BMO Financial Group Reports First Quarter 2021 Results

REPORT TO SHAREHOLDERS

BMO’s First Quarter 2021 Report to Shareholders, including the unaudited interim consolidated financial statements for the period ended January 31, 2021, is available online at www.bmo.com/investorrelations and at www.sedar.com.

Financial Results Highlights

First Quarter 2021 Compared With First Quarter 2020:

Toronto, February 23, 2021 – For the first quarter ended January 31, 2021, BMO Financial Group recorded net income of $2,017 million or $3.03 per share on a reported basis, and net income of $2,038 million or $3.06 per share on an adjusted basis.

“We had a very strong start to the year, continuing to build on clear and consistent operating momentum to deliver first quarter adjusted net income of over $2 billion, earnings per share of $3.06, and pre-provision, pre-tax earnings growth of 16% from last year and 13% from last quarter. We achieved solid revenue growth of 6%, compared with the prior year and the prior quarter, and continued to effectively manage expenses and strategically invest for future growth, with operating leverage above 7% and an efficiency ratio of 56.3%. Credit performance was very strong, reflecting both the credit quality of our loan portfolio and our commitment to superior risk management. All businesses performed well, particularly in our U.S. segment, which remains a key driver of diversified earnings growth now and in the future,” said Darryl White, Chief Executive Officer, BMO Financial Group.

“In addition to our strong financial results this quarter, we were proud to be named as the top North American bank in Corporate Knights’ 2021 Global 100 Most Sustainable Corporations in the World and are pleased to be an early signatory to the United Nations Principles for Responsible Banking. We remain resolute in the support of our customers and communities in the face of ongoing challenges related to the pandemic and are focused on helping them recover stronger as the economy rebounds.”

“We have a diversified and resilient model, a strong capital position and good momentum across our businesses that are well-positioned for the evolving environment. We are executing against a strategy to accelerate long-term growth and deliver top-tier shareholder value,” concluded Mr. White.

Reported net income increased 27% and adjusted net income increased 26% from the prior year. Adjusted results exclude the amortization of acquisition-related intangible assets and acquisition integration costs. The increase in net income was driven by net revenue³ growth of 6%, with increases across all operating groups, a decrease in expenses and lower provisions for credit losses.

Return on equity (ROE) was 15.7%, compared with 13.3% in the prior year, and adjusted ROE was 15.8%, compared with 13.5%. Return on tangible common equity (ROTCE) was 18.2%, an increase from 15.7% in the prior year, and adjusted ROTCE was 18.2%, an increase from 15.8%.

Concurrent with the release of results, BMO announced a second quarter 2021 dividend of $1.06 per common share, unchanged from the prior quarter and the prior year. The quarterly dividend of $1.06 per common share is equivalent to an annual dividend of $4.24 per common share.

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

First Quarter Performance Review

Canadian P&C

Reported and adjusted net income was $737 million, an increase of $38 million or 5% from the prior year. Results were driven by higher revenue, with an increase in net interest income, partially offset by a decrease in non-interest revenue, lower expenses and a modest decrease in the provision for credit losses.

During the quarter, Canadian P&C and Visa Canada launched the new BMO eclipse Visa Infinite and BMO eclipse Visa Infinite Privilege credit cards. The new cards are designed to meet the everyday lifestyle needs of Canadians by providing both accelerated earnings on key spending categories and increased flexibility and choice in redemptions.

U.S. P&C

Reported net income was $582 million, an increase of $231 million or 66% from the prior year, and adjusted net income was $589 million, an increase of $228 million or 63%.

Reported net income was US$454 million, an increase of US$187 million or 70% from the prior year, and adjusted net income was US$459 million, an increase of US$184 million or 67%. Results were driven by higher revenue with increases in both net interest income and non-interest revenue, lower expenses and a lower provision for credit losses, primarily due to lower commercial provisions.

During the quarter, we launched BMO EMpower, a five-year, US$5 billion pledge aimed at addressing key barriers faced by minority businesses, communities and families in the United States. As part of BMO’s Purpose to Boldly Grow the Good in business and life, BMO EMpower is a series of long-term lending pledges designed to drive meaningful change and champion racial equity.

BMO Wealth Management

Reported net income was $358 million, an increase of $67 million or 23% from the prior year, and adjusted net income was $366 million, an increase of $66 million or 22%. Results were driven by higher net revenue, and a modest decrease in expenses and in the provision for credit losses. Traditional Wealth reported net income was $286 million, an increase of $77 million or 37%, and adjusted net income was $294 million, an increase of $76 million or 35%, driven by higher revenue, primarily reflecting stronger global markets and higher online brokerage revenue. Insurance net income was $72 million, compared with $82 million in the prior year.

