Review of Fourth Quarter 2016 Performance

Transcription

1 Review of Fourth Quarter 2016 Performance Reported net income was $1,345 million for the fourth quarter of 2016, up $131 million or 11% from the prior year. Adjusted net income was $1,395 million, up $131 million or 10% from the prior year. Adjusted results for the quarter exclude the amortization of acquisition-related intangible assets of $37 million ($29 million after-tax), which were charged to the non-interest expense of the operating groups, and acquisition integration costs of $31 million ($21 million after-tax), which were primarily recorded in non-interest expense. Acquisition integration costs related to F&C were charged to Wealth Management and acquisition integration costs related to the acquired BMO Transportation Finance business were charged to Corporate Services. Reported EPS of $2.02 was up $0.19 or 10% and adjusted EPS of $2.10 was up $0.20 or 11% from the prior year. Return on equity was 13.8% and adjusted return on equity was 14.4%. Summary income statements and data for the quarter and comparative quarters are outlined on page 67. The combined P&C banking business net income of $878 million and adjusted net income of $891 million increased 14%. Canadian P&C net income increased 5% reflecting good operating performance with higher balances across most products and increased non-interest revenue, partially offset by higher expenses and higher provisions for credit losses. U.S. P&C reported net income increased 38% on a Canadian dollar basis and 37% on a U.S. dollar basis. U.S. P&C adjusted net income increased 35% on a Canadian dollar basis and 34% on a U.S. dollar basis. Reported and adjusted U.S. P&C net income benefited from the acquired BMO Transportation Finance business and continued good growth in commercial lending. Wealth Management reported net income was $279 million compared to $243 million in the prior year. Wealth Management adjusted net income was $302 million compared to $271 million, up 11% from the prior year. Traditional wealth reported net income increased 8% and adjusted net income increased 5% largely reflecting improved market conditions and growth across most of our businesses. From a year-over-year growth perspective, a gain on sale of an investment in the fourth quarter of 2016 was offset by a gain on sale net of a legal provision in the prior year. Insurance net income increased primarily due to the impact of business growth and favourable market movements in the fourth quarter of BMO Capital Markets net income increased 65% driven by strong revenue performance. Corporate Services reported and adjusted results declined primarily due to lower revenue driven by a recovery under a legal settlement in the prior year, above-trend expenses and lower credit recoveries. Total revenue of $5,278 million increased $296 million or 6% from the fourth quarter a year ago. Total revenue, net of CCPB, of $5,199 million increased $482 million or 10%. Canadian P&C revenue increased 5% due to higher balances across most products and increased non-interest revenue. U.S. P&C revenue increased 25% on a Canadian dollar and U.S. dollar basis primarily due to the benefit of the acquired BMO Transportation Finance business, as well as higher organic loan and deposit volumes, increased deposit spreads and fee income, net of loan spread compression. Traditional wealth revenue decreased as business growth and improved Canadian and U.S. equity markets were more than offset by the impact of higher gains in the prior year, lower revenue due to divestitures and the impact of the weaker British pound. Net insurance revenue increased mainly due to the impact of favourable market movements in the fourth quarter of 2016 and business growth. BMO Capital Markets revenue increased 27% with higher revenue in Investment and Corporate Banking due to strong merger and acquisition advisory activity, higher revenue from equity and debt underwriting, corporate lending and net securities gains. Trading Products revenue increased due to higher trading revenue from improved client activity, and higher equity issuances. Corporate Services revenue declined from above-trend revenue in the prior year, which included a recovery under a legal settlement. Net interest income of $2,498 million increased $187 million or 8% from a year ago due to the benefits of the acquired BMO Transportation Finance business and organic volume growth. BMO s overall net interest margin increased by 4 basis points to 1.57%. Net interest margin excluding trading increased 7 basis points from the prior year primarily due to the acquired BMO Transportation Finance business, higher deposit balances and in U.S. P&C higher deposit spreads. Average earning assets increased $33.9 billion or 6% to $631.4 billion, due to organic loan growth and the acquired BMO Transportation Finance business. Non-interest revenue increased $295 million or 12% on a net revenue basis to $2,701 million, primarily due to higher revenue from underwriting and advisory fees, trading revenue and a gain on sale of an equity investment sold in the fourth quarter, partially offset by lower other non-interest revenue. Other non-interest revenue includes lease revenue from the acquired BMO Transportation Finance business, which was more than offset by the prior year benefits from a gain on sale of BMO s U.S. retirement services business and a recovery under a legal settlement. BMO Financial Group 199th Annual Report

