Our Customers. Our Strength.
William A. Downe
President and Chief Executive Officer
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Update to Shareholders
In reflecting on the 2008 fiscal year, my starting point must be to recognize that it has been a period of fundamental instability in financial markets – a time when many of the world’s economies were pushed into recession. The impact on financial markets has been pervasive, affecting the cost of funds and liquidity. It has also affected our customers and much of the hard work of the bank in 2008 was directed to helping them respond to this changing environment.
The conditions affected us as well. But, at the same time, this year confirmed the strength and diversity of BMO Financial Group’s businesses.
We turned in a solid financial performance with close to $2 billion in net income and a Tier 1 Capital Ratio of 9.77 per cent – and we improved customer loyalty and market share in key product lines. Equally important, we made significant progress against our stated agenda and, as a result, we are better positioned – both for a period of low or negative economic growth and for the ultimate recovery.
The earning power of our company is driven by customers.
The actions we have taken to look at banking and the impact of the changing environment through our customers’ eyes represent a fundamental shift underway at BMO. We enhanced the clarity of our position in the marketplace with a well-defined promise – to help our customers make sense of their finances and to take away complexity.
Our consistent approach to customers will allow us to continue to grow customer loyalty and market share – and, as a result, grow earnings and maintain our strong balance sheet.
We began dealing early and effectively with the challenges of the current environment.
Eighteen months ago we launched a review of how we measure and manage risk at BMO. The work we did confirmed significant strengths – particularly with respect to the management of credit risk.
We also identified opportunities for improvement and immediately embarked on a program that focuses on areas of emerging risk and builds our capabilities for the future.
Under the direction of our newly appointed Chief Risk Officer we increased our capability and people skills and realigned the entire risk organization – we did this with the businesses. The risk team worked on building ownership with more clearly defined accountabilities. Risk transparency was emphasized throughout the organization with improved reporting of the performance of business units.
The active steps we took during the year to manage and reduce exposure in securitized asset and structured debt programs enabled us to make significant progress in reducing risk in this area. Our strategy going forward is to balance the objectives of continuing to reduce the size of these programs while preserving asset value.
In each group we have a defined business strategy built around our customers and our strengths.
Throughout the pages of this report, we have illustrated the performance of our four principal operating groups.
Personal and Commercial Banking Canada (P&C Canada) reported very good results in 2008, with revenue and net income improving each quarter. The group grew revenues at a higher rate than in 2006 and nearly twice the 2007 rate. We are in a period of strategic spending – executing deliberate plans and investing to improve our competitive position. But in the current environment, we are also highly mindful of making every dollar count. Expenses are being tightly controlled, as they are across the enterprise.
Customers are experiencing newer branches, improved service, innovative retail offerings and, in the fall of 2008, we increased our advertising in major urban centres in both Canada and the United States.
Personal and Commercial Banking U.S. is recognized for very high loyalty scores and strong customer relationships. Fiscal 2008 brought many new customers to Harris – customers seeking a strong and stable financial institution. We also continued to expand our branch network. While conscious of the realities of today’s markets and the importance of maintaining financial strength, we see opportunities ahead to increase our share of the U.S. Midwest market.
Private Client Group earnings in 2008 reflect the depth of our offerings and the quality of our relationships. It is notable that 2008 net income equalled 2007’s record results. This business offers products that are highly attractive to customers and helps them to plan and invest for their retirement years – and it’s tied to our entire commercial and personal distribution platform in Canada and the United States, which provides further opportunity to grow.
BMO Capital Markets earnings in 2008 flowed from strong performance in our interest-rate-sensitive and foreign exchange businesses. This strength served to offset softness in some of our fee-based businesses. The emphasis going forward will be on customer relationships, advice and execution.
Enterprise-wide, economic recovery will present significant opportunities for all our businesses.
P&C Canada has been successfully building share by focusing on relationships. As consumer confidence recovers and activity levels increase, we are well-positioned for above-average revenue growth. In the U.S. Midwest, where the competitive landscape has changed dramatically, Harris has become the natural home for more consumers and businesses. In Private Client Group, we succeed with our full range of award-winning offerings and our industry-recognized leadership in how we serve customers. In BMO Capital Markets, our focus on customer relationships positions us to benefit from increased mergers and acquisitions and advisory work as a number of our corporate clients – among them many of Canada’s largest and strongest companies – will be poised for growth when the recovery begins.
For investors looking to 2009 and beyond, there are compelling reasons BMO Financial Group represents a good investment: our retail-oriented customer focus is working and generating higher earnings; we have enhanced our risk management capabilities; and, we have excellent opportunities to leverage our strong capital position to grow our business.
To give credit where credit is due, many of our strategies and programs are implemented on the front lines, literally one customer at a time. So thank you, in particular this year, to the people who work with our customers every day.
I concluded last year’s annual report message saying: “The creation of value for our shareholders flows directly from the value we deliver to our customers. We know that the best way to do that is to bring the strength of our entire company to our customers, to help them make the choices that are best for them. Every time.” This continues to be our commitment.
William A. Downe
President and Chief Executive Officer
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