BMO Financial Group Reports Fourth Quarter and Fiscal 2019 Results

Toronto (ots/PRNewswire) – – For the fourth quarter ended October 31, 2019, BMO Financial Group (TSX:BMO) (NYSE:BMO) recorded net income of $1,194 million or $1.78 per share on a reported basis, and net income of $1,607 million or $2.43 per share on an adjusted basis.

Financial Results Highlights

Fourth Quarter 2019 Compared With Fourth Quarter 2018:

* Net income4,5 of $1,194 million, down 30%, reflecting a restructuring charge in the current quarter and a benefit from the
remeasurement of an employee benefit liability in the prior year; adjusted net income1 of $1,607 million, up 5%

* EPS2 of $1.78, down 31%; adjusted EPS1 of $2.43, up 5%

* Revenue, net of CCPB3,4, of $5,752 million, up 5%; revenue, net of
adjusted CCPB1, of $5,777 million, up 5%

* Provision for credit losses (PCL) of $253 million compared with $175 million in the prior year; includes PCL on performing loans of $22 million

* ROE of 9.9%, compared with 16.1%; adjusted ROE1 of 13.5%, compared
with 14.5%

* Common Equity Tier 1 Ratio of 11.4%

* Dividend increased $0.03 to $1.06, up 6% from the prior year

Fiscal 2019 Compared With Fiscal 2018:

* Net income4,5 of $5,758 million, up 6%; adjusted net income1 of $6,249 million, up 4%

* EPS2 of $8.66, up 6%; adjusted EPS1 of $9.43, up 5%

* Revenue, net of CCPB3,4, of $22,774 million, up 6%

* PCL of $872 million compared with $662 million in the prior year; includes PCL on performing loans of $121 million

* ROE of 12.6% compared with 13.3%; adjusted ROE1 of 13.7% compared with 14.6%

„BMO finished the year with very strong performance, delivering $1.6 billion in adjusted earnings and adjusted earnings per share of $2.43 in the fourth quarter, up 5% year-over-year, with pre-provision pre-tax earnings growth of 11%, driven by positive operating leverage in all businesses and particularly strong operating performance in Personal and Commercial banking in both Canada and the U.S.,“ said Darryl White, Chief Executive Officer, BMO Financial Group.

„Our results for the year reflect the strength and quality of our diversified businesses. Adjusted earnings per share were $9.43, up 5% from last year. We continued to make significant progress on our strategic priorities and delivered annual earnings growth of 23% in our U.S. business. With a clear bank-wide focus on disciplined expense management, we continued to improve our overall efficiency ratio with 130 basis points of improvement in the past two years and good momentum throughout the year. We have a number of initiatives underway, including today’s announcement of a restructuring charge, that will serve to accelerate our momentum and help us meet our efficiency objectives over the long-term. In addition, we gained market share in key areas, including commercial lending and retail deposits, in Canada and the U.S. Our credit performance remains good and we ended the year with a strong CET1 capital ratio of 11.4%.“

„Looking ahead to 2020, we will continue to execute on our clearly articulated strategic priorities and objectives. We remain focused on building on the foundation of our integrated North American platform to grow our customer base and broaden our customer relationships. I am confident that we are well-positioned to deliver sustainable and resilient profitability through an evolving economic environment,“ concluded Mr. White.

Reported net income in the current quarter included a restructuring charge of $357 million after-tax ($484 million pre-tax), related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. Reported net income also included a $25 million pre-tax and after-tax reinsurance adjustment for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business.

Return on equity (ROE) was 9.9%, compared with 16.1% in the prior year and adjusted ROE was 13.5%, compared with 14.5% in the prior year. Return on tangible common equity (ROTCE) was 11.9%, compared with 19.5% in the prior year and adjusted ROTCE was 15.7%, compared with 17.3% in the prior year.

Concurrent with the release of results, BMO announced a first quarter 2020 dividend of $1.06 per common share, up $0.03 per share or 3% from the prior quarter and up $0.06 per share or 6%from the prior year. The quarterly dividend of $1.06 per common share is equivalent to an annual dividend of $4.24 per common share.

BMO’s 2019 audited annual consolidated financial statements and accompanying Management Discussion and Analysis (MD&A) are available online at www.bmo.com/investorrelations and at www.sedar.com.

(1) Results and
measures in
this document
are presented
on a GAAP
basis. They
are also
presented on
an adjusted
basis that
excludes the
impact of
certain items.
Adjusted
results and
measures are
non-GAAP and
are detailed
for all
reported
periods in the
Non-GAAP
Measures
section, where
such non-GAAP
measures and
their closest
GAAP
counterparts
are disclosed.
(2) All Earnings
per Share
(EPS) measures
in this
document refer
to diluted
EPS, unless
specified
otherwise. EPS
is calculated
using net
income after
deducting
total
dividends on
preferred
shares and
distributions
on other
equity
instruments.
(3) On a basis
that nets
insurance
claims,
commissions
and changes in
policy benefit
liabilities
(CCPB) against
insurance
revenue.
(4) Q4-2019
reported net
income
included a
$357 million
after-tax
($484 million
pre-tax)
restructuring
charge,
related to
severance and
a small amount
of real
estate-related
costs, to
continue to
improve our
efficiency,
including
accelerating
delivery
against key
bank-wide
initiatives
focused on
digitization,
organizational
redesign and
simplification
of the way we
do business.
The current
quarter
reported net
income also
included a $25
million
(pre-tax and
after-tax) net
impact of
major
reinsurance
claims from
Japanese
typhoons that
were incurred
after our
announced
decision to
wind down our
reinsurance
business. The
restructuring
charge was
included in
non-interest
expense in
Corporate
Services and
the
reinsurance
adjustment was
included in
CCPB in BMO
Wealth
Management.
(5) In fiscal
2018, we
recorded a
$425 million
(US$339
million)
charge related
to the
revaluation of
our U.S. net
deferred tax
asset as a
result of the
enactment of
the U.S. Tax
Cuts and Jobs Act in the
first quarter;
a $192 million
after-tax
($260 million
pre-tax)
restructuring
charge,
primarily
related to
severance, in
the second
quarter; and a
benefit of
$203 million
after-tax
($277 million
pre-tax) from
the
remeasurement
of an employee
benefit
liability, as
a result of an
amendment to
our other
employee
future
benefits plan
for certain
employees, in
the fourth
quarter. The
second quarter
charge and
fourth quarter
benefit were
included in
non-interest
expense in
Corporate
Services. For
more
information on
the tax
charge, refer
to the
Critical
Accounting
Estimates –
Income Taxes
and Deferred
Tax Assets
section on
page 119 of
BMO’s 2018
Annual Report.
Note: All
ratios and
percentage
changes in
this
document
are based
on
unrounded
numbers.