2 MANAGEMENT S DISCUSSION AND ANALYSIS The total provision for credit losses was $174 million, an increase of $46 million from the prior year due to higher provisions in Canadian and U.S. P&C and lower net recoveries in Corporate Services. There was no net change to the collective allowance in the quarter. Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $79 million in the fourth quarter of 2016, down $186 million from $265 million in the fourth quarter of 2015 due to the impact of lower annuity premiums and reinsurance liabilities, partially offset by lower increases in long-term interest rates which resulted in a smaller decrease in the fair value of policy benefit liabilities compared to the fourth quarter of The decrease was largely offset in revenue. Non-interest expense of $3,323 million increased $230 million or 7% from the fourth quarter a year ago. Adjusted non-interest expense excludes acquisition integration costs and the amortization of acquisition-related intangible assets. Adjusted non-interest expense increased $223 million or 7% to $3,255 million. Reported and adjusted expenses increased largely due to the impact of the acquired BMO Transportation Finance business, increased technology costs and higher employee-related expenses, partially offset by the impact of divestitures. The provision for income taxes of $357 million increased $75 million from the fourth quarter of The effective tax rate for the quarter was 21.0%, compared with 18.8% a year ago. The adjusted provision for income taxes of $375 million increased $80 million from a year ago. The adjusted effective tax rate was 21.2% in the fourth quarter of 2016, compared with 18.9% a year ago. The higher reported and adjusted tax rate in the fourth quarter of 2016 relative to the fourth quarter of 2015 was primarily due to a higher proportion of income from higher tax-rate jurisdictions and lower tax-exempt income from securities. On a teb basis, the reported effective tax rate for the quarter was 26.3%, compared with 24.9% a year ago. On a teb basis, the adjusted effective tax rate for the quarter was 26.3%, compared with 24.7% a year ago Financial Performance Review The preceding discussions in the focused on our performance in fiscal This section summarizes our performance in fiscal 2015 relative to fiscal As noted on page 26, certain prior year data has been reclassified to conform to the presentation in 2016, including restatements arising from transfers between operating groups. Further information on restatements is provided on page 46. Net Income Net income increased $72 million or 2% to $4,405 million in 2015 and EPS increased $0.16 or 2% to $6.57. Adjusted net income excludes acquisition integration costs, the amortization of acquisition-related intangible assets and restructuring costs. Adjusted net income increased $228 million or 5% to $4,681 million and adjusted EPS increased $0.41 or 6% to $7.00, reflecting solid revenue growth. Higher net revenue exceeded incremental costs, contributing to growth in net income. There were higher provisions for credit losses and a slightly higher effective income tax rate. Return on Equity Return on equity and adjusted return on equity were 12.5% and 13.3%, respectively, in 2015, compared with 14.0% and 14.4%, respectively, in ROE declined in 2015 primarily due to growth in common equity exceeding growth in income. There was an increase of $96 million in earnings ($252 million in adjusted earnings) available to common shareholders. Average common shareholders equity increased $4.5 billion from 2014 primarily due to the impact of the stronger U.S. dollar on our investments in foreign operations and increased retained earnings. Revenue Revenue, net of CCPB, increased $1,417 million or 8% to $18,135 million in Adjusted revenue excludes a minor adjustment related to BMO Transportation Finance acquisition costs. Adjusted net revenue increased $1,419 million or 8% to $18,137 million. Revenue growth reflects the benefits of our diversified business mix and successful execution against our strategic priorities. The impact of the stronger U.S. dollar increased adjusted net revenue growth by $732 million or 4%. The remaining