BMO was recognized by Investment Week’s Sustainable and ESG Investment Awards, winning Best Sustainable and ESG Research Team for the third consecutive year and Best Sustainable and ESG Equity Fund for its BMO Responsible Global Equity Fund. In addition, we entered into an agreement to divest our private banking business in Hong Kong and Singapore to J. Safra Sarasin Group. The transaction is subject to regulatory approvals and other customary closing conditions and is expected to close in the first half of calendar 2021.

BMO Capital Markets

Reported net income was $483 million, an increase of $127 million or 36% from the prior year, and adjusted net income was $489 million, an increase of $127 million or 35%. Results were driven by strong revenue performance in Global Markets, partially offset by higher performance-based expenses, with a modest decrease in the provision for credit losses.

During the quarter, we continued to support clients with our deep industry expertise and insights across different sectors. BMO Capital Markets acted as left lead arranger, joint bookrunner and administrative agent on US$500 million of senior secured credit facilities for Centerbridge Partners’ acquisition and combination of daVinci Payments and North Lane Technologies under Syncapay Inc. We also acted as financial advisor, joint lead arranger and joint bookrunner for Clearlake Capital’s and TA Associates’ portfolio company, Ivanti Software, on $1.8 billion of acquisition financing of MobileIron and Pulse Secure.

Corporate Services

Corporate Services reported and adjusted net loss for the quarter was $143 million, compared with a net loss of $105 million in the prior year. Results decreased, primarily due to higher expenses and the impact of a favourable tax rate in the prior year.

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

The order in which the impact on net income is discussed in this section, and elsewhere in the MD&A, follows the order of revenue, expenses and provision for credit losses, regardless of their relative impact.

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Capital

BMO’s Common Equity Tier 1 (CET1) Ratio was 12.4% as at January 31, 2021. The CET1 Ratio increased from 11.9% in the prior quarter, driven by strong internal capital generation and other net positive changes, including lower risk-weighted assets.

Credit Quality

Total provision for credit losses was $156 million, a decrease of $193 million from the prior year. The total provision for credit losses ratio was 14 basis points, compared with 31 basis points in the prior year. The provision for credit losses on impaired loans was $215 million, a decrease of $109 million from $324 million in the prior year, largely due to lower commercial provisions in U.S. P&C. The provision for credit losses on impaired loans ratio was 19 basis points, compared with 29 basis points in the prior year. There was a $59 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $25 million provision in the prior year. The $59 million recovery of the provision for credit losses on performing loans reflects an improving economic outlook and positive credit migration, largely offset by the impact of the uncertain environment on credit conditions, including an increased adverse scenario weight. Refer to the Accounting Policies and Critical Accounting Estimates section and Note 3 in our unaudited interim consolidated financial statements for further information on the allowance for credit losses as at January 31, 2021.

Regulatory Filings

BMO’s continuous disclosure materials, including 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. Information contained in or otherwise accessible through our website (www.bmo.com), or any third party websites mentioned herein, does not form part of this document.

Caution

The extent to which the COVID-19 pandemic impacts BMO’s business, results of operations, reputation and financial performance and condition, including its regulatory capital and liquidity ratios, and credit ratings, as well as its impact on our customers, competitors and trading exposures, and the potential for loss from higher credit, counterparty and mark-to-market losses will depend on future developments, which are highly uncertain and cannot be predicted, including the scope, severity and duration of the pandemic and actions taken by governments, and governmental and regulatory authorities, which could vary by country and region, and other third parties in response to the pandemic. The COVID-19 pandemic may also impact our ability to achieve, or the timing to achieve, certain previously announced targets, goals and objectives. For additional information, refer to the Impact of COVID-19 section on page 8 and the Top and Emerging Risks That May Affect Future Results section on page 28 in this document.

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

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 23, 2021. 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, 2021, included in this document, as well as the audited consolidated financial statements for the year ended October 31, 2020, and the MD&A for fiscal 2020, contained in BMO’s 2020 Annual Report.

