Bank of Montreal Reports Record Quarter Results TORONTO, May 24, 2000 - - PDF document

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Bank of Montreal Reports Record Quarter Results

TORONTO, May 24, 2000 – Bank of Montreal reported record financial results today for the quarter ended April 30, 2000. Among the highlights:

• Net income was $497 million for the quarter, an increase of 36.6 per cent from the

prior year. Included in the current quarter results were gains of $52 million after-tax resulting from the sales of the bank’s U.S. corporate trust businesses and 17 branches in Western Canada. Excluding these gains, net income increased 22.3 per cent over the prior year.

• Revenue growth from the prior year of $235 million excluding gains, was generated

by volume growth in retail and commercial businesses and by strong equity market conditions in wealth management and institutional businesses.

• Expenses, excluding the impact of revenue-driven compensation, decreased from

the prior year by $32 million, due to reductions from on-going business operations.

• Asset quality remains sound. Gross impaired loans at the end of the quarter were

$1,189 million, up from $1,047 million a year ago. The allowance for credit losses exceeded the gross amount of impaired loans by $283 million at the end of the second quarter, compared with a $212 million excess a year earlier. Net income growth by operating and support groups was as follows:

• In the bank’s Personal and Commercial Client group, net income, excluding the

gains referred to above, increased 23.9 per cent ($45 million) over the prior year, driven by volume growth and strong expense controls.

• Net income in the Private Client group increased 71.1 per cent ($24 million) and in

the Investment Banking group increased 27.4 per cent ($38 million) year-over-year. In both groups, growth was driven by strong equity market conditions during the quarter.

• Net Income in Corporate Support areas decreased $26 million due to the inclusion,

in the second quarter of 1999, of gains on sales of bonds of lesser-developed countries which did not recur in 2000. "Our results this quarter reflect strong business performance across all our operating groups and our ability to capitalize on strong capital market activity," said Tony Comper, Chairman and Chief Executive Officer, Bank of Montreal. …/2

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"The achievement of these outstanding results reflects the bank's business focus, our

• ngoing objective of getting it right with our customers and the accomplishments of our

employees." Quarterly Highlights

Q2 2000 B/(W) Q2 1999 Q2 2000 B/(W) Q1 2000 Q2 2000 YTD B/(W) 1999 Q2 2000 $ % $ % Q2 2000 YTD $ % Reported Net income ($ millions) $497 133 36.6 23 4.9 $971 245 33.7 Fully diluted EPS $1.75 0.50 40.0 0.09 5.4 $3.41 0.92 36.9 Basic EPS $1.76 0.50 39.7 0.08 4.8 $3.44 0.93 37.1 Return on equity (%) 19.8

• 4.3
• 0.8

19.4

• 4.1

Return on equity - cash basis (%) 21.8

• 4.4
• 0.8

21.4

• 4.2

Reported results – excluding gains * Net income ($ millions) $445 81 22.3 38 9.4 $852 126 17.3 Fully diluted EPS $1.56 0.31 24.8 0.14 9.9 $2.98 0.49 19.7 Basic EPS $1.57 0.31 24.6 0.14 9.8 $3.00 0.49 19.5 Return on equity (%) 17.6

• 2.1
• 1.4

16.9

• 1.6

Return on equity - cash basis (%) 19.5

• 2.1
• 1.6

18.7

• 1.5

* after-tax gains include $44 million from the sale of the bank’s U.S. corporate trust businesses and $8 million from the sale of branches in Western Canada in the second quarter of 2000 and $67 million from the sale of Partners First in the first quarter of 2000.

Second Quarter 2000 Compared with Second Quarter 1999 Net income for the second quarter was $497 million, an increase of $133 million over the prior year. Net income for the quarter included after-tax gains of $44 million from the sale of U.S. corporate trust businesses and $8 million from the completion of certain of the previously announced sales of branches in Alberta, Saskatchewan and Manitoba. Excluding the gains, net income increased $81 million, or 22.3 per cent. High activity levels in equity markets resulted in strong growth in securities commissions and fees, underwriting fees and trading income in wealth management and institutional

• businesses. In addition, an increase in loan and term deposit volumes drove increased

revenue in retail and wealth management businesses. These increases were partially

• ffset by higher revenue-driven compensation expenses, a higher provision for credit

losses, a lower contribution from the bank’s investment in Grupo Financiero Bancomer and the impact of a reduction in net interest margin in Canada. …/3

