Bonjour.. I’m pleased to be here today. As you may know, last year I spoke about the Bank of Montreal’s commitment to financial leadership and today my message is: in these challenging times, Bank of Montreal remains committed to financial leadership.
What does financial leadership mean for me?
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It's about achieving top tier performance
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It also means following the best practices possible in applying accounting standards.
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It means providing full disclosure of all business activities
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And it's "calling it like it is", when things don't go the way you like.
This morning I'll discuss:
2001 Results
Let’s begin with the 2001 results. Financially it was a difficult year, and our share price reflected this.
Before presenting our numbers, I’d like to sketch out the larger picture. We got off to a slow start on the retail business in Canada when we put 1,000 new front-line sales staff in the branches. While this initiative positioned us well for future growth, we experienced a decline in revenue that impacted our earnings. As you will see in this quarter’s results, we are now seeing the benefits of this investment.
At the same time, equity markets slowed affecting our Private Client Group and some of our Investment Banking Group.
Lastly the deepening U.S. recession impacted our corporate lending business south of the border. As a result we completed a comprehensive review of our balance sheet which prompted us to increase our provisions for credit losses and write-down certain investments totaling $414 million after-tax.
This led to reported net income of $1.5 billion for fiscal 2001, down from $1.9 billion reported in 2000. Cash earnings per share excluding non-recurring items was $2.68, down from $3.05 in the previous year.
Despite our higher provision for credit losses in 2001, Bank of Montreal maintains one of the strongest credit portfolios in the industry. We’ve consistently outperformed the other Canadian banks in this area. Our 12-year average provisioning ratio of 41 basis points compares favourably to the Canadian peer group average of 64 basis points. Our sophisticated credit management methodology provides the Bank of Montreal with a competitive advantage.
Our Return on Equity for 2001, at 13.8% was down from 18% reflecting this challenging year.
The downturn also affected the performance of each of our operating groups. Excluding non-recurring items, net income in our Personal & Commercial Group was $795 million in 2001, slightly below the earnings in 2000.
In Canada, revenue increased on higher volumes while margins were relatively flat in the declining interest rate environment. In the U.S., the Harris retail business was buoyed by strong growth, which we continue to experience in 2002. Expenses increased early in the year as investments were made in strategic initiatives.
Net income for the Investment Banking Group declined from $603 million to $507 million as a result of the higher provisions for credit losses and write-downs announced in the fourth quarter were partially offset by improved performance in capital markets.
Net income for the Private Client group fell from $190 million in 2000 to $121 million in 2001 reflecting the effect of significantly weaker equity markets, which affected our full-service business and direct investing.
First Quarter 2002 Results
Now let’s turn to our first quarter 2002 results. These numbers, which were released this morning, reflect important initiatives that we’ve now undertaken. These steps include a renewed emphasis on revenue growth in each of our businesses. We’re focusing on organic growth as well as selective acquisitions. The Chairman will discuss some of these steps more fully.
We are committed to actively managing expenses to keep them well below revenue growth. Some of the steps we’ve taken include managing staffing and salary levels and significantly reducing discretionary expenses such as travel and consulting.
These initiatives are starting to have an impact. Compared with the results from the fourth quarter of 2001, the first quarter 2002 numbers show a significant improvement.
Cash earnings per share rose $0.50 from Q4. In fact, at $0.75/share these earnings are unchanged from Q1 last year when the economic environment was very different. And if you adjust for the higher level of loan loss provisions offset by the effect of the change in accounting for goodwill amortization, earnings improved. That $0.75/share translates into a net income of $372 million.
Our share buyback program, which was completed in Q4 2001, helped strengthen our cash EPS for the first quarter and will continue to benefit our earnings per share throughout 2002. The buyback program returned $2.5 billion of capital to our shareholders.
The Bank’s first quarter revenue is 2.6 percent higher than the same period last year. Increases were driven by growth in the Canadian and the U.S. retail segment as well as by improvements in our interest rate-sensitive businesses. However, these gains were somewhat offset by lower trading and fee based revenues.
As I explained, we’ve also kept down expenses. Expense growth was limited to $13 million. That’s a rise of less than 1 per cent from the fourth quarter, and reflects the benefits of the cost management program.
Our expense-to-revenue ratio of 66.3 percent, which is our primary measure of productivity, is slightly higher than it was in the same quarter last year. But this number is showing the right trend as it has declined from 68.1% last quarter.
The same positive story is evident when we look at the operating groups. Thanks to strong revenue growth of 7 percent in the US and Canada, our Personal and Commercial Group improved its performance compared to Q1 last year.
Our Investment Banking group’s numbers were also better than Q1 2001 because of improved expenses and continued momentum in the interest rate-sensitive businesses. The Private Client group also performed well despite challenging market conditions.
Our Outlook for 2002 reflects our confidence in the initiatives we’ve put in place, while at the same time it recognizes the difficult environment.
More specifically, we expect to:
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Achieve cash Earnings per Share growth of 8 to 12 percent
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Have a cash Return on Equity of 14 to 15 percent
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Maintain our Provision for Credit Losses at 40 yo 50 basis points, down from the 2001 leve of 60 basis points
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And Maintain a Tier 1 capital ratio of at least 8 percent. This ratio is our primary measure of capital adequacy.
We continue to view these as realistic targets in the current economic environment and are determined to meet or exceed them.
Full Disclosure
Financial leadership goes beyond financial performance – it includes financial reporting. And in this area we are recognized as a leader within Canada.
While many commentators are now talking about the need for transparent disclosure and principle-based accounting, Bank of Montreal has long been doing this by providing disclosure that is:
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Relevant, providing our readers with insights into our strategies, management practices, risks and the performance of our major businesses.
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Balanced, identifying both the positive and negative aspects of our businesses, both in absolute terms and relative to our peers.
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Reliable, supported by a comprehensive system of internal controls and oversight.
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Timely in its delivery
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And solidly based on accounting principles that fulfill the spirit as well as the letter of the regulations
Our leadership position is well recognized through awards of excellence for our annual reports in both Canada and the United States. And we are committed to maintaining our leadership position.
It is absolutely essential to have those standards and procedures in place. But I’d like to also emphasize that there is no substitute for high ethical standards. I am proud to tell you today that the professional staff at the Bank Of Montreal are exceptionally well qualified and have the highest ethical standards.
That’s financial leadership that shareholders can depend on.
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