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Thank you, Kevin for your introduction and good morning everyone. As the slide in front of you points out, my remarks this morning may include forward looking statements.
Before I begin, on a personal note, I’d like to take a moment to recognize a former Chairman and CEO of the Bank of Montreal. Our old friend and colleague Bill Mulholland passed away over the weekend at the age of 81. It was on Mr. Mulholland’s watch that BMO acquired Harris Bank in 1984 and Nesbitt Thompson in 1987. Canada’s business world has lost one of the most legendary figures of the 20th century.
Turning to this morning's presentation, I appreciate the opportunity to talk about BMO Financial Group – where we are, and where we’re headed.
We began a process of change and renewal since I assumed the role of Chief Operating Officer in January 2006. The recent transition from Tony Comper has gone smoothly – and the changes are now translating into outcomes.
The management committee has gone from eight members to 16, many of whom assumed new leadership positions in the last year.
And while the same sound strategic priorities continue to guide the decisions of management, we know that we have yet to unlock the tremendous potential of BMO. To do this, we have shifted the focus of our energy to growth and our belief that success in the sectors and geographic regions where we compete, will only come from growing faster than the market.
Central to growing the revenues of the Company is the relationship we have with our customers because that historically has been the hallmark of our success, the defining characteristic of BMO when we win in the market.
In the past, we have correctly said we intend to be the top performing financial institution in North America, and today I am going to be very clear about how we are going to achieve that goal. Let me go back to the customer and our commitment to recognition for superior customer service.
There has been a profound shift in the relationship between consumers and the services they use – a shift that affects all companies, in every industry. It is a shift in the power relationship between buyers and sellers, consumers and providers that recognizes the strength of market pull and the futility of supply push. It is something we give a lot of thought to and why we have created new enterprise roles like Head of E-business.
Some financial institutions compete on the basis of price – and more and more non-financial retailers believe they can enter our arena leading with price.
In contrast, we compete on the basis of service and giving customers what they want. Our research is very clear. The majority of customers want honest, straight-forward communication and no jargon. They don’t want more information; they want better information – information they can understand and learn from. They want meaningful choices – not laundry lists. They want clear, up-front, transparent guidance and advice. This is what we are focused on delivering.
So what is it that we are doing? Let me move to the actions we are taking, how we are measuring our results and where we see opportunities for growth.
We can see the focus on customers and growth clearly reflected in each of our businesses’ financial results.
In the third quarter, we earned $660 million, representing cash earnings per share of $1.30. Our return on equity was 18%. And while we did record a loss in commodities, we have now reduced the size of our exposure to a much lower level.
Excluding the restructuring charge announced in the first quarter and the impact of commodities losses, we’ve had three very good operating quarters: net income is up 11% year to date and revenue is up 7% in our four operating groups. ROE was 19.8%.
For the last five years, we have relentlessly pursued productivity improvements and it has been paying off. From 2002 to the end of 2006, our cash productivity ratio improved by 560 basis points.
In order to continue these reductions and at the same time provide the resources to generate incremental revenue, we knew we would have to derive a portion of future gains from streamlining the organization in which the businesses operate.
In January, we announced an initiative to accelerate that result. When we looked at our cost base, we saw we could improve productivity by eliminating duplicate functions between the corporate centre and the lines of business and shift more resources to the front line.
We have identified $300 million in run rate improvement and have established internal quarterly targets through to 2009. We are exceeding them. On a year to date basis, excluding the items previously mentioned cash productivity has improved by 146 basis points.
While the businesses continue to invest in the sales engine, the cost savings should allow them to improve their expense to revenue ratio in line with an overall expectation of about 100 to 150 basis points annually. The primary beneficiary of this initiative is Personal and Commercial Banking in Canada and the U.S., which together account for about half of BMO’s bottom line.
In P&C Canada, there has been a major renewal of management. The new executive team has considerable line experience, and throughout the organization managers are closer to the customers, and decision-making is closer to the front line.
We moved from four to six divisions and three of the leaders are new since the beginning of the year -- one recently recruited to BMO as SVP, Greater Toronto Area.
More than a third of the 28 district heads within these divisions are also new appointments. The focus is squarely on customer experience, performance management, small business delivery – reclaiming share.
We’ve introduced a single branch scorecard across our network focusing our employees on the key metrics to drive revenue growth, including the toughest loyalty measure: the Net Promoter Score.
Our branch network is key to our strategy and, year to date, we’ve opened seven branches, in places like Milton, Ontario and redeveloped 20 branches. We will concentrate our investment spending in our branch network on high growth areas. We’re also going “green” by deploying emission free electricity under a new contract that will ultimately support up to 53 locations. This should position BMO as the premier financial institution in Canada on Bullfrog Power’s green index.
We are differentiating ourselves with new offers and investing in our sales and distribution network. Earlier this year, we rolled out the second release of our sales and service software, Customer Connect.
