The Bank of Montreal (B1): A North American Personal and Commercial Finances Strategy

8/9/2019 The Bank of Montreal (B1): A North American Personal and Commercial Finances Strategy

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Problems Identified:

The Bank of Montreal (BMO) case study is an excellent example of what difficulties themanagement of an organization can face when trying to operate as multinational. Assuch, it is the embodiment of a strategic management case dealing with the managerialscope of planning, organizing and controlling over the borders of more than one country.The aspects of regulatory obstacles, changing technology and its implementation andeffect on the financial and economic world are all of vital importance to the strategicmanagers dealing with determining BMOs underlying strategy to meet these challenges.The scope for problems solved and problems that have the potential to occur within notone but two nations adds to the complexities the management of BMO must face in orderto accomplish their objectives. With activities on both sides of the border (in this case

Canada and the US) come twice the number of problems and two fronts on which to facethem; a regulation/law in Canada will still govern the firms presence in the US and viceversa. Guided by their North American strategic vision and driven by a company-widecommitment to excellence, Bank of Montreal is reaping the benefits of domestic,continental and global prosperity. By identifying and capitalizing on Canadian andinternational opportunities, and by delivering full value to their customers, the Bank hasenjoyed profitability.

Initial fiscal year was a watershed for Bank of Montreal. For the first time, more than halfthe Banks earnings came from outside Canada. Forty-one per cent came from the UnitedStates and 6% from Mexico. Their U.S. flagship, Harris Bank, has played a leading role

in the Banks three-pronged American expansion consciously conservative approach inMexico, dealing only in stable investments with business partners who are well-known tothem. Bank of Montreal has built a solid base for profitable long-term growth which canbe affected any time for improper decision taken by the management.

2007 Syed Belal Reza 1


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Functional Area Analysis:A closer look into the case study requires an intensive study on its related fields. In this

case we have decided to comply with seven different areas to find out the exact scenarioof Bank of Montreal and its adjacent business. As this is a short form of report so detailsare not given in this analysis part. A gist of different area has been gathered here to getthe intimate picture of problems.

Finance:

The activity of finance is the application of a set of techniques that individuals andorganizations (entities) use to manage their money, particularly the differences betweenincome and expenditure and the risks of their investments. An income that exceeds itsexpenditure can lend or invest the excess income. On the other hand, an entity whoseincome is less than its expenditure can raise capital by borrowing or selling equity claims,decreasing its expenses, or increasing its income. The lender can find a borrower, afinancial intermediary, such as a bank or buy notes or bonds in the bond market. Thelender receives interest, the borrower pays a higher interest than the lender receives, andthe financial intermediary pockets the difference. A bank aggregates the activities ofmany borrowers and lenders. A bank accepts deposits from lenders, on which it pays theinterest. The bank then lends these deposits to borrowers. Banks allow borrowers andlenders, of different sizes, to coordinate their activity. Banks are thus compensators ofmoney flows in space.

The financial scope of this study is focused on the analysis of current organizationalperformance two years into Vision 2002, i.e. year 1993-94; the plan spanning 1993-2002.The majority of possible avenues of analysis cannot be implemented as the necessaryfinancial statements for the relevant years are not included in the case study and otherdata of interest such as the percentage of investment into technological advances are alsonot included.

Nevertheless, we have attempted to use the provided data in Exhibits 1, 2, 3, 4, 6, 7, 8 &9 from the Case Study to provide a view of current performance (up to 1994) andcomparative study with respect to competing banks in the region, and how they allmeasure up to the ambitions of Vision 2002.

[Note1: it is important to realize that the case contains different figures for the sameitems in different exhibits and when written in the case proper. The likely cause, and asmentioned for some of the figures, is the fact that the numbers have been extracted fromdifferent financial sources which differ as per their respective content and scope.]