increase was mainly due to revenue growth in Canadian P&C and Wealth Management. Insurance Claims, Commissions and Changes in Policy Benefit Liabilities Insurance claims, commissions and changes in policy benefit liabilities were $1,254 million in 2015, down $251 million from $1,505 million in 2014 when lower long-term interest rates increased the fair value of policy benefit liabilities to a greater extent, partially offset by increased reinsurance liabilities and the impact of growth in the underlying business. The decline was largely offset in revenue. Provisions for Credit Losses The provision for credit losses was $612 million in 2015, up from $561 million in 2014, primarily due to lower recoveries in Corporate Services and higher provisions in BMO Capital Markets, partially offset by reduced provisions in the P&C businesses. Non-Interest Expense Non-interest expense increased $1,261 million or 12% to $12,182 million in Adjusted non-interest expense excludes acquisition integration costs, the amortization of acquisition-related intangible assets and restructuring costs. Adjusted non-interest expense increased $1,058 million or 10% to $11,819 million, of which approximately 6% was due to the stronger U.S. dollar, 2% was due to the inclusion of F&C results for two additional quarters relative to the prior year, and 2% was due to business growth. Provision for Income Taxes The provision for income taxes was $936 million in 2015, compared with $903 million in The reported effective tax rate in 2015 was 17.5%, compared with 17.2% in The adjusted provision for income taxes was $1,025 million in 2015 (1), compared with $943 million in The adjusted effective tax rate in 2015 was 18.0%, compared with 17.5% in The change in the tax rate from year to year is attributable to a lower proportion of income from lower tax rate jurisdictions. (1) The adjusted rate is completed using adjusted net income rather than net income in the determination of income subject to tax. 64 BMO Financial Group 199th Annual Report 2016

3 Canadian P&C Reported net income was $2,105 million in 2015, up $90 million or 4% from 2014, with improved performance in the second half of the year. Adjusted net income, which excludes the amortization of acquisition-related intangible assets, was $2,109 million, up $90 million or 4%. Revenue increased $234 million or 4% to $6,640 million as a result of higher balances and increased non-interest revenue, with a stable net interest margin. Revenue increased $177 million or 4% in our personal banking business as a result of higher balances and increased non-interest revenue. In our commercial banking business, revenue increased $57 million or 3%, mainly driven by higher balances. Our credit performance improved in 2015, as provisions for credit losses declined $32 million or 6% to $496 million, due to lower provisions in both the consumer and commercial portfolios. Noninterest expense was $3,339 million, up $158 million or 5% from 2014, primarily due to continued investment in the business, net of expense management, and higher costs associated with a changing business and regulatory environment. U.S. P&C Reported net income of $829 million increased $173 million or 26% from Adjusted net income, which excludes the amortization of acquisitionrelated intangible assets, was $882 million, up $174 million or 25%. Revenue grew $459 million or 15% to $3,616 million. All amounts in the remainder of this section are on a U.S. dollar basis. Reported net income of $661 million increased $62 million or 10% from Adjusted net income, which excludes the amortization of acquisition-related intangible assets, of $703 million increased $57 million or 9%. Revenue remained stable at $2,881 million as higher balances and increased mortgage banking revenue offset the effects of lower net interest margin. In our commercial banking business, revenue increased $9 million or 1% to $1,462 million, reflecting strong loan volume growth, primarily in the commercial and industrial loan portfolio, partially offset by the impact of spread compression due to a competitive environment. In our personal banking business, revenue decreased by $14 million or 1% to $1,419 million, primarily due to declines in loan balances and spreads and reduced fees from deposits and credit cards, partially offset by increased mortgage banking revenue and chequing balance growth. Provisions for credit losses of $95 million in 2015 improved by $67 million or 41%, primarily due to lower provisions in both the consumer and commercial loan portfolios. Non-interest expense of $1,904 million remained stable. Adjusted non-interest expense of $1,849 million increased $14 million, or less than 1%, due to a continued focus on expense management while making selective investments in the business. Wealth Management Reported net income