BMO Financial Group

"Delivering Long-Term Shareholder Value"
Remarks by Karen Maidment, Senior Executive Vice-President and Chief Financial Officer, BMO Financial Group, at 2005 Annual Meeting of Shareholders

Toronto, ON, February 22, 2005

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SLIDE 1 to 8 - Annual Meeting, Forward Looking Statement, Tony Comper, Introduction by Tony Comper and Fiscal 2004 Financial Results

Thank you, Tony. Good morning.

SLIDE 9 - 2004: Achieved Or Exceeded All Financial Targets

I am very proud to report on an excellent year for the bank – a year in which we earned record net income, improved our cash productivity, twice increased our quarterly dividend, and achieved or exceeded all of our financial targets.

We earned record net income of nearly $2.4 billion, up $526 million from a year ago.

Earnings per share rose 29% to $4.42 and return on equity climbed to 19.4%.

Before I talk more specifically about the numbers for last year and for the first quarter of 2005, let me take a couple of moments to reflect on the context of these results.

SLIDE 10 - Profile of BMO Investors

First, let me say I believe our performance is being publicly acknowledged. The fact is, we've been doing well on a relative basis.

However, I'm also well aware that there are "nay-sayers" out there - those who like to complain that our bank and our peers are making too much money.

They will argue, no doubt, that the interests of the banks are pitted against the interests of the general public.

But the fact is the shareholders of a Canadian bank do represent a broad cross section of the Canadian public.

As reported by the Canadian Bankers Association, ownership of the banks is widely held by Canadians through mutual funds, RRSPs, private pension plans and public pension plans like the Canada Pension Plan (CPP).

For example, in 2003, nearly 17 million Canadians, or over two thirds of the Canadian adult population, owned bank stocks through their participation in the CPP.

Some of you are here today as retail investors. About half of BMO's shares are held by retail investors, and they come from every walk of life.

Millions more people are represented here today by institutional accounts.

These are investors who rely upon mutual funds to do such things as prepare for their long-term future, or to put their kids through higher education.

Or people who rely upon the investments of their corporate pension plans to secure their retirement.

In fact, the other half of BMO's shares are held by institutions that manage those shares for you and me.

Our job, as BMO executives, is to ensure that we protect and grow the long-term value of your investment.

We are not in business to meet the quarterly expectations of the street analysts – although remaining aware of the expectations of the analysts quarter-by-quarter does impose a worthwhile discipline.

But no company – and certainly not BMO – should sacrifice long-term goals for the short-term game of beating the street estimates.

Sometimes a company must make tough decisions that hurt in the short term, but pay off in the long run.

As Tony mentioned, BMO did this six years ago, when we sacrificed revenue streams to get out of some lines of business that had low potential, or were unprofitable or lacked scale.

But as we have seen over the past two years, these were the right decisions.

SLIDE 11 - Managing for Long-Term Growth

I'd like to tell you about five of the key financial parameters that are always top of mind at BMO when managing for long-term growth and value:

Improving productivity;

Growing revenues;

Maintaining our credit risk management advantage;

Managing capital; and

Maximizing shareholder return.

I will refer to these as I discuss our financial performance in 2004.

SLIDE 12 - Cash Productivity Improving

First, improving productivity by growing revenues and controlling costs.

We measure the Cash Productivity ratio by calculating cash expenses as a percentage of revenues. This has been our major focus for several years now and is a key objective once again for 2005.

We improve productivity on the expense side by using our management skills and leveraging technology so that it costs us less money to earn every dollar of revenue. We believe this is a key driver in improving the shareholder value of BMO.

Last year, we spent 63 cents to earn a dollar. That was an improvement from the year before when we spent 64.5 cents, and the prior year when we spent 67.1 cents.

To put this in dollars, the improvement in productivity in 2004 added nearly $100 million to our earnings.

BMO has significant opportunities to improve our productivity even further in 2005. We are unique among our Canadian peers in being able to leverage our Canadian experience with our U.S. franchise. We see this as a significant competitive advantage, and a key to improving productivity.

SLIDE 13 - All Operating Groups Are Contributing To Revenue Growth

The second factor for increasing long-term value is growing revenues.

There is a saying that nobody ever downsized their way to greatness. Improving productivity can help us spend less money to earn our revenue, but the real key to significant growth is increasing revenue.

Last year, all operating groups contributed to revenue growth. Combined, we increased our revenue by $341 million to $9.6 billion or 3.7% over the prior year.

That increase climbs to 6.3% if we eliminate the negative impact of the weakening U.S. dollar during the year.

SLIDE 14 - Maintaining Our Credit Risk Management Advantage

The third factor in managing for the long term is maintaining our credit risk management advantage.

We lend to individuals and businesses, and lending carries risk. Some of the borrowers may default on their loans, and a successful bank must balance short-term revenue growth and the risk associated with losing money on bad loans.

In fact, one of the features that distinguishes BMO Financial Group from our peers in both Canada and the United States is our sophisticated yet prudent approach to credit risk management.

That's because we have strong portfolio management disciplines and work hard to ensure that we aren't unduly exposed to any sector or individual company.

What's more, we have an excellent team of loan workout specialists whose first priority is to work with companies to improve their results and get them back on track. When that isn't a viable option, these specialists focus on minimizing the Bank's economic loss.

As you can see from this slide, for the past 15 years, BMO's provision for credit losses, represented by the yellow line, has consistently been below the Canadian industry average, as noted by the red line.

The industry has lost on average 61 basis points per year on loans. At BMO, our average loan loss has been 39 basis points.

Last year was a very good year in the credit cycle. Our workout specialists were able to recover a significant amount of money by applying their best-in-class loan recovery practices, including selling loans we had previously written off.

