OREANDA-NEWS. For the second quarter ended April 30, 2016, BMO Financial Group (TSX:BMO)(NYSE:BMO) reported net income of $973 million or $1.45 per share on a reported basis and net income of $1,152 million or $1.73 per share on an adjusted basis. Adjusted net income was up 7% and adjusted EPS was up 8%, excluding a $79 million after-tax write-down of an equity investment.

"BMO delivered good results in the second quarter with adjusted net income of $1.2 billion and adjusted EPS of $1.73, reflecting strong performance in our combined personal and commercial banking business which grew 14% from last year," said Bill Downe, Chief Executive Officer, BMO Financial Group.

"Year-to-date adjusted net income and EPS were both up 7% driven by diversified loan and deposit growth, good revenue performance and a continued focus on expense control. Canadian and U.S. Personal and Commercial Banking and BMO Capital Markets had positive operating leverage and, in BMO Wealth Management, underlying business growth remained solid.

"In the quarter, we were encouraged to see a more positive tone in the market environment for interest rates, currencies and commodities, while economic fundamentals remain healthy. Our capital position is strong and we are progressing with the work of further differentiating the bank through our digital platforms while driving efficiency and growing customer loyalty as our first priority," concluded Mr. Downe.

Concurrent with the release of results, BMO announced a third quarter 2016 dividend of $0.86 per common share, up $0.02 per share or 2% from the preceding quarter and up $0.04 per share or 5% from a year ago, equivalent to an annual dividend of $3.44 per common share.

(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 deductions for net income attributable to non-controlling interest in subsidiaries and preferred share dividends.
     
Note: All ratios and percentage changes in this document are based on unrounded numbers

Total Bank Overview

Net income was $973 million for the second quarter of 2016, down $26 million or 3% from the prior year, due to a $132 million after-tax restructuring charge as we accelerate the use of technology to enhance customer experience and focus on driving operational efficiencies. Reported EPS was down 3% year over year.

Adjusted net income was $1,152 million, up $6 million or 1% from the prior year. Adjusted EPS was up 1% year over year. Adjusted net income was up 7% and adjusted EPS was up 8%, excluding a $79 million after-tax write-down of an equity investment, reflecting strong performance in the P&C businesses, including organic growth and the benefit from the acquired BMO Transportation Finance business (BMO TF). Traditional wealth net income was lower than the prior year due to the investment write-down. Insurance income declined from above-trend earnings in the prior year. BMO Capital Markets net income decreased 2% from the prior year as good revenue performance was offset by higher provisions for credit losses and higher expenses. Return on equity was 10.1% and adjusted return on equity was 12.1%. Book value per share increased 8% from the prior year to $55.57 per share. The Basel III Common Equity Tier 1 Ratio was 10.0%.

Operating Segment Overview

Canadian P&C

Net income of $525 million was up $40 million or 8% from a year ago. Revenue was up $67 million or 4% from the prior year due to higher balances across most products and increased non-interest revenue, partially offset by lower net interest margin. Expenses increased $29 million or 4% reflecting investments to support business growth, net of a continued focus on expense management. Year-over-year operating leverage was positive 0.6%. Year-over-year loan growth was 5% and deposit growth was 7%.

In our personal banking business, year-over-year loan and deposit growth was 4% and 7%, respectively. The average number of products held by our customers continues to grow, as we focus on strengthening relationships with our customers. We recently announced that we will offer Apple Pay to our customers, allowing them to make easy and secure purchases with their BMO credit and debit cards.

In our commercial banking business, loans and deposits grew 10% and 6% year over year, respectively. These results reflect our focused investment to increase capacity for our sales force and develop new products and services that meet our customers' needs. We recently started introducing biometric security enhancements to some corporate card customers with MasterCard® Identity Check. Using the mobile application, customers can verify their identity using facial recognition and fingerprint biometrics when making mobile and online purchases.

