BMO Financial Group Reports First Quarter 2020 Results

REPORT TO SHAREHOLDERS

Financial Results Highlights

First Quarter 2020 Compared With First Quarter 2019:

Toronto, February 25, 2020 – For the first quarter ended January 31, 2020, BMO Financial Group recorded net income of $1,592 million or $2.37 per share on a reported basis, and net income of $1,617 million or $2.41 per share on an adjusted basis.

“We had a strong quarter, delivering adjusted earnings per share of $2.41, with 8% year-over-year revenue growth, 16% pre-provision, pre-tax earnings growth and 5% net income growth. All our businesses performed well, each delivering operating leverage over 2% with total bank operating leverage of 4.6% driving a 270 basis point improvement in efficiency. Canadian P&C had another good quarter, with net income growth of 8% and continued robust loan and deposit growth in both personal and commercial. Capital Markets had a strong quarter in all businesses, demonstrating its earnings potential, with an increased contribution from our U.S. segment resulting in 38% total net income growth. Wealth Management and U.S. P&C also performed well, delivering positive operating leverage with both revenue growth and disciplined expense management. Overall portfolio credit quality remains stable, even as credit provisions this quarter were elevated, largely as a result of activity in two specific sectors,” said Darryl White, Chief Executive Officer, BMO Financial Group.

“We have significant momentum, with businesses increasing market share. Our segments are winning on the strength of our customer value proposition and our ability to compete effectively. Our commitment to growing our business, improving efficiency and building a stronger BMO for our customers, employees and communities will continue to drive our focus on delivering consistently strong relative performance and long-term shareholder value,” concluded Mr. White.

Return on equity (ROE) was 13.3%, compared with 13.6% in the prior year, and adjusted ROE was 13.5%, compared with 13.9% in the prior year. Return on tangible common equity (ROTCE) was 15.7%, compared with 16.5% in the prior year, and adjusted ROTCE was 15.8%, compared with 16.6% in the prior year.

Concurrent with the release of results, BMO announced a second quarter 2020 dividend of $1.06 per common share, unchanged 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.

Our complete First Quarter 2020 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended January 31, 2020, is available online at www.bmo.com/investorrelations and at www.sedar.com.

  Note: All ratios and percentage changes in this document are based on unrounded numbers.

First Quarter Operating Segment Overview

Canadian P&C

Reported net income was $700 million, an increase of $52 million or 8% and adjusted net income was $700 million, an increase of $51 million or 8% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Strong revenue growth was partially offset by higher provisions for credit losses and higher expenses.

During the quarter, we extended our partnership with Canadian Forces Morale and Welfare Services, as we continue to be the official bank and exclusive provider of unique banking services and financial products to members of the Canadian Defence Community, supporting current and former troops, Department of National Defence personnel, RCMP and Canadian Coast Guard members and their families, to help make their financial goals a reality. We also introduced a new personal financial management solution, BMO Insights, to help customers gain better control of their financial lives. The solution leverages artificial intelligence to deliver personalized, automated and actionable insights for everyday banking customers to help them manage their day-to-day finances and cash flow.

U.S. P&C

Reported net income was $351 million, compared with $444 million in the prior year, and adjusted net income was $361 million, compared with $454 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets.

Reported net income was US$267 million, compared with US$332 million, and adjusted net income was US$275 million, compared with US$340 million in the prior year, due to higher provisions for credit losses, in part due to a recovery in the prior year, partially offset by higher revenue.

During the quarter, BMO opened a new commercial banking office in Los Angeles, California, providing businesses in Southern California with access to BMO’s full array of industry expertise, financial solutions and capabilities, complemented by local market knowledge.

BMO Wealth Management

Reported net income was $291 million, an increase of $53 million or 22%, and adjusted net income was $300 million, an increase of $52 million or 21% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Traditional Wealth reported net income was $209 million, an increase of $36 million or 21%, and adjusted net income was $218 million, an increase of $35 million or 19%, primarily driven by higher revenue from a higher level of client assets and lower expenses. Insurance reported and adjusted net income was $82 million, an increase of $17 million or 26%, primarily due to a benefit from market movements in the current quarter, relative to the unfavourable impact of market movements in the prior year, partially offset by lower underlying business results.

