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BANK OF MONTREAL GROUP OF COMPANIES 181ST A N N U A L R E P O R T 19 9 8 98THE YEAR EVERYTHING CHANGED PERFORMANCE FOR 1998 NET INCOME ($ millions) 1,350 1,305 1,168 986 825 709 640 Net Income up 3.5% 595 522 90 91 92 93 94 95 96 97 98 FULLY DILUTED EARNINGS PER SHARE ($) 4.62 4.66 4.13 3.38 2.97 2.55 2.31 2.36 EPS of $4.66 2.10 90 91 92 93 94 95 96 97 98 RETURN ON COMMON SHAREHOLDERS’ EQUITY (%) 17.0 17.1 15.0 14.9 15.4 15.2 14.6 14.1 14.1 ROE at 15.2% 90 91 92 93 94 95 96 97 98 ROE OBJECTIVE (15–17%) TOTAL RETURN TO SHAREHOLDERS 15.9 ($ billions) 14.6 8.8 Shareholder Value up $1.3 billion 2 Chairman’s Message 5.8 4.0 4.2 5 A Different World 2.8 13 President’s Message 1.2 (0.4) 17 Performance at a Glance 90 91 92 93 94 95 96 97 98 20 Management Analysis of Operations 68 Consolidated Financial Statements 92 Glossary 93 Corporate Governance 97 Shareholder Information BANK OF MONTREAL GROUP OF COMPANIES BANK OF MONTREAL ATAGLANCE THE BUSINESS Personal and Commercial Personal and Commercial Financial Services (PCFS) provides a full range of financial products and services to Financial Services (PCFS) about six million Canadian households and commercial businesses, with an aim of achieving an appropriate value proposition for each relationship. Working with other Bank groups, PCFS meets the sophisticated demands of its clients as changing demographics cause a shift in focus to wealth management and retirement planning. Harris Regional Banking Harris Regional Banking is one of the largest community banking networks in Chicago and surrounding communities, and one of the premier mid-market corporate banks in the U.S. Midwest. The centrepiece of our U.S. strategy, Harris serves individuals, small businesses and mid-sized corpora- tions, providing a comprehensive range of banking, trust and investment services. Electronic Financial Services (EFS) Electronic Financial Services (EFS) is a diverse group of businesses that use new technologies and channels of distribution to provide exceptional service to a wide range of ® ® clients. The group includes mbanx , telephone banking, credit and debit cards, Cebra®† Inc., North American cash management, BMO Global Custody, and the Bank’s interest in Grupo Financiero Bancomer. Investment and Corporate Banking (I&CB) Together, Nesbitt Burns, Global Treasury and Trading, the Asset Management Services Group, the Merchant Bank and Global Corporate Banking provide a full range of products and services to corporate, institutional and individ- ual clients. Key components include complete investment and corporate banking services, wealth management alternatives and a customized financial solution approach for all customer segments. Portfolio and Risk Management The Portfolio and Risk Management Group (P&RMG) was formed in 1998. This group brings together under one Group (P&RMG) umbrella the enterprise-wide risk management and corporate treasury functions along with corporate asset portfolio management, global financial institutions and governments and trade finance. A rapidly evolving global banking industry demands we develop new ways to assess business opportu- nities and manage the associated risks. BANK OF MONTREAL GROUP OF COMPANIES BANK OF MONTREAL IS A HIGHLY DIVERSIFIED FINANCIAL SERVICES INSTITUTION OFFERING A FULL RANGE OF PRODUCTS AND SERVICES IN ALL THREE NAFTA COUNTRIES. THESE ARE THE OPERATING DIVISIONS THAT MAKE UP THE BANK OF MONTREAL GROUP OF COMPANIES: VOLUME* GROWTH HIGHLIGHTS STRATEGY ■ Grew the mortgage portfolio by 15% to $35 billion. ■ Improve technology and access channels to 63.4 ■ Announced agreements with The Great Atlantic and Pacific enter new markets and reduce operating costs. 55.3 58.7 48.9 52.4 Company of Canada Limited (A&P) and Canada Safeway ■ Retain and grow customer relationships through Limited to open in-store branches. improved knowledge management. ■ Opened 10 in-store locations in fiscal 1998. ■ Elevate workforce competencies in the area of ■ Implemented the Private Client Service Promise, providing customer service and sales management. one-stop banking and uniformity of services. ■ Redesign key processes to deliver improved ■ 94 95 96 97 98 Redesigned commercial credit approval system to provide customer service. sales and service capabilities. ■ Loan growth of 22% and growth in fee revenue of 39%. ■ Continue to expand our Midwest mid-market ■ 31.1 Double-digit growth in retail deposits – twice the market rate corporate franchise. 