fourth quarter of 2018 and a decrease of $107 million from the third quarter of 2019. The effective tax rate for the current quarter was 21.0%, compared with 20.6% in the fourth quarter of 2018, and 21.5% in the third quarter of 2019.

The adjusted provision for income taxes was $454 million, an increase of $78 million from the fourth quarter of 2018, and an increase of $22 million from the third quarter of 2019. The adjusted effective tax rate was 22.0% in the current quarter, compared with 19.7% in the fourth quarter of 2018 and 21.5% in the third quarter of 2019. The higher reported and adjusted effective tax rate in the current quarter relative to the fourth quarter of 2018 was primarily due to a favourable U.S. tax item in the prior year.

Adjusted results in this Income Taxes section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

10 BMO Financial Group Fourth Quarter Report 2019

Capital Management

BMO manages its capital within the capital management framework described in the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

Fourth Quarter 2019 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at October 31, 2019.

The CET1 Ratio was consistent with the prior quarter as retained earnings growth, which absorbed the restructuring charge, was offset by higher Risk-Weighted Assets (RWA).

CET1 Capital was $36.1 billion as at October 31, 2019, an increase from $35.7 billion as at July 31, 2019, driven by retained earnings growth and a lower deduction for deferred tax assets, partially offset by the net impact from higher pension and other post-employment benefit obligations due to lower discount rates. CET1 capital increased from $32.7 billion as at October 31, 2018, due to retained earnings growth, and to a lesser degree, a lower deduction for deferred tax assets and higher unrealized gains from securities fair valued through accumulated other comprehensive income, partially offset by an increase in the deduction for shortfall of provisions to expected losses and the net impact from higher pension and other post-employment benefit obligations due to lower discount rates.

RWA was $317.0 billion as at October 31, 2019, up from $313.0 billion as at July 31, 2019 and $289.2 billion as at October 31, 2018, mostly from business growth.

The Tier 1 Capital Ratio was 13.0% as at October 31, 2019, compared with 13.0% as at July 31, 2019, and 12.9% as at October 31, 2018. The Total Capital Ratio was 15.2% as at October 31, 2019, compared with 15.3% as at July 31, 2019, and 15.2% as at October 31, 2018. The Tier 1 and Total Capital ratios were relatively unchanged from prior periods, as higher capital, primarily from retained earnings growth, was offset by higher RWA.

The impact of foreign exchange movements on capital ratios was largely offset. BMO’s investments in foreign operations are primarily denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated RWA and capital deductions may result in variability in the bank’s capital ratios. BMO may manage the impact of foreign exchange movements on its capital ratios and did so during the fourth quarter. Any such activities could also impact our book value and return on equity.

BMO’s Leverage Ratio was 4.3% as at October 31, 2019, compared with 4.3% as at July 31, 2019, and 4.2% as at October 31, 2018, as higher Tier 1 Capital, mainly from retained earnings growth, was generally offset by higher leverage exposures from business growth.

Regulatory Capital

Regulatory capital requirements for BMO are determined in accordance with guidelines issued by the Office of the Superintendent Financial Institutions Canada (OSFI), which is based on the capital standards developed by the Basel Committee on Banking Supervision (BCBS). For more information, refer to the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

OSFI’s capital requirements are summarized in the following table.

 

(% of risk-weighted assets)    Minimum capital
requirements		      Total Pillar 1 Capital
Buffer (1)		      Domestic Stability
Buffer (2)		     

OSFI capital

requirements

including capital buffers

      BMO Capital and
Leverage Ratios as at
October 31, 2019		  

Common Equity Tier 1 Ratio

      4.5%        3.5%        2.0%        10.0%        11.4%  

Tier 1 Capital Ratio

      6.0%        3.5%        2.0%        11.5%        13.0%  

Total Capital Ratio

      8.0%        3.5%        2.0%        13.5%        15.2%  

Leverage Ratio (3)

      3.0%        na        na        3.0%        4.3%  

 

(1)

The minimum risk-based capital ratios set out in OSFI’s Capital Adequacy Requirements (CAR) Guideline are augmented by 3.5% in Pillar 1 Capital Buffers, which can absorb losses during periods of stress. The Pillar 1 Capital Buffers include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Tier 1 Surcharge for domestic systematically important banks (D-SIBs) and a Countercyclical Buffer as prescribed by OSFI (immaterial for the fourth quarter of 2019). If a bank’s capital ratios fall within the range of this combined buffer, restrictions on discretionary distributions of earnings (such as dividends, share repurchases and discretionary compensation) would ensue, with the degree of such restrictions varying according to the position of the bank’s ratios within the buffer range.

(2)

OSFI requires all D-SIBs to maintain a Domestic Stability Buffer (DSB) against Pillar 2 risks associated with systemic vulnerabilities. The DSB can range from 0% to 2.5% of total RWA and is set at 2.0% effective October 31, 2019. Breaches of the DSB will not result in a bank being subject to automatic constraints on capital distributions.

(3)

Minimum leverage ratio requirement as set out in OSFI’s Leverage Requirements Guideline.

na – not applicable

 

BMO Financial Group Fourth Quarter Report 2019 11

Regulatory Capital Position

(Canadian $ in millions, except as noted)

                    Q4-2019                    Q3-2019                    Q4-2018  

Gross common equity (1)

        45,728        45,295        41,387  

Regulatory adjustments applied to common equity

        (9,657 )       (9,632 )       (8,666 ) 

Common Equity Tier 1 Capital (CET1)

        36,071        35,663        32,721  

Additional Tier 1 eligible capital (2)

        5,348        5,348        4,790  

Regulatory adjustments applied to Tier 1

        (218 )       (217 )       (291 ) 

Additional Tier 1 Capital (AT1)

        5,130        5,131        4,499  

Tier 1 Capital (T1 = CET1 + AT1)

        41,201        40,794        37,220  

Tier 2 eligible capital (3)

        7,189        7,070        7,017  

Regulatory adjustments applied to Tier 2

        (50 )       (75 )       (121 ) 

Tier 2 Capital (T2)

        7,139        6,995        6,896  

Total Capital (TC = T1 + T2)

        48,340        47,789        44,116  

Risk-Weighted Assets and Leverage Ratio Exposures (4)(5)

           

CET1 Capital Risk-Weighted Assets

        317,029        313,003        289,237  

Tier 1 Capital Risk-Weighted Assets

        317,029        313,003        289,420  

Total Capital Risk-Weighted Assets

        317,029        313,003        289,604  

Leverage Ratio Exposures

        956,493        943,275        876,106  

 

Capital Ratios (%)

           

CET1 Ratio

        11.4        11.4        11.3  

Tier 1 Capital Ratio

        13.0        13.0        12.9  

Total Capital Ratio

        15.2        15.3        15.2  

Leverage Ratio

        4.3        4.3        4.2  

 

(1)

Gross common equity includes issued qualifying common shares, retained earnings, accumulated other comprehensive income and eligible common share capital issued by subsidiaries.

(2)

Additional Tier 1 eligible capital includes directly and indirectly issued qualifying Additional Tier 1 instruments.

(3)

Tier 2 eligible capital includes subordinated debentures and may include certain loan loss allowances.

(4)

For institutions using advanced approaches for credit risk or operational risk, there is a capital floor as prescribed in OSFI’s CAR Guideline.

(5)

The Credit Valuation Adjustment (CVA) was fully phased in starting Q1-2019. The applicable scalars for CET1, Tier 1 Capital and Total Capital were 80%, 83% and 86%, respectively, in fiscal 2018.