In support of responsible investing and customers’ increasing preference to align financial and social goals, BMO Asset Management launched a suite of indexed Environmental, Social and Governance (ESG) ETFs. BMO was also recognized by Investment Week’s Sustainable and ESG Investment Awards 2019, winning Best ESG Research Team for the second consecutive year and Best ESG Investment Fund for our BMO Responsible Global Equity Fund.

BMO Capital Markets

Reported net income was $356 million, an increase of $100 million or 39%, and adjusted net income was $362 million, an increase of $99 million or 38% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Strong revenue growth in both Global Markets and Investment and Corporate Banking was partially offset by higher expenses and higher oil and gas provisions.

On January 21, 2020, we entered into an agreement to acquire Clearpool Group Inc. (Clearpool), a New York-based provider of electronic trading solutions, operating in the United States and Canada. This acquisition delivers powerful new capabilities to BMO’s electronic trading platform and demonstrates our commitment to providing leading edge trading technology to our global client base. The transaction is subject to regulatory approvals and other customary closing conditions, and is expected to close in the calendar second quarter of 2020.

Corporate Services

Reported and adjusted net loss was $106 million, compared with a reported and adjusted net loss of $76 million in the prior year. Results decreased, primarily due to lower treasury related revenue, in part due to a stronger prior year level, and higher expenses.

Adjusted results in this First 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 January 31, 2020. The CET1 Ratio was unchanged from the prior quarter, as retained earnings growth was offset by impacts from business growth, regulatory changes, and the adoption of IFRS 16, Leases.

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Provision for Credit Losses

Total provision for credit losses was $349 million, an increase of $212 million from the prior year. The provision for credit losses ratio was 31 basis points, compared with a below trend level of 13 basis points in the prior year. The provision for credit losses on impaired loans of $324 million increased $197 million from $127 million in the prior year, primarily due to higher provisions in our P&C businesses and BMO Capital Markets. The prior year’s provision for credit losses included the benefit of a recovery on U.S. consumer loans. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 12 basis points in the prior year. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $10 million provision for credit losses on performing loans in the prior year. The $25 million provision for credit losses on performing loans in the current quarter was due to credit migration and portfolio growth.

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 annual 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’s member 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.

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Management’s Discussion and Analysis

Management’s Discussion and Analysis (MD&A) commentary is as at February 25, 2020. 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 January 31, 2020, 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 Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness, as at January 31, 2020, 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 January 31, 2020, 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.

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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 and consumer leverage; 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, and the Risk Management section on page 25 in this document, 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 and updated in the Economic Review and Outlook section set forth in this document. 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, we primarily consider historical economic data, past relationships between economic and financial variables, changes in government policies, and the risks to the domestic and global economy. Please refer to the following Economic Review and Outlook section.

Economic Review and Outlook

After slowing to an estimated rate of 1.6% in 2019 amid weaker global demand and uncertain trade policies, Canada’s economic growth is expected to improve slightly to 1.7% in 2020, in response to federal tax cuts, an easing in trade policy tensions and a relaxation of restrictions on Alberta’s oil production. Business investment is anticipated to strengthen, due to an initial trade deal between the United States and China and the ratification of the United States-Mexico-Canada Agreement. After rebounding last year, the housing market should remain well supported by low mortgage rates and the fastest increase in the population in three decades. However, despite a healthy labour market, consumer spending will be restrained by high debt-service payments. A slow-growing global economy, partially in response to the impact of the coronavirus on the tourism industry and China’s economy, will continue to restrain exports. A likely moderation in Canadian job growth should keep the unemployment rate steady near recent 45-year lows. The Bank of Canada has kept policy rates unchanged at 1.75% since late 2018, and it is expected to pursue a steady policy course this year with inflation remaining near the 2% target. However, should the economy weaken further, the central bank would be inclined to reduce policy rates. The risk of easier monetary policy and an ongoing trade deficit will likely keep the Canadian dollar close to current low levels against the U.S. dollar. Growth in industry-wide consumer credit is anticipated to remain modest at 3.2% in 2020, while residential mortgage credit is projected to pick up to a 4.8% rate, the fastest in three years. Non-financial business credit is anticipated to grow at a healthy rate of 5.4% in 2020, supported by an increase in business spending.