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Second Quarter 2000 Compared with First Quarter 2000 Net income for the second quarter reflected an increase of $23 million over the first

• quarter. The first quarter of 2000 included a $67 million after-tax gain from the sale of

the bank’s investment in Partners First, a U.S. credit card issuing business. Excluding the gains on sales in both quarters, the net income increase was $38 million,

• r 9.4 per cent. Net income growth was driven by increased revenues in wealth

management and institutional businesses for the same reasons as noted above. Revenue growth was partly offset by an increase in revenue-driven compensation expenses and higher income taxes, due to a higher proportion of Canadian income. 2000 Year-to-date Compared with 1999 Year-to-date Year-to-date net income was $971 million, an increase of $245 million. Excluding the gains on sales included in the current year-to-date results, the net income increase was $126 million, or 17.3 per cent and was driven by revenue growth of $312 million, partly

• ffset by expense growth of $99 million and a $40 million increase in the provision for

credit losses. Earnings in Canada were $276 million, or 55.4 per cent of the bank’s earnings in the

• quarter. Earnings from outside of Canada were $221 million, or 44.6 per cent of total

earnings, with $157 million (31.5 per cent) in the U.S., $24 million (5.0 per cent) in Mexico, and $40 million (8.1 per cent) in other countries. During the first half of the year, equity markets were particularly strong and contributed to the overall increase in net income. Equity market volumes moderated somewhat in the latter part of the second quarter from the exceptional levels seen to that point. Strategic Highlights Bank of Montreal continued to make progress in implementing its six-point growth strategy:

• 1. Continue to aggressively build the value of Harris
• On a U.S. GAAP basis, Harris Bank earnings were US $87 million, up US $32

million, or 59.9 per cent from the same quarter a year earlier. Excluding the gains

• n sales of the corporate trust businesses and securities gains, earnings

increased 16.0 per cent.

• 2. Rapidly grow the wealth management business
• Private Client Group net income increased by 71.1 per cent and revenues by

42.4 per cent over the prior year.

• Assets under management and administration and term deposits increased

$28.2 billion, or 14.6 per cent over the prior year. …/4

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• 3. Capitalize on the bank’s strong Canadian position in personal and commercial

banking

• Residential mortgages increased by $2.7 billion, or 7.2 per cent; credit cards and
• ther personal loans increased by $1.3 billion, or 7.8 per cent; and loans to

commercial enterprises, including small business increased $1.7 billion, or 8.3 per cent over the prior year.

• In-Store branches increased by 12, to a total of 58.
• Subsequent to the end of the quarter, the bank announced the purchase of 12

branches in the high-growth Kitchener-Waterloo area from TD Financial Group.

• 4. Build on the bank’s strong leadership position in investment banking
• On a year-to-date basis, Investment Banking Group ranked #2 in corporate

underwriting and institutional equity, and #1 in research and securitizations.

• A new team was formed to lead the U.S. media and telecommunications

investment and merchant banking business and US $450 million was committed to merchant banking in this area over the next three years.

• 5. Drive e-business opportunities
• Through the bank’s joint venture with American Management Systems,

Competix.com, the bank sold its state-of-the-art loan approval software to 41 American banks.

• The bank’s joint venture with CIT Group Inc., FinanciaLinx, became the first

financing company to offer all automobile dealers in Canada access to online, real-time, Internet-based car leases and loans.

• Private Client Group introduced the BMO Investing portal web-site to assist

customers with wealth management product selection.

• The bank continued to build on its leadership position in wireless financial

services through the introduction of wireless trading with BMO InvestorLine and U.S. wireless banking in conjunction with Sprint. In addition, Bank of Montreal’s Veev wireless service offered the first Canadian wireless retail application with indigo.ca.

• The MasterCard wallet was introduced for easy on-line purchasing.
• 6. Intensely focus on cost, capital and risk management
• The bank sold its U.S. corporate trust businesses for an after-tax gain of $44

million, to re-deploy capital and resources to grow and expand its other businesses.

• The bank announced the sale of 48 branches to a group of credit unions in

Western Canada, 17 of which were completed for an after-tax gain of $8 million. The bank plans to complete the remaining 31 branch sales during the rest of the fiscal year.

• Further progress has been achieved in managing market risk, through the

capture of commodities exposures on a Value-at-Risk basis.

