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Thank you, Cheryl, for your introduction, and for the invitation to be here today .... and good morning everyone.
Before I begin, I'd like to mention that we are currently in our quiet period. Our first quarter ended on January 31st and those results will be released on March 2nd. Therefore, the presentation and Q&A discussion today will focus on our fiscal 2009 results and our strategy.
Slide 1 – Forward Looking Statements & Other
Also, please note the caution regarding forward-looking statements on slide one. For your information, further details about such statements are available in BMO Financial Group’s public filings. All financial numbers in this presentation – unless otherwise noted – are in Canadian dollars.
My remarks today will highlight three things:
- The change that’s been underway at BMO over the last 36 months, as we’ve executed against our strategic priorities;
- The tangible improvement in both our operating performance and financial strength, which are the direct result of those changes; and
- Why we’re well positioned for continued success in the future.
Slide 2 – BMO Financial Group – North American Footprint
Before I get started, I’d like to reflect briefly on how I view the coming changes to the global banking industry and what they mean to us at BMO.
We’re at a moment in time where a bank that’s in a strong financial position and has a clear business strategy has a unique opportunity to grow. We at BMO are in this position because of good decision-making and a clear vision of how we compete and how we manage risk.
We’re embracing global financial reform because we believe we will thrive in the emerging global market which will define the behaviour of the most successful banks. I might add, it’s the right thing to do.
With that, let me start by highlighting BMO Financial Group’s market position in the context of the North American banking industry. I would characterize BMO as a well-capitalized, strong North American player, with concentrations of retail strength in Canada and the U.S. Midwest, a successful application of the universal banking model.
As you can see from our North American footprint, we have a wealth and capital markets presence across North America. We have deep roots in both of these markets – almost 200 years in Canada and over 125 years in the United States.
Our P&C businesses are entrenched as part of the fabric of their communities. In personal banking, we have market share positions over 11% in Canada and our retail deposit market share ranks second in the Chicago area.
In Canada, we have a powerhouse commercial banking business with a 20% market share. And, given the current environment, we have an opportunity to replicate this success in the U.S. Midwest where our share is lower. I’ll have more to say on this initiative in a few moments.
Slide 3 – BMO Financial Group
As measured by market capitalization, BMO today is the 9th largest bank in North America. And, we’re one of the strongest … our year-end ratio of tangible common equity to risk-weighted assets was 9.2%.
We serve more than ten million personal, commercial, corporate and institutional customers, operating under a single vision: to be the bank that defines great customer experience.
In fiscal 2009, which ended October 31st, BMO’s revenues increased 8.4% to $11.1 billion. Net income was $1.8 billion, or $3.14 per share on a cash basis including credit losses which, as expected, were higher for the year. On an adjusted basis, cash net income was $4.02 per share. Our year-end Tier 1 Capital ratio was 12.2%. And, we paid $2.80 per share in dividends during the year, extending our payment record to 181 consecutive years.
Slide 4 – Committed to Strong Dividends
With credit losses elevated and our dividend maintained at 2008 levels, our 2009 payout was above our medium term target range. That said, we expect that the payout ratio will come down over the next year. We have demonstrated the capacity to pay our dividend and I would note that – over the past 15 years – our common share dividend has increased at a compound annual growth rate of 10.8%.
2009 was a year of continued momentum for BMO – a reflection of the strength in our core businesses that has been emerging over a number of quarters – and it was achieved despite the issues resulting from the economic environment.
Slide 5 – BMO’s Strategic Priorities
Our performance is attributable to success against the five priorities we established in 2007, and our strategy of differentiating BMO in defining the customer experience. We’re providing a value proposition that’s clearly higher touch – and rooted in listening to and guiding customers to make sense of their choices.
These priorities – which I will reference throughout my remarks – are:
- Maximizing earnings growth in our North American P&C businesses by focusing on industry-leading customer experience and sales force productivity;
- Accelerating the growth of our wealth management business by providing clients with exceptional advice, emphasizing retirement and financial planning;
- Delivering strong, stable returns in our capital markets business by providing highly targeted solutions to core clients – everywhere we compete – from a single integrated platform;
- Growing our businesses in select global markets to meet our customers’ expanding needs; and
- Sustaining a culture that focuses on customers, high performance and our people.
Our success against these priorities is evident across all of our operating groups. Let me address each business in turn.