The record-long U.S. economic expansion is projected to proceed at a more moderate pace of 1.8% in 2020, compared with a 2.3% rate in 2019. While this pace would mark the slowest growth in four years, the unemployment rate should remain close to half-century lows. Business investment is expected to improve in response to the Phase One trade deal between the United States and China. The deal marks an easing in trade tensions and generally commits China to more than double its purchases of U.S. exports in the next two years. However, tariffs will remain in place until a more comprehensive agreement can be reached. Home sales have turned higher in response to lower mortgage rates and steady job growth, while record-low resale listings will encourage construction. Though moderating, consumer spending should remain well supported by record-high household wealth and record-low debt-service costs. The economy is expected to weaken early in the year due to the suspended production of Boeing’s 737 MAX aircraft, while the coronavirus could delay China’s purchases of U.S. exports. After reducing policy rates three times in 2019, the Federal Reserve is expected to maintain a steady policy stance as a result of low inflation and a stable jobless rate. Industry-wide consumer credit is expected to grow around 3.2% in 2020, while residential mortgage demand should expand 4.2%. Non-financial business credit will likely increase 4.0%, supported by firmer investment spending.

This Economic Review and Outlook section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Financial Highlights

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

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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 on page 7 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.

  Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.

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Foreign Exchange

The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars decreased relative to both the first quarter of 2019 and the fourth quarter of 2019 due to changes in the U.S. dollar exchange rate. 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 of 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 revenues, 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.

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

Net Income

Q1 2020 vs. Q1 2019

Reported net income was $1,592 million, an increase of $82 million or 5% from the prior year, and adjusted net income was $1,617 million, an increase of $79 million or 5%. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. Reported EPS of $2.37 increased $0.09 or 4%, and adjusted EPS of $2.41 increased $0.09 or 4% from the prior year.

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

Q1 2020 vs. Q4 2019

Reported net income increased $398 million or 33% from the prior quarter, and adjusted net income increased $10 million or 1%. Adjusted net income excludes a $357 million restructuring charge, primarily related to severance and a $25 million reinsurance adjustment, both in the prior period, as well as the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The current quarter includes stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year. Reported EPS increased $0.59 or 33%, and adjusted EPS decreased $0.02 or 1% from the prior quarter.

Strong net income performance in BMO Capital Markets was largely offset by a decrease in our P&C businesses and a higher net loss in Corporate Services. BMO Wealth Management reported net income increased from the prior quarter, while adjusted net income was unchanged.

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

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Revenue (1)

Q1 2020 vs. Q1 2019

Reported revenue was $6,747 million, an increase of $230 million or 4% from the prior year. On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue was $6,031 million, an increase of $440 million or 8%.

Results reflect strong revenue performance in BMO Capital Markets, Canadian P&C and BMO Wealth Management. U.S. P&C revenue increased 1%, or 3% on a U.S. dollar basis from the prior year, with Corporate Services revenue slightly lower.

Net interest income was $3,388 million, an increase of $216 million or 7%. On an excluding trading basis, net interest income was $3,031 million, an increase of $141 million or 5%, largely due to higher deposit and loan balances across all operating groups, partially offset by lower deposit margins.

Average earning assets were $804.5 billion, an increase of $60.3 billion or 8%, or 9% excluding the impact of the weaker U.S. dollar, due to loan growth, higher securities and higher cash resources. BMO’s overall net interest margin decreased 1 basis point from the prior year, driven by lower deposit spreads in U.S. P&C, largely due to rate decreases by the Federal Reserve, partially offset by a higher margin in Canadian P&C. On an excluding trading basis, net interest margin decreased 9 basis points, largely 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 $2,643 million, an increase of $224 million or 9%, or 10% excluding the impact of the weaker U.S. dollar, with increases in most non-interest revenue categories. On an excluding trading basis, net of CCPB, non-interest revenue was $2,502 million, an increase of $176 million or 8%.

Gross insurance revenue decreased $169 million from the prior year, primarily due to lower annuity sales in the current quarter, partially offset by a larger increase in the fair value of investments in the current quarter, compared with the prior year, resulting from decreases in long-term interest rates and the impact of stronger equity markets in the current quarter. These changes related to the fair value of investments and annuity sales are largely offset by changes in policy benefit liabilities, the impact of which is reflected in CCPB, as discussed on page 10. 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.