• The bank announced today that it may purchase up to 10,000,000 common

shares, or approximately 3.7 per cent of the issued and outstanding common shares of the bank, through a normal course issuer bid expiring October 31, 2000. …/5

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Financial Statement Highlights Revenues Total revenues for the quarter were $2,284 million, an increase of $323 million, or 16.5 per cent from a year ago. Excluding $74 million of revenues on the sale of U.S. corporate trust businesses and $14 million on the sale of branches in Western Canada, revenues increased $235 million, or 12.0 per cent. Net interest income for the quarter was $1,084 million, a decrease of $28 million from the prior year. Net interest income increased in retail and commercial and wealth management businesses due to loan and term deposit volume growth, partly offset by a lower net interest margin and lower contribution from Bancomer. Net interest margin on these businesses declined in Canada as the positive impact of rising interest rates was more than offset by the impact of additional higher-cost wholesale funding. Net interest income in institutional businesses declined as the impact of volume growth and increased net interest margin on the corporate loan portfolio was more than offset by net interest margin declines in capital markets businesses. Also contributing to a reduction in net interest income year-over-year, were gains from the sale of bonds of lesser-developed countries included in revenue in the prior year. Other income for the quarter was $1,200 million, an increase of $351 million from the prior year. Excluding the gains on sales of businesses, other income increased $263 million, or 31.0 per cent. Active equity markets benefited many of the bank’s businesses as reflected in increased securities commissions and fees, underwriting fees and trading income. Revenues for the quarter increased $161 million, or 7.5 per cent from the first quarter of

• 2000. The first quarter of 2000 included $112 million of revenues related to the sale of

Partners First. Excluding gains from the sales of businesses in both quarters, revenues increased $185 million, or 9.1 per cent. The increase was mainly due to increased equity-related commissions and fees and increased trading income. Expenses Expenses for the quarter increased $77 million, or 6.2 per cent from the second quarter

• f the prior year. Excluding an increase in revenue-driven compensation of $109

million, expenses declined by $32 million, or 2.4 per cent. This decline reflected a reduction in ongoing business operations expenses, including $64 million of cost reduction initiatives, partially offset by spending on strategic initiatives of $37 million. Expenses for the quarter increased $94 million, or 7.5 per cent from the first quarter of

• 2000. Excluding increased revenue-driven compensation of $71 million, expenses

increased $23 million, or 1.9 per cent. The increase was due to a reduction in ongoing business operations expenses, which was more than offset by higher spending on strategic initiatives. …/6

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Asset Quality The provision for credit losses was $100 million for the quarter, versus $80 million in

• 1999. The quarterly provision is based on an annual forecast of $400 million, compared

with $320 million in 1999. The annual forecast is based on a methodology used for a number of years and considers the level of expected loss in the loan portfolio, management’s view of the economic cycle, the level of impaired loans, and the balance

• f the general allowance for credit losses, which is currently $970 million. The split of

the specific and general provision will be determined by the fourth quarter. Gross impaired loans at the end of the quarter were $1,189 million, up from $1,047 million a year ago. The allowance for credit losses exceeded the gross amount of impaired loans by $283 million at the end of the second quarter, compared with a $212 million excess a year earlier. Capital Management At April 30, 2000, the bank’s Tier 1 and Total Capital ratios were 8.06 per cent and 11.13 per cent respectively, up from 7.73 per cent and 10.85 per cent at April 30, 1999, and up from 7.84 per cent and 10.99 per cent at January 31, 2000. Risk-weighted assets were $140.5 billion, an increase of 4.8 per cent from a year ago, and up 1.6 per cent from January 31, 2000. Harris Bank On a U.S. dollar/U.S. GAAP basis, Harris Bank earnings were $87 million, up $32 million, or 59.9 per cent from the same quarter a year earlier. Earnings in the current quarter included a pre-tax gain of $50 million on the sale of corporate trust businesses, while the corresponding quarter of 1999 included pre-tax gains on securities sales of $8

• million. Excluding these gains, earnings increased 16.0 per cent from the prior year.

Earnings growth was strong in community banking, private client and mid-market businesses, while a challenging interest rate environment resulted in reduced contributions from treasury and trading activities. Harris Bank earnings included in the bank’s consolidated results, on a Canadian dollar/Canadian GAAP basis, were $125 million, up 57.5 per cent from the same period last year, with a minimal impact from the U.S./Canadian dollar exchange rate. …/7

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Bank of Montreal, Canada’s first bank, is a highly diversified financial services

• institution. The bank operates in 32 lines of business within its group of companies,

including BMO Nesbitt Burns, one of Canada’s largest full-service investment firms and Chicago-based Harris Bank, a major U.S. mid-west financial institution. Bank of Montreal has an equity position in, and a strategic alliance with, Grupo Financiero Bancomer, a leading Mexican financial institution.