was $850 million in 2015, up $70 million or 9% from Adjusted net income, which excludes the amortization of acquisition-related intangible assets and acquisition integration costs, was $955 million, up $112 million or 13%. Traditional wealth reported net income was $610 million, up $116 million or 23%. Adjusted net income in traditional wealth was $715 million, up $158 million or 28% from a year ago, due to growth from the businesses, a gain on sale of BMO s U.S. retirement services business, as well as the benefit from the full year contribution from the acquired F&C business. Net income in insurance was $240 million compared to $286 million a year ago, primarily due to higher taxes in the current year and higher actuarial benefits in the prior year. Revenue, net of CCPB, was $4,509 million, up $676 million or 18% from the prior year. Revenue in traditional wealth was $4,057 million, up $687 million or 20% primarily due to growth in client assets, including the full year contribution from the acquired F&C business. Insurance revenue, net of CCPB, was $452 million compared to $463 million a year ago, due to higher actuarial benefits in the prior year. The stronger U.S. dollar increased revenue, net of CCPB, by $133 million or 4%. Non-interest expense was $3,357 million, up $517 million or 18%. Adjusted non-interest expense was $3,223 million, up $465 million or 17%, of which 4% was due to the stronger U.S. dollar, 9% was due to the inclusion of F&C results for two additional quarters and 4% was primarily due to higher revenue-based costs. BMO Capital Markets Reported net income decreased $45 million or 4% to $1,029 million in 2015, as the benefit of the stronger U.S. dollar was more than offset by higher provisions compared to net recoveries in the prior year. Adjusted net income, which excludes the amortization of acquisition-related intangible assets, was $1,031 million, a decrease of $44 million or 4%. Revenue increased $153 million or 4% to $3,867 million. Excluding the impact of the stronger U.S. dollar, revenue was stable year over year as higher trading revenues, including the prior year unfavourable impact of implementing a funding valuation adjustment, and higher lending revenues were offset by lower investment banking fees and reduced securities gains. Trading Products revenue increased $155 million or 7%, and increased 3% excluding the impact of the stronger U.S. dollar, reflecting higher trading revenues related to client trading activity. Investment and Corporate Banking revenue was consistent with the prior year, and decreased 5% excluding the impact of the stronger U.S. dollar as growth in lending revenue was more than offset by lower investment banking client activity and reduced securities gains. Provision for credit losses was $44 million higher due to higher provisions compared with net recoveries in the prior year. Non-interest expense increased $134 million or 6% to $2,483 million, and decreased $10 million excluding the impact of the stronger U.S. dollar, primarily due to lower employee-related expenses, partially offset by higher support costs related to a changing business and regulatory environment. Corporate Services Corporate Services reported net loss was $408 million in 2015, compared with a reported net loss of $192 million in Reported results in 2015 included certain acquisition integration costs and a $106 million charge, primarily due to restructuring. The adjusted net loss was $296 million, compared with an adjusted net loss of $192 million in Excluding the impact of the group teb adjustment on revenue and taxes, results were lower mainly due to lower purchased loan portfolio revenues and lower credit recoveries. Adjusted non-interest expense was down modestly. BMO Financial Group 199th Annual Report

4 MANAGEMENT S DISCUSSION AND ANALYSIS Summary Quarterly Earnings Trends BMO s results and performance measures for the past eight quarters are outlined on page 67. Periodically, certain business lines and units within the business lines are transferred between client operating groups to more closely align BMO s organizational structure and its strategic priorities. Comparative figures have been restated to conform to the current presentation. Over the past two years, we have remained focused on executing our strategic priorities. Economic conditions have remained challenging in Canada, hampered by weak investment in the oil industry and a slower U.S. economy. Growth in the U.S. economy was healthy in 2015 but slowed in 2016, reflecting low levels of exports, a reduction in oil production and decreased agriculture sector spending. Seasonality BMO s quarterly earnings, revenue and expense are modestly affected by seasonal factors. Since our second fiscal quarter has 89 days (90 in a leap year) and other quarters have 92 days, second-quarter results