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Region-wise, the prime focus of expansion for BMO in the United States was in theMidwest region (including Ohio, Michigan, Indiana, Illinois, Wisconsin, Missouri, Iowaand Minnesota). As one of the most attractive banking markets in the country, it is

characterized by its unique economic strength and the strong performance of its banks. Acompound growth rate of stock prices by 11.9% (over 1987 to 1992) compared to the2.6% for all other regions gives us a good idea of why this region would be fertile soil forany growing bank.

FIGURESFROMTHE HARRIS BANK ANNUAL REPORT, BANKOF MONTREAL ANNUAL REPORT

(as listed in Exhibit 7 and newly charted in the next page)

Figures provided in Exhibit 7 allow us view at the performance of Harris Bank in theperiod 1990 to 1994. Our interest in the exhibit lies in the entries for Net Income % of

average assets and net Income % of average equity which translate as return on assets(ROA; measures the profit earned on the companys employment of assets) and returnon equity (ROE; measures the percentage of profit earned on common stockholdersinvestment in the company) respectively. It must be remembered when looking at thefigures below (Fig 1.0 and Fig 1.1) and in future references, that figures for Harris Bankstated alone represent BMOs stake in the US whereas figures stated for BMO are forBMO and all its acquisitions in both Canada and the US.

Therefore, BMO figures include Harris performance (plus Suburban from 1994) andgive an overview of the organizations performance as a whole. The exhibit range of1990-94 can be divided into two time segments; Prior to Vision 2002 years, 1990-92, and

Vision 2002 years, 1993-94. This helps to compare the state of affairs relative to theorganizations position before and after Vision 2002. The biggest hurdle to what wouldhave been a positive projection of ROA and ROE for Harris in the Vision 2002 years isthe drop in respective values in 1994 thanks to a one-time expense from the decision toabsorb losses of $51.3 million on securities held in certain customer accounts. Had thisnot occurred, 1994 would have been a repeat of 1993s ROA and ROE would have stoodat 12.9%, a repeat of 1992. BMO figures and respective graphical representations belowalways include the loss absorption and the results reflect the effect on the wholeorganization.



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Fig 1.0:Return on Assets (ROA) for Harris Bank and BMO (from Exhibit 7)

Vision 2002 Prior to Vision 2002

ROA* 1994 1993 1992 1991 1990

Harris

Bank

0.70%** 0.92% 0.88% 0.80% 0.62%

BMO 0.68% 0.63% 0.61% 0.63% 0.64%

* Where Exhibit 7 shows ROA as income as a percentage of average assets.** including the effects of the decision to absorb losses of $51.3 million (0.92%otherwise)

The ROA chart shows the big dip in 1994 for Harris due to the loss absorption, but theBMO bars still show the organization as a whole continues to enjoy positive growth inthe Vision 2002 years (1993-93). This is in contrast to the declining trend prior to Vision2002 (1990-92). Harris on the other hand enjoyed a continuous positive growth bothbefore and after Vision 2002s inception. The exception being 1994, where the lossabsorption dipped the performance bar and even ignoring those effects, Harris would atbest have a repeat of year 1993. This is a cause for concern and a more intensive analysisinto the reasons that can be blamed for this drop in otherwise increasing returns wouldneed to be investigated. Unfortunately, due to lack of relevant data and comparative andstatistical information, we are at a loss to determine said causes.



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Fig 1.1:Return on Equity (ROE) for Harris Bank and BMO (from Exhibit 7)

Vision 2002 Prior to Vision 2002

ROE*** 1994 1993 1992 1991 1990

Harris

Bank

9.9%*+ 12.6% 12.9% 12.6% 9.9%

BMO 13.9% 13.1% 13.2% 14.2% 13.9%

*** Where Exhibit 7 shows ROE as income as a percentage of average equity.*+ including the effects of the decision to absorb losses of $51.3 million (12.9%otherwise)

Both Banks, with Suburban as well from 1994, seem to be facing rising returns in theVision 2002 years (1993-94) in terms of ROE and both Harris alone and BMO seem tohave fluctuating levels of ROE overall. 1991 seems to be have been the best year forBMO in the 1990-94 period and prior to Vision 2002 as well. Of course, as this reflectsthe inclusion of the loss absorption in 1994, which would make 1994 a repeat year of

1992 (Harriss best), so the added benefits can roughly place 1994 to at least the secondbest year over 1990 for BMO. Unfortunately, rough estimates and guesses are all we canemploy in the face of limited data. Graphing the ROA and ROE for the Vision 2002 yearsgives us the figure below (Fig 1.2). Both lines actually show increasing slopes but theROA line (blue) is almost negligible.