BMO’s 2020 Annual Report includes a comprehensive discussion of its 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, 2021, 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, 2021, 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 2021 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, our response to the COVID-19 pandemic and its expected impact on our business, operations, earnings, results, and financial performance and condition, as well as its impact on our customers, competitors, reputation and trading exposures, 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. The uncertainty created by the COVID-19 pandemic has heightened this risk given the increased challenge in making assumptions, 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: the severity, duration and spread of the COVID-19 pandemic, its impact on local, national or international economies, and its heightening of certain risks that may affect our future results; the possible impact on our business and operations of outbreaks of disease or illness that affect local, national or international economies; general economic and market conditions in the countries in which we operate; 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; changes in monetary, fiscal, or economic policy, and tax legislation and interpretation; interest rate and currency value fluctuations, as well as benchmark interest rate reforms; technological changes and technology resiliency; political conditions, including changes relating to or affecting economic or trade matters; the Canadian housing market and consumer leverage; climate change and other environmental and social risks; weak, volatile or illiquid capital or credit markets; 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 proposed acquisitions or dispositions, 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; global capital markets activities; the possible effects on our business of war or terrorist activities; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; 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, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section that starts on page 73 of BMO’s 2020 Annual Report, and the Risk Management section on page 28 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 2020 Annual Report and updated in the Economic Review and Outlook section set forth in this document, as well as in the Allowance for Credit Losses section on page 114 of BMO’s 2020 Annual Report and the Allowance for Credit Losses 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 Economic Review and Outlook and Allowance for Credit Losses sections.

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Economic Review and Outlook

After contracting an estimated 5.4% in 2020, Canada’s economy is anticipated to expand 5.0% in 2021. Though likely to slow in the first quarter of 2021, due to new restrictions to suppress the second wave of the virus, the economy is showing some resilience, with broad strength led by resources, manufacturing and the housing market more than offsetting weakness in a few industries that are heavily impacted by the pandemic. Real GDP is expected to rebound strongly in subsequent quarters as vaccines become more widely available and restrictions are relaxed. The recovery will be assisted by substantial government income-support measures, continued low interest rates, rising demand for in-person services and travel, and accumulated household savings. After record sales in 2020, the housing market is projected to moderate but remain healthy with steady increases in home prices. The unemployment rate is expected to fall from 9.4% in January 2021 to 7.0% at the end of 2021, still high historically. Continued low inflation will likely encourage the Bank of Canada to hold the overnight policy rate near zero for some time. The Canadian dollar is anticipated to strengthen modestly this year, in response to firmer oil and other resource prices. Industry-wide residential mortgage balances continue to rise strongly in response to low mortgage rates and increased demand for more spacious homes from remote workers, though growth is projected to moderate. While growth in consumer credit balances (excluding mortgages) remains weak due to restrained consumer spending, it is anticipated to improve alongside spending in 2021. Industry-wide business credit has been supported by government assistance programs that were facilitated through banks, and demand is anticipated to increase further in 2021 as business confidence and spending improve.

The U.S. economic recovery has slowed somewhat in response to the latest wave of the virus and renewed restrictions. However, passage of a US$900 billion support bill in late December 2020, including the extension of emergency unemployment benefit programs and forgivable loans to small businesses, will likely propel the expansion forward. More fiscal support is expected this year. As a result, after contracting 3.5% in 2020, real GDP is anticipated to grow 6.0% in 2021, the fastest since 1984. The unemployment rate is projected to fall from 6.3% in January 2021 to 4.7% at the end of 2021. The Federal Reserve is widely expected to keep policy rates unchanged in 2021, though longer-term Treasury yields could increase modestly in response to a stronger economy. Industry-wide residential mortgage growth will likely remain positive due to supportive housing market activity, while recent modest consumer credit growth is projected to benefit from increased spending. After declining in the second half of 2020, industry-wide business credit is projected to rise in 2021 as investment strengthens.

The unpredictable course of the coronavirus pandemic subjects the economic outlook to a high degree of uncertainty that is likely to persist until vaccines are widely distributed to most of the population. A more adverse mutation of the virus could lead to an escalation in caseloads and more aggressive shutdowns of business activity, potentially leading to a sustained economic contraction. Possible further delays in vaccine distribution, in particular in Canada, could also result in weaker economic growth in 2021.

This Economic Review and Outlook section contains forward-looking statements. Please see 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. Please refer to the Foreign Exchange section for a discussion of the effects of changes in exchange rates on BMO’s results. Pre-provision pre-tax earnings (PPPT) is a non-GAAP measure, and is calculated as the difference between revenue, net of insurance claims, commissions and changes in policy benefit liabilities (CCPB), and non-interest expense. 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.

  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. segment results that are denominated in U.S. dollars decreased relative to the fourth quarter of 2020 and the first quarter of 2020, 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 BMO’s 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 revenue, expenses, provisions for (recoveries of) credit losses and income taxes 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 63 of BMO’s 2020 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, and the carrying value of assets and liabilities on the balance sheet.

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.

Impact of COVID-19

Real GDP in Canada and the United States has recovered most of its losses from the COVID-19 pandemic, however, unemployment levels remain high and economic growth has slowed in response to renewed restrictions on social and business activity. While vaccine distribution should lead to stronger expansion later in the year, the spread of variants of the virus underscores the still highly unpredictable course of the pandemic. For additional information, refer to the Economic Review and Outlook section.