Capital Developments

We expect a combined impact of approximately 15 to 20 basis points on our CET1 Ratio in the first quarter of fiscal 2020, from the adoption of IFRS 16, Leases, and the expiry of transitional arrangements for standardized approach for counterparty credit risk and the revised securitization framework. For information on these and other regulatory developments, refer to the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

During the quarter, 196,539 common shares were issued through the exercise of stock options.

On November 14, 2019, we announced the conversion results of our Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 31 (Preferred Shares Series 31). During the conversion period, which ran from October 28, 2019 to November 12, 2019, 69,570 Preferred Shares Series 31 were tendered for conversion into Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 32 (Preferred Shares Series 32), which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 31 prospectus supplement dated July 23, 2014. As a result, no Preferred Shares Series 32 shares were issued and holders of Preferred Shares Series 31 retained their shares. The dividend rate for the Preferred Shares Series 31 is 3.851% for the five-year period commencing on November 25, 2019, and ending on November 24, 2024.

On September 19, 2019, we redeemed all of our outstanding $1,000 million subordinate debentures, Series H Medium-Term Notes First Tranche at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to, but excluding, the redemption date.

On September 16, 2019, we issued $1,000 million subordinated notes, Series J Medium-Term Notes First Tranche through our Canadian Medium-Term Note Program.

On August 14, 2019, we announced the conversion results of our Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (Preferred Shares Series 29). During the conversion period, which ran from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 30 (Preferred Shares Series 30), which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated May 30, 2014. As a result, no Preferred Shares Series 30 shares were issued and holders of Preferred Shares Series 29 retained their shares. The dividend rate for the Preferred Shares Series 29 is 3.624% for the five-year period commencing on August 25, 2019, and ending on August 24, 2024.

Dividends

On December 3, 2019, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, up $0.03 per share or 3% from the prior quarter and up $0.06 per share or 6% from the prior year. The dividend is payable on February 26, 2020, to shareholders of record on February 3, 2020. Common shareholders may elect to have their cash dividends reinvested in common shares of BMO, in accordance with the Shareholder Dividend Reinvestment and Share Purchase Plan.

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.

Caution

This Capital Management section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

 

12 BMO Financial Group Fourth Quarter Report 2019

Review of Operating Groups’ Performance

How BMO Reports Operating Group Results

The following sections review the financial results of each of our operating groups and operating segments for the fourth quarter of 2019.

Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more closely align BMO’s organizational structure with its strategic priorities. In addition, allocations of revenue, provisions for credit losses and expenses are updated to better align with current experience. Results for prior periods are reclassified to conform with the current period’s presentation.

Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related ratios have been reclassified to conform with the current period’s presentation.

The bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15), effective the first quarter of 2019, and we elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, when customers reimburse us for certain out-of-pocket expenses incurred on their behalf, we record the reimbursement in revenue. Previously, these reimbursements were recorded as a reduction in the related expense.

BMO analyzes revenue at the consolidated level based on GAAP revenue as reported 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 analyze revenue on a teb basis at the operating group level. Revenue and the provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to facilitate comparisons of income between taxable and tax-exempt sources. The offset to the group teb adjustments is reflected in Corporate Services revenue and provision for income taxes.

Personal and Commercial Banking (P&C)

 

(Canadian $ in millions, except as noted)

        Q4-2019          Q3-2019          Q4-2018          Fiscal 2019          Fiscal 2018  

Net interest income (teb)

        2,597          2,565          2,431          10,096          9,384  

Non-interest revenue (1)

        847          848          801          3,290          3,165  

Total revenue (teb) (1)

        3,444          3,413          3,232          13,386          12,549  

Provision for (recovery of) credit losses on impaired loans

        200          235          179          704          724  

Provision for (recovery of) credit losses on performing loans

        15          67          3          100          (35 ) 

Total provision for credit losses

        215          302          182          804          689  

Non-interest expense (1)

        1,763          1,774          1,707          6,993          6,678  

Income before income taxes

        1,466          1,337          1,343          5,589          5,182  

Provision for income taxes (teb)

        357          321          297          1,352          1,239  

Reported net income

        1,109          1,016          1,046          4,237          3,943  

Amortization of acquisition-related intangible assets (2)

        11          12          12          45          47  

Adjusted net income

        1,120          1,028          1,058          4,282          3,990  

Net income growth (%)

        6.0          1.1          17.6          7.5          12.1  

Adjusted net income growth (%)

        5.9          1.1          17.3          7.3          11.9  

Revenue growth (%)

        6.5          6.4          7.5          6.7          5.5  

Non-interest expense growth (%)

        3.3          4.1          6.2          4.7          3.9  

Adjusted non-interest expense growth (%)

        3.4          4.2          6.3          4.8          4.0  

Return on equity (%)

        17.8          16.4          19.0          17.5          18.5  

Adjusted return on equity (%)

        18.0          16.6          19.2          17.7          18.8  

Operating leverage (teb) (%)

        3.2          2.3          1.3          2.0          1.6  

Adjusted operating leverage (teb) (%)

        3.1          2.2          1.2          1.9          1.5  

Efficiency ratio (teb) (%)

        51.2          52.0          52.8          52.2          53.2  

Adjusted efficiency ratio (teb) (%)

        50.8          51.5          52.3          51.8          52.7  

Net interest margin on average earning assets (teb) (%)

        2.92          2.94          2.98          2.95          2.97  

Average earning assets

        352,731          346,301          324,014          342,153          316,359  

Average gross loans and acceptances

        362,865          355,478          330,502          350,762          321,537  

Average net loans and acceptances

        361,186          353,873          328,923          349,157          320,019  

Average deposits

        293,977          283,924          258,602          281,858          250,221  

 

(1)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue.

(2)

Total P&C before tax amounts of $15 million in both Q4-2019 and Q3-2019, $16 million in Q4-2018; $59 million for fiscal 2019 and $61 million for fiscal 2018 are included in non-interest expense.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and commercial operating segments, Canadian Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The P&C banking business reported net income of $1,109 million and adjusted net income of $1,120 million both increased 6% from the prior year, or 5% excluding the impact of the stronger U.S. dollar. Adjusted net income excludes the amortization of acquisition-related intangible assets. These operating segments are reviewed separately in the sections that follow.

Adjusted results in this P&C section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

BMO Financial Group Fourth Quarter Report 2019 13

Canadian Personal and Commercial Banking (Canadian P&C)

 

(Canadian $ in millions, except as noted)

        Q4-2019          Q3-2019          Q4-2018        Fiscal 2019          Fiscal 2018  

Net interest income

        1,540          1,498          1,421        5,878          5,541  

Non-interest revenue (1)

        543          550          522        2,128          2,069  

Total revenue (1)

        2,083          2,048          1,943        8,006          7,610  

Provision for (recovery of) credit losses on impaired loans

        134          174          118        544          466  

Provision for (recovery of) credit losses on performing loans

        11          30          (15 )       63          3  

Total provision for credit losses

        145          204          103        607          469  

Non-interest expense (1)

        971          970          931        3,854          3,710  

Income before income taxes

        967          874          909        3,545          3,431  

Provision for income taxes

        251          226          235        919          882  

Reported net income

        716          648          674        2,626          2,549  

Amortization of acquisition-related intangible assets (2)

        -          1          1        2          2  

Adjusted net income

        716          649          675        2,628          2,551  

Personal revenue

        1,294          1,273          1,244        4,998          4,921  

Commercial revenue

        789          775          699        3,008          2,689  

Net income growth (%)

        6.3          1.1          8.9        3.0          2.0  

Revenue growth (%)