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As the measure of profit earned on stockholders investment, the steeper slope of ROE isdefinitely encouraging to investors and other stakeholders of BMO. The fact is that theincreasing trend, though based on only two years (1993-94) of Vision 2002, is a positive

indication of the successful implementation of the guidelines set by the plan. BMOsmanagement can take heart from such observations and continue to pursue such winningstrategies barring significant changes in the future.

Fig 1.2:ROA and ROE over 1993-94for BMO (including Harris and Suburban (from 1994))

Besides signs of increasing profitability to justify their faith in Vision 2002, themanagement of BMO can take hope from further comparative reviews with respect totheir competitors in the field.

A comparison of Midwest region superregionals in Exhibit 2, as of 31 st December 1993,gives us a general idea of the standing of BMO in the market. A bar chart generated fromthe figures is below in Fig 1.3 and gives us the relative standing of BMO versuscompetition in the region. As the Midwest is the prime focus of the Banks US expansionpolicy, we can let a glance at the chart determine BMOs relative standing in terms ofmarket-to-book value (measures a companys future growth prospects) and return onequity (ROE).



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Fig 1.3:Return on Equity (ROE) for Harris Bank and BMO (from Exhibit 7)

A comparative summary of acquisitions over $100 million, in the period January 1 st 1993to mid-April 1994, in Exhibit 3 reinforces Harriss position as the acquirer of choice.Relative to the other banks like Banc One Corp., Norwest Corporation and PNC on thelist of acquisitions that can be called serious competitors to BMO due to their strongpresence in the chicagoland market, the acquisition of Suburban by BMO/Harris Bancorpis a triumph (Fig 1.4) over like banks enjoying better market-to-book ratios, 2.3 and 2.5for Banc One and Norwest respectively, to BMOs 1.3. This value measures the futuregrowth prospects of a company and the higher a banks market premium over the book,the stronger its currency in an acquisition, and the less likely its resulting short-termdilution in earnings. Thus, despite being in a less favored position than rivals Banc Oneand Norwest, Harris has pulled off a veritable coup in acquiring Suburban. This can becredited to their strategic focus on community banking, which created enough of apositive force to offset any other factors and land so ripe a plum in BMOs lap.

Buyer Seller Deal

Value

($MM)

Deal

Price/EPS

Deal

Price/Book

(%)

Banc One Corp Liberty national 882.6 16.8 212

NorwestCorporation

First united BankGroup

474.5 17.1 228

PNC First Eastern Corp 329.3 n/a 200

Harris Bancorp Suburban Bancorp 246.3 18.3 242

MEDIAN 213Fig 1.4: Comparative table of acquisitions Harris vs. competition (figures from Exhibit 3)



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And last but not least, a look at where the growth of income generated from the USstands in 1994 an essential inspection to assess the realities of Vision 2002s objectiveof attaining 50% of BMOs total income from the US. For this purpose, I have chosen to

ignore the tremendous drop in revenues from including the decision to absorb losses onsecurities in certain trust accounts in 1994.

Percent of Total from U.S.A.

Year 1994 1993 1992

Net Income 22.0 23.8 17.0Fig 1.5: Percent of total net income for BMO from the US (figures from Exhibit 1)

As per the above figures in Fig 1.5, we can calculate the average rate of income growthfor BMO in the US and extrapolate its course to determine what total percentage of thedesired 50% goal BMO can hope to achieve if that average growth is maintained.