Fourth Quarter Operating Segment Overview

Canadian P&C

Reported net income was $716 million, an increase of $42 million or 6% and adjusted net income was $716 million, an increase of $41 million or 6% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Results reflect strong revenue growth, partially offset by higher provisions for credit losses and higher expenses.

During the quarter, we launched a new digital lending solution, the first of its kind from a major Canadian financial institution. Customers are now able to apply for a personal line of credit by completing a short, user-friendly digital application and receive a decision on their loan application in minutes. We also became the first Canadian financial institution to offer retail credit card customers the option to report a lost or stolen card through online banking. These new digital services and innovations reflect BMO’s commitment to creating digital solutions that better support our customers.

U.S. P&C

Reported net income was $393 million, an increase of $21 million or 6% and adjusted net income was $404 million, an increase of $21 million or 5% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets.

Reported net income was US$297 million, an increase of US$12 million or 4% and adjusted net income was US$305 million, an increase of US$11 million or 4%, primarily due to higher revenue and lower provisions for credit losses, partially offset by a favourable U.S. tax item in the prior year and higher expenses.

During the quarter, the Federal Deposit Insurance Corporation released its annual deposit market share report. We improved our market share ranking within our core footprint, which includes Illinois, Kansas, Wisconsin, Missouri, Indiana and Minnesota, from fourth to third place and maintained our strong ranking of second place in the Chicago and Milwaukee markets.

BMO Wealth Management

Reported net income was $267 million, an increase of $48 million or 22% and adjusted net income was $301 million, an increase of $72 million or 31% from the prior year. Adjusted net income in the current quarter excludes the net impact of major reinsurance claims and the amortization of acquisition-related intangible assets in both the current and prior year. Traditional Wealth reported net income was $237 million, an increase of $45 million or 24% and adjusted net income was $246 million, an increase of $44 million or 22%, due to the impact of a legal provision in the prior year, higher deposit and loan revenue and higher fee-based revenue. Insurance reported net income was $30 million, an increase of $3 million or 9%, and adjusted net income of $55 million increased $28 million, primarily due to benefits from changes in investments to improve asset liability management.

For the second consecutive year, BMO Global Asset Management was named the best manager in liability-driven investment by Financial News.

BMO Capital Markets

Reported net income was $269 million, compared with $298 million and adjusted net income was $280 million, compared with $309 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Higher revenue was more than offset by higher provisions for credit losses and higher expenses.

On September 25, 2019, BMO Capital Markets celebrated the 15th anniversary of the Equity Through Education Trading Day, a BMO Capital Markets initiative that donates all institutional equity trading commissions earned that day across North America and Europe to charities helping underprivileged students through scholarships, bursaries and other academic programs. This year, we raised $1.6 million, bringing the total amount raised since the introduction of the program in 2005 to more than $21 million, and helping over 5,000 students. This is one of the many initiatives that continue to highlight BMO’s Purpose to Boldly Grow the Good in business and life.

Corporate Services

Reported net loss was $451 million, compared with a reported net income of $134 million in the prior year. Adjusted net loss was $94 million, compared with an adjusted net loss of $65 million in the prior year. Adjusted results in the current quarter exclude a restructuring charge of $357 million after-tax. Adjusted results in the prior year exclude a $203 million after-tax benefit from the remeasurement of an employee benefit liability and acquisition integration costs. Adjusted results decreased, primarily due to lower revenue excluding taxable equivalent basis (teb) adjustments, partially offset by lower expenses.

Adjusted results in this Fourth Quarter Operating Segment Overview section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Capital

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at October 31, 2019. The CET1 Ratio was unchanged from the prior quarter as retained earnings growth, which absorbed the restructuring charge, was offset by higher risk-weighted assets from business growth.

Provision for Credit Losses

Total provision for credit losses was $253 million, an increase of $78 million from the prior year. The provision for credit losses ratio was 23 basis points, compared with 18 basis points in the prior year. The provision for credit losses on impaired loans of $231 million increased $54 million from $177 million in the prior year, primarily due to higher provisions in BMO Capital Markets and our P&C businesses. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 18 basis points in the prior year. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $2 million recovery of credit losses on performing loans in the prior year. The year-over-year increase in the provision for credit losses on performing loans was as a result of negative migration in the current quarter, compared with positive migration in the prior year, and higher provisions in the current quarter from changes in scenario weights, partially offset by lower provisions in the current quarter from changes in the economic outlook.

Caution

The foregoing sections contain forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Regulatory Filings

Our continuous disclosure materials, including our interim filings, annual Management’s Discussion and Analysis and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular, are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators‘ website at www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange Commission’s website at www.sec.gov.

Bank of Montreal uses a unified branding approach that links all of the organization’smember companies. Bank of Montreal, together with its subsidiaries, is known as BMO Financial Group. As such, in this document, the names BMO and BMO Financial Group mean Bank of Montreal, together with its subsidiaries.

Financial Review

Management’s Discussion and Analysis (MD&A) commentary is as at December 3, 2019. The material that precedes this section comprises part of this MD&A. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2019, included in this document, as well as the audited consolidated financial statements for the year ended October 31, 2019, and the MD&A for fiscal 2019, contained in our 2019 Annual Report.

BMO’s 2019 Annual Report includes a comprehensive discussion of our businesses, strategies and objectives, and can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

Bank of Montreal’s management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at October 31, 2019, of Bank of Montreal’s disclosure controls and procedures (as defined in the rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2019, which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of inherent limitations, disclosure controls and procedures and internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.

As in prior quarters, Bank of Montreal’s Audit and Conduct Review Committee reviewed this document and Bank of Montreal’s Board of Directors approved the document prior to its release.

