Thursday, November 30, 2006

BMO Q4 2006 Earnings

  
The Globe and Mail, 30 November 2006

Bank of Montreal had its profit estimates and price target cut by analyst James Keating at RBC Dominion Securities Inc. yesterday as a result of weakened growth prospects. Mr. Keating reiterated his "underperform" rating on the stock.

Shares of the bank closed yesterday at $68.83 on the S&P/TSX, down 39 cents. Mr. Keating reduced his 12-month share price target to $70 from $73 and lowered his fiscal 2007 cash share profit estimate to $5.20 from $5.35.

"We are concerned about lack of growth in domestic retail banking and the potential for a large U.S. community bank acquisition," Mr. Keating said.

BMO reported a fourth-quarter profit of $1.37 a share this week, but the normalized earnings after adjusting for loan-loss provisions, securitization and securities gains and the tax rate were closer to $1.20 a share, he said.

Operating problems such as sluggish retail revenue and market share losses could cap share profit growth for two years, according to the report.
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Scotia Capital, 29 November 2006

Q4 Results - Underlying Earnings Extremely Weak

• Bank of Montreal recorded a 7% increase in Q4/06 cash operating EPS of $1.33 per share, excluding a $0.04 per share general reserve reversal. Earnings were boosted by an estimated $0.12 per share from a very low tax rate of 17.4% and $0.06 per share from security gains.

• BMO's operating results were disappointing, with weak underlying earnings and market share losses in personal and commercial banking.

• Underlying earnings were weak due to a 3% decline in revenue led by a steep decline in trading revenue (commodities and fixed income) as well as lower retail net interest margin, particularly in the U.S.

• Personal & Commercial (including Harris) earnings were down 11% YOY, with Private Client earnings up 4% and Investment Banking earnings down 11%. Corporate Support earnings contributed significantly to total earnings, increasing to $109 million (including loan loss recoveries) from $9 million a year earlier.

• Cash return on equity was 19.1% versus 19.2% a year earlier. Cash return on risk weighted assets was 1.65% versus 1.66% a year earlier

Dividend Increase 5%

• The bank announced a 5% dividend increase to $2.60 per share from $2.48 per share.

Fiscal 2006 Earnings Growth 13% - Expected to be Below Bank Group

• Cash earnings for fiscal 2006 increased 13% to $5.09 per share versus $4.50 per share in F2005.

• Cash operating ROE improved to 19.0% versus 18.3% in fiscal 2005.

Personal & Commercial Earnings Flat in Fiscal 2006

• Personal and Commercial Client Group (PCCG) earnings declined 11% YOY to $302 million. Earnings were down due to weak contributions from both Canadian and U.S. retail segments.

• Total Personal & Commercial bank earnings were flat in fiscal 2006 at $1,236 million versus $1,239 million in fiscal 2005.

P&C Canada Earnings Weak

• P&C Canada earnings were flat YOY at $273 million versus $274 million as volume growth was offset by lower net interest margin, higher expenses, and higher loan loss provisions. Excluding the customer loyalty charge in Q4/05, Canadian retail earnings declined 9% YOY.

• The bank lost 14 bp YOY in residential mortgage loans market share and 55 bp in personal deposits. Business banking loan market share declined 3 bp from a year earlier.

• P&C Canada revenue was up 5% with expenses increasing 4%.

• Securitization revenues were $55 million, up significantly compared with $21 million in the previous quarter and $34 million a year earlier, due to a $27 million gain or $0.04 per share on $1.5 billion credit card securitization.

• Fiscal 2006 earnings for P&C Canada remained flat at $1,097 million versus $1,095 million in fiscal 2005.

Retail Net Interest Margin Declines

• Canadian retail net interest margin (NIM) declined 3 basis points (bp) QOQ to 2.66% due to lower mortgage refinancing fees and price competition, after increasing 7 bp in the previous quarter.

• U.S. retail NIM was under significant pressure, declining 10 bp QOQ to 3.57%.

P&C U.S. Earnings Decline

• P&C U.S. earnings declined 24% YOY to $29 million from $38 million a year earlier due to a weaker U.S. dollar, and costs of integrating acquisitions and branch technology expenses. Average loans and acceptances increased 6% YOY; however, higher loans were offset by margin compression and mix shift to lower spread deposit products and fixed-rate loans.