Fig 1.6: actual % revenue growth and projection for 2002

Average rate of income growth = [{(23.8 17.0) / (1993 1992)} + {(22.0 23.8) /(1994 1993)}] / 2 = 2.5Which is the same as: 22.0 17.0 / 2 = 2.5i.e. an average income growth of 2.5% per year

Therefore, if 1992 has a base level of 17%, then in 10 years time,(2.5 * 10) + 17 = 42%Thus, according to a basic income extrapolation using average income growth from onlythree years worth of data, we can say that Vision 2002 can expect to realize 42% ofincome generation from the US, as opposed to the goal of 50% for BMO.



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LOTHEYR MARGINS RESULTEDFROMAN INCREASED MIXOF LOW-MARGIN BUSINESSESAND

LOTHEYR INTEREST RATES

Average net interest margin is the ratio of net interest income toaverage assets. Their total interest margin declined 21 basis pointsfrom 1992-1994, of which 8 basis points reflect the gross-up of assetsfor unrealized gains on derivatives in accordance with accountingrequirements. 1994 data was not restated. The factors contributing tothe remaining net 13 basis point decline in interest margin arediscussed below. Increased earnings from equities and bonds of lesserdeveloped countries contributed positively to their interest margin($48 million). In addition, cash collections on impaired loans increased($86 million) due to the improved

North American economy and the contribution from their equityinvestment in Bancomer increased by $32 million. The positive effectson interest margin theyre more than offset by factors whichcontributed to the overall decline in net interest margin in 1997. First,they experienced high growth in lower-yielding liquid assets,particularly in Investment and Corporate Banking and Global Treasury,as noted in the table above. Although this mix change reducedaverage net interest margin, growth of these products in GlobalTreasury and Investment and Corporate Banking contributed positivelyto revenue.

Second, as interest rates declined in 1994, the rates earned on loansTheyre lowered; however, the costs on several deposit products didnot fall to the same extent due to the existence of price floors. Theeffect of this compression was most pronounced in their retailbusiness. The decline of 13 basis points from 1990 to 1991 is largelydue to the same reasons outlined above. While they benefited fromearnings from their investment in Bancomer ($50 million), they alsoexperienced a high rate of growth in their lower-margin assets. Ratecompression due to the declining interest rate environment wasanother contributing factor to the overall decline.

OTHERINCOME GROWTH DUETOAN INCREASEIN FEE-RELATED BUSINESSES

Other income is comprised of all revenue other than net interestincome, such as service charges, lending fees, capital market fees,card services fees, mutual fund fees, commission revenue and tradingincome. Other income increased $465 million to $2,981 million in1990, or 18.5%, following an increase of 19.7% in 1991. Growth in



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other income was primarily due to higher capital market fees,increased investment management and custodial fees, and highermutual fund revenues. Growth in income from deposit and payment

service charges resulted from an increase in the number oftransactions as opposed to an increase in service charges relative to1991.The increase in lending fees reflected a number of sizeableunderwriting deals that were completed in their Global Distributionarea. Income from capital market fees includes commission revenue,and underwriting and advisory fees.

The increase in capital market fees resulted from the continued strongcapital markets in North America, increased issue activity andsecondary trading volumes. The increase in card services income wasdue to growth in their credit card volumes and the accountingtreatment of the credit card securitizations, which includes areclassification of income from net interest income to other income.

The increase in mutual fund revenues mainly resulted from growth inassets under management which grew 51.1% from $34,978 million to$52,869 million in 1993.Other fees and commissions include revenuefrom insurance-related activities, foreign exchange revenue other thantrading, investment securities gains and losses, and gains and lossesfrom disposal of premises and equipment. The increase from this areawas primarily due to revenues from insurance-related activitiesreflecting increased premiums as well as an increase due to a 1991write-down of capital assets.