        7.1          5.9          4.8        5.2          3.7  

Non-interest expense growth (%)

        4.4          4.0          4.1        3.9          5.0  

Adjusted non-interest expense growth (%)

        4.4          4.0          4.1        3.9          5.0  

Return on equity (%)

        28.6          26.3          31.2        27.3          30.5  

Adjusted return on equity (%)

        28.6          26.3          31.2        27.3          30.6  

Operating leverage (%)

        2.7          1.9          0.7        1.3          (1.3 ) 

Adjusted operating leverage (%)

        2.7          1.9          0.7        1.3          (1.3 ) 

Efficiency ratio (%)

        46.7          47.3          47.9        48.1          48.7  

Net interest margin on average earning assets (%)

        2.69          2.65          2.62        2.64          2.60  

Average earning assets

        227,377          224,073          215,290        222,513          212,965  

Average gross loans and acceptances

        243,648          239,310          226,953        237,142          223,536  

Average net loans and acceptances

        242,710          238,434          226,070        236,253          222,673  

Average deposits

        183,975          177,093          162,480        175,125          159,483  

 

(1)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue.

(2)

Before tax amounts of $nil in Q4-2019, $1 million in both Q3-2019 and Q4-2018; $2 million in both fiscal 2019 and fiscal 2018 are included in non-interest expense.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Q4 2019 vs. Q4 2018

Canadian P&C reported net income was $716 million, an increase of $42 million and adjusted net income was $716 million, an increase of $41 million or 6% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Results reflect strong revenue growth, partially offset by higher provisions for credit losses and higher expenses.

Revenue was $2,083 million, an increase of $140 million or 7% from the prior year, due to higher balances across all products, higher margins and increased non-interest revenue. Net interest margin of 2.69% increased 7 basis points due to higher long-term rates, a favourable product mix and the benefit of a widening Prime rate to the Banker’s Acceptances (BA) rate.

Personal revenue increased $50 million or 4%, due to higher balances across all products and higher margins, partially offset by lower non-interest revenue. Commercial revenue increased $90 million or 13%, due to higher balances across products, higher non-interest revenue and higher margins.

Total provision for credit losses was $145 million, an increase of $42 million from the prior year. The provision for credit losses on impaired loans increased $16 million, due to higher consumer and commercial provisions. There was an $11 million provision for credit losses on performing loans in the current quarter compared with a $15 million recovery of credit losses on performing loans in the prior year.

Non-interest expense was $971 million, an increase of $40 million or 4%, primarily due to investment in the business, including technology and sales force investments.

Average gross loans and acceptances of $243.6 billion increased $16.7 billion or 7% from the prior year. Total personal lending balances (excluding retail cards) increased 3%, including 5% growth in proprietary mortgages and amortizing home equity line of credit loans. Commercial loan balances (excluding corporate cards) increased 16%. Average deposits of $184.0 billion increased $21.5 billion or 13%. Personal deposit balances increased 14% and commercial deposit balances increased 12%.

Q4 2019 vs. Q3 2019

Reported net income increased $68 million and adjusted net income increased $67 million or 10% from the prior quarter.

Revenue increased $35 million or 2%, due to higher balances across all products and higher margins, partially offset by lower non-interest revenue. Net interest margin of 2.69% increased 4 basis points, due to a favourable product mix and the benefit of higher long-term rates.

Personal revenue increased $21 million or 2%, due to higher balances across all products, higher margins and increased non-interest revenue. Commercial revenue increased $14 million or 2%, due to higher margins and higher balances across all products, partially offset by lower non-interest revenue.

Total provision for credit losses decreased $59 million. The provision for credit losses on impaired loans decreased $40 million with lower consumer and commercial provisions in the current quarter. There was a $11 million provision for credit losses on performing loans in the current quarter, compared with a $30 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense increased $1 million.

Average gross loans and acceptances increased $4.3 billion or 2% and average deposits increased $6.9 billion or 4%.

Adjusted results in this Canadian P&C section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

14 BMO Financial Group Fourth Quarter Report 2019

U.S. Personal and Commercial Banking (U.S. P&C)

 

(US$ in millions, except as noted)

      Q4-2019            Q3-2019            Q4-2018            Fiscal 2019            Fiscal 2018  

Net interest income (teb)

      798       804       774       3,174       2,983  

Non-interest revenue (1)

      230       225       214       875       851  

Total revenue (teb) (1)

      1,028       1,029       988       4,049       3,834  

Provision for (recovery of) credit losses on impaired loans

      51       45       46       121       201  

Provision for (recovery of) credit losses on performing loans

      3       28       14       28       (31 ) 

Total provision for credit losses

      54       73       60       149       170  

Non-interest expense (1)

      598       606       594       2,362       2,303  

Income before income taxes

      376       350       334       1,538       1,361  

Provision for income taxes (teb)

      79       73       49       326       279  

Reported net income

      297       277       285       1,212       1,082  

        Amortization of acquisition-related intangible assets (2)

      8       8       9       32       35  

Adjusted net income

      305       285       294       1,244       1,117  

Personal revenue

      337       348       327       1,362       1,257  

Commercial revenue

      691       681       661       2,687       2,577  

Net income growth (%)

      4.1       (0.6 )      32.9       12.0       38.7  

Adjusted net income growth (%)

      3.8       (0.8 )      31.5       11.4       36.9  

Revenue growth (%)

      4.1       5.3       8.1       5.6       9.9  

Non-interest expense growth (%)

      0.6       2.3       5.4       2.6       4.1  

Adjusted non-interest expense growth (%)

      0.7       2.5       5.6       2.7       4.3  

Return on equity (%)

      10.5       9.8       11.1       11.0       10.8  

Adjusted return on equity (%)

      10.8       10.1       11.5       11.3       11.1  

Operating leverage (teb) (%)

      3.5       3.0       2.7       3.0       5.8  

Adjusted operating leverage (teb) (%)

      3.4       2.8       2.5       2.9       5.6  

Efficiency ratio (teb) (%)

      58.1       59.0       60.2       58.3       60.1  

Adjusted efficiency ratio (teb) (%)

      57.1       57.9       59.0       57.3       58.9  

Net interest margin on average earning assets (teb) (%)

      3.35       3.46       3.69       3.53       3.72  

Average earning assets

      94,682       92,116       83,336       90,035       80,255  

Average gross loans and acceptances

      90,047       87,549       79,369       85,505       76,067  

Average net loans and acceptances

      89,488       87,000       78,835       84,966       75,558  

Average deposits

      83,085       80,520       73,668       80,316       70,431  

 

(Canadian $ equivalent in millions)

                                         

Net interest income (teb)

      1,057       1,067       1,010       4,218       3,843  

Non-interest revenue (1)

      304       298       279       1,162       1,096  

Total revenue (teb) (1)

      1,361       1,365       1,289       5,380       4,939  

Provision for credit losses on impaired loans

      66       61       61       160       258  

Provision for (recovery of) credit losses on performing loans

      4       37       18       37       (38 ) 

Total provision for credit losses

      70       98       79       197       220  

Non-interest expense (1)

      792       804       776       3,139       2,968  

Income before income taxes

      499       463       434       2,044       1,751  

Provision for income taxes (teb)

      106       95       62       433       357  

Reported net income

      393       368       372       1,611       1,394  

Adjusted net income

      404       379       383       1,654       1,439  

Net income growth (%)

      5.6       1.2       37.4       15.6       36.9  

Adjusted net income growth (%)

      5.2       1.0       35.9       15.0       35.1  

Revenue growth (%)

      5.6       7.2       11.8       8.9       8.4  

Non-interest expense growth (%)

      2.1       4.2       9.0       5.8       2.7  

Adjusted non-interest expense growth (%)

      2.2       4.3       9.2       5.9       2.9  

Average earning assets

      125,354       122,228       108,724       119,640       103,394  

Average gross loans and acceptances

      119,217       116,168       103,549       113,620       98,001  

Average net loans and acceptances

      118,476       115,439       102,853       112,904       97,346  

Average deposits

      110,002       106,831       96,122       106,733       90,738  

 

(1)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue.