U.S. P&C

Net income of $267 million increased $60 million or 29% and adjusted net income of $279 million increased $59 million or 27% from the prior year. All amounts in the remainder of this section are on a U.S. dollar basis.

Net income of $206 million increased $39 million or 23% from a year ago and adjusted net income of $216 million increased $39 million or 21%, benefiting from the acquired BMO TF business and organic growth.

Revenue of $879 million increased $171 million or 24%, due to the benefits of BMO TF, higher loan and deposit volumes and increased deposit spreads, net of loan spread compression. Adjusted non-interest expense of $545 million increased $92 million or 20%, largely due to the acquisition of BMO TF. Year-over-year adjusted operating leverage was positive 3.7%.

Year-over-year loan and acceptances growth was $9.7 billion or 16%, benefiting from the acquisition of BMO TF and organic commercial loan growth of 13%.

In February, Talk With Our Kids About Money Day, powered by BMO Harris Bank, was awarded the 2015 Wisconsin Financial Literacy Award, for its efforts to work towards educating families, children and communities on financial stability.

During the quarter, BMO Harris Bank introduced two new Smart Branch locations, providing our customers with the best of our innovative technologies in a unique, smaller format that is tailored to their needs.

BMO Wealth Management

Net income was $134 million compared to $238 million a year ago. Adjusted net income was $158 million compared to $265 million a year ago. Traditional wealth adjusted net income was $90 million compared with $169 million a year ago, due to a $79 million after-tax write-down of an equity investment. Underlying traditional wealth adjusted results were unchanged with business growth offset by lower year-over-year equity markets. Adjusted net income in insurance was $68 million compared to above-trend results of $96 million a year ago.

Assets under management and administration declined $16 billion or 2% from a year ago to $817 billion, driven by market depreciation, partially offset by favourable foreign exchange movements.

In February 2016, BMO Mutual Funds was awarded the DALBAR Mutual Fund Service Award1 for the 10th consecutive year. This prestigious award recognizes firms that provide consistent best-in-class service to investors.

1The annual DALBAR Mutual Fund Service Award rankings are based on evaluations of telephone service made over the calendar year, measuring a company's quality of performance in product knowledge, professionalism and their ability to provide value-added service.

BMO Capital Markets

Net income of $291 million decreased $5 million or 2% from the prior year as good revenue performance was offset by higher provisions for credit losses and higher expenses. Revenue increased $42 million or 4%, excluding the impact of the stronger U.S. dollar. Trading Products reported strong performance primarily from higher client activity, while Investment and Corporate Banking revenue decreased as higher corporate banking related revenue was more than offset by lower net securities gains. Non-interest expenses increased $4 million or 1%, excluding the impact of the stronger U.S. dollar. Year-over-year operating leverage was positive 3.0%.

BMO Capital Markets was recognized for several industry awards during the quarter. Global Finance magazine named us the World's Best Metals & Mining Investment Bank for the seventh consecutive year and we were named Best Trade Bank in Canada by Trade Finance Magazine. We were also named Canadian Bank of the Year - Deal Value, at the Canadian Dealmakers Awards.

Corporate Services

Corporate Services net loss for the quarter was $244 million compared with a net loss of $227 million a year ago. The current quarter reported figures included a $132 million after-tax restructuring charge as we accelerate the use of technology to enhance customer experience and focus on driving operational efficiencies. The prior year included a $106 million after-tax restructuring charge primarily due to restructuring to drive operational efficiencies. Corporate Services adjusted net loss for the quarter was $101 million, compared with an adjusted net loss of $121 million a year ago.

Adjusted results in these Total Bank Overview and Operating Segment Overview sections are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Capital

BMO's Basel III Common Equity Tier 1 (CET1) Ratio was 10.0% at April 30, 2016. The CET1 Ratio decreased by approximately 10 basis points from 10.1% at the end of the first quarter due largely to business growth and changes in book quality, partially offset by retained earnings growth, which was lower than normal given the restructuring charge.