Financial Highlights

(Canadian $ in Q4-2019 Q3-2019 Q4-2018 Fiscal Fiscal
millions, except as 2019 2018
noted) Summary Income Statement

Net interest income 3,364 3,217 3,015 12,888 11,438
(1)
Non-interest 2,723 3,449 2,878 12,595 11,467
revenue (1)(2)
Revenue (2) 6,087 6,666 5,893 25,483 22,905
Insurance claims, 335 887 390 2,709 1,352 commissions and
changes in policy
benefit liabilities
(CCPB)
Revenue, net of 5,752 5,779 5,503 22,774 21,553
CCPB
Provision for 231 243 177 751 700
(recovery of)
credit losses on
impaired loans
Provision for 22 63 (2) 121 (38)
(recovery of)
credit losses on
performing loans
Total provision for 253 306 175 872 662
credit losses
Non-interest 3,987 3,491 3,193 14,630 13,477
expense (2)
Provision for 318 425 438 1,514 1,961
income taxes (3)
Net income 1,194 1,557 1,697 5,758 5,453 attributable to
equity holders of
the bank
Adjusted net income 1,607 1,582 1,531 6,249 5,982 Common Share Data
($, except as
noted)
Earnings per share 1.78 2.34 2.58 8.66 8.17
Adjusted earnings 2.43 2.38 2.32 9.43 8.99
per share
Earnings per share (30.7) 1.0 42.4 6.0 3.3
growth (%)
Adjusted earnings 4.8 0.8 19.7 4.9 10.3
per share growth
(%)
Dividends declared 1.03 1.03 0.96 4.06 3.78
per share
Book value per 71.54 70.88 64.73 71.54 64.73
share
Closing share price 97.50 98.80 98.43 97.50 98.43
Number of common
shares outstanding
(in millions)
End of period 639.2 639.0 639.3 639.2 639.3
Average diluted 640.4 640.4 641.8 640.4 644.9
Total market value 62.3 63.1 62.9 62.3 62.9
of common shares ($
billions)
Dividend yield (%) 4.2 4.2 3.9 4.2 3.8
Dividend payout 57.6 43.9 37.2 46.8 46.1
ratio (%)
Adjusted dividend 42.3 43.2 41.3 43.0 41.9
payout ratio (%) Financial Measures and Ratios (%)

Return on equity 9.9 13.2 16.1 12.6 13.3
Adjusted return on 13.5 13.5 14.5 13.7 14.6
equity
Return on tangible 11.9 15.8 19.5 15.1 16.2
common equity
Adjusted return on 15.7 15.8 17.3 16.1 17.5
tangible common
equity
Net income growth (29.6) 1.3 38.6 5.6 2.1
Adjusted net income 5.0 1.1 17.1 4.5 8.8
growth
Revenue growth 3.3 15.1 5.0 11.3 3.6
Revenue growth, net 4.5 4.6 9.1 5.7 4.8
of CCPB
Non-interest 24.9 3.9 (4.4) 8.6 2.2
expense growth
Adjusted 1.2 4.1 6.2 5.0 3.5
non-interest
expense growth
Efficiency ratio, 69.3 60.4 58.0 64.2 62.5
net of CCPB
Adjusted efficiency 60.0 59.9 62.2 61.4 61.9
ratio, net of CCPB
Operating leverage, (20.4) 0.7 13.5 (2.9) 2.6
net of CCPB
Adjusted operating 3.8 0.5 2.9 0.8 1.3
leverage, net of
CCPB
Net interest margin 1.71 1.67 1.68 1.70 1.67
on average earning
assets
Effective tax rate 21.0 21.5 20.6 20.8 26.5
(3)
Adjusted effective 22.0 21.5 19.7 21.1 20.7
tax rate
Total 0.23 0.28 0.18 0.20 0.17 PCL-to-average net
loans and
acceptances
(annualized)
PCL on impaired 0.21 0.22 0.18 0.17 0.18 loans-to-average
net loans and
acceptances
(annualized) Balance Sheet (as
at, $ millions,
except as noted)
Assets 852,195 839,180 773,293 852,195 773,293
Gross loans and 451,537 444,390 404,215 451,537 404,215 acceptances
Net loans and 449,687 442,588 402,576 449,687 402,576 acceptances
Deposits 568,143 553,383 520,928 568,143 520,928
Common 45,728 45,295 41,381 45,728 41,381 shareholders‘
equity
Cash and 28.9 28.3 29.9 28.9 29.9 securities-to-total
assets ratio (%) Capital Ratios (%)
CET1 Ratio 11.4 11.4 11.3 11.4 11.3
Tier 1 Capital 13.0 13.0 12.9 13.0 12.9
Ratio
Total Capital Ratio 15.2 15.3 15.2 15.2 15.2
Leverage Ratio 4.3 4.3 4.2 4.3 4.2 Foreign Exchange Rates ($)

As at Canadian/U.S. 1.3165 1.3198 1.3169 1.3165 1.3169
dollar
Average 1.3240 1.3270 1.3047 1.3290 1.2878 Canadian/U.S.
dollar

(1) Effective
Q1-2019,
certain
dividend income
in our Global
Markets
business has
been
reclassified
from
non-interest
revenue to net
interest
income. Results
for prior
periods and
related ratios
have been
reclassified to
conform with
the current
period’s
presentation.
(2) Effective
Q1-2019, the
bank adopted
IFRS 15,
Revenue from
Contracts with Customers (IFRS
15) and elected
to
retrospectively
present prior
periods as if
IFRS 15 had
always been
applied. As a
result, loyalty
rewards and
cash promotion
costs on cards
previously
recorded in
non-interest
expense are
presented as a
reduction in
non-interest
revenue. In
addition,
certain
out-of-pocket
expenses
reimbursed to
BMO from
customers have
been
reclassified
from a
reduction in
non-interest
expense to
non-interest
revenue.
(3) Q1-2018
reported net
income included
a $425 million
charge due to
the revaluation
of our U.S. net
deferred tax
asset as a
result of the
enactment of
the U.S. Tax
Cuts and Jobs
Act. For more
information,
refer to the
Critical
Accounting
Estimates –
Income Taxes
and Deferred
Tax Assets
section on page
119 of BMO’s
2018 Annual
Report.
Certain
comparative
figures have
been
reclassified
to conform
with the
current
period’s
presentation.
Adjusted
results are
non-GAAP
amounts or
non-GAAP
measures.
Please refer
to the
Non-GAAP
Measures
section.

Non-GAAP Measures

Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS. They are also presented on an adjusted basis that excludes the impact of certain items, as set out in the table below. Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on our U.S. segment are non-GAAP measures. Please refer to the Foreign Exchange section for a discussion of the effects of changes in exchange rates on our results. Management assesses performance on a reported basis and on an adjusted basis, and considers both to be useful in assessing underlying ongoing business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. It also permits readers to assess the impact of certain specified items on results for the periods presented, and to better assess results excluding those items that may not be reflective of ongoing results. As such, the presentation may facilitate readers‘ analysis of trends. Except as otherwise noted, management’s discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results. Adjusted results and measures are non-GAAP and as such do not have standardized meanings under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from, or as a substitute for, GAAP results.

