15
Management’s Discussion and Analysis
Financial Performance and Condition at a Glance
Our Performance Peer Group Comparison
Total Shareholder Return (TSR)
•
BMO’s average annual five-year TSR of 19.1% improved from
13.8% a year ago and was better than the average return from
the financial services industry and the broader market indices.
•
BMO’s one-year TSR of 24.1% in 2006 was the second best
of the Canadian peer group. The result improved our five-year
TSR and marks returns of more than 15% in four of the past
five years.
Further details are provided on page 31.
13.8
19.1
18.9
12.9
7.9
Five-Year TSR (%)
•
BMO’s average annual five-year TSR of 19.1% was
below the Canadian peer group average of 19.6%
but substantially above the North American peer
group average of 14.4%.
•
Our strong one-year TSR narrowed the gap to
the Canadian peer group average and improved
our advantage over the North American peer
group average.
MD&A
2006 2005 2004 2003 2002
Earnings per Share (EPS) Growth
•
EPS rose 11.2% to $5.15 in 2006, the fourth consecutive
year of record earnings. The increase was driven by business
growth, low and stable provisions for credit losses and
a lower effective tax rate.
•
Excluding changes in the general allowance for credit losses in
2006 and 2005, EPS grew 11.6%, exceeding our 2006 target of
5% to 10% growth on this basis.
Further details are provided on page 32.
EPS Growth (%)
•
BMO’s EPS growth of 11.2% in 2006 improved but was
below a Canadian peer group average of 59.2% that
was elevated by the impact of litigation provisions in
2005 and a significant gain on the sale of a business
in 2006. These same factors contributed to a strong
North American peer group average of 21.0%.
2006 2005 2004 2003 2002
28.4 27.9
0.8
5.2
11.2
Return on Equity (ROE)
•
ROE of 19.2% was up from 18.8% in 2005 and was the second
highest in the past 20 years, and above our 2006 target of 17%
to 19%. In 2007, we are targeting ROE of 18% to 20%.
•
We increased our medium-term target to 18% to 20% ROE from
18% to 19% ROE at the end of 2006.
Further details are provided on page 33.
18.8
19.2
19.4
16.4
13.4
ROE (%)
•
ROE of 19.2% in 2006 was below the Canadian
peer group average of 23.2% but above the North
American peer group average of 17.5%.
•
BMO has earned ROE of more than 13% in each of
the past 17 years, the only major North American
bank with this record of earnings consistency.
2006 2005 2004 2003 2002
Net Economic Profit (NEP) Growth
•
NEP, a measure of added economic value, grew 10.3% to a
record $1,230 million.
•
Results in Private Client Group and Corporate Services drove
the improvement, as the other operating groups were allocated
higher capital in 2006.
Further details are provided on page 33.
NEP Growth (%)
•
NEP growth of 10.3% in 2006 was below the Canadian
peer group average of 92.1% and the North American
peer group average of 37.7%. The averages were
favourably affected by the 2005 litigation provisions
and the 2006 gain on sale of a business.
Canadian peer group NEP growth for 2002 (–104%) and
2003 (3,112%) is not to scale.
2006 2005 2004 2003 2002
0.1
10.3
58.4
(15.2)
91.8
Revenue Growth
•
Revenue* increased $154 million or 1.5% in 2006, but increased
5.9% excluding the effects of the sale of Harrisdirect and
the weaker U.S. dollar. On this basis, revenue in each of our
operating groups improved, with most of this improvement
reflected in P&C Canada and Private Client Group.
Further details are provided on page 36.
5.0
1.5
3.7
4.7
Revenue Growth (%)
•
Revenue growth of 1.5% in 2006 was below
the Canadian peer group average of 7.2% and the
strong North American peer group average of
8.4%. Excluding the sale of Harrisdirect and
the impact of the weaker U.S. dollar, BMO’s
revenue growth was 5.9%.
2006 2005 2004 2003 2002
(0.1)
Expense-to-Revenue Ratio (Productivity Ratio)
•
The productivity ratio improved 77 basis points to 62.8% in
2006. The cash productivity ratio improved 25 basis points to
62.4%, following 538 basis points of total improvement in
the three previous years. We had targeted an improvement of
100 to 150 basis points in the cash productivity ratio in 2006.