Trading revenue includes net interest and other income derived fromon- or off-balance sheet positions considered by management to beundertaken for trading purposes.All trading portfolios are marked-to-marketdaily. Total revenue fromtrading-related activities, which includes trading income recorded innet interest income as well as that which is recorded in other income,decreased 2.1% in 1990 compared to a 17.0% increase in 1991. The

relatively flat performance in 1990 was primarily due to an increase inforeign exchange revenues and financing portfolios due to marketvolatility, more than offset by a decrease in public debt relatedrevenues, where they continue to face challenging market conditionsin North America as governments reduce deficits and spreads narrow.

GOVERNMENT LEVIESAND TAXES REPRESENTED 46.7% OF THEIR PRE-TAX EARNINGS



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Total government levies and taxes of $1,226 million in 1994 represented just less thanhalf of their net income before taxes and government levies. The provision for taxes inthe Income Statement as a percentage of pre-tax income was 38.7% versus 38.9% in 1992

as shown in note 13 to the consolidated financial statements on page 80. The effective taxrate of 38.7% was below the Canadian combined statutory tax rate of 41.9% due largelyto their investment in foreign subsidiaries, whose earnings were taxed at lower rates.

INVESTMENT SPENDING

They define investment spending as (i) strategic acquisition spending and (ii) othercapital spending which is primarily technology-related. The illustration at the left reflectstheir spending relative to these categories. Spending in technological developmentcontinued in 1994, representing their commitment to a modern banking environment.However, due to the purchase of Household Banks retail business and the purchase of a16.2% equity stake in Bancomer in 1996, the relative spending level has decreased. The

primary investments made over the past few years in Harris Regional Banking, Bancomerand Nesbitt Burns have contributed to an overall $100 million increase in total earningsfrom these areas of the Bank in 1994 alone.EXPENSE GROWTH DRIVENBY REVENUE-GENERATING ACTIVITIESAND INVESTMENTFOR

FUTURE GROWTH

As a secondary measure of productivity, they analyzed year-over-year expense growth,which was 16.8% in 1994, versus 8.3% in 1993. Expenses increased by $664 million in1994. The primary driver of the increase was revenue-driven expenses, largely variablecompensation, which amounted to $210 million of the increase. Strategic developmentspending, which is highlighted below, contributed an incremental $192 million toexpense growth. Another item contributing to expense growth was a $75 million charge

that they realized in the fourth quarter, representing accelerated depreciation related totechnology changes and costs associated with improving the efficiency of their creditprocess. Other expenses contributed 5.3%, representing costs related to inflation andvolume growth, reduced by the benefits from productivity initiatives.

CONTRIBUTIONTO EXPENSE GROWTH

Total expenses in 1993 increased 8.3% over 1995.Variable compensation contributed$190 million or 5.2%, and strategic development spending contributed $84 million or2.3%. The 1993 results include a non-recurring $23 million charge resulting fromlegislation to assess premiums on deposits insured by the Savings Association InsuranceFund (SAIF). This charge related to Harris Banks acquisition of Household and

contributed 0.7% to overall expense growth.

DIVERSIFICATION STRATEGY RESULTSIN STRONG GROWTHIN INVESTMENTAND CORPORATE

BANKINGAND GLOBAL TREASURY GROUP

In 1993 they made a number of organizational changes related to the creation ofElectronic Financial Services and the Global Treasury Group which included transferringsome lines of business from other groups. As a result, the contents of the remaininggroups are not the same as they were in 1992. The businesses that comprise each group



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are described at the beginning of each operating group section over the next severalpages. All financial information has been restated to be consistent with the five operatinggroups.

Net income increased across most operating groups and in most geographic areas in 1994as shown by the table below. Investment and Corporate Banking produced the highestincome growth at 33.9%, driven by strong capital markets in the low interest rateenvironment. Global Treasurys net income increased $85 million as a result of newbusiness and product development as well as cash collections due to the improved NorthAmerican economy. Harris Regional Bankings net income growth was 21.4% largelydriven by volume growth offset by expense growth. Personal and Commercial FinancialServices net income declined 1.4%, resulting from strong business volume growth andgood cost control outweighed by a decline in net interest margin. Electronic FinancialServices income declined by $15 million due to business growth which was more than

offset by strategic investment spending on mbanx. The operating groups and theirrespective performance are discussed in more detail over the next several pages.