We’ve put new tools in the hands of our bankers. Technology like a Sales Navigator that proposes products relevant to their particular customers, a shopping cart and sales leads specific to that customer. There is also a one-click customer welcome offer that includes a Line of Credit.
And we have:
- Ensured that we are serving customers consistently in every location regardless of their home branch
- Introduced End-to End tracking of customer inquiries and issues
- Started to use technology to increase the ATM limits before the customers’ request them.
So how is all of this paying off?
It is returning at least 40 minutes per day to each individual front line banker in the system.
It’s paying off in a record quarter for P&C Canada, with earnings of $350 million, up 14% over a year ago, excluding the IPO gain from Mastercard International and tax recoveries.
It’s paying off in cash productivity, also a record at 53.3%.
A big contributor to the record results was Commercial banking. Year over year, revenue in commercial banking grew almost 7%, loans grew 7.7%, and deposits grew 9.6%. We have a strong customer-focused operating model. We continue to rank second in business banking market share which increased strongly for the second quarter in a row, rising 56 basis points year over year. The outcome of a deliberate focus.
It’s also paying off in our cards business, where core revenues grew 13% year over year and volume grew 12.4% year over year. We attribute part of this success to a greater emphasis on branch-originated sales. Year to date we’ve seen new cardholders rise by 40% and the number of applications coming from the branches has increased by 118%.
In addition we launched a Student Price Mosaik Mastercard which provides students with exclusive discounts on clothing, food and entertainment at 10,000 locations across Canada to meet their needs and save money on their everyday expenses.
We are looking for the best way to distribute other products through our branches. In our mortgage business we exited the broker channel which has low spreads and fewer cross-sell opportunities. We are hiring more mortgage specialists -- 45 so far this year, 19 more by fiscal year end -- and plan to increase the number by another 80 next year. We expect to increase volumes to regain lost share --but with a much higher margin.
Another program designed to take share is our loyalty program that rewards AIR MILES Collectors for all of their debit card transactions.
Since 2002, total debit card transactions have grown by 73%. With more than 9 million active AIR MILES collectors in Canada, our Power Switch program makes it easy for collectors to switch all their banking to BMO. We are confident that this will build deposits. For example, in July, the first full month since the launch, account openings were up 25% over the prior year.
The Private Client Group serves the fastest growing segment of our market. PCG has been highly effective in using client insight to help focus on where customer need is the greatest but where sales productivity can still improve. A few years ago, consumers asked, “What is private banking?” Today they know, and BMO defines what private banking is in Canada. Euromoney magazine named BMO Harris Private Bank as Best Private Bank in Canada for 2004, 2005 and 2006.
The Private Bank is partnering to meet the needs of our commercial customers. In major centres, we have established a new retail concept. It’s a place where commercial customers are at the centre of our thinking, where we can showcase how much we have to offer them, in an environment that addresses their commercial needs but also extends to comprehensive resources of a private banking office.
The Private Client Group is delivering outstanding results. In fact, the best we’ve seen since we sold our U.S. brokerage in 2005. Our net income for that year was $314 million. Last year, net income grew to $355 million. Year to date, we have already reached $301 million, with one quarter to go.
We continue to invest in this business with new products:
- MyLink provides Investorline customers with information specific to their holdings and the ability to chat through a secure in-box.
- Life Stage Plus Funds provides customers market returns plus a guaranteed maturing amount with staggered maturity dates to suit investors’ individual cash flow needs.
We are focused on:
- Positioning ourselves as a leader in the retirement market
- Investment Advisor productivity
- Leveraging our entire distribution network to drive referrals
PCG’s efficiency is top decile, with a cash productivity ratio of 68.4%.
BMO Capital Markets reported net income of $196 million in the third quarter, and excluding the impact of the commodities losses, these are exceptional results. Adjusted for those losses, earnings grew 45% from a year ago to $293 million driven by trading revenues, merger and acquisition fees and debt underwriting with a cash return on equity of 22.5%. In both Canada and the U.S. our objective is to reinforce our leading position by focusing on specialized industry sectors such as Mining, where we are a global leader.
We’re investing heavily in our U.S. Mid Market business -- distinguishing ourselves as a universal, integrated corporate and investment bank with a full product offering and cross-border capabilities.
We are leveraging our balance sheet to capture ancillary business and targeting lead relationships among mid-market public and private companies with sales between US$250MM to US$2 billion.
In the last two years we’ve recruited sector and product talent for key roles including new heads at M&A, Energy, Media, Communications & Telecom and recently, Commercial & Industrial. US issuer client revenues, including investment banking revenues, are up significantly year-over-year.
Finally, let me turn to the business line where we get the most questions about our future plans: P&C U.S.
This group represents about 6% of the total assets of the bank, and about 5% of BMO’s total bottom line. Because of the strength and visibility of the Harris Brand and the quality of the customer base there is performance leverage in this business. A year ago, Ellen Costello and the management team took steps to bring lower performing branches up to a higher standard over the last year and we are seeing results. For the past three quarters, we are averaging acquisition integration expenses of between $4 MM and $6 MM, but prior to those expenses, Q1, Q2, and Q3 of this year generated consecutive growth in earnings – up 19% from Q4 2006.