The safety of the bank’s employees and customers remains a top priority. We continue to be guided by relevant public health authorities to closely monitor developments around the spread of the virus. We continue to support customers in this challenging environment, working closely with governments and agencies on programs and lending facilities designed to reduce the financial hardship caused by COVID-19, and help individuals and businesses to withstand stress and recover financially. The majority of loan payment deferral programs offered to customers beginning in the second quarter of 2020 have expired, with the majority of clients resuming payments after exiting the deferral program.

As of January 31, 2021, we had approximately $0.64 billion of balances under payment deferral programs in Canada ($3.81 billion as at October 31, 2020), and US$0.35 billion in the United States (US$0.69 billion as at October 31, 2020).

BMO continues to participate in government-offered programs in both Canada and the United States. In Canada, these include the Emergency Business Account (CEBA) program, the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) relief programs, and access to the Highly Affected Sectors Credit Availability Program (HASCAP), introduced in February 2021, in collaboration with the BDC. In the United States, we participated in the Main Street Lending Program and continue to support customers with the Small Business Administration’s Paycheck Protection Program.

The extent to which the COVID-19 pandemic impacts BMO’s business, results of operations, reputation and financial performance and condition, including its regulatory capital and liquidity ratios, and credit ratings, as well as its impact on our customers, competitors and trading exposures, and the potential for loss from higher credit, counterparty and mark-to-market losses will depend on future developments, which are highly uncertain and cannot be predicted, including the scope, severity and duration of the pandemic and actions taken by governments, and governmental and regulatory authorities, which could vary by country and region, and other third parties in response to the pandemic. The COVID-19 pandemic may also impact our ability to achieve, or the timing to achieve, certain previously announced targets, goals and objectives. For additional information, refer to the Top and Emerging Risks That May Affect Future Results section on page 28 in this document.

This Impact of COVID-19 section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

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Net Income

Q1 2021 vs. Q1 2020

Reported net income was $2,017 million, an increase of $425 million or 27% from the prior year, and adjusted net income was $2,038 million, an increase of $421 million or 26%. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. Reported EPS was $3.03, an increase of $0.66 or 28% from the prior year, and adjusted EPS was $3.06, an increase of $0.65 or 27%.

Adjusted results were driven by higher revenue, lower expenses, and the impact of lower provisions for credit losses. Net income increased across all operating groups from the prior year, with particularly strong performance in U.S. P&C, BMO Capital Markets and BMO Wealth Management, and good growth in Canadian P&C, partially offset by a higher net loss in Corporate Services.

Q1 2021 vs. Q4 2020

Reported net income was $2,017 million, an increase of $433 million or 27% from the prior quarter, and adjusted net income was $2,038 million, an increase of $428 million or 27%. Reported EPS increased $0.66 or 28% and adjusted EPS increased $0.65 or 27% from the prior quarter.

Adjusted results were driven by higher revenue, partially offset by higher expenses, and the impact of lower provisions for credit losses. Net income increased across all operating groups, partially offset by a higher net loss in Corporate Services.

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

Revenue

Q1 2021 vs. Q1 2020

Total revenue was $6,975 million, an increase of $228 million or 3% 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 increased $343 million, or 6% from $6,031 million in the prior year.

Revenue increased in BMO Capital Markets due to higher trading revenue from strong client activity, in our P&C businesses, primarily due to higher net interest income, and in BMO Wealth Management, primarily reflecting stronger global markets and higher online brokerage revenue, partially offset by lower insurance revenue. Revenue in Corporate Services was unchanged. Results were also impacted by the weaker U.S. dollar.

Net interest income was $3,578 million, an increase of $190 million or 6%. Excluding trading, net interest income was $3,100 million, an increase of $69 million or 2%, largely due to higher net interest income in the P&C businesses, partially offset by the impact of the weaker U.S. dollar.

Average earning assets were $893.9 billion, an increase of $88.5 billion or 11%, due to higher securities, short-term cash positions, including securities borrowed or purchased under resale agreements, and loan growth, partially offset by the impact of the weaker U.S. dollar. BMO’s overall net interest margin decreased 8 basis points from the prior year, primarily driven by higher liquidity levels, partially offset by higher trading net interest income and a higher margin in U.S. P&C. Excluding trading, net interest margin decreased 12 basis points.

Non-interest revenue, net of CCPB, was $2,796 million, an increase of $153 million or 6%. Excluding trading and net of CCPB, non-interest revenue was $2,584 million, an increase of $82 million or 3% from the prior year, with increases across most categories.