25.8 of growth. ■ Develop retail franchise to become a dominant 23.0 20.5 ■ 16.9 Retail market share in Chicagoland has tripled from 2.7% force in the Chicago area. in 1994 to 8.2%. ■ Grow wealth management business in the ■ Consistently high customer satisfaction scores. Midwest, Arizona, Florida and nationwide. ■ Expanded trust services in Florida to full range of banking ■ Continue structural cost reductions through 94 95 96 97 98 services. standardized processes and continued integration of North American operations. ■ mbanx achieved a 95% customer satisfaction rating and added ■ Develop a deeper knowledge and understanding over 50,000 clients for a total of 151,700. of our customers. 10.2 ■ New Client Contact Centre strategy ensures the highest quality ■ Continually look for innovative applications 7.7 6.0 of service across different channels. of technology. 4.5 5.1 ■ Enhanced MasterCard®* web site allows customers to check ■ Create customer-focused solutions through the balances and review transactions. leveraging of technology and client information. ■ Cebra’s Internet-based tendering service MERXTM* had strong ■ Create value through strategic alliances as 94 95 96 97 98 growth and currently has 200,000 government tender a means of delivering the best customer documents on its web site. service possible. ■ Formed an alliance between our North American Cash ManagementGroupandCheckFree®1 Corporation for automated A GLANCE BMO AT clearing house processing, creating greater economies of scale. ■ Maintained leading market share position in M&A advisory ■ Solidify leading market share for specific 95.4 business, block trading of Canadian equities and top investment and corporate banking activities 80.6 research ranking. in Canada. 53.6 ■ Launched Nesbitt Burns Quadrant ProgramTM1 allowing ■ Align all functions to better meet customer needs. 45.6 ■ 32.7 clients to custom tailor their portfolios. Expand Global Corporate Bank. ■ Introduced Nesbitt Burns Mutual Fund MosaicTM1,amutualfund ■ Integrate and expand all wealth management system that determines optimal asset mix. products, services and channels. ■ ® ■ 94 95 96 97 98 Rolled out investore Mobile, a money management store Develop enhanced derivative core competencies. on wheels. ■ Continue to grow the Merchant Bank. ■ Participated in a significant number of large Corporate Banking transactions. ■ Consolidated enterprise-wide credit, market, operational and ■ Establish a “best in class” Risk Management Group. 40.3 liquidity risk management to optimize our risk and return profile. ■ Asset Portfolio Management Group to pro-actively 30.0 ■ Finalized the segregation of the management of assets manage corporate assets, using state-of-the-art 22.0 22.9 originated from our Global Corporate Banking Group to Asset portfolio management methodology. 19.4 Portfolio Management. ■ Continue to grow collateralized bond obligation ■ Completed a US$3 billion collateralized loan obligation. portfolio during fiscal 1999. ■ Collateralized Bond Obligation Group ranks among the largest ■ Provide value-added sales and distribution high-yield managers in Canada. services for Global Financial Institutions and 94 95 96 97 98 ■ Integrated Trade Finance with Global Financial Institutions Government clients and grow Trade Finance Note: including guarantees and standby and Governments. businesses with North American importers letters of credit and exporters. * Average assets ($ billions) Powerful forces are transforming financial services around the world. Bank of Montreal responded strongly in 1998 with our proposed merger with Royal Bank of Canada. We were disappointed by the Canadian government’s decision to reject the merger, but our well-developed strategic framework for value-based management shows us the way ahead. It will be good news for all our stakeholders and, especially, for our shareholders. As we go forward, all our initiatives must pass the test of creating new wealth by building on the businesses we do best. BANK OF MONTREAL GROUP OF COMPANIES THE YEAR EVERYTHING CHANGED CHAIRMAN’S MESSAGE Our Annual Report’s theme this year makes a legitimate, effective and comprehensive a dramatic claim, but one that has been well response to the forces that are creating a new justified in the event. On January 23, 1998, financial universe worldwide. I have men- we announced our agreement to merge with tioned those forces often in earlier Annual Royal Bank of Canada, long one of our most Reports, and some of them are discussed later important competitors. Under Canadian law in these pages: globalization, the continu- such mergers require the approval of the ing integration of world markets; profound federal Minister of Finance. Shortly before demographic currents that are transforming this Report went to press, Finance Minister patterns of demand; customers who are Paul Martin announced that he would not becoming steadily more knowledgeable and approve our proposed merger and that the exacting. Running through everything is the government would consider mergers between digital revolution in information