Non-GAAP Measures

(Canadian $ in Q4-2019 Q3-2019 Q4-2018 Fiscal Fiscal millions, except as 2019 2018
noted) Reported Results
Revenue 6,087 6,666 5,893 25,483 22,905 Insurance claims, (335) (887) (390) (2,709) (1,352) commissions and
changes in policy
benefit liabilities
(CCPB)
Revenue, net of 5,752 5,779 5,503 22,774 21,553
CCPB
Total provision for (253) (306) (175) (872) (662)
credit losses
Non-interest (3,987) (3,491) (3,193) (14,630) (13,477) expense
Income before 1,512 1,982 2,135 7,272 7,414
income taxes
Provision for (318) (425) (438) (1,514) (1,961)
income taxes
Net income 1,194 1,557 1,697 5,758 5,453
EPS ($) 1.78 2.34 2.58 8.66 8.17
Adjusting Items
(Pre-tax) (1)
Acquisition (2) (3) (18) (13) (34) integration costs
(2)
Amortization of (38) (29) (31) (128) (116) acquisition-related
intangible assets
(3)
Restructuring costs (484) – – (484) (260)
(4)
Reinsurance (25) – – (25) –
adjustment (5)
Benefit from the – – 277 – 277 remeasurement of an
employee benefit
liability (6)
Adjusting items (549) (32) 228 (650) (133)
included in
reported pre-tax
income
Adjusting Items (After tax)(1)
Acquisition (2) (2) (13) (10) (25) integration costs
(2)
Amortization of (29) (23) (24) (99) (90) acquisition-related
intangible assets
(3)
Restructuring costs (357) – – (357) (192)
(4)
Reinsurance (25) – – (25) –
adjustment (5)
Benefit from the – – 203 – 203 remeasurement of an
employee benefit
liability (6)
U.S. net deferred – – – – (425)
tax asset
revaluation (7)
Adjusting items (413) (25) 166 (491) (529)
included in
reported net income
after tax
Impact on EPS ($) (0.65) (0.04) 0.26 (0.77) (0.82) Adjusted Results
Revenue 6,087 6,666 5,893 25,483 22,905 Insurance claims, (310) (887) (390) (2,684) (1,352) commissions and
changes in policy
benefit liabilities
(CCPB)
Revenue, net of 5,777 5,779 5,503 22,799 21,553
CCPB
Total provision for (253) (306) (175) (872) (662)
credit losses
Non-interest (3,463) (3,459) (3,421) (14,005) (13,344) expense
Income before 2,061 2,014 1,907 7,922 7,547
income taxes
Provision for (454) (432) (376) (1,673) (1,565)
income taxes
Net income 1,607 1,582 1,531 6,249 5,982
EPS ($) 2.43 2.38 2.32 9.43 8.99

(1) Adjusting items are
generally included
in Corporate
Services, with the
exception of the
amortization of
acquisition-related
intangible assets
and certain
acquisition
integration costs,
which are charged
to the operating
groups, and the
reinsurance
adjustment, which
is included in BMO
Wealth Management.
(2) Acquisition
integration costs
related to the
acquired BMO
Transportation
Finance business
are charged to
Corporate Services,
since the
acquisition impacts
both Canadian and
U.S. P&C
businesses.
KGS-Alpha
acquisition
integration costs
are reported in BMO
Capital Markets.
Acquisition
integration costs
are recorded in
non-interest
expense.
(3) These amounts were
charged to the
non-interest
expense of the
operating groups.
Before-tax and
after-tax amounts
for each operating
group are provided
in the Review of
Operating Group’s
Performance
section.
(4) Q4-2019 reported
net income included
a restructuring
charge of $357
million after-tax
($484 million
pre-tax), related
to severance and a
small amount of
real estate-related
costs, to continue
to improve our
efficiency,
including
accelerating
delivery against
key bank-wide
initiatives focused
on digitization,
organizational
redesign and
simplification of
the way we do
business. The
restructuring
charge in 2018 was
also a result of a
similar bank-wide
program.
Restructuring costs
are included in
non-interest
expense in
Corporate Services.
(5) Q4-2019 reported
net income included
a reinsurance
adjustment of $25
million (pre-tax
and after-tax) in
claims, commissions
and changes in
policy benefit
liabilities for the
net impact of major
reinsurance claims
from Japanese
typhoons that were
incurred after our
announced decision
to wind down our
reinsurance
business. This
reinsurance
adjustment is
included in BMO
Wealth Management.
(6) Q4-2018 reported
net income included
a benefit of $203
million after-tax
($277 million
pre-tax) from the
remeasurement of an
employee benefit
liability, as a
result of an
amendment to our
other employee
future benefits
plan for certain
employees. This
amount was included
in non-interest
expense in
Corporate Services.
(7) Q1-2018 reported
net income included
a $425 million
(US$339 million)
charge related to
the revaluation of
our U.S. net
deferred tax asset
as a result of the
enactment of the
U.S. Tax Cuts and
Jobs Act. For more
information, refer
to the Critical
Accounting
Estimates – Income
Taxes and Deferred
Tax Assets section
on page 119 of
BMO’s 2018 Annual
Report.
Certain
comparative
figures have
been
reclassified
to conform
with the
current
period’s
presentation.
Adjusted
results and
measures in
this table
are non-GAAP
amounts or
non-GAAP
measures.

Caution Regarding Forward-Looking Statements

Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the „safe harbor“ provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements in this document may include, but are not limited to, statements with respect to our objectives and priorities for fiscal 2020 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, the regulatory environment in which we operate and the results of or outlook for our operations or for the Canadian, U.S. and international economies, and include statements of our management. Forward-looking statements are typically identified by words such as „will“, „would“, „should“, „believe“, „expect“, „anticipate“, „project“, „intend“, „estimate“, „plan“, „goal“, „target“, „may“ and „could“.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct, and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements, as a number of factors – many of which are beyond our control and the effects of which can be difficult to predict – could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; the Canadian housing market; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal, or economic policy and tax legislation and interpretation; the level of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes on funding costs; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; failure of third parties to comply with their obligations to us; our ability to execute our strategic plans and to complete and integrate acquisitions, including obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks, including with respect to reliance on third parties; changes to our credit ratings; political conditions, including changes relating to or affecting economic or trade matters; global capital markets activities; the possible effects on our business of war or terrorist activities; outbreaks of disease or illness that affect local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; information, privacy and cyber security, including the threat of data breaches, hacking, identity theft and corporate espionage, as well as the possibility of denial of service resulting from efforts targeted at causing system failure and service disruption; and our ability to anticipate and effectively manage risks arising from all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding, operational, legal and regulatory, business, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section that begins on page 68 of BMO’s 2019 Annual Report, all of which outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook section on page 18 of BMO’s 2019 Annual Report. Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by governments, historical relationships between economic and financial variables, and the risks to the domestic and global economy.