Gross insurance revenue decreased $136 million from the prior year, primarily due to changes in the fair value of investments, largely offset by changes in policy benefit liabilities, the impact of which is reflected in CCPB, as discussed on page 11. 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 2021 vs. Q4 2020

Total revenue was $6,975 million, an increase of $989 million or 17% from the prior quarter. Revenue, net of CCPB, was $6,374 million, an increase of $388 million or 6% from the prior quarter.

Revenue increased in BMO Capital Markets, primarily due to higher trading revenue, in our P&C businesses due to higher net interest income and non-interest revenue, and in BMO Wealth Management due to stronger global markets and higher online brokerage revenue, partially offset by lower Corporate Services revenue. Results were also impacted by the weaker U.S. dollar.

Net interest income increased $48 million or 1%. Excluding trading, net interest income increased $82 million or 3%, largely due to higher net interest income, particularly in the P&C businesses, as well as in BMO Capital Markets and BMO Wealth Management, partially offset by lower net interest income in Corporate Services and the impact of the weaker U.S. dollar.

Average earning assets increased $17.6 billion or 2%, primarily due to higher securities, higher short-term cash positions, and loan growth, partially offset by the impact of the weaker U.S. dollar. BMO’s overall net interest margin decreased 1 basis point from the prior quarter, primarily due to higher trading assets and lower net interest income in Corporate Services, partially offset by a higher margin in the P&C businesses. Excluding trading, net interest margin increased 4 basis points from the prior quarter, primarily due to a higher margin in the P&C businesses, partially offset by lower net interest income in Corporate Services.

Non-interest revenue, net of CCPB, was $2,796 million, an increase of $340 million or 14% from the prior quarter. Excluding trading and net of CCPB, non-interest revenue increased $151 million or 6%. The increase was primarily driven by higher securities gains other than trading, securities commission and fees, mutual fund revenue, lending revenue, and investment management and custodial fee revenue.

Gross insurance revenue increased $601 million from the prior quarter, due to changes in the fair value of investments. The increase in insurance revenue was largely offset by changes in CCPB, as discussed on page 11.

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

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Provision for Credit Losses

Q1 2021 vs. Q1 2020

Total provision for credit losses was $156 million, a decrease of $193 million from the prior year. The total provision for credit losses ratio was 14 basis points, compared with 31 basis points in the prior year. The provision for credit losses on impaired loans was $215 million, a decrease of $109 million from $324 million in the prior year, largely due to lower commercial provisions in U.S. P&C. The provision for credit losses on impaired loans ratio was 19 basis points, compared with 29 basis points in the prior year. There was a $59 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $25 million provision in the prior year. The $25 million provision for credit losses on performing loans in the prior year was due to credit migration and portfolio growth, while the $59 million recovery of the provision in the current quarter reflects an improving economic outlook and positive credit migration, largely offset by the impact of the uncertain environment on credit conditions, including an increased adverse scenario weight.

Q1 2021 vs. Q4 2020

Total provision for credit losses was $156 million, a decrease of $276 million from the prior quarter. The total provision for credit losses ratio was 14 basis points, compared with 37 basis points in the prior quarter. The provision for credit losses on impaired loans decreased $124 million, primarily due to lower commercial provisions in our P&C businesses and lower provisions in BMO Capital Markets. The provision for credit losses on impaired loans ratio was 19 basis points, compared with 29 basis points in the prior quarter. There was a $59 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $93 million provision in the prior quarter. The $93 million provision for credit losses on performing loans in the prior quarter reflects a more severe adverse scenario, partially offset by an improving economic outlook and lower balances, while the $59 million recovery of the provision in the current quarter reflects an improving economic outlook and positive credit migration, largely offset by the impact of the uncertain environment on credit conditions, including an increased adverse scenario weight.

  Certain comparative figures have been reclassified to conform with the current period’s presentation.

Impaired Loans

Total gross impaired loans (GIL) were $3,442 million, compared with $2,822 million in the prior year, with the largest increase in impaired loans attributed to the retail trade industry. GIL decreased $196 million from $3,638 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 $665 million, compared with $831 million in the prior year, and $662 million in the prior quarter.

  Certain comparative figures have been reclassified to conform with the current period’s presentation.

BMO Financial Group First Quarter Report 2021 10

Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $601 million in 2021, a decrease of $115 million from the prior year. Results decreased, largely due to changes in the fair value of policy benefit liabilities.

CCPB increased $601 million from the prior quarter, due to an increase in the fair value of policy benefit liabilities. The changes were largely offset in revenue.