(2)

Before tax amounts of US$11 million in each of Q4-2019, Q3-2019 and Q4-2018; US$43 million for fiscal 2019 and US$45 million for fiscal 2018 are included in non-interest expense.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Q4 2019 vs. Q4 2018

U.S. P&C reported net income was $393 million, an increase of $21 million or 6% and adjusted net income was $404 million, an increase of $21 million or 5% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income was $297 million, an increase of $12 million or 4% and adjusted net income was $305 million, an increase of $11 million or 4%, primarily due to higher revenue and lower provisions for credit losses, partially offset by a favourable U.S. tax item in the prior year and higher expenses.

Revenue was $1,028 million, an increase of $40 million or 4% from the prior year, with higher loan and deposit balances, partially offset by a lower net interest margin. Net interest margin of 3.35% decreased 34 basis points, due to loan margin compression, changes in deposit product mix, lower deposit product margins, the impact of loans growing faster than deposits and lower interest recoveries.

Personal revenue increased $10 million or 3%, due to higher loan revenue. Commercial revenue increased $30 million or 5%, primarily due to higher loan balances and deposit revenue, partially offset by loan margin compression.

Total provision for credit losses was $54 million, a decrease of $6 million from the prior year. The provision for credit losses on impaired loans increased $5 million, due to higher consumer provisions. There was a $3 million provision for credit losses on performing loans in the current quarter, compared with a $14 million provision for credit losses on performing loans in the prior year.

 

BMO Financial Group Fourth Quarter Report 2019 15

Non-interest expense was $598 million and adjusted non-interest expense was $587 million, both reflecting an increase of $4 million or 1% from the prior year, as higher technology and employee-related costs, were largely offset by lower premises costs.

Average gross loans and acceptances of $90.0 billion increased $10.7 billion or 13% from the prior year, driven by growth in commercial loans of 15% and personal loans of 6%. Average deposits of $83.1 billion increased $9.4 billion or 13%, with 18% growth in commercial deposit balances and 9% growth in personal deposit balances.

Q4 2019 vs. Q3 2019

Reported net income and adjusted net income both increased $25 million or 7% from the prior quarter. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income and adjusted net income both increased $20 million or 7%, reflecting lower provisions for credit losses and lower expenses.

Revenue was unchanged from the prior quarter, as the impact of lower interest rates offset higher loan and deposit balances and fee income. Net interest margin of 3.35% decreased 11 basis points, due to lower deposit margins.

Personal revenue decreased $11 million or 3%, due to lower deposit revenue. Commercial revenue increased $10 million or 2%, due to higher loan and fee income.

Total provision for credit losses decreased $19 million. The provision for credit losses on impaired loans increased $6 million, due to higher consumer provisions, partially offset by lower commercial provisions. There was a $3 million provision for credit losses on performing loans in the current quarter, compared with a $28 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense and adjusted non-interest expense decreased $8 million or 1%, as higher technology investment and other costs were more than offset by lower premises costs and good expense management discipline.

Average gross loans and acceptances increased $2.5 billion or 3%, with growth in both commercial and personal loans. Average deposits increased $2.6 billion or 3%, with growth in both commercial and personal deposit balances.

Adjusted results in this U.S. P&C section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

16 BMO Financial Group Fourth Quarter Report 2019

BMO Wealth Management

 

                                                                          

(Canadian $ in millions, except as noted)

      Q4-2019        Q3-2019        Q4-2018        Fiscal 2019        Fiscal 2018  

Net interest income

      236        237        210        935        826  

Non-interest revenue (1)

      1,331        1,876        1,361        6,727        5,475  

Total revenue (1)

      1,567        2,113        1,571        7,662        6,301  

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

      335        887        390        2,709        1,352  

Revenue, net of CCPB

      1,232        1,226        1,181        4,953        4,949  

Provision for (recovery of) credit losses on impaired loans

      1        -        2        2        6  

Provision for (recovery of) credit losses on performing loans

      (1 )       (2 )       1        (2 )       -  

Total provision for (recovery of) credit losses

      -        (2 )       3        -        6  

Non-interest expense (1)

      860        885        882        3,522        3,515  

Income before income taxes

      372        343        296        1,431        1,428  

Provision for income taxes

      105        94        77        371        356  

Reported net income

      267        249        219        1,060        1,072  

      Amortization of acquisition-related intangible assets (2)

      9        8        10        37        41  

      Reinsurance adjustment (3)

      25        -        -        25        -  

Adjusted net income

      301        257        229        1,122        1,113  

Traditional Wealth businesses reported net income

      237        225        192        862        805  

Traditional Wealth businesses adjusted net income

      246        233        202        899        846  

Insurance reported net income

      30        24        27        198        267  

Insurance adjusted net income

      55        24        27        223        267  

Net income growth (%)

      22.0        (14.3 )       25.3        (1.1 )       11.0  

Adjusted net income growth (%)

      31.3        (14.4 )       21.2        0.8        8.0  

Revenue growth (%)

      (0.2 )       37.2        (6.8 )       21.6        1.3  

Revenue growth, net of CCPB (%)

      4.4        (3.6 )       6.1        0.1        5.7  

Adjusted CCPB

      310        887        390        2,684        1,352  

Revenue growth, net of adjusted CCPB (%)

      6.5        (3.6 )       6.1        0.6        5.7  

Non-interest expense growth (%)

      (2.6 )       1.0        4.9        0.2        4.8  

Adjusted non-interest expense growth (%)

      (2.4 )       1.2        5.6        0.3        5.8  

Return on equity (%)

      16.6        15.3        14.1        16.7        17.8  

Adjusted return on equity (%)

      18.7        15.9        14.7        17.7        18.5  

Operating leverage, net of CCPB (%)

      7.0        (4.6 )       1.2        (0.1 )       0.9  

Adjusted operating leverage, net of CCPB (%)

      8.9        (4.8 )       0.5        0.3        (0.1 ) 

Reported efficiency ratio (%)

      54.9        41.9        56.2        46.0        55.8  

Reported efficiency ratio, net of CCPB (%)

      69.8        72.2        74.8        71.1        71.0  

Adjusted efficiency ratio (%)

      54.1        41.3        55.4        45.3        55.0  

Adjusted efficiency ratio, net of CCPB (%)

      67.5        71.2        73.7        69.8        70.0  

Assets under management

      471,160        464,711        438,274        471,160        438,274  

Assets under administration (4)

      393,576        391,622        382,839        393,576        382,839  

Average assets

      42,750        41,891        37,510        40,951        35,913  

Average gross loans and acceptances

      24,660        24,068        21,559        23,519        20,290  

Average net loans and acceptances

      24,628        24,036        21,531        23,487        20,260  

Average deposits

      38,123        36,190        33,968        36,419        34,251  

 

(1)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, certain out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.

(2)

Before tax amounts of $11 million in both Q4-2019 and Q3-2019, $13 million in Q4-2018; $47 million in fiscal 2019 and $52 million in fiscal 2018 are included in non-interest expense.