• The net interest margin declined 10 bp during the quarter to 3.57%. We expect continued margin pressure at Harris.

• P&C U.S. fiscal 2006 earnings declined 3% to $139 million from $144 million due to the weaker U.S. dollar, lower net interest margin and higher costs associated with new branches and acquisitions.

Private Client Group Earnings Solid

• Private Client Group (PCG) earnings in Q4 increased 4% YOY (excluding the $18 million after-tax gain on sale of Harrisdirect and $16 million after-tax gain on sale of TSX shares in Q4/05) to $85 million.

• Cash earnings for fiscal 2006 increased 13% to $364 million versus $323 million in F2005 due to higher fee-based revenue from increased asset levels, while increased managed-asset levels and positive net sales drove higher mutual fund revenues.

• Mutual fund revenue increased 12% YOY to $130 million. Mutual fund assets under management (as reported by IFIC) increased 20% YOY to $34.4 billion.

• For the fiscal year, mutual fund revenue increased 14% to $499 million.

Investment Banking Group Earnings Down 11%

• Investment Banking Group (IBG) earnings declined 11% to $186 million due to extremely weak trading revenue and a 6% decline in capital markets revenue.

• For the fiscal year, IBG operating earnings were up 12% to $861 million resulting from higher trading revenue.

Trading Revenue Extremely Weak

• Trading revenue declined by half to $83 million from $172 million in the previous quarter and $162 million a year earlier, the lowest level in two years. The bank recorded a trading loss in the other category (mainly commodities, oil and gas). The bank was offside in its natural gas position during the quarter. Interest rate trading revenue was also very low.

Trading Revenue - Commodities and Interest Rates - Steep Decline

• Trading revenue in other (commodities) was a loss of $8 million versus a profit of $41 million in the previous quarter and a profit of $43 million a year earlier.

• Interest rates (fixed income) trading was also particularly weak at $11 million versus $52 million in the previous quarter and $62 million a year earlier. Interest rates trading revenue in Q4/06 was at the lowest level in at least seven years.

• For the fiscal year, trading revenue was $665 million, up 13% from $588 million in fiscal 2005 on higher commodities driven by volatility and foreign exchange trading.

Capital Market Revenue

• Capital market revenue was $351 million versus $352 million in the previous quarter and $373 million a year earlier. Underwriting and advisory fees increased 3% YOY to $104 million, while securities commissions and fees declined 9% to $247 million.

• For the fiscal year, capital market revenue increased a modest 1% to $1,458 million.

Security Gains & Unrealized Security Surplus

• Security gains recorded in the quarter were $46 million or $0.06 per share versus $0.02 per share in the previous quarter and $0.04 per share a year earlier (excluding special gains).

• Unrealized security surplus increased to $41 million from $5 million in the previous quarter, with its equity position in MasterCard accounting for a good portion of this. The bank has one quarter of security gains available based on this quarter's gains.

Corporate Support Earnings - Strong

• Corporate Support earnings increased significantly to $109 million (excluding the general reserve reversal) from $9 million a year earlier due to higher LLP recoveries, lower expenses and lower income taxes. The bank also booked a $27 million gain on $1.5 billion in credit card securitization in the corporate segment.

Total Revenue Down 3%; Expenses Flat

• Operating leverage in Q4/06 was negative 3% with total bank revenue declining 3% and noninterest expenses remaining flat.

• For the fiscal year, revenue increased 3% while non-interest expenses increased 2%.

Productivity Ratio

• Overall, the bank’s cash productivity ratio deteriorated to 64.2% from 62.0% in the previous quarter and 62.6% a year earlier.

• The bank's productivity ratio for fiscal 2006 improved 60 basis points to 62.6% (excluding unusual items), missing its goal of 100 - 150 basis point improvement.

Loan Loss Provisions 13 bp

• Specific loan loss provisions (LLPs) were $51 million or 0.13% of loans, versus $42 million, or 0.11% of loans in the previous quarter. Total LLPs in fiscal 2006 were $176 million, comprised of specific LLPs of $211 million and $35 million of general reserve reversal.

• Specific LLPs in fiscal 2006 were $211 million or 0.13% of loans, compared to $219 million, or 0.15% of loans in fiscal 2005.