Q1 2020 vs. Q4 2019

Revenue increased $660 million or 11% from the prior quarter. Revenue, net of CCPB increased $279 million or 5%. Revenue, net of adjusted CCPB, which excludes the reinsurance adjustment in the prior period, increased $254 million or 4%, or 5% excluding the impact of the weaker U.S. dollar.

Results reflect strong revenue performance in BMO Capital Markets and BMO Wealth Management. Corporate Services and Canadian P&C increased slightly, while U.S. P&C recorded a slight decrease on a Canadian dollar basis, or a slight increase on a U.S. dollar basis.

Net interest income increased $24 million or 1% from the prior quarter. On an excluding trading basis, net interest income increased $52 million or 2% from the prior quarter, largely due to higher deposit volumes across all operating groups and higher loan volumes in the P&C businesses, partially offset by lower margins in the P&C businesses.

Average earning assets increased $26.1 billion or 3%, or 4% excluding the impact of the weaker U.S. dollar, primarily due to higher securities, higher cash resources and loan growth. BMO’s overall net interest margin decreased 3 basis points, or 2 basis points on an excluding trading basis, primarily due to a higher volume of assets in Corporate Services and BMO Capital Markets, which have a lower spread than the bank.

Non-interest revenue, net of CCPB, increased $255 million or 11%. Non-interest revenue, net of adjusted CCPB, increased $230 million or 10%, primarily due to higher trading revenue, underwriting and advisory revenue and insurance revenue, net of CCPB. On an excluding trading basis, net of adjusted CCPB, non-interest revenue increased $68 million or 3%.

Gross insurance revenue increased $445 million from the prior quarter, primarily due to an increase in the fair value of investments in the current quarter, resulting from decreases in long-term interest rates, compared with relatively unchanged long-term interest rates in the prior quarter, higher annuity sales, and the impact of stronger equity markets in the current quarter. The increase in insurance revenue was largely offset by changes in CCPB, as discussed on page 10.

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.

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Provision for Credit Losses

Q1 2020 vs. Q1 2019

Total provision for credit losses was $349 million, an increase of $212 million from the prior year. The provision for credit losses ratio was 31 basis points, compared with a below trend level of 13 basis points in the prior year. The provision for credit losses on impaired loans of $324 million increased $197 million from $127 million in the prior year, primarily due to higher provisions in our P&C businesses and BMO Capital Markets. The prior year’s provision for credit losses included the benefit of a recovery on U.S. consumer loans. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 12 basis points in the prior year. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $10 million provision for credit losses on performing loans in the prior year. The $25 million provision for credit losses on performing loans in the current quarter was due to credit migration and portfolio growth. The year-over-year increase in the provision for credit losses on performing loans was primarily due to the difference in credit migration between periods, with credit migration increasing the allowance in the current quarter, compared with improved credit performance in the prior year, partially offset by relative changes in economic outlook.

Q1 2020 vs. Q4 2019

Total provision for credit losses increased $96 million from the prior quarter. The provision for credit losses ratio was 31 basis points, compared with 23 basis points in the prior quarter. The provision for credit losses on impaired loans increased $93 million, primarily due to higher provisions in our U.S. Commercial business and BMO Capital Markets. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 21 basis points in the prior quarter. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $22 million provision for credit losses on performing loans in the prior quarter, with the increase largely due to a change in economic outlook.

Impaired Loans

Total gross impaired loans (GIL) were $2,822 million at the end of the current quarter, up from $2,019 million in the prior year, with the largest increase in impaired loans in oil and gas and manufacturing. GIL increased $193 million from $2,629 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 $831 million, up from $467 million in the prior year, and up from $799 million in the prior quarter.

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Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Reported and adjusted insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $716 million, a decrease of $210 million from the prior year, primarily due to lower annuity sales in the current quarter, partially offset by a larger increase in the fair value of policy benefit liabilities in the current quarter, compared with the prior year, resulting from decreases in long-term interest rates and the impact of stronger equity markets in the current quarter.

