"Results
you can count on"
Karen Maidment, Senior Executive Vice-President and Chief Financial
Officer, BMO Financial Group, at the Annual Meeting of Shareholders
Toronto, ON,
February 24, 2004
SLIDE 1 - Introduction
Thank you, Tony.
Good morning.
This is the fourth
year in which I've had the privilege to deliver BMO's Annual and First
Quarter results to you. In past years, I reported on the tough decisions
we made to reposition BMO and improve our balance sheet.
SLIDE 2
I am pleased to
report that those decisions continue to pay off. BMO Financial Group
achieved all of its financial targets for 2003.
SLIDE 3 - Fiscal
2003 Financial Results
In spite of the
challenging economic climate of 2003, BMO delivered a one-year total
shareholder return, or TSR, of 33.4%. This is more than double the one-year
TSR of 2002, and brings BMO's five-year TSR to 12.9%, up from 7.9% a
year earlier. We measure TSR by comparing our share price at different
points in time and adding dividends.
Both measures outperformed
their respective S&P 500 and TSX Composite Indexes, but our results
remained slightly below the TSX Financial Services Index. However, during
the first quarter of 2004, we were the top performing Canadian bank
stock with a 17.9% total shareholder return.
SLIDE 4
Net income for 2003
was $1.8 billion, an increase of 29% over 2002. That equates to $3.44
per share, up from $2.68 per share a year earlier. Return on equity
was 16.4%, up 3 full percentage points over 2002.
SLIDE 5
Our improvements
over 2002 were driven by lower provisions for credit losses, higher
business growth in our operating groups and lower net losses on investment
securities. These improvements were partially offset by higher income
taxes.
As you can see from
the chart, provision for credit losses fell significantly and resulted
in industry-leading credit performance. We have earned our enviable
reputation in strong credit risk management through our disciplined
approach to portfolio management and diversification, with no undue
sector or industry concentrations.
SLIDE 6
One of our major
objectives for 2003 was to improve our efficiency, which we measure
through the cash productivity ratio, or cash expense-to-revenue ratio.
This ratio is simply calculated by dividing total expenses by total
revenues. It fell to 64.5%, which means that our productivity improved
260 basis points over 2002. To look at it another way: to earn a dollar
of revenue, BMO must spend 65 cents. The falling ratio means it costs
us less to earn every dollar of our revenue and that's one way to build
shareholder value! The improvement in this ratio was well above our
targeted improvement of 150 to 200 basis points.
Our revenue rose
to $9.3 billion, an increase of 5% and expenses grew only 1%. Revenue
growth was driven by strong performance from our three operating groups:
- Personal and
Commercial Client Group;
- Private Client
Group; and
- Investment Banking
Group.
SLIDE 7
In the Personal
and Commercial Client Group, revenues rose as a result of higher volumes,
particularly in the personal banking segment. This revenue growth was
evident in both our Canadian and in our U.S. Harris franchises.
In the Private Client
Group, revenue growth was driven by improved market fundamentals, which
led to increased client trading activity, and an increase in the market
value of the assets we manage on behalf of our clients.
The Investment Banking
Group revenues benefited from higher equity origination fees and trading
revenue as well as fewer securities losses than in the prior year.
In addition to strong
performances from our operating groups, we effectively managed capital
and foreign currency exposure. Our capital remains strong with a Tier
1 capital ratio of 9.55% on October 31st. This is well above the 7%
minimum required by regulators.
We managed foreign
exchange exposures so that, when the Canadian dollar strengthened so
significantly, we lost only about 6 cents per share, which was much
less than many other Canadian companies.
SLIDE 8
We focus on growing
our businesses and profitability in absolute terms, but we also want
to perform well relative to the rest of our industry. On the screen
you can see the Canadian Bank Scorecard, which shows BMO's relative
performance to our Canadian Peer Group. We've colour-coded the scorecard
to clearly show in green those measures where BMO ranks better than
our peers, and in red where we have fallen short.
BMO's absolute performance
in 2003 was much better than in 2002. Notably, our cash productivity
ratio improved from 5th to 2nd place. In addition, our 2003 performance
relative to our North American Peer Group also improved.
SLIDE 9 - First
Quarter 2004 Results
I'd like to move
on now to the current quarter's results, which we released this morning.
Our First Quarter's numbers continue to build on our accomplishments
in 2003.
SLIDE 10
I am pleased to
announce net income of $532 million, or $1.00 per share. Excluding the
effect of certain items totaling $18 million, net income would have
been $514 million or $0.97 per share.
Return on equity
for the quarter was 18.3%.
SLIDE 11
Highlights for the
quarter include revenue growth of 3.6% compared to the same quarter
last year. We reduced expenses by about 1%, and improved the cash productivity
ratio over last year by 270 basis points to 63.9%. We remained focused
on improving our productivity - our top priority for 2004.
Another significant
factor was the reduction in provision for credit losses year-over-year
of $135 million. We provided a net amount of $15 million for credit
losses for the quarter, made up of $55 million in specific provisions
and a $40 million reduction in our general allowance.