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Media Relations Contacts: Investor Relations Contacts: Joe Barbera (416) 927-2740 Bob Wells (416) 867-4009 Rick Kuwayti (416) 927-2740 Susan Payne (416) 867-6656 Ronald Monet (514) 877-1101 Lynn Inglis (416) 867-5452 Internet: http://www.bmo.com Notes: A live Internet broadcast of the second quarter conference call with analysts will take place on May 24, 2000, at 3:00 p.m. E.S.T. at www.bmo.com/investorrelations. The second quarter financial statements, supplemental financial information and a slide presentation to investors are available on the site. The live second quarter conference call can be accessed by calling 1-877-871-4065. A replay of the conference call can be accessed by calling (416) 626-4100 and entering the passcode 15233988. …/8

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Operating Group Review During the quarter, certain business lines were transferred between client groups to more closely align with the bank’s client segments. The mid-market corporate banking and treasury units of Harris Bank were transferred from the Personal and Commercial Client Group (P&C) to the Investment Banking Group, combining the strengths of the Harris client relationships with BMO Nesbitt Burns investment banking and capital markets capabilities in Chicago. In addition, the Canadian term deposit business and Private Client Service Centres were transferred from P&C to the Private Client Group. All comparative figures have been restated to reflect the transfers. Personal and Commercial Client Group The Personal and Commercial Client Group (P&C) provides financial services, including electronic financial services, to households and commercial businesses in Canada, the U.S. and Mexico. Net income for the quarter was $279 million, an increase of $97 million, or 52.3 per cent from the comparable period last year. Excluding the gains on sales of U.S. corporate trust businesses and Western branches, net income increased $45 million, or 23.9 per cent. Revenues for the quarter increased $172 million, or 16.3 per cent over last year. Excluding the revenues from the foregoing sales, revenues were up $84 million, or 7.9 per cent. Net interest income and other income growth of $30 million and $54 million respectively, were driven by strong volume growth across most business lines, particularly in the mortgage and commercial lines of business in Canada. Net interest margins declined in Canada as the positive impact of rising interest rates was more than

• ffset by the impact of additional higher cost wholesale funding. Gains on sales of

investments increased $15 million over the prior year. Expenses for the quarter declined by $10 million, or 1.3 per cent from last year, mainly due to strong expense controls. Earnings on the bank’s investment in Grupo Financiero Bancomer declined by $19 million, or 47.8 per cent from the prior year. The decline was largely due to a narrowing

• f spreads as Mexican interest rates declined coincident with upgrades in Mexico’s

economic status. Improvements to loan quality combined with lack of loan growth also contributed to the decline. During the quarter, Bancomer signed an agreement with Spain’s Grupo Banco Bilbao Vizcaya Argentaria (BBVA) to proceed with a merger and capitalization program. Subsequent to the end of the quarter, Bancomer received an unsolicited merger and capitalization proposal from Mexico’s Grupo Financiero Banamex-Accival (Banamex). The bank is continuing to study its options for its investment in Bancomer and is not committed to any course of action at this time. …/9

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The first quarter of 2000 included a $67 million after-tax gain on the sale of Partners

• First. Excluding the effects of that gain and the gains on sales in the current quarter, net

income decreased $2 million, or 0.8 per cent from the first quarter of 2000. The net decrease was due to a reduction in earnings on the bank’s investment in Grupo Financiero Bancomer and fewer days in the current quarter, partially offset by gains on investments and reduced expenses. In Canada, P&C introduced products tailored to the changing needs of customers, including a Five-Year Open Term Mortgage which provides security from a long-term fixed-rate mortgage with benefits of an open mortgage; a Six-Year Term Flexible Below Prime Mortgage, a competitively priced mortgage with flexible options; and Asset Based Lending, a new source of funding for mid-sized companies. Distribution strategies implemented during the quarter included the arrangement for the sale of 48 branches to credit unions in Saskatchewan, Alberta and Manitoba and an agreement to open branches in IGA supermarkets in Quebec. Twelve in-store branches were opened during the quarter. Other initiatives were the Electronic Bill Payment at the ABM and the launch of the Double Dip with Debit Card, enabling customers to earn Air Miles on debit card purchases. FinanciaLinx, a joint venture with The CIT Group Inc. expanded its product offering to cover the bank’s automobile loans. In the U.S., Chicago-based Harris Bank’s retail banking provides retail and small business customers with a broad array of products across multiple channels, including a comprehensive on-line offering, resulting in strong customer loyalty and satisfaction. Migration of customers to alternative channels has enhanced retail productivity and the introduction of credit scoring and auto decisioning is now improving small business productivity. Private Client Group The Private Client Group (PCG) encompasses all of the bank’s wealth management capabilities in six lines of business: retail investment products (including term deposits), direct and full-service investing, Canadian and U.S. private banking, and institutional asset management. Net income for the quarter was $59 million, a substantial increase of $24 million, or 71.1 per cent from the comparable period last year. Revenues for the quarter increased $132 million, or 42.4 per cent over 1999, primarily due to increased client trading volumes in both full-service and direct investing, which benefited from strong equity