are lower relative to other quarters because there are fewer calendar days, and thus fewer business days. The fourth quarter can have a higher level of expenses. The December holiday season also contributes to a slowdown in some activities. Canadian P&C Canadian P&C delivered solid net income performance in the second half of 2015, continuing into Despite higher provisions for credit losses in 2016, up from below-trend provisions in the second half of 2015, year-over-year net income growth and operating leverage were both positive in each quarter of Revenue growth has been driven by higher balances and non-interest revenue, with relatively stable net interest margins. Expenses have grown as a result of continued investment in the business, net of an ongoing focus on expense management. U.S. P&C Results improved in 2015 as a result of balance sheet growth, and disciplined expense management in a challenging interest rate environment. Growth in 2016 largely reflected the results of the acquired BMO Transportation Finance business and also organic revenue growth and good expense management, partially offset by higher credit losses. The U.S. dollar generally has strengthened significantly since the beginning of 2015, contributing to growth in the Canadian dollar equivalents of U.S. P&C s results. Wealth Management Wealth Management s results in 2015 reflected good momentum. Results in 2016 were impacted by lower Canadian equity markets on average in 2016 compared to the prior year, despite markets slowly rebounding in the second half of the year. The fourth quarter of 2015 benefited from a gain on the sale of our U.S. retirement services business, the second quarter of 2016 included an investment write-down and the fourth quarter of 2016 included a gain on sale of an equity investment. Quarterly results in the insurance businesses have been subject to variability, resulting primarily from impacts of interest rates and equity markets, as well as methodology and actuarial assumptions changes. BMO Capital Markets BMO Capital Markets results have reflected good momentum, from softer results in the first quarter of 2015 to strong results in Strong overall performance has been driven by steady revenue growth in our Trading Products business, strong growth in the second half of 2016 in our Investment and Corporate Banking business and a tightened expense and efficiency focus, resulting in positive operating leverage in each of the five most recent quarters. Provisions for Credit Losses BMO s PCL measured as a percentage of loans and acceptances has generally been relatively stable, with some quarter-to-quarter variability, and decreased in the fourth quarter of 2016 due to lower new specific provisions and higher reversals and recoveries, after experiencing increases in the second and third quarters of 2016 primarily due to higher oil and gas provisions. Corporate Services Reported and adjusted results can vary from quarter to quarter. Reported results in 2015 and 2016 each included a restructuring charge and acquisition integration costs. The reported results in 2016 also included a cumulative accounting adjustment related to foreign currency translation that largely impacted prior periods. Results are impacted in part by the variability associated with benefits from the purchased loan portfolio. Beginning in the first quarter of 2016, the reduction in the credit mark that is reflected in net interest income and the provision for credit losses on the purchased performing portfolio are being recognized in U.S. P&C, consistent with the accounting for the acquisition of BMO Transportation Finance and given that these amounts have reduced substantially in size. Results for prior periods have not been reclassified. Foreign Exchange The U.S. dollar strengthened significantly in 2015 with further modest strengthening in 2016, despite a slight weakening in the second quarters of 2015 and A stronger U.S. dollar increases the translated value of our U.S.-dollar-denominated revenues, expenses, provisions for (recoveries of) credit losses, income taxes and net income. It also reduces our return on equity. Provision for Income Taxes The effective income tax rate can vary, as it depends on the timing of resolution of certain tax matters, recoveries of prior periods income taxes and the relative proportion of earnings attributable to the different jurisdictions in which we operate. Caution This Summary Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements. In the opinion of Bank of Montreal management, information that is derived from unaudited financial information, including information as at and for the interim periods, includes all adjustments necessary for a fair presentation of such information. All such adjustments are of a normal and recurring nature. Financial ratios for interim periods are stated on an annualized basis, where appropriate, and the ratios, as well as interim operating results, are not necessarily indicative of actual results for the full fiscal year. 66 BMO Financial Group 199th Annual Report 2016