SLIDE 12
Net income of $246
million in the Personal and Commercial Client Group was up 11 per cent
over last year, driven by revenue growth in Canada and lower expenses
in both Canada and the U.S. Net income dropped $7 million or 3% from
the fourth quarter last year due to the effect of lower interest rates.
In the Private Client
Group, net income was $55 million in the first quarter, up $20 million
or 55% from a year ago. This improvement came from revenue growth in
all our major lines of business, driven by stronger market fundamentals
combined with revenue generating initiatives.
The Investment Banking
Group's net income for the quarter set a record at $212 million. This
was up $31 million or 17 per cent over the first quarter last year and
up $24 million or 14 per cent over the fourth quarter. The improvements
came from revenue growth in fee-based businesses and reduced provision
for credit losses, which I referred to previously.
SLIDE 13 - The
New Climate for Financial Governance
I am confident that,
under Tony's leadership, we will continue to sharpen our focus on improving
productivity, improving the bottom line, and improving our return to
shareholders. But, as Tony mentioned, I would also like to take a few
moments to talk about the current climate for financial reporting.
Across North America,
the dishonesty of some has undermined investor confidence. Legislators,
regulators and the accounting profession have reacted quickly to strengthen
processes surrounding the preparation of financial statements and the
related accounting rules. They mean well, but the solutions are costly
and do not adequately recognize that many companies already have their
own processes that work very well.
Unfortunately, the
newly-imposed solutions may not be enough to restore investor confidence.
Shareholder trust must ultimately come down to a question of personal
integrity - integrity that does not rely on laws, regulations or standards.
It comes from the character of our people and the quality of our processes.
I welcome the new
principles which underlie the new environment of transparency and disclosure,
even if I question the need for more rules and regulations when guiding
principles should suffice. The bottom line is this: shareholders deserve
to know the true financial condition of the company.
In every industry,
the role of the Chief Financial Officer has come under intense scrutiny.
The financial governance issues that affect a CFO's work are now at
the top of the corporate agenda, and we have a greater opportunity than
ever before to influence a corporate culture, the hallmarks of which
are honesty, integrity, and transparency.
Protecting the
Interests of Shareholders
The Chief Financial
Officer of any company has a leadership role in protecting the interests
of shareholders. As CFO, I Chair the Bank's committee that sets the
overall policy on disclosure. The basic principle of our disclosure
policy is that no one will profit from early knowledge of material information
that is not yet available to the public. The Disclosure Committee has
the responsibility to decide whether information relating to the affairs
of the bank could reasonably be expected to result in a material change
in our share price. We have very strict policies and practices on how
to handle this information. Wherever possible, we exceed the regulatory
requirements.
And as CFO, I have
always felt that my personal reputation is linked to the integrity of
our financial reporting. I know Tony feels the same way. It didn't take
legislation like the Sarbanes-Oxley Act to tell us that we were personally
signing off on the financial statements. Sarbanes-Oxley compels CEOs
and CFOs of all public companies operating in the U.S. to certify the
accuracy of their financial statements. But as far back as ten years
ago, the Bank of Montreal put in place a comprehensive process to hold
our senior management personally accountable for the results we achieve
and the manner in which we achieve them.
Each quarter, ninety
senior executives, on behalf of the entire bank, attest in writing to
Tony and I personally that the reported results for their areas of responsibility
are true and accurate.
In addition to high
accountability standards, BMO is routinely cited for the volume, depth,
transparency and overall quality of the financial details we supply
to our shareholders and the public. Our annual report has received no
less than 17 awards since 1992.
We believe that
when we are open and honest in explaining our results - both good news
and bad - we earn the trust of investors over the long-term. We believe
in using plain language. Investors should be able to readily understand
our financial report. Even knowledgeable investors can get lost in the
complexity of the financial reports of some large companies like ours.
This is not their problem; it is the company's problem. While there
is still room for improvement, I am determined to report our results
in a way that all investors can understand.
Finally, I want
to emphasize that, in today's business climate, financial management
means more than simply following Generally Accepted Accounting Principles
or GAAP. A CFO must do much more than manage the company's accounting
practices. We have a key responsibility to help the company make the
right choices. The raw numbers that we work with day-by-day become tools
to steer the strategic objectives of the company year-by-year.
And we will use
the numbers to assess our performance.
SLIDE 14
Here are our Financial
Targets for 2004:
- earnings per
share growth of 10 to 15 percent;
- return on equity
of 16 to 18 percent;
- provision for
credit losses of $500 million or less;
- Tier 1 Capital
Ratio of at least 8 percent; and
- cash productivity
ratio improvement of 150 to 200 bps.
SLIDE 15
Those are our targets.
Those are the results we are committed to achieving and I am pleased
to tell you that we are on track based on our first quarter performance.
SLIDE 16
Above all, you can
always count on the integrity of our results.
Thank you.