(3)

Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in CCPB.

(4)

We have certain assets under management that are also administered by us and are included in assets under administration.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Q4 2019 vs. Q4 2018

BMO Wealth Management reported net income was $267 million, an increase of $48 million or 22% and adjusted net income was $301 million, an increase of $72 million or 31% from the prior year. Adjusted net income in the current quarter excludes the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business and the amortization of acquisition-related intangible assets in both the current and prior year. Traditional Wealth reported net income was $237 million, an increase of $45 million or 24% and adjusted net income was $246 million, an increase of $44 million or 22%, due to the impact of a legal provision in the prior year and higher deposit and loan revenue and higher fee-based revenue. Insurance reported net income was $30 million, an increase of $3 million or 9% and adjusted net income was $55 million, an increase of $28 million, primarily due to benefits from changes in investments to improve asset liability management.

Revenue of $1,567 million was relatively unchanged, compared with the prior year. Revenue, net of reported CCPB, was $1,232 million, an increase of $51 million or 4%. Revenue in Traditional Wealth was $1,155 million, an increase of $53 million or 5%, due to the impact of a legal provision in the prior year, higher deposit and loan, and fee-based revenue. Insurance revenue, net of reported CCPB, was relatively unchanged compared with the prior year and Insurance revenue, net of adjusted CCPB, increased $24 million, due to benefits from changes in investments to improve asset-liability management.

Reported non-interest expense was $860 million, a decrease of $22 million or 3%, and adjusted non-interest expense was $849 million, a decrease of $20 million or 2%, primarily due to below trend expenses in the current quarter and the impact of the legal provision in the prior year.

Assets under management of $471.2 billion increased $32.9 billion or 8% from the prior year, primarily driven by stronger equity markets. Assets under administration of $393.6 billion increased $10.7 billion or 3% from the prior year, primarily driven by stronger equity markets and underlying growth. Average gross loans and average deposits increased 14% and 12%, respectively, as we continue to diversify our product mix.

 

BMO Financial Group Fourth Quarter Report 2019 17

Q4 2019 vs. Q3 2019

Reported net income increased $18 million or 7%, and adjusted net income increased $44 million or 17% from the prior quarter. Traditional Wealth reported net income increased $12 million or 5%, and adjusted net income increased $13 million or 5% from the prior quarter, primarily due to lower expenses. Insurance reported net income increased $6 million or 27%, and adjusted net income increased $31 million, primarily due to benefits from changes in investments to improve asset-liability management.

Revenue was $1,567 million, compared with $2,113 million in the prior quarter. Revenue, net of CCPB, increased $6 million or 1%. Revenue, net of adjusted CCPB, increased $31 million or 3%. Revenue in Traditional Wealth was relatively unchanged. Insurance revenue, net of CCPB, increased $4 million and Insurance revenue, net of adjusted CCPB, increased $29 million, due to benefits from changes in investments to improve asset-liability management.

Reported and adjusted non-interest expense both decreased $25 million or 3%, primarily due to the benefit of below trend expenses in the current quarter and continued good expense management discipline.

Assets under management increased $6.4 billion or 1% and assets under administration increased $2.0 billion, relatively unchanged from the prior quarter, primarily driven by stronger equity markets. Average gross loans increased 2% and average deposits increased 5% from the prior quarter.

Adjusted results in this BMO Wealth Management section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

18 BMO Financial Group Fourth Quarter Report 2019

BMO Capital Markets

 

(Canadian $ in millions, except as noted)

        Q4-2019        Q3-2019        Q4-2018        Fiscal 2019        Fiscal 2018  

Net interest income (teb) (1)

        696        538        493        2,394        1,784  

Non-interest revenue (1)(2)

        477        662        639        2,340        2,579  

Total revenue (teb) (1)(2)

        1,173        1,200        1,132        4,734        4,363  

Provision for (recovery of) credit losses on impaired loans

        32        7        (3 )       52        (17 ) 

Provision for (recovery of) credit losses on performing loans

        8        3        (4 )       28        (1 ) 

Total provision for (recovery of) credit losses

        40        10        (7 )       80        (18 ) 

Non-interest expense (2)

        788        794        765        3,261        2,859  

Income before income taxes

        345        396        374        1,393        1,522  

Provision for income taxes (teb)

        76        83        76        307        366  

Reported net income

        269        313        298        1,086        1,156  

        Acquisition integration costs (3)

        2        2        9        10        11  

        Amortization of acquisition-related intangible assets (4)

        9        3        2        17        2  

Adjusted net income

        280        318        309        1,113        1,169  

Global Markets revenue (5)

        688        665        630        2,704        2,541  

Investment and Corporate Banking revenue

        485        535        502        2,030        1,822  

Net income growth (%)

        (9.6 )       4.0        (5.6 )       (6.0 )       (9.4 ) 

Adjusted net income growth (%)

        (9.4 )       5.0        (2.3 )       (4.8 )       (8.5 ) 

Revenue growth (%)

        3.6        8.6        1.5        8.5        (4.7 ) 

Non-interest expense growth (%)

        3.0        13.3        12.4        14.1        2.6  

Adjusted non-interest expense growth (%)

        3.1        12.8        10.5        13.5        2.1  

Return on equity (%)

        9.7        11.3        12.2        9.8        12.8  

Adjusted return on equity (%)

        10.1        11.5        12.6        10.1        13.0  

Operating leverage (teb) (%)

        0.6        (4.7 )       (10.9 )       (5.6 )       (7.3 ) 

Adjusted operating leverage (teb) (%)

        0.5        (4.2 )       (9.0 )       (5.0 )       (6.8 ) 

Efficiency ratio (teb) (%)

        67.2        66.1        67.6        68.9        65.5  

Adjusted efficiency ratio (teb) (%)

        66.0        65.6        66.4        68.2        65.1  

Average assets

        341,745        343,009        317,655        342,347        307,087  

Average gross loans and acceptances

        62,752        60,870        47,972        60,034        46,724  

Average net loans and acceptances

        62,642        60,771        47,909        59,946        46,658  

 

(1)

Effective Q1-2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related ratios have been reclassified to conform with the current period’s presentation.

(2)

Effective Q1-2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, certain out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.

(3)

KGS-Alpha acquisition integration costs before tax amounts of $2 million in Q4-2019, $3 million in Q3-2019 and $12 million in Q4-2018; $13 million in fiscal 2019 and $14 million in fiscal 2018 are included in non-interest expense.

(4)

Before tax amounts of $12 million in Q4-2019, $3 million in Q3-2019 and $2 million in Q4-2018; $22 million for fiscal 2019 and $3 million for fiscal 2018 are included in non-interest expense.

(5)

Global Markets was previously known as Trading Products.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Q4 2019 vs. Q4 2018

BMO Capital Markets reported net income was $269 million, compared with $298 million in the prior year, and adjusted net income was $280 million, compared with $309 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Higher revenue was more than offset by higher provisions for credit losses and higher expenses.

Revenue was $1,173 million, an increase of $41 million or 4%. Global Markets revenue increased, driven by higher interest rate trading revenue, primarily due to the impact of the acquisition of KGS-Alpha, higher commodities and foreign exchange trading, partially offset by lower equities trading. Investment and Corporate Banking revenue decreased slightly from the prior year, driven by lower underwriting and advisory revenue, partially offset by higher corporate banking-related revenue.

