BMO financial group is reporting that retail and business banking performance in Canada and the United States continued to improve in the third quarter of 2002 due to strong deposit and lending growth. However, BMO also reports that investment write-downs and weak revenues in capital markets businesses affected overall results.

BMO earned net income of $346 million, diluted earnings per share of $0.65 and a return on equity of 12.9% for the third quarter ended July 31, 2002. Excluding this quarter’s $23 million of non-recurring CSFBdirect, now part of Harrisdirect, acquisition-related costs, earnings per share were $0.68, return on equity was 13.5 per cent and cash
earnings per share were $0.72. Excluding non-recurring items, net income was $360 million, a decline of 19% from the third quarter a year ago but up 19% from the second quarter.

Results were affected by net investment securities losses of $72 million after-tax. This consisted of write-downs of $98 million after-tax, net of realized gains of $26 million after-tax. Write-downs included $34 million after-tax related to BMO’s equity investments in its own collateralized bond obligations and a $16 million after-tax charge against WorldCom, Inc. bonds. The write-down on CBOs reduced earnings in the quarter by $0.07 per share. The equity investment in CBOs has now been fully written-off.

Compared to the second quarter, excluding non-recurring items, net income rose $59 million or 19%. The improvement was attributable to a $106 million after-tax reduction in the required provision for credit losses and stronger Canadian retail and business banking performance. Improved trading gains were more than offset by higher investment securities losses, while the second quarter had also benefited from corporate loan securitization revenues.

Year-to-date net income declined $236 million after excluding the effect of non-recurring items, the most notable of which were last year’s $272 million after-tax gains on sales of BMO’s investment in Bancomer. Much stronger performance in retail and business banking was more than offset by higher provisions for credit losses and lower wholesale banking revenues in the weaker capital markets environment. Increased investment losses also contributed to the decline while year-to-date net income benefited from the discontinuance of amortization of goodwill and more favourable income tax rates and tax benefits in fiscal 2002.

Excluding acquisitions, expenses were reduced $43 million or 3% from the third quarter of last year as BMO continues its focus on expense management.

Gross impaired loans declined $93 million from the second quarter despite the designation of $312 million of loans to six of the operating companies of Adelphia Group as impaired. These loans are considered adequately secured and no significant loss is anticipated, although results reflect a modest provision for two of the loans. The decline in gross impaired loans was also reflective of write-offs in the corporate loan portfolio, particularly in the telecom sector. New impaired loan formations were slightly lower than in the second quarter, notwithstanding the designation of the Adelphia loans. Excluding the Adelphia loans, new impaired loan formations in the quarter were at their lowest level of the past two years.

Provisions for credit losses totalled $160 million for the quarter and $660 million year-to-date. This quarter’s provisions were down $160 million from the second quarter but were up $43 million from the third quarter of last year. BMO continues to anticipate that its provision for credit losses will approximate $775 million to $825 million for the year, representing a range of about 55 basis points of average net loans and acceptances including securities purchased under resale agreements.

The annual targets of cash EPS growth of 8 to 12% and cash ROE of 14 to 15% are considered achievable but will require higher levels of earnings in the fourth quarter of the year. Achieving the targets will require better performance than in the third quarter from Investment Banking Group and continued revenue growth in retail and business banking, says BMO. The bank is also anticipating achievement of its annual target of Tier 1 capital of at least 8.0%.


On a U.S. dollar/U.S. GAAP basis, Harris Bank’s net income was $76 million for the third quarter of 2002, an increase of 24% from the third quarter of last year and up 15% from the immediately preceding
quarter. The year-over-year increase was attributable to both continued strong revenue growth and effective expense control. The improvement from the second quarter was due to gains on sales of securities, cost reductions and lower provisions for credit losses.