Reported CCPB increased $381 million and adjusted CCPB increased $406 million from the prior quarter. Adjusted CCPB excludes a $25 million net impact of major reinsurance claims from Japanese typhoons that were incurred in the prior quarter, after our announced decision to wind-down our reinsurance business. Results increased primarily due to an increase in the fair value of policy benefit liabilities in the current quarter, resulting from decreases in long-term interest rates, compared with relatively unchanged long-term interest rates in the prior quarter, higher annuity sales and the impact of stronger equity markets in the current quarter. The changes related to the fair value of policy benefit liabilities and annuity sales were largely offset in revenue.

Adjusted results in this Insurance Claims, Commissions and Changes in Policy Benefit Liabilities section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Non-Interest Expense (1)

Reported non-interest expense was $3,669 million, an increase of $112 million or 3% from the prior year, or 4% excluding the impact of the weaker U.S. dollar, and adjusted non-interest expense was $3,637 million, an increase of $117 million or 3%, or 4% excluding the impact of the weaker U.S. dollar. Adjusted non-interest expense excludes the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The increase was primarily due to higher employee-related costs, in part due to higher revenue, and higher technology costs, partially offset by activities across the bank to execute on productivity initiatives.

Reported non-interest expense decreased $318 million or 8% from the prior quarter, and adjusted non-interest expense increased $174 million or 5% from the prior quarter. Adjusted non-interest expense excludes the restructuring charge in the prior quarter and the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The increase was largely driven by higher employee-related expenses, including stock-based compensation for employees eligible to retire that are expensed in the first quarter of each year and seasonality of benefits, partially offset by lower professional fees.

Reported operating leverage on a net revenue basis was positive 4.7%, compared with positive 1.4% in the prior year. Adjusted operating leverage on a net revenue basis was positive 4.6%, compared with positive 1.5% in the prior year.

The reported efficiency ratio was 54.4%, compared with 54.6% in the prior year, and was 60.8% on a net revenue basis, compared with 63.6% in the prior year. The adjusted efficiency ratio was 53.9%, compared with 54.0% in the prior year, and 60.3% on a net revenue basis, compared with 63.0% in the prior year.

Non-interest expense is detailed in the unaudited interim 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 $421 million, an increase of $34 million from the first quarter of 2019, and an increase of $103 million from the fourth quarter of 2019. The effective tax rate for the current quarter was 20.9%, compared with 20.4% in the first quarter of 2019, and 21.0% in the fourth quarter of 2019.

The adjusted provision for income taxes was $428 million, an increase of $32 million from the first quarter of 2019, and a decrease of $26 million from the fourth quarter of 2019. The adjusted effective tax rate was 21.0% in the current quarter, compared with 20.4% in the first quarter of 2019, and 22.0% in the fourth quarter of 2019. The change in the reported and adjusted effective tax rate in the current quarter relative to the first quarter of 2019 and the fourth quarter of 2019 was primarily due to earnings mix.

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

BMO Financial Group First Quarter Report 2020 10

Capital Management

BMO continues to manage its capital within the capital management framework described on page 59 of BMO’s 2019 Annual Report.

First Quarter 2020 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at January 31, 2020.

The CET1 Ratio was unchanged from the fourth quarter of fiscal 2019, as retained earnings growth was offset by impacts from business growth, regulatory changes, and the adoption of IFRS 16, Leases.

CET1 capital was $37.1 billion as at January 31, 2020, up from $36.1 billion as at October 31, 2019, mainly due to retained earnings growth and to a lesser extent, lower deduction for deferred tax assets and higher unrealized gains from securities fair valued through accumulated other comprehensive income.

Risk-Weighted Assets (RWA) were $325.6 billion as at January 31, 2020, up from $317.0 billion as at October 31, 2019, mainly due to business growth, regulatory changes and the adoption of IFRS 16.

The bank’s Tier 1 and Total Capital Ratios were 13.0% and 15.2%, respectively, as at January 31, 2020, unchanged from October 31, 2019, as higher capital from increase in CET1, as discussed above, 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 current quarter. Any such activities could also impact our book value and return on equity.

BMO’s Basel III Leverage Ratio was 4.3% as at January 31, 2020, unchanged from the fourth quarter of fiscal 2019, as higher Tier 1 Capital was offset by higher leverage exposures from business growth.