Total provision for credit losses was $40 million, an increase of $47 million from a $7 million recovery of credit losses in the prior year. The provision for credit losses on impaired loans was $32 million in the current quarter, compared with a $3 million recovery of credit losses on impaired loans in the prior year. There was a $8 million provision for credit losses on performing loans in the current quarter, compared with a $4 million recovery of credit losses on performing loans in the prior year.

Non-interest expense was $788 million, an increase of $23 million or 3% and adjusted non-interest expense was $774 million, an increase of $23 million or 3%, or 2% excluding the impact of the stronger U.S. dollar. The increase was due to higher other operating expenses and the impact of the acquisition of KGS-Alpha, partially offset by lower other employee-related costs.

Q4 2019 vs. Q3 2019

Reported net income was $269 million, compared with $313 million in the prior quarter, and adjusted net income was $280 million, compared with $318 million in the prior quarter.

Revenue decreased $27 million or 2%. Global Markets revenue increased, primarily due to higher interest rate and commodities trading revenue, partially offset by lower equities trading revenue. Investment and Corporate Banking revenue decreased from the prior quarter, primarily due to lower debt underwriting and advisory revenue.

Total provision for credit losses increased $30 million. The provision for credit losses on impaired loans increased $25 million in the current quarter. There was a $8 million provision for credit losses on performing loans in the current quarter, compared with a $3 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense decreased $6 million or 1% and adjusted non-interest expense decreased $14 million or 2%, primarily due to lower employee-related expenses.

Adjusted results in this BMO Capital Markets section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

BMO Financial Group Fourth Quarter Report 2019 19

Corporate Services

 

(Canadian $ in millions, except as noted)        Q4-2019        Q3-2019        Q4-2018        Fiscal 2019        Fiscal 2018  

Net interest income before group teb offset

        (88 )       (49 )       (52 )       (241 )       (243 ) 

Group teb offset

        (77 )       (74 )       (67 )       (296 )       (313 ) 

Net interest income (teb)

        (165 )       (123 )       (119 )       (537 )       (556 ) 

Non-interest revenue

        68        63        77        238        248  

Total revenue (teb)

        (97 )       (60 )       (42 )       (299 )       (308 ) 

Provision for (recovery of) credit losses on impaired loans

        (2 )       1        (1 )       (7 )       (13 ) 

Provision for (recovery of) credit losses on performing loans

        -        (5 )       (2 )       (5 )       (2 ) 

Total provision for (recovery of) credit losses

        (2 )       (4 )       (3 )       (12 )       (15 ) 

Non-interest expense (1)

        576        38        (161 )       854        425  

Income (loss) before income taxes

        (671 )       (94 )       122        (1,141 )       (718 ) 

Provision for (recovery of) income taxes (teb)

        (220 )       (73 )       (12 )       (516 )       -  

Reported net income (loss)

        (451 )       (21 )       134        (625 )       (718 ) 

      Acquisition integration costs (1)

        -        -        4        -        14  

      Restructuring costs (2)

        357        -        -        357        192  

      U.S. net deferred tax asset revaluation (3)

        -        -        -        -        425  

      Benefit from the remeasurement of an employee benefit liability (4)

        -        -        (203 )       -        (203 ) 

Adjusted net loss

        (94 )       (21 )       (65 )       (268 )       (290 ) 

Adjusted non-interest expense

        92        38        110        370        422  

 

(1)

Acquisition integration costs related to the acquired BMO Transportation Finance business are included in non-interest expense.

(2)

Q4-2019 reported net income included a $357 million after-tax ($484 million pre-tax) restructuring charge, related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business, and Q2-2018 included a $192 million after-tax ($260 million pre-tax) restructuring charge. Restructuring charges are included in non-interest expense.

(3)

Q1-2018 net income included a $425 million (US$339 million) charge related to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act. For more information, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.

(4)

Q4-2018 net income included a benefit of $203 million after-tax ($277 million pre-tax) from the remeasurement of an employee benefit liability, as a result of an amendment to our employee future benefits plan for certain employees. This amount was included in Corporate Services in non-interest expense.

Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Corporate Services consists of Corporate Units and Technology and Operations (T&O). Corporate Units provide enterprise-wide expertise, governance and support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, human resources, communications, marketing, real estate, procurement, data and analytics, and innovation. T&O develops, monitors, manages and maintains governance of information technology, and also provides cyber security and operations services.

The costs of these Corporate Units and T&O services are largely transferred to the three operating groups (Personal and Commercial Banking, BMO Wealth Management and BMO Capital Markets), with any remaining amounts retained in Corporate Services results. As such, Corporate Services results largely reflect the impact of residual treasury-related activities, the elimination of taxable equivalent adjustments, and residual unallocated expenses. Reported results in the current quarter include a restructuring charge and the prior year included a benefit from the remeasurement of an employee benefit liability, as well as certain acquisition integration costs.

Q4 2019 vs. Q4 2018

Corporate Services reported net loss was $451 million, compared with a reported net income of $134 million in the prior year. Adjusted net loss was $94 million, compared with an adjusted net loss of $65 million in the prior year. Adjusted results in the current quarter exclude the restructuring charge. Adjusted results in the prior year exclude the benefit from the remeasurement of an employee benefit liability and acquisition integration costs. Adjusted results decreased, primarily due to below trend revenue excluding taxable equivalent basis (teb) adjustments, partially offset by lower expenses.

Q4 2019 vs. Q3 2019

Reported net loss for the quarter was $451 million, compared with a reported net loss of $21 million in the prior quarter. Adjusted net loss was $94 million compared with $21 million in the prior quarter. Adjusted results exclude the restructuring charge in the current quarter and decreased, primarily due to an increase in expenses from a below trend level recorded in the prior quarter, which included the impact of a gain on the sale of an office building, and below trend revenue excluding teb adjustments.

Adjusted results in this Corporate Services section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

 

 

Risk Management

Our risk management policies and processes to measure, monitor and control credit and counterparty, market, insurance, liquidity and funding, operational, legal and regulatory, business, strategic, environmental and social and reputation risk are outlined in the Enterprise-Wide Risk Management section on pages 68 to 106 of BMO’s 2019 Annual Report.

 

20 BMO Financial Group Fourth Quarter Report 2019

Condensed Consolidated Financial Statements

Consolidated Statement of Income

 

(Unaudited) (Canadian $ in millions, except as noted)    For the three months ended      For the twelve months ended  
     October 31,     July 31,      October 31,      October 31,      October 31,  
      2019     2019      2018      2019      2018  

Interest, Dividend and Fee Income

              

Loans

    $           5,072     $             5,120      $             4,486      $ 19,824      $ 16,275  

Securities

      1,415       1,407        1,186                    5,541                    4,119  

Deposits with banks

      195       187        206        787        641  
       6,682       6,714        5,878        26,152        21,035  

Interest Expense

              

Deposits

      2,203       2,224        1,881        8,616        6,080  

Subordinated debt

      71       69        61        279        226  

Other liabilities

      1,044       1,204        921        4,369        3,291  
       3,318       3,497        2,863        13,264        9,597  

Net Interest Income

      3,364       3,217        3,015        12,888        11,438  

Non-Interest Revenue

              

Securities commissions and fees

      262       259        256        1,023        1,025  

Deposit and payment service charges

      314       309        290        1,204        1,134  

Trading revenues

      (21 )      115        131        298        705  

Lending fees

      313       314        266        1,181        997  

Card fees

      107       109        111        437        428  

Investment management and custodial fees

      449       444        441        1,747        1,749  

Mutual fund revenues

      359       357        359        1,419        1,473  

Underwriting and advisory fees

      221       260        244        986        943  

Securities gains, other than trading

      68       90        83        249        239  

Foreign exchange gains, other than trading

      29       48        42        166        182  

Insurance revenue

      435       989        485        3,183        1,879  

Investments in associates and joint ventures

      39       31        38        151        167  

Other

      148       124        132        551        546  
       2,723       3,449        2,878        12,595        11,467  