Note that BMO employs a methodology for segmented reporting purposes whereby expected credit losses are charged to the operating groups quarterly, based on their share of expected credit losses. The difference between expected loss and actual provisions is charged to Corporate. Actual credit losses by operating group are disclosed separately.
Slide 6 – Personal & Commercial Banking - Canada
I’ll begin with P&C Canada, which is BMO’s largest business and the biggest generator of revenue and net income. The group has over 16,000 employees serving seven million customers through a national footprint of 900 branches and more than 2,000 bank machines.
In 2009, P&C Canada’s earnings increased over 15% to $1.4 billion, representing approximately 47% of the bank’s revenues. We’re delivering strong results by differentiating our business from our competitors, with a clear focus on one vision and one brand promise that both start with the customer.
Revenue growth was 8% year-over-year while expenses were up 4%. Our cash productivity ratio was 53.9% – a 220 basis point improvement from a year ago. Personal loan growth was 4.2% while deposits were up 13.6%.
Slide 7 – Personal & Commercial Banking – Canada
In line with our strategic priority to maximize earnings in our P&C businesses, we aim to succeed in the Canadian market through the quality and consistency of our customer service and through the productivity of our sales and distribution network.
Today, we’re better at identifying what customers want and need, and we're getting offers to the market faster and in a straightforward way. As an example, we simplified and enhanced our entire suite of credit card products – including the introduction of a no fee card – to deliver more rewards and make it easier for customers to choose a credit card that meets their needs.
Our distribution investments are targeted to capitalize on the highest value opportunities. Since 2006, we've built 51 new branches and redeveloped or renovated approximately 170 more.
Also – aligned to our brand promise of providing the clarity that our customers want – we’re simplifying our processes and leveraging technology to improve our customer experience, to free up frontline capacity, and to reduce operating costs.
Slide 8 – P&C Canada – Continuing to Make Gains...
There are four measures that we use to track progress against our strategy and to compare P&C Canada with our five main competitors; growth in revenue, growth in net income after tax, and our personal and commercial customer loyalty, both measured by Net Promoter Score.
We have improved in each of these measures, narrowing the gap to exemplar. At the end of 2007, we ranked fifth in both revenue and net income growth. By the end of fiscal 2009, we had moved up to second in revenue growth and first in net income growth. And, in customer loyalty for both our personal and commercial businesses, we’ve materially improved our scores and narrowed the gap to exemplar.
With P&C Canada, we’ve built a franchise that sets the tone for our entire company and reflects how we intend to compete across all of our businesses. We’re well positioned to continue growing and delivering value for shareholders and customers.
Slide 9 – Personal & Commercial Banking – U.S.
Our U.S. P&C business – Harris – serves more than 1.2 million customers in select Midwest markets. We’re based in Chicago, which is by far our largest market. We have a comprehensive and increasingly integrated distribution network, including 280 branches, a dynamic online banking platform and more than 650 bank machines. We’re ranked in the top three for retail deposit share in most markets where we compete.
Slide 10 – Personal & Commercial Banking – U.S.
Revenue in this business has grown steadily in recent years, reaching $973 million U.S. dollars in 2009, a 9% increase after adjusting for the impact of impaired loans and proceeds from the VISA IPO in 2008.
Cash net income – adjusted for the impact of credit costs and other items – has remained relatively consistent over the past five quarters.
Cost control is an enterprise-wide initiative for BMO and a focus across all businesses in the organization. We’re committed to expense management and have not shied away from tough decisions.
This is evident at Harris, where we had positive cash operating leverage of 1.6% in 2009, resulting from expense controls and an 11% reduction in our active workforce. However, non-performing loans – and the costs of managing them – have increased and will continue to mute reported profitability.
That said, our results reflect steady progress across a number of key performance measures:
- Our retail Net Promoter Score is high and continued to increase, reflecting the renewed customer focus that characterizes all our businesses – and in 2009, Harris was ranked Number One in the U.S. Midwest region for ‘customer satisfaction in retail banking’, by J.D. Power and Associates.
- Deposit growth has been strong and steady; in 2009, Harris maintained its number two rank for retail deposit market share in the Chicago metropolitan market, growing 7%, while larger banks lost share.
Harris has benefited from significant internal changes. We’ve overhauled the operating platform, brought in new leadership and hired new talent. Our particular internal focus right now is on our commercial business.
Slide 11 – Personal & Commercial Banking – U.S.
As I noted earlier, our commercial banking market share in the U.S. Midwest region is lower than it is in Canada and we have a great opportunity to improve.