Regulatory Developments

The Basel III reforms package, finalized by the Basel Committee on Banking Supervision (BCBS) in December 2017, for implementation on January 1, 2022 includes: revised standardized and internal ratings-based approaches for credit risk, revisions to the credit valuation adjustment (CVA) framework, revised standardized approach for operational risk which replaces the existing standardized and advanced measurement approaches, revised leverage ratio framework and an output floor for RWA to be phased in over a five-year period. The preliminary view of the Office of the Superintendent of Financial Institution (OSFI) on the scope and timing of implementation of the Basel III reforms in Canada is set out in its discussion paper issued for consultation in July 2018. While the BCBS outlined a five-year transition period for the RWA output floor from 50% in 2022 to 72.5% in 2027, OSFI’s discussion paper proposes to set the output floor at 72.5% upon implementation of the reforms in the first quarter of fiscal 2022.

The Minimum Capital Requirements for Market Risk (the Final Market Risk Framework), part of the Basel III reforms, was finalized by the BCBS in January 2019, with a proposed implementation date of January 1, 2022.

The Basel III reforms are expected to increase the amount of capital we are required to hold. We continue to engage with OSFI as it works to finalize the timing and approach to domestic implementation.

In January 2020, OSFI revised its capital requirements for operational risk applicable to deposit-taking institutions, reflecting the final Basel III revisions published by the BCBS in December 2017. OSFI has decided that the domestic implementation of the revised Basel III operational risk capital requirements will move from the first quarter of fiscal 2021 to the first quarter of fiscal 2022 to coincide with the implementation of the final Basel III credit risk and leverage ratio requirements.

In December 2019, OSFI set the level of the Domestic Stability Buffer (DSB), a Pillar 2 buffer applicable to Canadian domestic systemically important banks (D-SIBs) at 2.25%, up from 2.0%, effective April 30, 2020. The increase reflects OSFI’s view that key vulnerabilities to D-SIBs remain elevated, and in some cases show signs of increasing, including Canadian household indebtedness, asset imbalances and institutional indebtedness, as well as global vulnerabilities which could increase the chance of a spillover of external risks into the Canadian financial system. The DSB, which is met with CET1 capital, can be set between 0% and 2.5% of total RWA. OSFI’s long-term objective is to ensure the effectiveness of the DSB. Within that context, OSFI will review the 0%-2.5% range to determine if it is appropriate.

In the first quarter of fiscal 2020, the expiry of transitional arrangements provided by OSFI for the standardized approach for counterparty credit risk and the revised securitization framework, resulted in a modest increase in the amount of capital we are required to hold.

IFRS 16, Leases was effective November 1, 2019 and resulted in a downward adjustment to opening retained earnings on adoption. The most significant impact for BMO is the recording of real estate leases on the balance sheet.

The combined impact of IFRS 16, and the expiry of transitional arrangements was 16 basis points on our CET1 Ratio in the first quarter of fiscal 2020.

The implementation of the final version of the Large Exposure Limits Guideline, applicable to D-SIBs, in the first quarter of fiscal 2020, did not have a significant impact on our operations.

The Canadian Bail-In Regime, including OSFI’s Total Loss Absorbing Capacity (TLAC) Guideline, came into effect on September 23, 2018. Under this regime, the bank is required to meet target TLAC requirements by November 1, 2021. The targets are currently set at a risk-based TLAC ratio of 23.75% RWA (including a 2.25% DSB) and a TLAC leverage ratio of 6.75%. At January 31, 2020, our risk-based TLAC was 20.8% and our TLAC leverage ratio was 6.9%.

For a more detailed discussion of regulatory developments, see the Enterprise-Wide Capital Management section on pages 59 to 65, the Liquidity and Funding Risk section on pages 91 to 99 and the Legal and Regulatory Risk section on pages 103 to 104 of BMO’s 2019 Annual Report.

11 BMO Financial Group First Quarter Report 2020

Regulatory Capital

Regulatory capital requirements for BMO are determined in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline, which is based on the capital standards developed by the BCBS. For more information, see the Enterprise-Wide Capital Management section on pages 59 to 65 of BMO’s 2019 Annual Report.

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

na – not applicable

Regulatory Capital Position

Other Capital Developments

During the quarter, 392,291 common shares were issued through the exercise of stock options.