Foreign Exchange

The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars decreased relative to the third quarter of 2019 and increased relative to the fourth quarter of 2018 due to changes in the U.S. dollar. The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on our U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated amounts recorded outside BMO’s U.S. segment.

Changes in exchange rates will affect future results measured in Canadian dollars, and the impact on those results is a function of the periods in which revenue, expenses and provisions for (recoveries of) credit losses arise.

Economically, our U.S. dollar income stream was unhedged to changes in foreign exchange rates during the current and prior year. We regularly determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on net income.

Refer to the Enterprise-Wide Capital Management section on page 59 of the 2019 Annual Report for a discussion of the impact that changes in foreign exchange rates can have on our capital position. Changes in foreign exchange rates will also affect accumulated other comprehensive income, primarily as a result of the translation of our investment in foreign operations.

This Foreign Exchange section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Effects of Changes in Exchange Rates on BMO’s U.S. Segment Reported and Adjusted Results

Q4-2019
(Canadian $ in millions, except as noted) vs. Q4-2018 vs. Q3-2019
Canadian/U.S. dollar exchange rate (average)

Current period 1.3240 1.3240

Prior period 1.3047 1.3270

Effects on U.S. segment reported results

Increased (decreased) net interest income 17 (3)

Increased (decreased) non-interest revenue 11 (2)

Increased (decreased) revenues 28 (5)

Decreased (increased) provision for credit losses (1) –

Decreased (increased) expenses (20) 3

Decreased (increased) income taxes (1) 1

Increased (decreased) reported net income 6 (1)

Impact on earnings per share ($) 0.01 –

Effects on U.S. segment adjusted results

Increased (decreased) net interest income 17 (3)

Increased (decreased) non-interest revenue 11 (2)

Increased (decreased) revenues 28 (5)

Decreased (increased) provision for credit losses (1) –

Decreased (increased) expenses (20) 3

Decreased (increased) income taxes (1) 1

Increased (decreased) adjusted net income 6 (1)

Impact on adjusted earnings per share ($) 0.01 –

Adjusted
results
in this
section
are
non-GAAP
amounts
or
non-GAAP
measures.
Please
refer to
the
Non-GAAP
Measures
section.

Net Income

Q4 2019 vs. Q4 2018

Reported net income was $1,194 million, compared with $1,697 million in the prior year, and adjusted net income was $1,607 million, an increase of $76 million or 5% from the prior year. Adjusted net income excludes a $357 million restructuring charge, related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business, as well as a $25 million reinsurance adjustment for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, and a $203 million benefit from the remeasurement of an employee benefit liability in the prior year. Reported EPS of $1.78 decreased $0.80 or 31% and adjusted EPS of $2.43 increased $0.11 or 5% from the prior year.

Results reflect good performance in our P&C businesses and higher net income in BMO Wealth Management, partially offset by a decrease in BMO Capital Markets and a higher net loss in Corporate Services. Prior year results included a favourable tax item in our U.S. segment.

Q4 2019 vs. Q3 2019

Reported net income decreased $363 million or 23% from the prior quarter and adjusted net income increased $25 million or 2%. Adjusted net income excludes the restructuring charge and reinsurance adjustment in the current quarter, and the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior quarter. Reported EPS decreased $0.56 or 24% and adjusted EPS increased $0.05 or 2% from the prior quarter.

Results reflect higher net income in our P&C businesses, with particularly strong performance in Canadian P&C, and in BMO Wealth Management, partially offset by a higher net loss in Corporate Services and a decrease in BMO Capital Markets.

Adjusted results in this Net Income section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

Revenue (1)(2)

Q4 2019 vs. Q4 2018

Revenue was $6,087 million, an increase of $194 million or 3% from the prior year and revenue, net of insurance claims, commissions and changes in policy benefit liabilities (CCPB), was $5,752 million, an increase of $249 million or 5%.

Results reflect good performance in our P&C businesses and increases in BMO Wealth Management and BMO Capital Markets, partially offset by a decrease in Corporate Services.

Net interest income was $3,364 million, an increase of $349 million or 12%, or 11% excluding the impact of the stronger U.S. dollar. On an excluding trading basis, net interest income was $2,979 million, an increase of $210 million or 8%, or 7% excluding the impact of the stronger U.S. dollar, largely due to higher loan and deposit balances across all operating groups, partially offset by lower loan margins.

Average earning assets were $778.4 billion, an increase of $66.7 billion or 9%, or $62.7 billion or 9% excluding the impact of the stronger U.S. dollar, due to loan growth, higher securities and higher securities borrowed or purchased under resale agreements. BMO’s overall net interest margin increased 3 basis points, primarily due to higher net interest income from trading activities and a higher margin in Canadian P&C, partially offset by a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, as well as a lower margin in U.S. P&C. On an excluding trading basis, net interest margin decreased 5 basis points, primarily due to a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.

Non-interest revenue, net of CCPB, was $2,388 million, a decrease of $100 million or 4%, and also 4% excluding the impact of the stronger U.S. dollar, due to lower trading non-interest revenue, partially offset by higher lending and deposit revenue. Non-interest revenue, net of adjusted CCPB, was $2,413 million, a decrease of $75 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar. On an excluding trading basis, net of adjusted CCPB, non-interest revenue was $2,434 million, an increase of $77 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar.

Gross insurance revenue decreased $50 million from the prior year, due to lower annuity sales, offset by relatively unchanged long-term interest rates in the current quarter, compared with increases in long-term interest rates that decreased the fair value of investments in the prior year and stronger equity markets in the current quarter. These changes relate to annuity sales and fair value investments, which are largely offset by changes in policy benefit liabilities, which is reflected in CCPB, as discussed in the Insurance Claims, Commissions and Changes in Policy Benefit Liabilities. We generally focus on analyzing revenue, net of CCPB, given the extent to which insurance revenue can vary and that this variability is largely offset in CCPB.

Q4 2019 vs. Q3 2019

Revenue decreased $579 million or 9% from the prior quarter. Revenue net of CCPB was relatively unchanged from the prior quarter.

Higher revenue in Canadian P&C and BMO Wealth Management were offset by lower revenue in BMO Capital Markets, while U.S. P&C revenue was relatively unchanged and Corporate Services revenue decreased from the prior quarter.

Net interest income increased $147 million or 5% from the prior quarter. On an excluding trading basis, net interest income of $2,979 million was relatively unchanged from the prior quarter, with higher deposit and loan volumes across all operating groups, offset by lower deposit spreads in U.S. P&C, due to rate decreases by the Federal Reserve, and lower net interest income in Corporate Services.