Non-Interest Expense

Reported non-interest expense was $3,613 million, a decrease of $56 million or 2% from the prior year, and adjusted non-interest expense was $3,585 million, a decrease of $52 million or 1%. The decrease was largely due to lower travel and business development costs and communication costs, partially offset by higher computer and equipment costs. Non-interest expenses were also impacted by the weaker U.S. dollar.

Reported non-interest expense was $3,613 million, an increase of $65 million or 2% from the prior quarter, and adjusted non-interest expense was $3,585 million, an increase of $70 million or 2%. The increase was driven by higher employee-related costs, 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 computer and equipment costs, as well as decreases in professional fees and travel and business development costs. Non-interest expenses were also impacted by the weaker U.S. dollar.

Reported operating leverage on a net revenue basis was positive 7.2% and adjusted operating leverage on a net revenue basis was positive 7.1%.

The reported efficiency ratio was 51.8%, compared with 54.4% in the prior year, and was 56.7% on a net revenue basis, compared with 60.8% in the prior year. The adjusted efficiency ratio on a net revenue basis was 56.3%, compared with 60.3% in the prior year.

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

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

Income Taxes

The provision for income taxes was $588 million, an increase of $167 million from the first quarter of 2020, and an increase of $166 million from the fourth quarter of 2020. The effective tax rate for the current quarter was 22.6%, compared with 20.9% in the first quarter of 2020, and 21.1% in the fourth quarter of 2020.

The adjusted provision for income taxes was $595 million, an increase of $167 million from the first quarter of 2020, and an increase of $166 million from the fourth quarter of 2020. The adjusted effective tax rate was 22.6% in the current quarter, compared with 21.0% in the first quarter of 2020, and 21.1% in the fourth quarter of 2020. The higher reported and adjusted effective tax rate in the current quarter relative to the first quarter of 2020 and the fourth quarter of 2020 was primarily due to earnings mix, including the impact of higher pre-tax income in the current quarter.

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

Balance Sheet

  Certain comparative figures have been reclassified to conform with the current period presentation.

Total assets were $973.2 billion as at January 31, 2021, an increase of $24.0 billion from October 31, 2020. The weaker U.S. dollar decreased assets by $16.8 billion, excluding the impact on derivative financial assets.

Cash and cash equivalents and interest bearing deposits with banks increased $15.0 billion, due to higher balances held with central banks, partially offset by the impact of the weaker U.S. dollar.

Securities decreased $1.1 billion, as higher client activity in BMO Capital Markets and treasury activities in Corporate Services were more than offset by the impact of the weaker U.S. dollar.

Securities borrowed or purchased under resale agreements increased $9.7 billion, due to higher client activity in BMO Capital Markets, partially offset by treasury activities in Corporate Services and the impact of the weaker U.S dollar.

Net loans and acceptances increased $2.8 billion. Business and government loans and acceptances increased $1.9 billion, primarily due to growth in U.S. P&C, largely offset by the impact of the weaker U.S. dollar, and lower balances in BMO Capital Markets due to lower loan utilization. Residential mortgages increased $1.1 billion, due to growth in Canadian P&C, partially offset by lower balances in U.S. P&C, including the impact of the weaker U.S. dollar.

Derivative financial assets decreased $2.8 billion, due to a decrease in the value of client-driven trading derivatives in BMO Capital Markets, with a decrease in the fair value of equity and interest rate contracts, partially offset by an increase in the fair value of foreign exchange contracts.

Other assets were relatively unchanged from the prior period.

Liabilities increased $24.4 billion from October 31, 2020. The weaker U.S. dollar decreased liabilities by $15.6 billion, excluding the impact on derivative financial liabilities.

Deposits increased $13.5 billion, with growth across all operating groups, partially offset by the impact of the weaker U.S. dollar.

Derivative financial liabilities decreased $0.9 billion, partially due to a decrease in the value of client-driven trading derivatives in BMO Capital Markets, with a decrease in the fair value of interest rate and commodities contracts, partially offset by an increase in the fair value of foreign exchange contracts.

Securities lent or sold under repurchase agreements increased $11.2 billion, driven by client activity in BMO Capital Markets, partially offset by the impact of the weaker U.S. dollar.

Other liabilities increased $1.8 billion, as higher securities sold but not yet purchased, driven by client activity in BMO Capital Markets, was primarily offset by a decrease in acceptances, lower secured funding and the impact of the weaker U.S. dollar.

Subordinated debt decreased $1.1 billion, primarily due to a maturity in the current quarter.