5 Summarized Statement of Income and Quarterly Financial Measures (Canadian $ in millions, except as noted) Q Q Q Q Q Q Q Q Net interest income 2,498 2,474 2,420 2,480 2,311 2,227 2,060 2,165 Non-interest revenue 2,780 3,159 2,681 2,595 2,671 2,599 2,466 2,890 Total revenue 5,278 5,633 5,101 5,075 4,982 4,826 4,526 5,055 Insurance claims, commissions and changes in policy benefit liabilities (CCPB) Revenue, net of CCPB 5,199 4,942 4,694 4,709 4,717 4,608 4,502 4,308 Provision for credit losses specific (see below) Provision for (recovery of) credit losses collective Non-interest expense 3,323 3,092 3,312 3,270 3,093 2,971 3,112 3,006 Income before provision for income taxes 1,702 1,593 1,181 1,256 1,496 1,477 1,229 1,139 Provision for income taxes Reported net income (see below) 1,345 1, ,068 1,214 1, ,000 Acquisition integration costs (1) Amortization of acquisition-related intangible assets (2) Cumulative accounting adjustment (3) 62 Restructuring costs (4) Adjusted net income (see below) 1,395 1,295 1,152 1,178 1,264 1,230 1,146 1,041 Operating group reported net income Canadian P&C reported net income Amortization of acquisition-related intangible assets (2) Canadian P&C adjusted net income U.S. P&C reported net income Amortization of acquisition-related intangible assets (2) U.S. P&C adjusted net income Wealth Management reported net income Acquisition integration costs (1) Amortization of acquisition-related intangible assets (2) Wealth Management adjusted net income BMO Capital Markets reported net income Amortization of acquisition-related intangible assets (2) BMO Capital Markets adjusted net income Corporate Services reported net income (208) (115) (244) (120) (39) (68) (227) (74) Acquisition integration costs (1) Cumulative accounting adjustment (3) 62 Restructuring costs (4) Corporate Services adjusted net income (194) (105) (101) (52) (33) (68) (121) (74) Information per Common Share ($) Dividends declared Basic earnings per share Diluted earnings per share Adjusted diluted earnings per share Book value Market price High Low Close Financial Measures (%) Dividend yield Return on equity Adjusted return on equity Net interest margin on average earning assets Efficiency ratio, net of CCPB Adjusted efficiency ratio Adjusted efficiency ratio, net of CCPB Operating leverage, net of CCPB (2.2) (8.5) (7.5) Adjusted operating leverage, net of CCPB (0.8) (2.0) (6.8) PCL as a % of average net loans and acceptances Effective tax rate Adjusted effective tax rate Canadian/U.S. dollar as at exchange rate ($) Canadian/U.S. dollar average exchange rate ($) Cash and securities-to-total assets Capital Ratios (%) (5) Common Equity Tier 1 (CET1) Ratio Tier 1 Capital Ratio Total Capital Ratio Leverage Ratio (1) Acquisition integration costs before tax are included in non-interest expense. Wealth Management amounts of: $10 million in Q4-2016; $10 million in Q3-2016; $6 million in Q2-2016; $12 million in Q1-2016; $13 million in Q4-2015; $9 million in Q3-2015; $11 million in Q and $13 million in Q Corporate Services amounts of: $21 million in Q4-2016; $17 million in Q3-2016; $18 million in Q2-2016; $10 million in Q1-2016; $7 million in Q4-2015, and $nil in each of Q3-2015, Q and Q (2) Amortization of acquisition-related intangible assets was charged to the non-interest expense of the operating groups. Canadian P&C amounts of: $1 million in Q4-2016; $1 million in Q3-2016; $nil in Q2-2016; $1 million in Q and $2 million in Q4-2015; and $1 million in each of Q3-2015, Q and Q US P&C amounts of: $17 million in Q4-2016; $16 million in Q3-2016; $17 million in Q2-2016; $18 million in Q1-2016; $18 million in Q4-2015; $16 million in Q3-2015; and $17 million in each of Q and Q BMO Wealth Management amounts of: $19 million in Q4-2016; $22 million in Q3-2016; $23 million in Q2-2016; $24 million in Q1-2016; and $22 million in each of Q4-2015, Q3-2015, Q and Q BMO Capital Markets amounts of: $nil in Q4-2016; $1 million in Q3-2016; $nil in each of Q and Q1-2016; $1 million in each of Q and Q3-2015; and $nil in each of Q and Q (3) Cumulative accounting adjustment recognized in other non-interest revenue related to foreign currency translation that largely impacted prior periods. (4) Restructuring charges before tax amounts included in non-interest expense in Corporate Services of $188 million in Q and $149 million in Q (5) Comparative figures are as amended for Q1-2016, Q and Q capital ratios, other than the Leverage Ratio. Adjusted results in this table are non-gaap and are discussed in the Non-GAAP Measures section on page 33. BMO Financial Group 199th Annual Report