Average earning assets were $778.4 billion, an increase of $15.1 billion or 2%, primarily due to loan growth and increased cash resources. BMO’s overall net interest margin increased 4 basis points, primarily due to a higher net interest income from trading activities and a higher margin in Canadian P&C, partially offset by higher assets in Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C. On an excluding trading basis, net interest margin decreased 6 basis points, primarily due to a higher volume of assets in Corporate Services and BMO Capital Markets, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.

Non-interest revenue, net of CCPB, decreased $174 million or 7%, primarily due to lower trading non-interest revenue and underwriting and advisory fee revenue. Non-interest revenue, net of adjusted CCPB, decreased $149 million or 6%. On an excluding trading basis, net of adjusted CCPB, non-interest revenue decreased $13 million or 1%.

Gross insurance revenue decreased $554 million from the prior quarter, primarily due to relatively unchanged long-term interest rates in the current quarter, compared with decreases in long-term interest rates that increased the fair value of investments in the prior quarter and lower annuity sales. The decrease in insurance revenue was largely offset by lower CCPB, as discussed in the Insurance Claims, Commissions and Changes in Policy Benefit Liabilities.

Net interest income and non-interest revenue are detailed in the unaudited interim consolidated financial statements.

Adjusted results in this Revenue section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

(1) Effective
Q1-2019,
certain
dividend income
in our Global
Markets
business has
been
reclassified
from
non-interest
revenue to net
interest
income. Results
for prior
periods and
related ratios
have been
reclassified to
conform to the
current
period’s
presentation.
(2) Effective
Q1-2019, the
bank adopted
IFRS 15,
Revenue from
Contracts with Customers (IFRS
15) and elected
to
retrospectively
present prior
periods as if
IFRS 15 had
always been
applied. As a
result, loyalty
rewards and
cash promotion
costs on cards
previously
recorded in
non-interest
expense are
presented as a
reduction in
non-interest
revenue. In
addition,
certain
out-of-pocket
expenses
reimbursed to
BMO from
customers have
been
reclassified
from a
reduction in
non-interest
expense to
non-interest
revenue.

Provision for Credit Losses

Q4 2019 vs. Q4 2018

Total provision for credit losses was $253 million, an increase of $78 million from the prior year. The provision for credit losses ratio was 23 basis points, compared with 18 basis points in the prior year. The provision for credit losses on impaired loans of $231 million increased $54 million from $177 million in the prior year, primarily due to higher provisions in BMO Capital Markets and our P&C businesses. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 18 basis points in the prior year. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $2 million recovery of credit losses on performing loans in the prior year. The $22 million provision for credit losses on performing loans in the current quarter was due to portfolio growth, negative migration and scenario weight change, partially offset by changes in economic outlook. The year-over-year increase in the provision for credit losses on performing loans was as a result of negative migration in the current quarter, compared with positive migration in the prior year, and higher provisions in the current quarter from changes in scenario weights, partially offset by lower provisions in the current quarter from changes in the economic outlook.

Q4 2019 vs. Q3 2019

Total provision for credit losses decreased $53 million from the prior quarter. The provision for credit losses ratio was 23 basis points, compared with 28 basis points in the prior quarter. The provision for credit losses on impaired loans decreased $12 million to $231 million, due to lower impaired loan provisions in Canadian P&C, partially offset by higher loan losses in BMO Capital Markets and U.S. P&C. The provision for credit losses on impaired loans ratio was 21 basis points, compared with 22 basis points in the prior quarter. There was a $22 million provision for credit losses on performing loans in the current quarter, compared with a $63 million provision for credit losses on performing loans in the prior quarter. The majority of the quarter-over-quarter decrease was due to a more favourable impact on credit losses on performing loans in the current quarter, resulting from changes in economic outlook, as well as a smaller impact from both balance growth and negative migration.

Provision for Credit Losses by Operating Group

BMO Wealth BMO Corporate
Capital
(Canadian Canadian U.S. Total Management Markets Services Total$ in P&C P&C P&C Bank millions)
Q4-2019
Provision 134 66 200 1 32 (2) 231
for
(recovery
of) credit
losses on
impaired
loans
Provision 11 4 15 (1) 8 – 22
for
(recovery
of) credit
losses on
performing
loans
Total 145 70 215 – 40 (2) 253 provision for (recovery of) credit losses
Q3-2019

Provision 174 61 235 – 7 1 243
for
(recovery
of) credit
losses on
impaired
loans
Provision 30 37 67 (2) 3 (5) 63
for
(recovery
of) credit
losses on
performing
loans
Total 204 98 302 (2) 10 (4) 306 provision
for
(recovery
of) credit
losses
Q4-2018
Provision 118 61 179 2 (3) (1) 177
for
(recovery
of) credit
losses on
impaired
loans
Provision (15) 18 3 1 (4) (2) (2)
for
(recovery
of) credit
losses on
performing
loans
Total 103 79 182 3 (7) (3) 175 provision
for
(recovery
of) credit
losses
Fiscal 2019

Provision 544 160 704 2 52 (7) 751
for
(recovery
of) credit
losses on
impaired
loans
Provision 63 37 100 (2) 28 (5) 121
for
(recovery
of) credit
losses on
performing
loans
Total 607 197 804 – 80 (12) 872 provision
for
(recovery
of) credit
losses
Fiscal 2018

Provision 466 258 724 6 (17) (13) 700
for
(recovery
of) credit
losses on
impaired
loans
Provision 3 (38) (35) – (1) (2) (38)
for
(recovery
of) credit
losses on
performing
loans
Total 469 220 689 6 (18) (15) 662 provision
for
(recovery
of) credit
losses

Provision for Credit Losses Performance Ratios

Q4-2019 Q3-2019 Q4-2018 Fiscal Fiscal
2019 2018
Total 0.23 0.28 0.18 0.20 0.17
PCL-to-average
net loans and
acceptances
(annualized) (%)
PCL on impaired 0.21 0.22 0.18 0.17 0.18 loans-to-average
net loans and
acceptances
(annualized) (%)

Impaired Loans

Total gross impaired loans (GIL) were $2,629 million at the end of the current quarter, up from $1,936 million in the prior year, with the largest increase in impaired loans in oil and gas. GIL increased $197 million from $2,432 million in the prior quarter.

Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the quarter totalled $799 million, up from $443 million in the prior year, and up from $679 million in the prior quarter.