Equity decreased $0.4 billion from October 31, 2020, as higher retained earnings was more than offset by a decrease in accumulated other comprehensive income and lower preferred shares and other equity instruments. Retained earnings increased $1.3 billion, as a result of net income earned in the quarter, partially offset by dividends and distributions on other equity instruments. Accumulated other comprehensive income decreased $1.0 billion, primarily due to the impact of the weaker U.S. dollar on the translation of net foreign operations and the impact of lower own credit spreads on financial liabilities designated at fair value, partially offset by an increase in the value of pension plan assets on pension and other employee future benefit plans. Preferred shares and other equity instruments decreased $0.8 billion, due to redemptions in the quarter.

Contractual obligations by year of maturity are outlined on page 36 in this document.

Please see the Impact of COVID-19 and Risk Management sections.

BMO Financial Group First Quarter Report 2021 12

Capital Management

BMO continues to manage its capital within the framework described on page 63 of BMO’s 2020 Annual Report.

First Quarter 2021 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 12.4% as at January 31, 2021, increased from 11.9% at the end of the fourth quarter of fiscal 2020, due to strong internal capital generation, other net positive capital changes and lower source currency risk-weighted assets (RWA).

CET1 Capital was $40.9 billion as at January 31, 2021, an increase from $40.1 billion as at October 31, 2020, primarily due to retained earnings growth, pension and other employee future benefits impact and lower net deductions, which were partially offset by a decline in accumulated other comprehensive income, primarily due to foreign exchange movements and a decrease in the Office of the Superintendent of Financial Institutions’ (OSFI) regulatory adjustment for expected credit loss provisioning, driven by the transitional reduction in the applicable scaling factor.

RWA were $328.8 billion as at January 31, 2021, decreased from $336.6 billion as at October 31, 2020, driven by asset quality changes, foreign exchange movements and model updates, partially offset by growth in asset size.

The bank’s Tier 1 and Total Capital Ratios were 14.2% and 16.6%, respectively, as at January 31, 2021, compared with 13.6% and 16.2%, respectively, as at October 31, 2020. The Tier 1 Ratio and Total Capital Ratio were higher than the prior quarter, primarily due to the factors impacting the CET1 Ratio. The Total Capital Ratio was also impacted by a subordinated debt redemption.

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 our capital ratios. We may manage the impact of foreign exchange movements on our capital ratios and did so during the current quarter. Any such activities could also impact our book value and return on equity.

BMO’s Leverage Ratio was 4.8% as at January 31, 2021, consistent with the fourth quarter of fiscal 2020, as higher Tier 1 Capital was offset by higher leverage exposures.

Regulatory Capital Developments

On January 27, 2021, OSFI advised federally regulated deposit-taking institutions (DTIs) that loans to businesses through the Government of Canada’s Highly Affected Sectors Credit Availability Program (HASCAP) can be treated as exposures to the Government of Canada. DTIs must include the entire amount of the loan in the leverage ratio calculation.

On January 11, 2021, OSFI communicated its plan to launch the final consultation on domestic implementation of the Basel III reforms in March 2021.

On December 14, 2020, OSFI announced that while the restrictions on regular dividend increases remain in place, there may be exceptional circumstances where a non-recurring payment of special, or irregular, dividends may be acceptable, but the objective cannot be the distribution of capital to a broad group of shareholders.

On December 8, 2020, OSFI announced that the Domestic Stability Buffer (DSB) will remain at 1.0%, unchanged from the level set on March 13, 2020.

On November 5, 2020, OSFI announced an eight-month extension of the temporary exclusion of central bank reserves and sovereign-issued securities from the DTIs’ leverage ratio exposure measures which will now remain in place until December 31, 2021.

Please refer to the Enterprise-Wide Capital Management section on pages 63 to 70 of BMO’s 2020 Annual Report for a summary of the modifications to capital requirements announced by OSFI in 2020 to address the market disruption posed by COVID-19. For those that are temporary in nature, OSFI will continue to closely monitor the economic and financial outlook and provide guidance on the unwinding of the modifications.

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 Basel Committee on Banking Supervision. For more information see the Enterprise-Wide Capital Management section on pages 63 to 70 of BMO’s 2020 Annual Report.

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

na – not applicable

13 BMO Financial Group First Quarter Report 2021

Under Canada’s Bank Recapitalization (Bail-In) Regime, eligible senior debt issued on or after September 23, 2018 is subject to statutory conversion requirements. Canada Deposit Insurance Corporation has the power to trigger the conversion of bail-in debt into common shares. This statutory conversion supplements non-viable contingent capital (NVCC) instruments, which must be converted, in full, prior to the conversion of bail-in debt. The prospective minimum requirements for Total Loss Absorbing Capacity (TLAC) are currently set at a risk-based TLAC ratio of 22.5% of RWA, including a 1.0% DSB, and a TLAC leverage ratio of 6.75%. The bank expects to meet the minimum requirements when they come into effect on November 1, 2021. As at January 31, 2021, BMO’s TLAC ratio was 24.6% and its TLAC leverage ratio was 8.4%.

