BMO(BMO) - 2023 Q4 - Annual Report

Business Review This section outlines BMO's identity, 2023 performance, strategic initiatives, and leadership messages Who We Are BMO Financial Group is North America's eighth largest bank by assets, serving 13 million customers globally BMO Financial Group at a Glance | Metric | Value | | :--- | :--- | | Customers Globally | 13 million | | Total Assets | $1.29 trillion | | Ranking | 8th largest bank in North America by assets | | Established | 1817 (206 years of service) | - BMO's operations are structured into three main segments: Personal and Commercial Banking, BMO Wealth Management, and BMO Capital Markets[11][12][13] Financial Performance In fiscal 2023, BMO's financial performance fell short of medium-term objectives despite maintaining its dividend record 2023 Financial Performance vs. Medium-Term Objectives | Performance Measure | Medium-Term Objective | 2023 Reported | 2023 Adjusted | | :--- | :--- | :--- | :--- | | EPS Growth | 7% to 10% | (71.6)% | (11.4)% | | ROE | 15% or more | 6.0% | 12.3% | | ROTCE | 18% or more | 8.2% | 15.8% | | Net Operating Leverage | 2% or more | (45.9)% | (8.2)% | | CET1 Ratio | Exceed regulatory req. | 12.5% | N/A | - BMO has the longest-running dividend payout record of any company in Canada, at 195 years, with an annual dividend yield of 5.5% at year-end[22] - On an adjusted basis, net income was generated in Canada/Other (55%) and the U.S. (45%), with Canadian P&C contributing 40% of reported net income[22] Digital Strategy and Leadership BMO's "Digital First" strategy enhances customer experience and drives efficiency, earning significant industry recognition in 2023 - BMO's digital leadership was recognized with several awards in 2023, including the highest score in the J.D. Power Canada Online Banking Satisfaction Study[24][25][26] Chair's Message The Chair highlighted the successful Bank of the West acquisition, which expanded BMO's U.S. footprint and strengthened its strategy - The strategic acquisition of Bank of the West significantly expanded BMO's presence in the Western and Midwestern United States[28] - The board is now gender-balanced with seven women and seven men, reflecting a commitment to diversity[29] Chief Executive Officer's Message The CEO highlighted strategic progress, including key acquisitions, despite a challenging global economic environment - The successful acquisition of Bank of the West established BMO as a top 10 U.S. bank and the eighth largest in North America by assets[31][34][37] - Through its BMO EMpower 2.0 plan, the bank will deliver more than $40 billion in community support across its U.S. footprint[43] Progress Reports (Economic, Sustainable, Equitable) BMO reports progress on its commitments to a thriving economy, a sustainable future, and an inclusive society - Economic Progress: BMO is a top 5 commercial lender in North America and has committed US$16.5 billion to lending for U.S. small businesses[53][54][56] - Sustainable Progress: The bank pledged $300 billion in capital for sustainable outcomes and was named North America's most sustainable bank[60] - Equitable Progress: The BMO EMpower 2.0 plan commits over $40 billion to address barriers for minority businesses and communities in the U.S[74] One Client Leadership BMO's collaborative "One Client" approach provided critical support to a business devastated by Hurricane Fiona - BMO's integrated teams provided immediate support to Victoria Co-operative Fisheries Ltd, enabling the business to rebuild and avoid closure[77][78] - The co-op's General Manager stated, "we would have been out of business without BMO," highlighting the bank's critical impact[78][80] Board of Directors and Executive Committee This section lists the members of BMO's gender-balanced Board of Directors and its Executive Committee - The report lists the 14 members of the Board of Directors, chaired by George A. Cope, and their committee assignments[84] - The report lists the 11 members of the Executive Committee, led by Chief Executive Officer Darryl White[85] Financial Review This section provides a detailed analysis of BMO's 2023 financial performance, condition, risk management, and audited statements Enhanced Disclosure Task Force This index references disclosures recommended by the EDTF, demonstrating BMO's commitment to transparent risk reporting - BMO has adopted EDTF recommendations, and an index is provided to locate specific disclosures on risk, capital, and liquidity[86][87] Management's Discussion and Analysis (MD&A) The MD&A provides a comprehensive review of BMO's 2023 financial performance, strategic direction, and risk management Financial Objectives and Value Measures BMO's 2023 performance missed adjusted EPS and ROE targets but exceeded capital requirements and grew dividends 2023 Performance vs. Financial Objectives (Adjusted Basis) | Financial Objective | Target | 2023 Result | | :--- | :--- | :--- | | Earnings per share growth | 7-10% | (11.4)% | | Average return on equity | 15% or more | 12.3% | | Average return on tangible common equity | 18% or more | 15.8% | | Operating leverage, net of CCPB | 2% or more | (8.2)% | | Common Equity Tier 1 Ratio | Exceed regulatory requirement | 12.5% | - Reported EPS decreased by 72% to $5.68, while adjusted EPS decreased by 11% to $11.73[102] Total Shareholder Return (TSR) | Period | BMO TSR | Canadian Peer Group Average | | :--- | :--- | :--- | | 1-Year | (12.5)% | (8.8)% | | 3-Year CAGR | 14.3% | 10.0% | | 5-Year CAGR | 5.6% | 5.5% | Financial Highlights In 2023, reported net income declined sharply, while total assets grew to $1.29 trillion and the CET1 ratio stood at 12.5% Key Financial Highlights (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $4,377M | $13,537M | | Adjusted Net Income | $8,675M | $9,039M | | Diluted EPS | $5.68 | $19.99 | | Adjusted Diluted EPS | $11.73 | $13.23 | | Return on Equity (ROE) | 6.0% | 22.9% | | Adjusted ROE | 12.3% | 15.2% | | Total Assets | $1,293,276M | $1,139,199M | | CET1 Ratio | 12.5% | 16.7% | Non-GAAP and Other Financial Measures This section reconciles reported GAAP results to adjusted non-GAAP measures, detailing significant acquisition-related adjustments Reconciliation of Reported to Adjusted Net Income (2023) | Description | Amount (in millions) | | :--- | :--- | | Reported Net Income | $4,377 | | Adjusting Items (After-tax): | | | Management of fair value changes (Bank of the West) | ($1,461) | | Acquisition and integration costs | ($1,533) | | Initial PCL on purchased loans | ($517) | | Impact of Canadian tax measures | ($502) | | Amortization of acquisition-related intangibles | ($264) | | Legal provision | $21 | | Adjusted Net Income | $8,675 | Recent Acquisitions BMO completed the acquisitions of Bank of the West and the AIR MILES Reward Program in 2023 - The acquisition of Bank of the West was completed on February 1, 2023, with customer system conversion finalized in September 2023[129] - On June 1, 2023, BMO completed the acquisition of the AIR MILES Reward Program, now part of the Canadian P&C segment[129] Economic Developments and Outlook The 2024 economic outlook suggests a slowdown in Canada and the U.S. due to higher interest rates and persistent inflation risks - Canada's real GDP growth is forecast to slow to 0.5% in 2024, with unemployment rising to approximately 6.5%[131] - The U.S. economy is projected to grow by 1.3% in 2024, with unemployment expected to rise to 4.4%[131] - Significant risks include persistent inflation, geopolitical conflicts, and trade tensions[131] 2023 Financial Performance Review BMO's 2023 reported net income fell significantly due to acquisition costs, while adjusted net income saw a modest 4% decline 2023 vs. 2022 Performance Summary | Metric | 2023 (Reported) | 2022 (Reported) | 2023 (Adjusted) | 2022 (Adjusted) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $4,377M | $13,537M | $8,675M | $9,039M | | Revenue, net of CCPB | $29,260M | $34,393M | $31,439M | $27,216M | | Total PCL | $2,178M | $313M | $1,473M | $313M | | Non-Interest Expense | $21,219M | $16,194M | $18,798M | $15,194M | - The inclusion of Bank of the West results decreased reported net income by $1,498 million but increased adjusted net income by $592 million[136] - Reported trading-related revenue was $1,005 million, a significant decrease from $10,159 million due to acquisition-related fair value management[143] 2023 Operating Groups Performance Review This section details performance across BMO's operating segments, reflecting varied impacts from acquisitions, markets, and expenses Canadian Personal and Commercial Banking Canadian P&C net income declined 3% as revenue growth was offset by higher credit provisions and expenses Canadian P&C Financial Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenue | $10,827M | $9,868M | | Total PCL | $930M | $341M | | Non-Interest Expense | $4,770M | $4,349M | | Reported Net Income | $3,718M | $3,826M | - Average gross loans and acceptances increased by 8% to $315.0 billion, while average deposits grew by 12% to $272.6 billion[178] - The acquisition of the AIR MILES Reward Program contributed to both non-interest revenue and expenses[163][178] U.S. Personal and Commercial Banking U.S. P&C net income grew 9%, driven by the Bank of the West acquisition which significantly expanded the business's scale U.S. P&C Financial Performance (USD Basis, 2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenue (teb) | $6,983M | $4,874M | | Total PCL | $379M | $11M | | Non-Interest Expense | $4,076M | $2,353M | | Reported Net Income | $2,018M | $1,933M | - The acquisition of Bank of the West was successfully integrated, with nearly two million customers transitioned to BMO platforms[184] - Average gross loans and acceptances (USD) increased 42% to $145.5 billion, and average deposits increased 31% to $147.2 billion[199] BMO Wealth Management BMO Wealth Management's net income declined due to weaker markets and higher acquisition-related expenses BMO Wealth Management Financial Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Revenue, net of CCPB | $5,455M | $5,207M | | Non-Interest Expense | $3,962M | $3,564M | | Reported Net Income | $1,126M | $1,251M | - Assets under management (AUM) increased by 9% to $332.9 billion, while assets under administration (AUA) decreased by 2%[216] - The segment maintained its leadership in Canadian ETFs, ranking first in net sales for 12 consecutive years[205] BMO Capital Markets BMO Capital Markets' net income fell 5% as higher revenue was offset by increased expenses and credit provisions BMO Capital Markets Financial Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenue (teb) | $6,450M | $6,172M | | Total PCL | $18M | ($43M) | | Non-Interest Expense | $4,279M | $3,855M | | Reported Net Income | $1,682M | $1,772M | - Revenue growth was driven by an 8% increase in Investment and Corporate Banking[235] - Average gross loans and acceptances grew 22% to $77.1 billion, reflecting higher lending activity[235] Corporate Services, including Technology and Operations Corporate Services reported a significant net loss of $4.9 billion, primarily due to costs from the Bank of the West acquisition Corporate Services Financial Performance (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Reported Net Income (Loss) | ($4,873M) | $4,191M | | Adjusted Net Loss | ($852M) | ($338M) | - Major items contributing to the reported loss include a $1,461M loss from fair value management and $1,520M in acquisition costs for Bank of the West[238][239] Financial Condition Review BMO's total assets grew to $1.29 trillion due to the Bank of the West acquisition, while capital ratios decreased but remained strong Summary Balance Sheet (As at Oct 31) | Item | 2023 | 2022 | | :--- | :--- | :--- | | Total Assets | $1,293.3B | $1,139.2B | | Net Loans | $656.5B | $551.3B | | Deposits | $909.7B | $769.5B | | Total Equity | $77.0B | $71.0B | Key Capital Ratios (As at Oct 31) | Ratio | 2023 | 2022 | | :--- | :--- | :--- | | CET1 Ratio | 12.5% | 16.7% | | Tier 1 Capital Ratio | 14.1% | 18.4% | | Total Capital Ratio | 16.2% | 20.7% | | Leverage Ratio | 4.2% | 5.6% | - Risk-Weighted Assets (RWA) increased to $424.2 billion from $364.0 billion, primarily due to the inclusion of Bank of the West assets[288] Enterprise-Wide Risk Management BMO utilizes a comprehensive framework to manage key risks, including economic conditions, cyber security, and geopolitical instability - Top and emerging risks include General Economic Conditions, Cyber and Cloud Security, Technology Resiliency, and Geopolitical Risk[310][311][313](index=313&type=chunk][314] - Total enterprise-wide credit risk exposure at default was $1,123.4 billion as of October 31, 2023, an increase of 7%[357][362] Total Trading Value at Risk (VaR) Summary | Metric (Pre-tax C$ millions) | 2023 Average | 2022 Average | | :--- | :--- | :--- | | Commodity VaR | 2.4 | 3.1 | | Equity VaR | 14.0 | 13.1 | | Foreign exchange VaR | 2.9 | 1.8 | | Interest rate VaR | 27.4 | 18.0 | | Total Trading VaR | 32.1 | 26.6 | Accounting Matters and Disclosure and Internal Control This section details critical accounting estimates and confirms the effectiveness of disclosure controls and internal financial reporting - Significant accounting estimates are required for allowance for credit losses, fair value of financial instruments, and goodwill[485][500] - BMO will adopt IFRS 17 (Insurance Contracts) effective November 1, 2023[501] - Management concluded that the bank's disclosure controls and internal control over financial reporting were effective as of October 31, 2023[513][514] Supplemental Information This section provides extensive supplementary data, including a ten-year statistical review and detailed financial breakdowns - Provides a ten-year statistical review of key financial metrics from 2014 to 2023[517][519] - Includes detailed tables analyzing the change in net interest income due to volume and rate fluctuations[521][524] - Presents granular data on loans, gross impaired loans, and allowance for credit losses by geography and industry[525][528][532] Independent Auditor's Report and Financial Statements This section includes the formal financial statements, management's affirmation, and the auditor's unqualified opinion - Management is responsible for the preparation of the financial statements in accordance with IFRS and for maintaining effective internal controls[547] - The independent auditor, KPMG LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal controls[551][561] - Key Audit Matters included the valuation of loans from the Bank of the West acquisition and the assessment of allowances for credit losses[553]