Changes in Gross Impaired Loans (GIL) (1) and Acceptances

(Canadian $ Q4-2019 Q3-2019 Q4-2018 Fiscal Fiscal
in 2019 2018
millions,
except as
noted)
GIL, 2,432 2,335 2,076 1,936 2,220
beginning
of period
Classified 799 679 443 2,686 2,078
as impaired
during the
period
Transferred (220) (132) (188) (604) (708)
to not
impaired
during the
period
Net (219) (232) (214) (800) (1,051)
repayments
Amounts (159) (138) (194) (528) (618)
written-off
Recoveries – – – – –
of loans
and
advances
previously
written-off
Disposals – (57) (5) (57) (11)
of loans
Foreign (4) (23) 18 (4) 26
exchange
and other
movements
GIL, end of 2,629 2,432 1,936 2,629 1,936
period
GIL to 0.58 0.55 0.48 0.58 0.48
gross loans
and
acceptances
(%)

(1) GIL excludes purchased credit impaired loans.

Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Reported insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $335 million in the current quarter, a decrease of $55 million from $390 million in the prior year, and adjusted CCPB, which excludes a $25 million net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business, was $310 million, a decrease of $80 million from the prior year.

Adjusted CCPB decreased, due to the impact of lower annuity sales, offset by relatively unchanged long-term interest rates in the current year, compared with increases in long-term interest rates that decreased the fair value of policy benefit liabilities in the prior year and the impact of stronger equity markets in the current year. CCPB decreased $552 million from $887 million in the prior quarter, and adjusted CCPB decreased $577 million from the prior quarter, due to relatively unchanged long-term interest rates in the current quarter, compared with decreases in long-term interest rates that increased the fair value of policy benefit liabilities in the prior quarter, and the impact of lower annuity sales. The changes related to the fair value of policy benefit liabilities and annuity sales were largely offset in revenue.

Adjusted results in this CCPB section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

Non-Interest Expense

Reported non-interest expense of $3,987 million increased $794 million or 25% from the prior year. Adjusted non-interest expense of $3,463 million increased $42 million or 1%, and also 1%, excluding the impact of the stronger U.S. dollar, from the prior year. Adjusted non-interest expense excludes the restructuring charge in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, as well as the benefit from the remeasurement of an employee benefit liability in the prior year. The increase largely reflected higher technology and employee-related costs, including the impact of the acquisition of KGS-Alpha, partially offset by lower premises costs.

Reported non-interest expense increased $496 million from the prior quarter and adjusted non-interest expense, which excludes the restructuring charge in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods, was relatively unchanged.

Reported operating leverage on a net revenue basis was negative 20.4%, compared with positive 13.5% in the prior year. Adjusted operating leverage on a net revenue basis was positive 3.8%, compared with positive 2.9% in the prior year.

The reported efficiency ratio was 65.5%, compared with 54.2% in the prior year and was 69.3% on a net revenue basis, compared with 58.0% in the prior year. The adjusted efficiency ratio was 56.9%, compared with 58.1% in the prior year and 60.0% on a net revenue basis, compared with 62.2% in the prior year.

Non-interest expense is detailed in the condensed consolidated financial statements.

Adjusted results in this Non-Interest Expense section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures Section.

Income Taxes

The provision for income taxes was $318 million, a decrease of $120 million from the fourth quarter of 2018 and a decrease of $107 million from the third quarter of 2019. The effective tax rate for the current quarter was 21.0%, compared with 20.6% in the fourth quarter of 2018, and 21.5% in the third quarter of 2019.

The adjusted provision for income taxes was $454 million, an increase of $78 million from the fourth quarter of 2018, and an increase of $22 million from the third quarter of 2019. The adjusted effective tax rate was 22.0% in the current quarter, compared with 19.7% in the fourth quarter of 2018 and 21.5% in the third quarter of 2019. The higher reported and adjusted effective tax rate in the current quarter relative to the fourth quarter of 2018 was primarily due to a favourable U.S. tax item in the prior year.

Adjusted results in this Income Taxes section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Capital Management

BMO manages its capital within the capital management framework described in the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

Fourth Quarter 2019 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at October 31, 2019.

The CET1 Ratio was consistent with the prior quarter as retained earnings growth, which absorbed the restructuring charge, was offset by higher Risk-Weighted Assets (RWA).

CET1 Capital was $36.1 billion as at October 31, 2019, an increase from $35.7 billion as at July 31, 2019, driven by retained earnings growth and a lower deduction for deferred tax assets, partially offset by the net impact from higher pension and other post-employment benefit obligations due to lower discount rates. CET1 capital increased from $32.7 billion as at October 31, 2018, due to retained earnings growth, and to a lesser degree, a lower deduction for deferred tax assets and higher unrealized gains from securities fair valued through accumulated other comprehensive income, partially offset by an increase in the deduction for shortfall of provisions to expected losses and the net impact from higher pension and other post-employment benefit obligations due to lower discount rates.

RWA was $317.0 billion as at October 31, 2019, up from $313.0 billion as at July 31, 2019 and $289.2 billion as at October 31, 2018, mostly from business growth.

The Tier 1 Capital Ratio was 13.0% as at October 31, 2019, compared with 13.0% as at July 31, 2019, and 12.9% as at October 31, 2018. The Total Capital Ratio was 15.2% as at October 31, 2019, compared with 15.3% as at July 31, 2019, and 15.2% as at October 31, 2018. The Tier 1 and Total Capital ratios were relatively unchanged from prior periods, as higher capital, primarily from retained earnings growth, was offset by higher RWA.

The impact of foreign exchange movements on capital ratios was largely offset. BMO’s investments in foreign operations are primarily denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated RWA and capital deductions may result in variability in the bank’s capital ratios. BMO may manage the impact of foreign exchange movements on its capital ratios and did so during the fourth quarter. Any such activities could also impact our book value and return on equity.

BMO’s Leverage Ratio was 4.3% as at October 31, 2019, compared with 4.3% as at July 31, 2019, and 4.2% as at October 31, 2018, as higher Tier 1 Capital, mainly from retained earnings growth, was generally offset by higher leverage exposures from business growth.

Regulatory Capital

Regulatory capital requirements for BMO are determined in accordance with guidelines issued by the Office of the Superintendent Financial Institutions Canada (OSFI), which is based on the capital standards developed by the Basel Committee on Banking Supervision (BCBS). For more information, refer to the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

OSFI’s capital requirements are summarized in the following table.