Other Capital Developments

During the quarter, 407,360 common shares were issued through the exercise of stock options.

On December 8, 2020, we redeemed all of our outstanding $1,000 million subordinated debentures, Series H Medium-Term Notes Second Tranche at par, together with accrued and unpaid interest to, but excluding, the redemption date.

On November 25, 2020, we redeemed all of our 6 million issued and outstanding Non-Cumulative Perpetual Class B Preferred Shares, Series 35 (NVCC) for an aggregate total of $156 million and all of our 600,000 issued and outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 36 (NVCC) for an aggregate total of $600 million.

If a NVCC trigger event were to occur, our NVCC 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 3.3 billion BMO common shares, assuming no accrued interest and no declared and unpaid dividends.

Dividends

On February 23, 2021, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, consistent with the prior quarter and the prior year. The dividend is payable on May 26, 2021, to shareholders of record on May 3, 2021. OSFI’s expectation set in March 2020 that federally regulated financial institutions should halt dividend increases, remains in effect until further notice. 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. Until further notice, such additional common shares will be purchased on the open market.

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.

15 BMO Financial Group First Quarter Report 2021

Review of Operating Groups’ Performance

How BMO Reports Operating Group Results

The following sections review the financial results of each of the operating groups for the first quarter of 2021. See also the Impact of COVID-19 section on page 8 and the Risk Management section on page 28 in this document, as well as the Enterprise-Wide Risk Management sections in BMO’s 2020 Annual Report starting on page 73.

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.

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, BMO analyzes 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 $1,319 million, an increase of 26% from the prior year. Adjusted net income was $1,326 million, an increase 25% from the prior year. 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 2021 vs. Q1 2020

Canadian P&C reported and adjusted net income was $737 million, an increase of $38 million or 5% from the prior year.

Total revenue was $2,099 million, an increase of $17 million or 1% from the prior year. Net interest income increased, largely driven by higher balances, partially offset by lower margins. Non-interest revenue decreased, primarily due to lower credit card fee revenue. Net interest margin of 2.66% decreased 2 basis points, reflecting the impact of the lower interest rate environment.

Personal revenue was unchanged from the prior year, as higher net interest income was offset by lower non-interest revenue. Commercial revenue increased $17 million or 2%, due to higher net interest income, partially offset by lower non-interest revenue.

Total provision for credit losses was $147 million, a decrease of $5 million from the prior year. The provision for credit losses on impaired loans was $149 million, an increase of $11 million, due to higher commercial provisions, partially offset by lower consumer provisions. There was a $2 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $14 million provision in the prior year.

Non-interest expense was $954 million, a decrease of $33 million or 3% from the prior year, due to lower employee-related costs and other operating costs.

Average total gross loans and acceptances increased $6.3 billion or 3% from the prior year to $253.8 billion. Personal lending balances increased 4% and commercial loan balances increased 1%, while credit card balances decreased 13%. Average total deposits increased $28.5 billion or 15% to $220.0 billion. Personal deposits increased 7% and commercial deposits increased 28%, reflecting the higher liquidity retained by customers, due to the impact of COVID-19.

Q1 2021 vs. Q4 2020

Reported net income was $737 million, an increase of $90 million or 14% from the prior quarter, and adjusted net income was $737 million, an increase of $89 million or 14%.

Total revenue was $2,099 million, an increase of $68 million or 3% from the prior quarter. Net interest income increased, largely driven by higher margins and higher balances. Non-interest revenue increased modestly. Net interest margin of 2.66% increased 6 basis points from the prior quarter, largely due to higher loan margins and a favourable product mix.

Personal revenue increased $39 million or 3%, due to higher net interest income, partially offset by lower non-interest revenue. Commercial revenue increased $29 million or 4%, due to higher net interest income and higher non-interest revenue.

Total provision for credit losses was $147 million, a decrease of $44 million from the prior quarter. The provision for credit losses on impaired loans decreased $31 million, largely due to lower commercial provisions. There was a $2 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $11 million provision in the prior quarter.

Non-interest expense was $954 million, a decrease of $14 million or 1% from the prior quarter.

Average total gross loans and acceptances increased $2.7 billion or 1% from the prior quarter. Personal loans increased 2% and commercial loan balances were relatively unchanged, while credit card balances decreased 2%. Average total deposits increased $2.0 billion or 1%, with growth of 3% in commercial deposit balances, partially offset by decline in personal deposit balances of 1%.

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)