We have a very strong franchise here with an enviable network of high quality locations, strong customer satisfaction and loyalty scores, and a breadth of service beyond the reach of smaller competitors. We see real opportunity in business banking which represents a much smaller portion of the business in the U.S. than in Canada and we still have significant costs to take out of the back office which is much less automated than our Canadian business.
With the short-term challenge in the U.S. housing market, we are seeking out owners of banks who might now consider selling their bank. Our platform can support a much larger network than we currently have. We can gain real leverage as we add more branches to our system.
We have targeted the Midwest, which has a population of about 66 million people – double that of Canada – and a GDP of almost $2.7 trillion U.S. dollars – again, about double Canada’s. This is a highly diversified economy, and the banking industry is still fragmented, with great potential for continued BMO expansion.
We have applied a seasoned and disciplined approach to acquiring banks that are a good strategic and cultural fit. Since 2001, we have nearly doubled the number of branches, and nearly tripled the volume of loans. We remain focused on our goal to become the leading P&C bank in the Midwest. Several years ago, we had no representation in Indiana or Wisconsin. Now we have 51 branches in Indiana, and will have 40 full service branches in Wisconsin when the transactions we recently announced close.
The opportunity for Harris is disproportionately higher than the capital we have invested.
The growth aspirations for all BMO’s business lines need to be considered against the current economic backdrop. We’ve seen resilient growth in both Canada and the U.S., but the recent volatility in financial markets and stress in credit markets raises the risk of slower growth. This volatility and stress brings both challenges and opportunities.
In our capital markets business, we expect some headwinds in equity underwriting and merger and acquisitions, but market volatility and wider credit spreads may ultimately benefit our trading businesses and corporate loan book.
Harris draws its customer base from some of the most desirable market segments in the Midwest. In the current difficulties facing the U.S. housing markets, foreclosures are up in every state in the U.S. but Illinois. We attribute that to the fact that the region did not experience the rapid price escalation of the East and West coast markets.
To further underscore this point, consider the speech Fed Chairman Bernanke gave two weeks ago at the Federal Reserve Bank of Kansas City's Economic Symposium. He was talking about the housing market and its impact on the economy, and he pointed out that delinquencies for sub-prime mortgages with adjustable rates rose to about 13½% in June, more than double the recent low seen in 2005. Harris does not originate sub-prime and has very little direct retail exposure with sub-prime characteristics. Harris’s overall delinquency rate was 0.4% in June.
This reflects our consistent underwriting standards. In fact, just maintaining our current lending standards we have the opportunity to build market share without changing our risk appetite. We are open for business.
We continue to expect growth in our retail market as margins are improving in Canada and we are seeing stabilization in the U.S.
We’ve made important changes that I believe will result in better performance. We’ve stepped back, critically assessed every option, every business, every strategy. We have clarified our thinking and it’s really quite simple.
- We want to be clearer in how we engage with our customers and how we work with them.
- And we want to make it easier for our customers to work with us.
We are pushing harder to reach performance levels beyond what we’ve seen to date.
We have made substantial changes to prepare ourselves for a customer-focused world with
- New Appointments
- Key Hires
- Allocated resources where they have the highest impact on customers.
- Introduced new products and services that respond to customer needs.
- And we continue to look for growth opportunities.
The consumer is changing and we want to be at the forefront of this change.
I would be pleased to answer your questions.
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Caution Regarding Forward-Looking Statements
Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the ‘safe harbor’ provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for 2007 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic conditions in the countries in which we operate; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 28 and 29 of BMO’s 2006 Annual Report, which outlines in detail certain key factors that may affect BMO’s future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statement, whether written or oral, that may be made, from time to time, by the organization or on its behalf.
Assumptions about the future performance of the Canadian and U.S. economies and how that will affect our businesses were material factors we considered when setting our strategic priorities and objectives and in determining our financial targets, including provisions for credit losses. Key assumptions included that the Canadian and U.S. economies would expand at a moderate pace in 2007 and that inflation would remain low. We also assumed that interest rates in 2007 would remain little changed in Canada but decline in the United States and that the Canadian dollar would hold onto its value relative to the U.S. dollar. The Canadian dollar has strengthened relative to the U.S. dollar and interest rates have increased in the United States, but we believe that our other assumptions remain valid. We have continued to rely upon those assumptions and the views outlined in the following Economic Outlook in considering our ability to achieve our 2007 targets. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies. Tax laws in the countries in which we operate, primarily Canada and the United States, are material factors we consider when determining our sustainable effective tax rate.
Assumptions about the performance of the natural gas and crude oil commodities markets and how that will affect the performance of our commodities business were material factors we considered in making the forward-looking statements regarding the commodities portfolio set out in this document. Key assumptions included that commodities prices and implied volatility would be stable and our positions would continue to be managed with a view to lowering the size and risk level of the portfolio.
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