On February 25, 2020, we announced our intention, subject to the approval of OSFI and the Toronto Stock Exchange, to establish a new normal course issuer bid (NCIB) for up to 12 million common shares, commencing on or around June 3, 2020. Once approvals are obtained, the share repurchase program will permit BMO to purchase its common shares for the purpose of cancellation. The NCIB is a regular part of BMO’s capital management strategy. The timing and amount of purchases under the NCIB are subject to regulatory approvals and to management discretion based on factors such as market conditions and capital levels. We will consult with OSFI before making purchases under the bid.

If a non-viable contingent capital (NVCC) trigger event were to occur, our NVCC capital instruments would be converted into BMO common shares pursuant to automatic conversion formulas, with a conversion price based on the greater of: (i) a floor price of $5.00; and (ii) the current market price of our common shares at the time of the trigger event (calculated using a 10-day weighted average). Based on a floor price of $5.00, these NVCC capital instruments would be converted into approximately 3.08 billion BMO common shares, assuming no accrued interest and no declared and unpaid dividends.

Outstanding Shares and Securities Convertible into Common Shares (1)

Dividends

On February 25, 2020, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, unchanged from the preceding quarter, and up $0.06 per share or 6% from the prior year. The dividend is payable on May 26, 2020, to shareholders of record on May 1, 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

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

13 BMO Financial Group First Quarter Report 2020

Review of Operating Groups’ Performance

How BMO Reports Operating Group Results

The following sections review the financial results of each of our operating groups and operating segments for the first quarter of 2020.

Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more closely align BMO’s organizational structure with its strategic priorities. In addition, allocations of revenue, provisions for credit losses and expenses are updated to better align with current experience.

Effective November 1, 2019, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior years. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. Depreciation on the right-of-use assets has been recorded in non-interest expense and interest on the lease liability in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

BMO analyzes revenue at the consolidated level based on GAAP revenue as reported in the consolidated financial statements rather than on a taxable equivalent basis (teb), which is consistent with our Canadian peer group. Like many banks, we analyze revenue on a teb basis at the operating group level. Revenue and the provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to facilitate comparisons of income between taxable and tax-exempt sources. The offset to the group teb adjustments is reflected in Corporate Services revenue and provision for income taxes.

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

The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and commercial operating segments, Canadian Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The P&C banking business reported net income was $1,051 million, compared with $1,092 million in the prior year. Adjusted net income was $1,061 million, compared with $1,103 million in the prior year, and excludes the amortization of acquisition-related intangible assets. These operating segments are reviewed separately in the sections that follow.

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

Canadian Personal and Commercial Banking (Canadian P&C)

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

Q1 2020 vs. Q1 2019

Canadian P&C reported net income was $700 million, an increase of $52 million or 8% and adjusted net income was $700 million, an increase of $51 million or 8% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Strong revenue growth was partially offset by higher provisions for credit losses and higher expenses.

Revenue was $2,082 million, an increase of $132 million or 7% from the prior year, primarily due to higher balances across all products, higher margins and increased non-interest revenue. Net interest margin of 2.68% increased 7 basis points, due to a favourable product mix and the benefit of a widening Prime rate to the Banker’s Acceptances rate.

Personal revenue increased $67 million or 6%, due to higher balances across all products and higher margins. Commercial revenue increased $65 million or 9%, due to higher balances across all products and higher non-interest revenue.

Total provision for credit losses was $152 million, an increase of $32 million from the prior year. The provision for credit losses on impaired loans increased $24 million, due to higher commercial provisions. There was a $14 million provision for credit losses on performing loans in the current quarter, compared with a $6 million provision for credit losses on performing loans in the prior year.

Non-interest expense was $986 million, an increase of $30 million or 3%, primarily due to higher technology and pension costs.

Average gross loans and acceptances increased $17.0 billion or 7% from the prior year to $247.4 billion. Total personal lending balances (excluding retail cards) increased 4%, including 6% growth in proprietary mortgages and amortizing home equity line of credit loans. Commercial loan balances (excluding corporate cards) increased 15%. Average deposits increased $23.3 billion or 14% to $191.5 billion. Personal deposit balances and commercial deposit balances both increased 14%.

Q1 2020 vs. Q4 2019

Reported and adjusted net income decreased $10 million or 1% from the prior quarter.