• Our 2007 LLP forecast is unchanged at $320 million or 0.20% of loans, with management guidance at $400 million or less. Our 2008 LLP forecast is $400 million or 0.25% of loans.

Tier 1 Capital

• Tier 1 ratio was 10.2% versus 10.1% in the previous quarter and 10.3% a year earlier. Risk weighted assets increased 9% YOY to $163 billion. The total capital ratio was 11.8% at the end of the quarter versus 11.6% in the previous quarter and 11.8% a year earlier.

Acquisition of First National Bank & Trust

• On September 27, BMO announced that its U.S. subsidiary, Harris Financial Corp., agreed to acquire First National Bank & Trust (FNBT) for US$290 million. The transaction is expected to close in January 2007. Excluding one-time items, the transaction is expected to be accretive to BMO's cash EPS in year one. FNBT has 32 branches and 33 ABMs in Indianapolis and the surrounding communities of Kokomo and Terre Haute.

Share Buyback Activity

• During the quarter, BMO repurchased 975,000 shares at an average cost of $65.84 per share for $64 million. Year-to-date, BMO repurchased 5,919,400 shares under its repurchase programs for total consideration of $376 million.

• On September 1, BMO announced a normal course issuer bid to repurchase up to 15 million Bank of Montreal shares, representing approximately 3% of BMO’s public float. This program commenced on September 6, 2006, and will expire on September 5, 2007.

Fiscal 2007 & 2008 Earnings Estimates

• We are reducing slightly our 2007 cash earnings estimate to $5.30 per share from $5.35 per share. We are introducing our 2008 earnings estimate at $5.60 per share.

• Our 12-month share price target is unchanged at $80, representing 15.1x our 2007 earnings estimate and 14.3x our 2008 earnings estimate.

Recommendation

• Maintain 3-Sector Underperform on BMO based on relative weak earnings momentum, low return on equity versus the bank group and weak strategic positioning with no meaningful P/E multiple discount to the bank group.
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newratings, 29 November 2006

Analyst J Bantis of Credit Suisse maintains his "neutral" rating on Bank of Montreal. The target price has been raised from C$68 to C$72.

In a research note published this morning, the analyst mentions that the company has reported its 4Q operating EPS short of the consensus. Bank of Montreal’s performance has been negatively impacted by a reduction in the net interest margins, market share losses in domestic retail, higher operating expenses in US retail, proprietary trading losses and rising market risk, the analyst says. The market share headwinds in domestic retail banking are likely to continue during 1H07, since a turnaround without price competition would need time and execution, Credit Suisse adds.
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newratings, 29 November 2006

Analysts at UBS maintain their "neutral" rating on Bank of Montreal, while reducing their estimates for the company. The target price is set to C$72.

In a research note published this morning, the analysts mention that the company is expected to witness challenges to attaining earnings growth during 2007. Although Bank of Montreal is undertaking initiatives to address operational issues, it is expected to witness market share erosion going forward, the analysts add. The EPS estimate for 2008 has been reduced from $5.75 to $5.70
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The Globe and Mail, Andrew Willis, 29 November 2006

Employees at some of Bank of Montreal's 201 branches in the Chicago area have grown accustomed to seeing a balding 54-year-old pedal up on his way to work, park his bike, check that the ATMs are working, then go to the teller's cage to ask how business is going.

The cyclist in question is Bill Downe, the newly named chief executive officer at Canada's fourth largest bank. As he prepares to take the wheel -- or handlebars -- from 61-year-old Tony Comper at the annual meeting next March, Mr. Downe is bringing a hands-on approach to a bank that faces a formidable challenge in finding new places to grow.

Mr. Downe is taking control of a bank that is losing market share to rivals in its major business lines. One reason the bank's board tapped this 23-year BMO veteran for the top job is no one knows more about how to expand the bank's U.S. operations, which represent its single biggest growth opportunity.

That American retail banking network saw profit fall $11-million to just $23-million in the most recent quarter, compared with last year. The decline reflected small acquisitions -- BMO spent $290-million (U.S.) on a recent 32-branch purchase -- along with the costs of rolling out new technology in branches.