• markets. Increased deposit volumes also contributed to increased revenues, partially
• ffset by reduced trading returns in the managed futures program. Expenses

increased $82 million, or 33.5 per cent due to higher revenue-driven compensation and

• ther expenses associated with the higher volumes.

…/10

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Net income for the quarter increased $9 million, or 20.3 per cent from the first quarter of

• 2000. Revenue growth was driven by increased volumes in both full-service and direct

investing, which benefited from strong equity markets and from increased volumes in term deposits. Expenses increased due to higher revenue-driven compensation, expenses associated with higher business volumes and initiative spending. During the second quarter, PCG continued to implement its key wealth management

• strategies. The PCG specialized sales force, designed to provide quality advice and

proactive sales, grew to 102 Resident Investment Advisors and 166 Investment Funds Specialists to be deployed in branches. BMO Nesbitt Burns full-service investing had an

• utstanding RRSP season, experiencing a 35 per cent increase in accounts compared

to last year. BMO Nesbitt Burns continued to expand its Online investment program with the addition of top-ranked proprietary Mutual Fund research. The direct investing line of business achieved very strong account and asset growth and BMO InvestorLine continued the introduction of Veev wireless trading launched earlier this year. PCG also introduced the BMO Investing portal web-site to assist customers with wealth management product selection. U.S. Private Banking continued its expansion initiative, focusing on staffing and development of new locations in fast growing affluent communities. PCG assets under management and administration ($187.5 billion) and term deposits ($33.9 billion) grew to a total of $221.4 billion by the end of the quarter. This represents an increase of $18.1 billion, or 8.9 per cent over the prior quarter, and an increase of $28.2 billion, or 14.6 per cent from the beginning of the fiscal year. PCG's wealth management businesses are committed to providing integrated banking and investment services to meet rapidly changing client needs in one of the fastest growing areas in financial services today. Investment Banking Group The Investment Banking Group services the corporate and investment banking needs of larger corporate and institutional clients. Net income for the quarter was $180 million, an increase of $38 million, or 27.4 per cent from the comparable period in 1999. Revenues increased by $95 million, or 16.7 per cent, driven by increased equity market activity resulting in higher trading gains, commissions, merger and acquisition fees and underwriting fees. This was partially

• ffset by an overall decline in net interest margin as the improvement in margin in the

corporate loan portfolio was less than the decline in margins in capital markets related

• businesses. Expenses were up $31 million, or 10.2 per cent over last year, due to

higher revenue-driven compensation. …/11

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Net income for the quarter increased $23 million, or 15.0 per cent from the first quarter

• f 2000. Revenues were up $91 million, or 16.3 per cent, primarily due to strong equity

market activity resulting in higher trading gains, commissions, merger and acquisition fees and underwriting fees, partly offset by lower net securities gains. Expenses increased $48 million, or 17.0 per cent, mainly due to increased revenue-driven compensation. During the quarter, the Investment Banking Group announced the creation of a BMO Nesbitt Burns team to grow its U.S. media and telecommunications investment banking and merchant banking businesses. It also announced the commitment of US $450 million ($667 million CDN) to fund merchant banking investments in this sector. In addition, the Securitization group that traditionally focused on issuers and the Credit Investment Management Group that focused on investors, were brought together under single leadership. The combination of the two groups will leverage strong securitization and credit portfolio management capabilities to provide additional products and services to both client groups. Debt Capital Markets led the final senior bond issue for 407 International’s refinancing of its senior bridge credit facility. The $400 million issue was sold entirely to Canadian investors.

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