Today, our leadership teams at Harris and BMO Capital Markets are working together on a plan to reorganize under a more integrated commercial banking strategy – one that best aligns our people and capital with the client potential. This initiative comes at a time when the Chicago market is undergoing enormous change. The competitive dynamic is shifting as a consequence of a number of regulator-initiated consolidations.
As a result, we have an opportunity to increase Harris’ size and momentum in the market. We intend to leverage our established platform to take advantage of an environment where many traditional competitors are sidelined or distracted.
We’re increasing our focus on advisory roles with large corporate clients. And, we’re planning to efficiently address a much larger client base.
This initiative is expected to drive our commercial market share, lower costs and improve returns in this business. It’s also expected to help build the pipeline of investment banking opportunities for BMO Capital Markets.
The earnings capacity of Harris’ core businesses will become evident as the economy recovers and our commercial strategy kicks in. Over and above organic growth, Harris is also uniquely positioned to capitalize on the changing competitive environment through acquisitions.
Slide 12 – Private Client Group
Turning now to our Private Client Group – PCG. This business provides a broad offering of wealth management and insurance to a full range of client segments, from mainstream to ultra-high net worth, as well as institutional markets. With access to BMO’s broad client base and distribution network in Canada and the United States, this business also has significant scope for expansion.
PCG offers customers a planning and advice-based approach that integrates investments, insurance, specialized wealth management and core banking solutions. Our brand prestige, recognition and trust have contributed to a strong national presence in Canada, as well as a growing national presence in the U.S., concentrated on major urban markets.
2009 revenue was just over $2 billion, reflecting a reduced level of assets under management and administration, a function of the 2008 decline in global equity markets. However, with the improvement in markets throughout 2009, the revenue trend reversed in the second half of the year, with Q4 revenue improving 5% quarter over quarter.
Private Client Group earned $381 million in the year, which was a good result, in line with our expectations. Assets under management and administration finished the year at $239 billion and resumed growth in the fourth quarter.
Slide 13 – BMO Insurance Acquisition
In 2009 – in line with our priority to accelerate growth by providing clients with the best retirement and financial planning advice – we made a strategic acquisition, adding 400,000 insurance clients and 300 new employees under the umbrella of the BMO Life Assurance Company.
This business is an excellent addition to our wealth management offering and has substantially accelerated our wealth strategy. We now have a stronger, more comprehensive product line-up for our clients, an excellent direct marketing channel and, most importantly, access to a managing general agent distribution channel across Canada with a network of 5,000 advisors.
We’re already seeing the impact of the BMO brand on the business, with good receptivity in distribution channels and excellent customer response.
Slide 14 – China: Key differentiator…
As I highlighted earlier in reviewing our strategic priorities, we’re committed to growing our business in select global markets to meet our customers' expanding needs. In 2009, we strengthened our commitment to Asia with the official opening of BMO’s expanded China headquarters in Beijing.
China remains a key differentiator for us and a strong option for future growth. The country shows a prolonged trend of wealth accumulation and BMO has an enviable position there. We’ve built an excellent long-term platform for growth, which began with the first recognition of the People's Republic of China 20 years ago. This initiative is expected to drive business for all of our operating groups.
Slide 15 – BMO Capital Markets
Our fourth business group, BMO Capital Markets, is probably the one best known to many of you, providing a full range of products and services to corporate, institutional and government clients. It’s our second largest contributor to earnings, representing approximately 31% of 2009 revenues.
We operate from 27 offices on five continents – including 14 in North America – with a full offering:
- Investment and Corporate Banking services including:
- Equity and debt underwriting;
- Corporate lending; and
- M&A.
- And Trading Products including:
- Treasury and market risk management;
- Foreign exchange; and
- Institutional debt & equity research, sales and trading.
Slide 16 – BMO Capital Markets – Equity Research
For the 29th consecutive year, we were ranked number one for Canadian equity research by Brendan Wood and our goal is to be a top three provider for Canadian equities worldwide. In the United States, we plan to move up the rankings:
- We now have 31 analysts covering 480 U.S. companies; including inter-listed stocks, we now cover 580 companies trading on U.S. exchanges;
- We’re fully integrating our entire research effort, so that U.S. investor clients will be able to access our coverage of 915 companies covered by 62 analysts.
Slide 17 – BMO Capital Markets
2009 was an excellent year for BMO Capital Markets, with revenue reaching $3.5 billion, net income of approximately $1.1 billion and an ROE of 16.4%.