Further details are provided on page 40.
63.6
62.8
65.0
66.5
69.0
Expense-to-Revenue Ratio (%)
•
BMO’s productivity ratio of 62.8% was worse than
the Canadian peer group average of 60.8% and the
North American peer group average of 57.3%.
•
BMO is targeting to improve the cash productivity
ratio by 100–150 bps in 2007.
2006 2005 2004 2003 2002
*Revenue and income taxes are reported in the MD&A on a taxable equivalent basis.
See pages 34, 36 and 41.
See page 26 for further comments on peer
group comparisons.
Certain prior year data has been restated.
See Note 1 on page 26.
BMO Financial Group
Canadian peer group average
North American peer group average
24 • BMO Financial Group 189th Annual Report 2006
Net Economic Profit (NEP) Growth
•
NEP, a measure of added economic value, grew 10.3% to a
record $1,230 million.
•
Results in Private Client Group and Corporate Services drove
the improvement, as the other operating groups were allocated
higher capital in 2006.
Further details are provided on page 33.
NEP Growth (%)
•
NEP growth of 10.3% in 2006 was below the Canadian
peer group average of 92.1% and the North American
peer group average of 37.7%. The averages were
favourably affected by the 2005 litigation provisions
and the 2006 gain on sale of a business.
Canadian peer group NEP growth for 2002 (–104%) and
2003 (3,112%) is not to scale.
2006 2005 2004 2003 2002
0.1
10.3
58.4
(15.2)
91.8
Management’s Discussion and Analysis
Our Performance Peer Group Comparison
Credit Losses
•
Provisions for credit losses were low and stable, at $176 million.
Specific provisions were $211 million and there was a $35 million
reduction in the general allowance, both comparable to
a year ago.
•
The provision represented 9 basis points of average net loans
and acceptances, down from 11 basis points in 2005.
Impaired Loans
•
Gross impaired loans and acceptances were $666 million,
compared with $804 million in 2005, and represented
3.8% of equity and allowances for credit losses, down from
4.9% a year ago.
•
Formations of new impaired loans and acceptances, a key driver
of credit provisions, were $420 million, in line with a year ago,
as credit conditions remained favourable.
Cash and Securities-to-Total Assets
•
The cash and securities-to-total assets ratio was up slightly from
a year ago at 27.2%.
•
Liquidity remains sound and continues to be supported by broad
diversification of deposits.
Capital Adequacy
•
The Tier 1 Capital Ratio was 10.22%, down slightly from 10.30%
last year but above our minimum target of 8.0%.
•
The Total Capital Ratio was 11.76%, down slightly from 11.82%
in 2005.
•
BMO has $3.6 billion of excess capital relative to our targeted
minimum Tier 1 Capital Ratio.
Credit Rating (Standard & Poor’s)
•
Our credit rating, as measured by Standard & Poor’s
(S&P) senior debt ratings, remained at AA–, matching two
competitors and exceeding the rating of the other three
major Canadian banks.
•
S&P’s ratings outlook on BMO remains stable.
Credit Rating (Moody’s)
•
Our credit rating, as measured by Moody’s senior debt ratings,
remained at Aa3, slightly below the highest-rated Canadian
bank and consistent with the highest-rated of the remaining
major Canadian banks.
•
Moody’s ratings outlook on BMO remains stable.
Provision for Credit Losses as a % of
Average Net Loans and Acceptances
•
BMO’s provision for credit losses of 0.09% of average
net loans and acceptances was better than the
Canadian peer group average of 0.17% and the North
American peer group average of 0.53%.
•
BMO’s credit loss experience has been better than
the average of the Canadian peer group in 14 of the
past 15 years.
Gross Impaired Loans and Acceptances as a % of
Equity and Allowances for Credit Losses
•
BMO’s ratio of 3.8% was better than the Canadian
peer group average of 4.3% but worse than the
North American peer group average of 2.6%.
•
BMO’s ratio has approximated the Canadian average
but has been higher than the North American average
in recent years.