Total Revenue

      6,087       6,666        5,893        25,483        22,905  

Provision for Credit Losses

      253       306        175        872        662  

Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

      335       887        390        2,709        1,352  

Non-Interest Expense

              

Employee compensation

      2,381       1,960        1,613        8,423        7,461  

Premises and equipment

      759       734        745        2,988        2,753  

Amortization of intangible assets

      148       135        125        554        503  

Travel and business development

      134       142        150        545        519  

Communications

      72       72        70        296        282  

Professional fees

      165       141        160        568        572  

Other

      328       307        330        1,256        1,387  
       3,987       3,491        3,193        14,630        13,477  

Income Before Provision for Income Taxes

      1,512       1,982        2,135        7,272        7,414  

Provision for income taxes

      318       425        438        1,514        1,961  

Net Income attributable to Equity Holders of the Bank

    $ 1,194     $ 1,557      $ 1,697      $ 5,758      $ 5,453  

Earnings Per Share (Canadian $)

              

Basic

    $ 1.79     $ 2.34      $ 2.58      $ 8.68      $ 8.19  

Diluted

      1.78       2.34        2.58        8.66        8.17  

Dividends per common share

      1.03       1.03        0.96        4.06        3.78  

 

Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy.

 

   

 

BMO Financial Group Fourth Quarter Report 2019 21

Condensed Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

 

(Unaudited) (Canadian $ in millions)        For the three months ended     For the twelve months ended  
     October 31,               July 31,               October 31,               October 31,               October 31,  
      2019     2019     2018     2019     2018  

Net Income

    $             1,194     $             1,557     $             1,697     $             5,758     $             5,453  

Other Comprehensive Income (Loss), net of taxes

           

Items that may subsequently be reclassified to net income

           

 Net change in unrealized gains (losses) on fair value through OCI securities

           

 Unrealized gains (losses) on fair value through OCI debt securities arising during the period (1)

      67       112       (49 )      412       (251 ) 

  Reclassification to earnings of (gains) in the period (2)

      (29 )      (14 )      (22 )      (72 )      (65 ) 
       38       98       (71 )      340       (316 ) 

Net change in unrealized gains (losses) on cash flow hedges

           

Gains (losses) on derivatives designated as cash flow hedges arising during the period (3)

      (36 )      290       (309 )      1,444       (1,228 ) 

Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period (4)

      21       36       120       143       336  
       (15 )      326       (189 )      1,587       (892 ) 

Net gains (losses) on translation of net foreign operations

           

Unrealized gains (losses) on translation of net foreign operations

      35       (577 )      303       (11 )      417  

Unrealized gains (losses) on hedges of net foreign operations (5)

      (17 )      94       (62 )      (13 )      (155 ) 
       18       (483 )      241       (24 )      262  

Items that will not be reclassified to net income

           

Gains (losses) on remeasurement of pension and other employee future benefit plans (6)

      (169 )      (233 )      (42 )      (552 )      261  

Gains (losses) on remeasurement of own credit risk on financial liabilities designed at fair value (7)

      63       31       (18 )      75       (24 ) 

Unrealized gains on fair value through OCI equity securities during the period (8)

      1       -       -       1       -  
       (105 )      (202 )      (60 )      (476 )      237  

Other Comprehensive Income (Loss), net of taxes

      (64 )      (261 )      (79 )      1,427       (709 ) 

Total Comprehensive Income attributable to Equity Holders of the Bank

    $ 1,130     $ 1,296     $ 1,618     $ 7,185     $ 4,744  

(1) Net of income tax (provision) recovery of $(23) million, $(39) million, $22 million for the three months ended, and $(140) million, $69 million for the twelve months ended, respectively.

(2) Net of income tax provision of $11 million, $5 million, $8 million for the three months ended, and $26 million, $23 million for the twelve months ended, respectively.

(3) Net of income tax (provision) recovery of $15 million, $(106) million, $114 million for the three months ended, and $(521) million, $432 million for the twelve months ended, respectively.

(4) Net of income tax (recovery) of $(7) million, $(13) million, $(43) million for the three months ended, and $(51) million, $(121) million for the twelve months ended, respectively.

(5) Net of income tax (provision) recovery of $6 million, $(35) million, $22 million for the three months ended, and $4 million, $56 million for the twelve months ended, respectively.

(6) Net of income tax (provision) recovery of $58 million, $83 million, $23 million for the three months ended, and $196 million, $(111) million for the twelve months ended, respectively.

(7) Net of income tax (provision) recovery of $(23) million, $(11) million, $7 million for the three months ended, and $(27) million, $6 million for the twelve months ended, respectively.

(8) Net of income tax (provision) of $(1) million, $nil and $nil for the three months ended, and $(1) million, $nil for the twelve months ended, respectively.

Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy.

 

22 BMO Financial Group Fourth Quarter Report 2019

Condensed Consolidated Financial Statements

Consolidated Balance Sheet

 

(Unaudited) (Canadian $ in millions)    As at  
               October 31,                July 31,                October 31,  
      2019      2019      2018  

Assets

         

Cash and Cash Equivalents

    $                   48,803      $                   38,938      $                   42,142  

Interest Bearing Deposits with Banks

      7,987        6,899        8,305  

Securities

         

Trading

      85,903        94,906        99,697  

Fair value through profit or loss

      13,704        13,548        11,611  

Fair value through other comprehensive income

      64,515        67,434        62,440  

Debt securities at amortized cost

      24,472        15,024        6,485  

Other

      844        813        702  
       189,438        191,725        180,935  

Securities Borrowed or Purchased Under Resale Agreements

      104,004        106,612        85,051  

Loans

         

Residential mortgages

      123,740        122,054        119,620  

Consumer instalment and other personal

      67,736        65,989        63,225  

Credit cards

      8,859        8,749        8,329  

Business and government

      227,609        222,857        194,456  
     427,944        419,649        385,630  

Allowance for credit losses

      (1,850 )       (1,802 )       (1,639 ) 
       426,094        417,847        383,991  

Other Assets

         

Derivative instruments

      22,144        22,200        25,422  

Customers’ liability under acceptances

      23,593        24,741        18,585  

Premises and equipment

      2,055        1,989        1,986  

Goodwill

      6,340        6,329        6,373  

Intangible assets

      2,424        2,319        2,272  

Current tax assets

      1,165        1,256        1,515  

Deferred tax assets

      1,568        1,662        2,039  

Other

      16,580        16,663        14,677  
       75,869        77,159        72,869  

Total Assets

    $ 852,195      $ 839,180      $ 773,293  

Liabilities and Equity

         

Deposits

    $ 568,143      $ 553,383      $ 520,928  

Other Liabilities

         

Derivative instruments

      23,598        23,613        23,629  

Acceptances

      23,593        24,741        18,585  

Securities sold but not yet purchased

      26,253        27,375        28,804  

Securities lent or sold under repurchase agreements

      86,656        89,829        66,684  

Securitization and structured entities’ liabilities

      27,159        25,544        25,051  

Current tax liabilities

      55        32        50  

Deferred tax liabilities

      60        74        74  

Other

      38,607        37,070        36,985  
       225,981        228,278        199,862  

Subordinated Debt

      6,995        6,876        6,782  

Equity

         

Preferred shares and other equity instruments

      5,348        5,348        4,340  

Common shares

      12,971        12,958        12,929  

Contributed surplus

      303        303        300  

Retained earnings

      28,725        28,241        25,850  

Accumulated other comprehensive income

      3,729        3,793        2,302  

Total Equity

      51,076        50,643        45,721  

Total Liabilities and Equity

    $ 852,195      $ 839,180      $ 773,293  

 

Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy.