Mr. Comper said the new computers make integrating larger takeovers easier and cheaper, and repeated the bank is targeting 400 U.S. branches, a goal that has been in place throughout the outgoing CEO's seven years in the top job. Colleagues say Mr. Downe "spends his whole day with his sleeves rolled up" and is likely to deliver on long-promised U.S. expansion.

"Bill is growth-oriented. And he's an optimist. He's not going to do a lunatic acquisition, but he's going to be far more willing to pull the trigger than Tony," said one long-time colleague in the bank's Chicago office. BMO has consistently said it can spend up to $2-billion on U.S. purchases, but on Mr. Comper's watch, it didn't step forward with an acquisition that would vault the bank out of the middle of the Midwest pack.

Mr. Downe's great advantage over his predecessors, and domestic rivals, is two decades of U.S. banking experience. He knows the players in a clubby industry. He championed the bank's foray into the U.S. discount brokerage, then engineered a profitable exit from the sector when the economics turned against BMO. Bank of Nova Scotia's Rick Waugh is the only other Canadian bank CEO who has run his institution's U.S. operations.

Long before he was riding his bike around to Chicago branches, Mr. Downe broke into banking as a credit analyst and corporate lender in BMO's energy-focused Houston office, then moved to Denver and Chicago. Armed with an undergraduate degree from Wilfrid Laurier University, and an MBA from University of Toronto in 1978, the Ontario native successfully balanced making loans to clients such as cyclical energy companies with holding the line on credit quality. In recent years, he has run the Canadian wealth management and investment banking teams, in addition to overseeing the U.S. operation.

Success as a travelling corporate banker took a personal toll. Mr. Downe and his wife Robin, who have three adult sons, separated briefly then reconciled last year. One colleague said: "I think that, like many wives, she grew impatient with a husband who spent his entire life on an airplane."

Mr. Downe will still be seeing a fair amount of airports, as he maintains homes in both Chicago and Toronto. But regardless of where he is based, the new CEO is expected to be more plugged into colleagues than the previous generation of bank chiefs.

"Bill will send an e-mail over the weekend, or phone first thing in the morning to discuss a deal. That's a welcome degree of engagement," one of the bank's senior deal makers said. Another colleague said: "The last generation of CEOs said get back to me next month. Bill says get back to me tomorrow." Mr. Downe is known for being BlackBerry-accessible, seven days a week, a sharp departure for a bank with a history of regal CEOs.

In his address to employees following the succession announcement, Mr. Comper said: "Bill has the intellect, the industry knowledge, the leadership acumen and the will to take this enterprise to new heights of growth and success."

Because the new CEO is an insider, and succession was clearly telegraphed, there's unlikely to be a sweeping changing of the guard at BMO's head office. Analyst James Keating at RBC Dominion Securities said yesterday: "Mr. Downe's personnel are already in place at all three divisions, so no management changes should be expected. The change heightens our alertness for acquisitions in U.S. retail and/or [investment banking]."

Jason Bilodeau, an analyst at UBS Securities Canada, said he doesn't expect Mr. Downe to "deviate" from Mr. Comper's U.S. strategy. "There's not going to be a radical shift in direction," Mr. Bilodeau said before the succession announcement. "He has spent a lot of time talking about the domestic retail business and their need to be more effective with their retail customers in Canada."
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The Globe and Mail, Andrew Willis, 29 November 2006

A slowing U.S. economy and strong competition are threatening earnings growth at Bank of Montreal, which announced a record $2.7-billion annual profit yesterday, and named a new chief executive officer.

BMO earned $1.35 a share in the fourth quarter, handily beating the $1.26 forecast by analysts polled by Thomson Financial. For the year, BMO's profit was up 11 per cent, and the bank recorded a return on equity of 19.2 per cent, compared with 18.8 per cent in 2005.

Despite the strong results, BMO chief executive officer Tony Comper noted that "operating momentum slowed in the fourth quarter due to a weaker business environment."

"Market share losses across the board suggest efforts to invigorate the domestic retail operations are ongoing and we suspect will be an issue for the coming quarters," said analyst Jason Bilodeau at UBS Securities in a report to clients titled "Not a Great Start," a reference to the fact that BMO was the first bank to report results for fiscal 2006. Mr. Bilodeau said: "Looking to 2007, rising credit costs, less robust trading activity and a normalization of tax rates all present headwinds."