Our performance reflects the strong, diversified revenue flows of the business. The low interest rate environment – coupled with our strong liquidity and capital positions – allowed us to benefit from interest rate-related trading opportunities throughout the year.
I should note net income from this source is expected to moderate. That said, steady improvement in the North American economy should lead to other capital markets opportunities – for example, equity underwriting.
We have implemented a comprehensive five-part strategy designed to produce an attractive, sustainable risk-return profile for this business, with high-quality earnings over the course of the business cycle and a target average ROE in the high teens.
Our strategy embraces BMO’s company-wide focus on the customer. We’re focused on meeting our objective of building client relationships that encompass multiple offerings.
We’re optimizing our businesses to achieve the right scale and risk-return profile. We’ve downsized or exited some businesses, while investing in others. We’ve reduced both off-balance sheet exposures and run-rate expenses. We will continue to build strong risk management capabilities through solid internal partnerships and enhanced risk transparency.
Slide 18 – Credit – Loan Portfolio well diversified…
Let me now spend a few moments reviewing credit. Our provision for credit losses in 2009 came in at $1.6 billion, which was in line with our expectations.
Gross impaired loans remain high, reflecting where we are in the cycle. We’re actively managing our U.S. book and expect that – as we go through 2010 and 2011 – these levels will decline.
Negative migration is moderating and we’re confident that the strength of our core business earnings can absorb our credit losses through the cycle. We expect to demonstrate once again in this cycle why we have earned such a strong reputation for credit management in the past. This has long been a core strength at BMO.
Overall, we expect provisions to remain elevated in 2010. However, we see credit stabilizing and our outlook for this year could have some upside.
Slide 19 – Capitalizing on Opportunities…
We continue to maintain a very strong balance sheet. As I highlighted earlier, our year-end Tier 1 Capital Ratio was 12.2% and our tangible common equity to risk-weighted asset ratio was 9.2%.
Until there is regulatory certainty with respect to global capital standards, excess capital will weigh on our ROE. That said, we wouldn’t apologize for building levels of capital that we consider prudent, given the uncertainties in the market over the past two years.
Obviously, the U.S. banking industry remains challenged. The pace of closures has been the fastest in 17 years and the restructuring process is ramping up. While we still don’t know exactly what the final language and mechanisms of regulatory reform will look like, I’m confident in saying that they’ll give rise to potential opportunities for banks with strong balance sheets, good core business performance and a firm foothold in attractive regional U.S. markets … like BMO Financial Group.
We’re looking at all opportunities in the market today and expect more to emerge. And we’ve recently demonstrated this opportunistic strategy by strengthening our business through a number of transactions:
- As I referenced earlier, our insurance acquisition significantly expanded our scale and life insurance capabilities;
- We recently strengthened P&C’s North American corporate card business with the acquisition of Diners Club North America, to combine enhanced reporting with MasterCard acceptance for commercial customers; this makes us the fifth largest issuer of corporate cards in North America;
- We’ve been in the municipal bond business since the founding of Harris Bank … and in 2008, we completed an acquisition that makes BMO Capital Markets the sixth-largest bank-qualified municipal bond dealer in the United States, and the largest in Illinois;
- In 2009, we became the first Canadian bank to launch ETFs and we recruited a top management team to secure their expertise and knowledge in this space; to date, we have launched a total of 22 new funds for this product line.
- And finally, we recently expanded our existing securities lending business, acquiring a specialized team from one of our long-time clients.
Slide 20 – BMO: Differentiating to Drive Performance & Growth
More broadly … as we look ahead, we’re excited about the platform we’ve established and the opportunities it presents:
- We have a clear North American growth strategy supported by a strong customer base;
- We have a growing global presence to support those customers and new ones;
- Our financial position is very strong, providing significant flexibility;
- Our risk management is proactive, independent and disciplined; and
- We have a strong commitment to all stakeholders including customers, shareholders and employees.
Before I invite your questions, I’d like to conclude with a final thought.
The gains we’ve made in our core businesses over the past three years reflect the fact that we’ve supported our customers. This success is attributable to our fifth strategic priority – a commitment to sustain a culture that focuses on the customer, high performance and our people.
There is a huge amount of energy behind our customer promise – more than I can recall in the time I've been with the company. This is coming through in both customer and employee feedback. And most importantly, it's coming through in our core earnings. We are positioned to generate superior performance.
Thank you for your attention. I’ll now be pleased to answer any questions that you may have.
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