 

 

BMO Financial Group Fourth Quarter Report 2019 23

Condensed Consolidated Financial Statements

Consolidated Statement of Changes in Equity

 

(Unaudited) (Canadian $ in millions)    For the three months ended         For the twelve months ended      
          October 31,
2019		         October 31,
2018		         October 31,
2019		         October 31,
2018		  

Preferred Shares and Other Equity Instruments

         

Balance at beginning of period

    $             5,348     $ 4,240     $ 4,340     $ 4,240  

Issued during the period

      -       400       1,008       400  

Redeemed during the period

      -       (300 )      -       (300 ) 

Balance at End of Period

      5,348       4,340       5,348       4,340  

Common Shares

         

Balance at beginning of period

      12,958       12,924       12,929       13,032  

Issued under the Stock Option Plan

      13       26       62       99  

Repurchased for cancellation

      -       (21 )      (20 )      (202 ) 

Balance at End of Period

      12,971       12,929       12,971       12,929  

Contributed Surplus

         

Balance at beginning of period

      303       302       300       307  

Stock option expense, net of options exercised

      (1 )      (2 )      -       (12 ) 

Other

      1       -       3       5  

Balance at End of Period

      303       300       303       300  

Retained Earnings

         

Balance at beginning of period

      28,241       24,901       25,850       23,700  

Impact from adopting IFRS 9

      -       -       -       99  

Net income attributable to equity holders of the bank

      1,194       1,697       5,758       5,453  

Dividends – Preferred shares

      (52 )      (43 )      (211 )      (184 ) 

– Common shares

      (658 )      (614 )      (2,594 )      (2,424 ) 

Equity issue expense

      -       (5 )      (8 )      (5 ) 

Common shares repurchased for cancellation

      -       (86 )      (70 )      (789 ) 

Balance at End of Period

      28,725       25,850       28,725       25,850  

Accumulated Other Comprehensive Income (Loss) on Fair Value through OCI Securities, net of taxes

         

Balance at beginning of period

      (13 )      (244 )      (315 )      56  

Impact from adopting IFRS 9

      -       -       -       (55 ) 

Unrealized gains (losses) on fair value through OCI debt securities arising during the period

      67       (49 )      412       (251 ) 

Unrealized gains on fair value through OCI equity securities arising during the period

      1       -       1       -  

Reclassification to earnings of (gains) on fair value through OCI debt securities during the period

      (29 )      (22 )      (72 )      (65 ) 

Balance at End of Period

      26       (315 )      26       (315 ) 

Accumulated Other Comprehensive Income (Loss) on Cash Flow Hedges, net of taxes

         

Balance at beginning of period

      528       (885 )      (1,074 )      (182 ) 

Gains (losses) on derivatives designated as cash flow hedges arising during the period

      (36 )      (309 )      1,444       (1,228 ) 

Reclassification to earnings of losses on derivatives designated as cash flow hedges in the period

      21       120       143       336  

Balance at End of Period

      513       (1,074 )      513       (1,074 ) 

Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes

         

Balance at beginning of period

      3,685       3,486       3,727       3,465  

Unrealized gains (losses) on translation of net foreign operations

      35       303       (11 )      417  

Unrealized (losses) on hedges of net foreign operations

      (17 )      (62 )      (13 )      (155 ) 

Balance at End of Period

      3,703       3,727       3,703       3,727  

Accumulated Other Comprehensive Income (Loss) on Pension and Other Employee Future Benefit Plans, net of taxes

         

Balance at beginning of period

      (214 )      211       169       (92 ) 

Gains (losses) on remeasurement of pension and other employee future benefit plans

      (169 )      (42 )      (552 )      261  

Balance at End of Period

      (383 )      169       (383 )      169  

Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes

         

Balance at beginning of period

      (193 )      (187 )      (205 )      (181 ) 

Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value

      63       (18 )      75       (24 ) 

Balance at End of Period

      (130 )      (205 )      (130 )      (205 ) 

Total Accumulated Other Comprehensive Income

      3,729       2,302       3,729       2,302  

Total Equity

    $             51,076     $             45,721     $             51,076     $             45,721  

 

Certain comparative figures have been reclassified to conform with the current period’s presentation and for changes in accounting policy.

 

 

24 BMO Financial Group Fourth Quarter Report 2019

INVESTOR AND MEDIA PRESENTATION

Investor Presentation Materials

Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2019 annual MD&A and audited annual consolidated financial statements, quarterly presentation materials and supplementary financial information package.

Quarterly Conference Call and Webcast Presentations

Interested parties are also invited to listen to our quarterly conference call on Tuesday, December 3, 2019, at 8:00 a.m. (ET). The call may be accessed by telephone at 416-641-2144 (from within Toronto) or 1-888-789-9572 (toll-free outside Toronto), entering Passcode: 7865067#. A replay of the conference call can be accessed until Monday, February 24, 2020, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering Passcode: 2812262#.

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.

Media Relations Contacts

Paul Gammal, Toronto, paul.gammal@bmo.com, 416-867-6543

Investor Relations Contacts

Jill Homenuk, Head, Investor, Media & Government Relations, jill.homenuk@bmo.com, 416-867-4770

Tom Little, Director, Investor Relations, tom.little@bmo.com, 416-867-7834

 

 

 

Shareholder Dividend Reinvestment and Share Purchase

Plan (the Plan)

Average market price as defined under the Plan

August 2019: $93.12

September 2019: $96.93

October 2019: $98.58

 

For dividend information, change in shareholder address

or to advise of duplicate mailings, please contact

Computershare Trust Company of Canada

100 University Avenue, 8th Floor

Toronto, Ontario M5J 2Y1

Telephone: 1-800-340-5021 (Canada and the United States)

Telephone: (514) 982-7800 (international)

Fax: 1-888-453-0330 (Canada and the United States)

Fax: (416) 263-9394 (international)

E-mail: service@computershare.com

   

For other shareholder information, including the notice for
our normal course issuer bid, please contact

Bank of Montreal

Shareholder Services

Corporate Secretary’s Department

One First Canadian Place, 21st Floor

Toronto, Ontario M5X 1A1

Telephone: (416) 867-6785

Fax: (416) 867-6793

E-mail: corp.secretary@bmo.com

 

For further information on this document, please contact

Bank of Montreal

Investor Relations Department

P.O. Box 1, One First Canadian Place, 10th Floor

Toronto, Ontario M5X 1A1

 

To review financial results and regulatory filings and
disclosures online, please visit our website at

www.bmo.com/investorrelations.

 

 

Our 2019 Annual MD&A, audited annual consolidated financial statements and annual report on Form 40-F (filed with the U.S. Securities and Exchange Commission) are available online at www.bmo.com/investorrelations and at www.sedar.com. Printed copies of the bank’s complete 2019 audited financial statements are available free of charge upon request at 416-867-6785 or corp.secretary@bmo.com.

 

 

Annual Meeting 2020

The next Annual Meeting of Shareholders will be held on Tuesday, March 31, 2020, in Toronto, Ontario.

 

 

 

® Registered trademark of Bank of Montreal

 

BMO Financial Group Fourth Quarter Report 2019 25