The bank's fourth-quarter revenue was down 5.9 per cent, though the slide would narrow to 2.3 per cent if BMO's soon-to-be sold U.S. discount brokerage was removed from the mix.

Incoming chief executive officer Bill Downe, who will take the top job at the March 1 annual meeting, said yesterday: "We need to do a better job of translating our good intentions to build lasting customer relationships into tangible business results." In the internal address to employees, he added: "We need to pick up the pace of progress."

Bank stocks have soared in recent months, and analysts feared the rally could end if a softening economy led to slower-than-expected profit growth and higher-than-anticipated credit losses. Right now, Canadian bank stocks command a premium to their global peers, and analyst Martin Roberge at Versant Partners said in a report: "The high and rising relative valuation multiple of the banks is troubling considering relative profitability growth has lagged over the past two years."

BMO shares fell on the earnings news, closing yesterday down $2.29 or 3.2 per cent to $69.22 on the Toronto Stock Exchange.

BMO had no problems with bad loans, setting aside a $16-million provision in the fourth quarter for credit losses, compared with $57-million in the same period last year. The bank is forecasting profit will rise by 5 to 10 per cent in 2007, although specific provisions for credit losses could almost double to $400-million from $211-million this year.

BMO raised its dividend by 3 cents a quarter to 65 cents or $2.60 annually. The bank has the highest target payout range in the country, with up to 55 per cent of profit handed out to shareholders as dividends. Last year, BMO paid out 50 per cent of its profit as dividends.

"Two important themes continue to dominate the banks from a capital perspective; deployment and dividend growth," said a report from analyst Robert Wessel at National Bank Financial. He said all bank CEOs must balance acquisitions with shareholder-friendly dividend boosts. Four of the six big banks are expected to increase their dividends when they report fourth-quarter results. Bank of Nova Scotia, National Bank of Canada and Canadian Imperial Bank of Commerce are expected to follow BMO's lead by boosting payouts.
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Canadian Press, David Friend, 28 November 2006

The Bank of Montreal has booked its highest-ever annual profit — an 11 per cent increase to $2.7 billion — but analysts said the latest quarter was disappointing and could signal turbulent times ahead.

The Toronto-based bank, also known as BMO Financial Group, reported today its revenues were $2.46 billion in its fourth quarter ended Oct. 31, off from $2.62 billion a year ago.

BMO, the first of Canada’s major banks to report year-end results, earned $696 million on the quarter, amounting to $1.35 per diluted share. That was up 4.8 per cent from $664 million or $1.28 per share in the year-ago quarter.

However, “If you peel that back and look at BMO’s underlying core businesses, they actually posted earnings that were lower than the year-ago period,” said Tom Kersting, a financial services analyst with Edward Jones in St. Louis.

Operating profit beat expectations but was driven by unsustainable factors including an unusually low tax rate and a decline in loan loss provisions to a mere $16 million, Kersting said.

He noted that the three weakest divisions were personal and commercial banking, the private client investment group and investment banking — and “the three businesses across the board being weak is pretty unusual from an earnings standpoint.”

Profits from personal and commercial banking dropped $11 million to $294 million, while private client group income was down $22 million at $85 million. Investment banking profit tumbled $40 million to $186 million on lower trading revenues and securities gains.

Kersting noted that the comparisons come against strong year-ago results.

“The last couple of years saw a tremendous period of earnings growth driven by a strong Canadian economy, particularly driven by a strong consumer,” he said, adding that the other banks could feel similar pressure.

UBS Securities analyst Jason Bilodeau commented that the most likely challenges for BMO are less robust trading activity, higher credit costs and a return to normal tax rates.

“Market share losses across the board suggest efforts to invigorate the domestic retail operations are ongoing and we suspect will be an issue for the coming quarters,” Bilodeau wrote in a note.

BMO chief executive officer Tony Comper told a conference call that despite a “more difficult operating environment” in the fourth quarter, the bank’s year overall showed a good performance.

“All three operating groups delivered record net income for the second consecutive year,” said Comper, whose retirement effective March 1 was confirmed by the bank Tuesday. Comper, 61, will be succeeded by chief operating officer Bill Downe, 54.

The full-year earnings of $2.66 billion or $5.15 per share came on a 1.5 per cent increase in revenue to $9.99 billion, helped by a record profit of $710 million in the third quarter.