As a result, we reduced our credit provisions from $455 million in 2003 to a recovery of $103 million in 2004, including a $170 million reduction in our general allowance.

That is an improvement of $558 million before taxes, which added significantly to BMO's earnings.

SLIDE 15 - Managing Capital For The Long Term

The fourth factor is capital. We take a long-term approach to managing capital.

We add to our capital base the earnings of the enterprise and use capital by supporting business growth, acquisitions, dividends and at times we return capital to shareholders through a modest share buyback program.

Canadian banks are required by law to maintain capital reserves to make sure that we have the cash on hand to meet our obligations – such as money to give you if you want to withdraw from your savings account.

The Bank Act requires us to maintain a Tier 1 capital ratio of 7%. We do much better than that.

Last year, we targeted a minimum Tier 1 ratio of 8%, and we actually ended the year with a very strong 9.81% or $13.5 billion. That's an increase from 9.55% at the end of 2003.

Our strong capital base gives us the flexibility to do what is best for the long term for BMO. And, as you can see from this slide, BMO has had 13 years of uninterrupted dividend increases, which includes our dividend announcement today.

SLIDE 16 - A History Of Strong Long Term Returns

And finally, the fifth aspect I want to talk about today is the total shareholder return.

After all, from your perspective, everything I have been talking about so far is a means to an end: making sure that you have a good return on your investment. Simply put, achieving superior long-term shareholder returns is the guiding principle in our decision-making.

We measure the total shareholder return on your investment by comparing the share price at different points in time and adding dividends.

Growth in earnings leads to a rising share price. A rising share price, combined with rising dividends, means that the value of your investment has increased substantially.

In fact, last year BMO delivered a one-year total shareholder return of 20%, as shown by the blue bar on this slide with the purple bar representing the performance of the TSX.

Your five-year total shareholder return is now 18.9% — a big improvement on the 12.9% five-year average we reported last year.

What does it all mean? It means that the tough decisions we made a few years ago are paying off for our investors.

If you invested $10,000 in BMO twenty years ago, it grew by an average of 17.5% per year, and today it is worth $252,000.

If you had invested the same amount in the TSX index of stocks, it would have grown at 9.2% per year, and today would be worth $59,000. Your BMO investment has beaten the TSX composite by over 4 times.

SLIDE 17 - Q1 2005 Financial Results

That's a summary of our fiscal 2004 results. Now, I'd like to move on to the current quarter's results, which were released this morning.

SLIDE 18 - Higher Volumes and Lower Costs Drive Earnings Growth

Our first quarter continues to build on our accomplishments of 2004.

Net Income was $602 million, up $81 million, or 15% from Q1 2004.
Earnings per share of $1.16 rose 16% and ROE improved to 19.4% from 18.3% a year ago.

SLIDE 19 - Financial Highlights

We improved cash productivity, our number one priority, by 288 basis points to 61.9%, as a result of revenue growth of 2.9%, and a decline in expenses of 1.8%.

Adjusting for the impact of foreign currency translation, revenue rose 5.1% and expenses were flat.

Results this quarter and first quarter last year were impacted by a few accounting and special items.

Excluding these items in both periods, net income increased 9%.

SLIDE 20 - Net Income Growth In All Operating Groups

Net income grew in all 3 operating groups, which I'll highlight individually.

In Personal and Commercial Client Group, we saw strong volume growth across all products, both in Canada and the U.S., and effective cost management.

Investment Banking Group benefited from both a special item and an accounting change - an income tax recovery and a change in accounting for Merchant Banking Investments. Otherwise, reduced revenue due to less favourable market conditions was partially offset by lower provisions and good expense management.

And in the Private Client Group, earnings rose from a combination of higher fee-based revenues and commissions and lower costs.

Slide 21 - Strong 2004 Performance Against Peer Group

BMO had a strong first quarter building on a strong 2004.

Last year, we performed well in absolute terms, and compared to the rest of the financial services industry.

On this slide you see the 2004 Canadian Bank Scorecard, which shows BMO's relative performance to our Canadian Peer Group. Green shows those measures where we ranked better; red means we've fallen short.

You can see the strength of our 2004 financial results. In 25 out of 35 measures, we ranked better than the other Canadian Banks.

We had good revenue growth, top tier expense management, and we made good progress in closing the productivity gap on the industry leader.

The results of our efforts show in the price of the stock. Stock price, of course, is subject to many variables. We cannot control all of those variables – everything from the interest rate environment to the value of the U.S. dollar is well beyond our control.

But we manage the best we can to anticipate these variables, and respond to protect your investment.

The rise of the Canadian dollar against its U.S. counterpart, for example, affects both revenues and expenses as I mentioned earlier. We can manage for the effects of foreign exchange volatility.

We have a relatively well-matched U.S.-dollar balance sheet, as well as a program to hedge our expected U.S.-dollar earnings. As a result, we have been able to reduce the impact on our bottom line due to the sharp decline in the U.S. dollar.

The point here is that, while there are many factors beyond our control, we remain tightly focused on managing the factors we can control.

We will continue to run the company in a prudent manner.

We will continue to ensure that our corporate governance practices are among the best.

We will continue to focus on providing better service and products for our clients and customers.

We will continue our commitment to return superior shareholder value to you who have shown such confidence in us by investing in BMO.

SLIDE 22 - 2005 Financial Targets

And with this in mind, here are our goals for 2005:

Earnings per share growth of 3 to 8 percent, excluding reversals of our general allowance in 2004;

Return on equity of 17 to 18 percent;

Provision for credit losses of $400 million or less, now anticipated to be $350 million or less

Tier 1 Capital Ratio of at least 8 percent; and

A cash productivity ratio improvement of 150 to 200 bps.

Those are our goals. I am looking forward to the year ahead, and to reporting a year from now on how your company has reached them.

Thank you.