Cash and Securities as a % of Total Assets (%)
•
BMO’s liquidity ratio of 27.2% was below the
Canadian peer group average of 33.5% and the
North American peer group average of 31.2%.
•
Our liquidity ratio was higher than a year ago and
remains at an acceptable level.
Tier 1 Capital Ratio (%)
•
Our Tier 1 Capital Ratio at 10.22% was slightly below
the Canadian peer group average of 10.36%.
•
On a U.S. regulatory basis, our Tier 1 Capital Ratio was
9.93% and was above the North American peer group
average of 8.53%.
Credit Rating (Standard & Poor’s)
•
BMO’s credit rating of AA–, as measured by S&P’s
senior debt ratings, was in the upper half of the
Canadian peer group, with two of the banks in
our peer group rated as highly as BMO and three
rated lower. BMO’s rating was consistent with the
median rating of the North American peer group.
Credit Rating (Moody’s)
•
BMO’s credit rating of Aa3, as measured by Moody’s
senior debt ratings, was comparable to the median of
the Canadian peer group but slightly higher than the
North American peer group median.
2006 2005 2004 2003 2002
0.11
0.09
(0.07)
0.30
0.56
2006 2005 2004 2003 2002
4.9
3.8
7.5
13.9
17.4
2006 2005 2004 2003 2002
26.5
27.2
26.0
29.1
24.9
2006 2005 2004 2003 2002
10.30
10.22
9.84
9.55
8.80
AA– AA– AA–
AA–
A+
A+A+
AA–
2006 2005 2004 2003 2002
Aa3 Aa3 Aa3 Aa3 Aa3
Aa2 Aa2
2006 2005 2004 2003 2002
See page 26 for further comments on peer
group comparisons.
Certain prior year data has been restated.
See Note 1 on page 26.
Further details are provided on pages 39 and 68.
Further details are provided on pages 39 and 68.
Further details are provided on pages 71 and 72.
Further details are provided on pages 58 and 59.
Further details are provided on page 59.
Further details are provided on page 59.
BMO Financial Group
Canadian peer group average
North American peer group average
MD&A
BMO Financial Group 189th Annual Report 2006 • 25
Net economic profit (NEP)
represents cash net income
available to common share-
holders, less a charge for
capital. NEP is an effective
measure of economic value
added. NEP is a non-GAAP
measure. See page 34.
The Canadian peer group averages are based on the performance of Canada’s six largest banks:
BMO Financial Group, Canadian Imperial Bank of Commerce, National Bank of Canada, RBC Financial
Group, Scotiabank and TD Bank Financial Group. The North American peer group averages are based on
the performance of North America’s largest banks, consisting of 15 banks in North America having
shareholders’ equity that is at least 75% as large as BMO’s. It includes the Canadian peer group, except
National Bank of Canada, as well as Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase &
Co., KeyCorp, National City Corporation, The PNC Financial Services Group Inc., SunTrust Banks Inc., U.S.
Bancorp, Wachovia Corporation, and Wells Fargo & Company.
GAAP and Related Non-GAAP Measures Used in the MD&A
($ millions, except as noted) 2006 2005 2004
Net income 2,663 2,396 2,295
Amortization of intangible assets
(net of income tax) 36 74 78
Cash net income (1) 2,699 2,470 2,373
Preferred share dividends (30) (30) (31)
Charge for capital
(1) (1,439) (1,324) (1,230)
Net economic profit (1) 1,230 1,116 1,112
Non-GAAP Measures
BMO uses both GAAP and non-GAAP measures to assess per-
formance. Securities regulators require that companies caution
readers that earnings and other measures adjusted to a basis
other than generally accepted accounting principles (GAAP) do
not have standardized meanings under GAAP and are unlikely
to be comparable to similar measures used by other companies.
Net economic profit is another non-GAAP measure. It rep-
resents cash earnings available to common shareholders less
a charge for capital, and is considered an effective measure of
added economic value.
Provides detailed
explanation of non-GAAP
measures, including a
reconciliation to fi nancial
statements.
Consistently reports on
12 KPIs against peer group
averages, as shown in detail
here for NEP Growth.
Defi nes the peer groups.