The bank announced an increase in its quarterly dividend to 65 cents per share, up three cents, representing a payout of about half of the past year’s earnings available to common shareholders.

Comper said BMO has “some gaps in the small business sector and we are losing share at this point in time,” and the new year will also bring a closer look at the mortgage business.

“We have backed off a very aggressive pricing strategy and we’re looking at that participation strategy as we move into the first couple of quarters,” he said.

BMO shares closed down $2.35 or 3.3 per cent to $69.16 on the Toronto Stock Exchange. The stock had hit an all-time high of $72.22 on Monday ahead of the earnings report.
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Bloomberg, Doug Alexander and Sean B. Pasternak, 28 November 2006

Bank of Montreal, Canada's fourth- biggest bank, promoted William Downe to chief executive officer, replacing Anthony Comper, who will step down in March. The stock had its biggest decline in 15 months after profit at the three main business units fell.

Comper, 61, said earlier this year he'd retire by April, ending his tenure as the longest serving chief executive among Canada's six largest banks. That fueled speculation that Downe, the chief operating officer, would be the successor.

Downe's challenges when he becomes CEO on March 1 will be to reverse a slump in the U.S. and to regain market share in Canada from bigger rivals Royal Bank of Canada and Toronto- Dominion Bank, said Tom Kersting, an analyst at Edward Jones. The bank said today that profit from U.S. consumer banking fell to C$23 million ($20 million), the lowest in 10 quarters.

``The U.S. hasn't been a particularly bright spot for BMO, and market conditions are not getting any easier,'' said Kersting in an interview today from St. Louis.

Shares of Toronto-based Bank of Montreal fell C$2.29, or 3.2 percent, to C$69.22 at 4:10 p.m. on the Toronto Stock Exchange, the biggest decline since Aug. 4, 2005. The stock has risen 6.5 percent this year, the worst performer among Canada's five biggest banks. Other bank shares declined, with Canadian Imperial Bank of Commerce dropping 2.3 percent and National Bank of Canada down 2.4 percent.

Bank of Montreal, the first Canadian lender to report fourth-quarter earnings, said in a statement that net income rose 4.8 percent to C$696 million, or C$1.35 a share, from C$664 million, or C$1.28 a year earlier.

Robert Wessel, an analyst at National Bank Financial in Toronto, said the bank earned C$1.33 a share before one-time items, topping his estimate of C$1.24 a share.

The bank benefited from lower taxes and a decline in provisions for bad loans. That helped offset a drop in profit from the investment banking, personal and commercial banking and the private client group units.

``We're clearly not pleased with the softer operating performance in the fourth quarter,'' Downe said today in a conference call with analysts.

Canadian consumer banking profit for the period ended Oct. 31 rose 1.2 percent to C$244 million, and profit from its U.S. operations fell 32 percent. Overall profit for personal and commercial banking declined 3.7 percent to C$294 million. The bank said lending margins narrowed as interest rates rose and competition increased for products such as mortgages. The bank also lost market share for consumer deposits.

The bank said it backed off on ``aggressive pricing'' for its mortgages and high-interest savings accounts, which hurt revenue in these areas. The bank saw stronger growth in consumer loans and credit cards, said Frank Techar, head of Canadian consumer banking.

Profit from investment banking fell 18 percent to C$186 million, as trading revenue from commodities and foreign exchange declined 59 percent to C$69 million. Revenue from underwriting and advisory fees rose 2.9 percent to C$104 million.

``You didn't see any one business unit that shined,'' said Kersting, who rates Bank of Montreal stock a ``hold'' and doesn't own any. ``I think people are starting to get concerned about the sustainability of earnings.''

Revenue fell because of a decline in commodity trading, Genuity Capital Markets analyst Mario Mendonca said today in a note. Genuity said in October that falling natural-gas prices and the collapse of hedge-fund manager Amaranth Advisors LLC, a Bank of Montreal client that lost $6.6 billion betting on the commodity, would hurt the bank's trading businesses.

The bank met four of its five financial targets in Comper's final year as CEO, after he took over the top spot in 1999. Earnings per share rose 12 percent on the year to C$5.15, topping the bank's target of 5 percent to 10 percent growth. Bank of Montreal aims to increase profit by 5 percent to 10 percent again next year, and is targeting the ``low end'' of that range, Chief Financial Officer Karen Maidment said on the conference call.