(% of Minimum Total Domestic OSFI capital BMO
risk-weighted capitalrequirements Pillar StabilityBuffer requirements Capital
assets) 1Capital (2) including and
Buffer capital Leverage
(1) buffers Ratios

as at

October

31, 2019
Common Equity 4.5% 3.5% 2.0% 10.0% 11.4%
Tier 1 Ratio

Tier 1 6.0% 3.5% 2.0% 11.5% 13.0%
Capital Ratio

Total Capital 8.0% 3.5% 2.0% 13.5% 15.2%
Ratio
Leverage 3.0% na na
3.0% 4.3% Ratio (3)

(1) The minimum
risk-based
capital ratios
set out in
OSFI’s Capital
Adequacy
Requirements
(CAR) Guideline
are augmented by
3.5% in Pillar 1
Capital Buffers,
which can absorb
losses during
periods of
stress. The
Pillar 1 Capital
Buffers include
a 2.5% Capital
Conservation
Buffer, a 1.0%
Common Equity
Tier 1 Surcharge
for domestic
systematically
important banks
(D-SIBs) and a
Countercyclical
Buffer as
prescribed by
OSFI (immaterial
for the fourth
quarter of
2019). If a
bank’s capital
ratios fall
within the range
of this combined
buffer,
restrictions on
discretionary
distributions of
earnings (such
as dividends,
share
repurchases and
discretionary
compensation)
would ensue,
with the degree
of such
restrictions
varying
according to the
position of the
bank’s ratios
within the
buffer range.
(2) OSFI requires
all D-SIBs to
maintain a
Domestic
Stability Buffer
(DSB) against
Pillar 2 risks
associated with
systemic
vulnerabilities.
The DSB can
range from 0% to
2.5% of total
RWA and is set
at 2.0%
effective
October 31,
2019. Breaches
of the DSB will
not result in a
bank being
subject to
automatic
constraints on
capital
distributions.
(3) Minimum leverage
ratio
requirement as
set out in
OSFI’s Leverage
Requirements
Guideline.
na – not
applicable

Regulatory Capital Position

(Canadian $ in millions, except as noted) Q4-2019 Q3-2019 Q4-2018
Gross common equity (1) 45,728 45,295 41,387
Regulatory adjustments applied to common equity (9,657) (9,632) (8,666)Common Equity Tier 1 Capital (CET1)
36,071 35,663 32,721
Additional Tier 1 eligible capital (2) 5,348 5,348 4,790
Regulatory adjustments applied to Tier 1 (218) (217) (291) Additional Tier 1 Capital (AT1)
5,130 5,131 4,499 Tier 1 Capital (T1 = CET1 + AT1)
41,201 40,794 37,220
Tier 2 eligible capital (3) 7,189 7,070 7,017
Regulatory adjustments applied to Tier 2 (50)
(75) (121) Tier 2 Capital (T2)
7,139 6,995 6,896 Total Capital (TC = T1 + T2)
48,340 47,789 44,116 Risk-Weighted Assets and Leverage Ratio Exposures (4)(5)
CET1 Capital Risk-Weighted Assets 317,029 313,003 289,237
Tier 1 Capital Risk-Weighted Assets 317,029 313,003 289,420
Total Capital Risk-Weighted Assets 317,029 313,003 289,604
Leverage Ratio Exposures 956,493 943,275 876,106Capital Ratios (%)

CET1 Ratio 11.4
11.4 11.3
Tier 1 Capital Ratio 13.0
13.0 12.9
Total Capital Ratio 15.2
15.3 15.2
Leverage Ratio 4.3 4.3 4.2

(1) Gross common
equity
includes
issued
qualifying
common
shares,
retained
earnings,
accumulated
other
comprehensive
income and
eligible
common share
capital
issued by
subsidiaries.
(2) Additional
Tier 1
eligible
capital
includes
directly and
indirectly
issued
qualifying
Additional
Tier 1
instruments.
(3) Tier 2
eligible
capital
includes
subordinated
debentures
and may
include
certain loan
loss
allowances.
(4) For
institutions
using
advanced
approaches
for credit
risk or
operational
risk, there
is a capital
floor as
prescribed in
OSFI’s CAR
Guideline.
(5) The Credit
Valuation
Adjustment
(CVA) was
fully phased
in starting
Q1-2019. The
applicable
scalars for
CET1, Tier 1
Capital and
Total Capital
were 80%, 83%
and 86%,
respectively,
in fiscal
2018.

Capital Developments

We expect a combined impact of approximately 15 to 20 basis points on our CET1 Ratio in the first quarter of fiscal 2020, from the adoption of IFRS 16, Leases, and the expiry of transitional arrangements for standardized approach for counterparty credit risk and the revised securitization framework. For information on these and other regulatory developments, refer to the Enterprise-Wide Capital Management section of BMO’s 2019 Annual Report.

During the quarter, 196,539 common shares were issued through the exercise of stock options.

On November 14, 2019, we announced the conversion results of our Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 31 (Preferred Shares Series 31). During the conversion period, which ran from October 28, 2019 to November 12, 2019, 69,570 Preferred Shares Series 31 were tendered for conversion into Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 32 (Preferred Shares Series 32), which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 31 prospectus supplement dated July 23, 2014. As a result, no Preferred Shares Series 32 shares were issued and holders of Preferred Shares Series 31 retained their shares. The dividend rate for the Preferred Shares Series 31 is 3.851% for the five-year period commencing on November 25, 2019, and ending on November 24, 2024.

On September 19, 2019, we redeemed all of our outstanding $1,000 million subordinate debentures, Series H Medium-Term Notes First Tranche at a redemption price of 100 percent of the principal amount plus unpaid accrued interest to, but excluding, the redemption date.

On September 16, 2019, we issued $1,000 million subordinated notes, Series J Medium-Term Notes First Tranche through our Canadian Medium-Term Note Program.

On August 14, 2019, we announced the conversion results of our Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29 (Preferred Shares Series 29). During the conversion period, which ran from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 30 (Preferred Shares Series 30), which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated May 30, 2014. As a result, no Preferred Shares Series 30 shares were issued and holders of Preferred Shares Series 29 retained their shares. The dividend rate for the Preferred Shares Series 29 is 3.624% for the five-year period commencing on August 25, 2019, and ending on August 24, 2024.

Dividends

On December 3, 2019, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, up $0.03 per share or 3% from the prior quarter and up $0.06 per share or 6% from the prior year. The dividend is payable on February 26, 2020, to shareholders of record on February 3, 2020. Common shareholders may elect to have their cash dividends reinvested in common shares of BMO, in accordance with the Shareholder Dividend Reinvestment and Share Purchase Plan.

For the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation, BMO designates all dividends paid or deemed to be paid on both its common and preferred shares as „eligible dividends“, unless indicated otherwise.

Caution

This Capital Management section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Review of Operating Groups‘ Performance

How BMO Reports Operating Group Results

The following

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