Revenue increased $4 million, primarily due to higher balances across all products, partially offset by lower margins and lower non-interest revenue. Net interest margin of 2.68% decreased 1 basis point from the prior quarter.

Personal revenue decreased $6 million, primarily due to lower non-interest revenue and lower margins, partially offset by higher balances across all products. Commercial revenue increased $10 million or 1%, primarily due to higher balances across all products, partially offset by lower margins.

Total provision for credit losses increased $7 million. The provision for credit losses on impaired loans increased $4 million with higher commercial provisions, partially offset by lower consumer provisions in the current quarter. There was a $14 million provision for credit losses on performing loans in the current quarter, compared with a $11 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense increased $10 million or 1% from the prior quarter.

Average gross loans and acceptances increased $4.0 billion or 2% from the prior quarter, and average deposits increased $7.5 billion or 4%.

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

U.S. Personal and Commercial Banking (U.S. P&C)

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

Q1 2020 vs. Q1 2019

U.S. P&C reported net income was $351 million, compared with $444 million in the prior year, and adjusted net income was $361 million, compared with $454 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income was $267 million, compared with $332 million, and adjusted net income was $275 million, compared with $340 million in the prior year, due to higher provisions for credit losses, in part due to a recovery in the prior year, partially offset by higher revenue.

Revenue was $1,030 million, an increase of $28 million or 3% from the prior year, primarily due to higher loan and deposit balances and higher fee income, partially offset by a lower net interest margin. Net interest margin of 3.34% decreased 37 basis points, primarily due to lower deposit product margins driven by the impact of a lower interest rate environment, as well as changes in deposit product mix and loan margin compression.

Personal revenue was $328 million, compared with $341 million in the prior year, due to lower deposit revenue. Commercial revenue was $702 million, an increase of $41 million or 6%, primarily due to higher loan and deposit balances and fee income, partially offset by lower margins.

Total provision for credit losses was $113 million, an increase of $108 million from the prior year. The provision for credit losses on impaired loans increased $88 million, due to higher commercial provisions in the current year and higher consumer provisions as a result of a recovery on consumer loans in the prior year. There was a $13 million provision for credit losses on performing loans in the current quarter, compared with a $7 million recovery of credit losses on performing loans in the prior year.

Non-interest expense was $578 million and adjusted non-interest expense was $568 million, with both increasing $3 million or 1% from the prior year.

BMO Financial Group First Quarter Report 2020 16

Average gross loans and acceptances increased $10.0 billion or 12% from the prior year to $90.6 billion, driven by growth in commercial loans of 13% and personal loans of 9%. Average deposits increased $8.7 billion or 11% to $87.2 billion, with 13% growth in commercial deposit balances and 9% growth in personal deposit balances.

Q1 2020 vs. Q4 2019

Reported net income was $351 million, compared with $393 million, and adjusted net income was $361 million, compared with $404 million in the prior quarter. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income was $267 million, compared with $297 million, and adjusted net income was $275 million, compared with $305 million in the prior quarter, due to higher provisions for credit losses, partially offset by lower expenses.

Revenue was $1,030 million, an increase of $2 million from the prior quarter, primarily due to higher deposit balances and fees, partially offset by lower deposit margins. Net interest margin of 3.34% decreased 1 basis point, primarily due to lower deposit margins, reflecting the impact of lower rates and change in deposit product mix, partially offset by the benefit of deposits growing faster than loans.

Personal revenue was $328 million, compared with $337 million in the prior quarter, due to lower deposit revenue and lower fee income. Commercial revenue of $702 million increased $11 million, primarily due to higher deposit balances, higher fee income and loan revenue.

Total provision for credit losses increased $59 million. The provision for credit losses on impaired loans increased $49 million, due to higher commercial provisions. There was a $13 million provision for credit losses on performing loans in the current quarter, compared with a $3 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense decreased $19 million or 3% and adjusted non-interest expense decreased $18 million or 3%, primarily due to lower technology, employee-related and other costs, partially offset by higher premises costs.

Average gross loans and acceptances increased $0.6 billion or 1% from the prior quarter, driven by growth in commercial loans and personal loans. Average deposits increased $4.1 billion or 5%, with growth in commercial and personal deposit balances.

Adjusted results in this U.S. P&C section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

BMO Wealth Management