Lending to small business, increasing mortgages and boosting consumer banking fees will be priorities for 2007, Downe said on the call. He also said he expects ``double-digit'' loan growth in the U.S. next year.

The bank surpassed its earnings growth target ``with the benefit of extremely low taxes that are unlikely to be sustainable, suggesting poor quality,'' said Canadian Imperial Bank of Commerce analyst Darko Mihelic, who added that this was ``an extremely weak result.''

The bank expects a tax rate of 25 percent to 28 percent for 2007, Maidment said in the call.

Bank of Montreal said profit for fiscal 2006 rose to a record C$2.66 billion, up from C$2.4 billion, or C$4.63 a share, in the previous year. Revenue for the year rose 1.5 percent to C$10.1 billion.

Comper, who joined Bank of Montreal in 1967, will remain with the bank as an adviser until April 24, his 62nd birthday, the bank said.

Downe, 54, was promoted to the new position of COO in February. He's been with the bank for about 23 years, starting as a credit analyst. He became head of the BMO Nesbitt Burns investment-banking arm in May 2001 and began overseeing the U.S. operations in September 2002.

Jason Bilodeau, an analyst at UBS Canada, said he doesn't expect Downe to ``deviate'' from Comper's strategy.

``There's not going to be a radical shift in direction,'' Bilodeau said in an interview before the announcement. ``He has spent a lot of time talking about the domestic retail business and their need to be more effective with their retail customers in Canada.''

Downe completed his Bachelor of Arts degree from Wilfrid Laurier University before graduating from the University of Toronto with a Master of Business Administration in 1978, according to Bank of Montreal's Web site. Comper also attended University of Toronto, obtaining a bachelor's degree in English.

Over the last seven years, Bank of Montreal's total shareholder return, including dividends, has been 19 percent a year, the second-worst performer among the six biggest lenders over that period.

Comper indicated in March at the bank's annual meeting of shareholders in Calgary that he could step down within the next year. The next annual meeting is on March 1 in Toronto.
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RBC Capital Markets, 28 November 2006

First Impression

• Underlying EPS Low. BMO’s $1.37 cash EPS included: (i) a $35MM general loan loss release (added 4.5¢ versus our estimate), (ii) 17% effective tax rate (hard to estimate net impact – calculates as a 20¢ helper versus our estimate), (iii) corporate division was high by $42MM (added 8¢ versus our expectation and prior run-rate), and (iv) securities gains added 4¢ versus our estimate. Underlying EPS looks like ~$1.20 (consensus was $1.26, we estimated $1.21). Dividend hiked 3¢ as expected.

• Negligible Revenue Change. Revenue, by our calculation, declined 3% YoY, surprisingly weak given that securities gains and securitization revenue were above estimates. Retail spread was weak.

• Personal & Commercial Missed by 11%. Retail and commercial income of $294MM was below our estimate of $330MM (a 7¢ miss).

• Investment Banking and Wealth In Line. Collectively, $271MM in net income matched our estimate of $272MM. However, securities gains were very high at $46MM (added 4¢ versus our expected level) while trading revenue missed our estimate and the prior run rate by $83MM (12¢).

• Corporate Contributed 18% of Earnings. The centralized, non-core division reported $131MM in earnings this quarter. Excluding our estimate of the general loan loss release already highlighted above, we see another $42MM of positive variance, roughly an 8¢ helper.

• Expenses In Line. Given the revenue miss and expense as expected, operating leverage took a hit, with cost/revenue rising to 65.5%.

• Low Tax Rate. BMO experienced a “perfect storm” in Q4/06 with the favourable resolution of certain tax matters and several small tax initiatives all going the right way. The bank reported a tax rate of 17.4% (teb) – this is not sustainable, as indicated by the bank’s 2007 range of 25% to 28%. We are currently using 28.6% (teb) in our 2007 estimates.

• It’s Official – Tony Comper Retiring March 1st. BMO announced Tony Comper is set to retire and pass the CEO mantle on March 1, 2007, with Bill Downe taking over as expected. Mr. Downe’s personnel are already in place at all 3 divisions, so no management changes should be expected. The change heightens our alertness for acquisitions in US retail and/or wholesale.
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