Provision for Credit Losses

The total provision for credit losses was $201 million, an increase of $40 million from the prior year primarily due to higher resource-related provisions in BMO Capital Markets.

   
Non-GAAP Measures  
(Canadian $ in millions, except as noted)   Q2-2016     Q1-2016     Q2-2015     YTD-2016     YTD-2015  
Reported Results                              
Revenue   5,101     5,075     4,526     10,176     9,581  
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)   (407 )   (366 )   (24 )   (773 )   (771 )
Revenue, net of CCPB   4,694     4,709     4,502     9,403     8,810  
Provision for credit losses   (201 )   (183 )   (161 )   (384 )   (324 )
Non-interest expense   (3,312 )   (3,270 )   (3,112 )   (6,582 )   (6,118 )
Income before income taxes   1,181     1,256     1,229     2,437     2,368  
Provision for income taxes   (208 )   (188 )   (230 )   (396 )   (369 )
Net Income   973     1,068     999     2,041     1,999  
EPS ($)   1.45     1.58     1.49     3.03     2.95  
Adjusting Items (Pre-tax)                              
Amortization of acquisition-related intangible assets (1)   (40 )   (43 )   (40 )   (83 )   (80 )
Acquisition integration costs (2)   (24 )   (22 )   (11 )   (46 )   (24 )
Cumulative accounting adjustment (3)   -     (85 )   -     (85 )   -  
Restructuring cost (4)   (188 )   -     (149 )   (188 )   (149 )
Adjusting items included in reported pre-tax income   (252 )   (150 )   (200 )   (402 )   (253 )
Adjusting Items (After tax)                              
Amortization of acquisition-related intangible assets (1)   (31 )   (33 )   (31 )   (64 )   (62 )
Acquisition integration costs (2)   (16 )   (15 )   (10 )   (31 )   (20 )
Cumulative accounting adjustment (3)   -     (62 )   -     (62 )   -  
Restructuring cost (4)   (132 )   -     (106 )   (132 )   (106 )
Adjusting items included in reported net income after tax   (179 )   (110 )   (147 )   (289 )   (188 )
Impact on EPS ($)   (0.28 )   (0.17 )   (0.22 )   (0.45 )   (0.29 )
Adjusted Results                              
Revenue   5,101     5,159     4,526     10,260     9,581  
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)   (407 )   (366 )   (24 )   (773 )   (771 )
Revenue, net of CCPB   4,694     4,793     4,502     9,487     8,810  
Provision for credit losses   (201 )   (183 )   (161 )   (384 )   (324 )
Non-interest expense   (3,060 )   (3,204 )   (2,912 )   (6,264 )   (5,865 )
Income before income taxes   1,433     1,406     1,429     2,839     2,621  
Provision for income taxes   (281 )   (228 )   (283 )   (509 )   (434 )
Net income   1,152     1,178     1,146     2,330     2,187  
EPS ($)   1.73     1.75     1.71     3.48     3.24  
Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.
(1)   These expenses were charged to the non-interest expense of the operating groups. Before and after-tax amounts for each operating group are provided on pages 16, 17, 18 and 20 of the Second Quarter 2016 Report to Shareholders.
(2)   Acquisition integration costs related to F&C are charged to Wealth Management. Acquisition integrated costs related to BMO TF are charged to Corporate Services, since the acquisition impacts both Canadian and U.S. P&C businesses. Acquisition costs are primarily recorded in non-interest expense.
(3)   Cumulative accounting adjustment recognized in other non-interest revenue related to foreign currency translation, largely impacting prior periods.
(4)   Restructuring charge in Q2-2016, as we accelerate the use of technology to enhance customer experience and focus on driving operational efficiencies. Restructuring charge in Q2-2015, primarily due to restructuring to drive operational efficiencies. Restructuring cost is recorded in non-interest expense.