FINANCIAL PERFORMANCE OBJECTIVES, TARGETSAND MEASURES

BMO has established an overall governing objective and medium term financialperformance and condition objectives, which are outlined at the top of the page. BMOalso establishes annual financial targets for certain of their performance and conditionmeasures, which are outlined in the table above. Their success in achieving their overallgoverning objective of first-quartile total shareholder return is dependent on achievingtheir minimum medium-term financial performance and condition objectives, and on therelative performance of their peer group. Because annual financial targets represent

checkpoints in the achievement of their medium-term financial objectives, they reflecteconomic conditions prevailing at the time and may be higher or lower than the medium-term financial objectives in any particular year.

Their operating philosophy is to increase revenues at higher rates than general economicgrowth rates, while limiting expense growth rates to equal to or less than revenue growthrates, over time. They strive for efficiencies in expense management and a balancebettheyen current profitability and the need to invest for future growth. When possible,expense efficiencies partially or totally fund the costs of investing for the future.However, the relationship between revenues and expenses in any year is affected byeconomic conditions. Their targets for 2002 were established in the context of their

expectations for the economy in the year ahead.

Much of the performance analysis in the MD&A occurs in the context of the primarymeasures BMO management uses to assess performance. The 11 primary measures areoutlined in the Financial Performance and Condition at a Glance section on earliersections. Four of these measures are categorized as their value measures: TotalShareholder Return, Earnings per Share Growth, Return on Equity and Net Economic



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Profit Growth. These value measures, which are reviewed on initial, are those thatmeasure shareholder return or most directly influence shareholder return.

The remaining seven primary measures are reviewed in the Financial PerformanceReview, starting first section, and in the Financial Condition Review, starting on earlierpagers, and form the basis of their review of the consolidated financial statements. Pagesfinishing of the Financial Performance Review discuss non-GAAP measures, foreignexchange and acquired businesses, which are important factors influencing much of theresults discussion in the MD&A.

CANADIANAND U.S. ECONOMICAND FINANCIAL SERVICES DEVELOPMENTSIN 1993

After growing strongly last year, the Canadian economy theyakened in 1994. Real GDPgrew at a sub-par pace in the first quarter of the calendar year, contracted slightly in thesecond quarter, and expanded only modestly in the third. The economy faced a series ofchallenges in 1994, including the SARS crisis, an international ban on Canadian beefexports.

Ontario and a sharp appreciation of the Canadian dollar relative to the U.S. dollar. As aconsequence, exports remained weak in the first three quarters of the year, and theattendant weakness in manufacturing dampened a recovery in investment and businesslending. In contrast, consumer spending was supported by low interest rates, resulting ina pickup in personal loans. The demand for housing stayed strong, boosting growth inmortgages.

Following one of the strongest years on record, employment growth slowed in 1994. Arising jobless rate, together with a surging currency, encouraged the Bank of Canada toreduce overnight rates in the summer. With short-term rates at four-decade lows, growth

in demand deposits has outpaced term deposits. After growing slowly last year, the U.S.economy gathered strength in 1994. From a sub-par pace in the first quarter, real GDPgrowth picked up in the second quarter and accelerated sharply in the third. Supported byreductions in income taxes and low interest rates, consumer spending gained momentumthrough the year. Home sales reached record highs in the summer and auto salesremained brisk.



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Accordingly, residential mortgages and personal loans continued to grow strongly in1994. Business spending, especially on productivity-enhancing computing equipment,strengthened during the year. However, business loans continued to shrink as firms used

sharply higher profits to finance their spending. Despite the improved economy,however, non-farm employment remained weak. Rising joblessness and moderatinginflation spurred the Federal Reserve to reduce overnight lending rates in the summer totheir lowest level in 45 years. Falling interest rates and rising corporate profits spurred arally in equity prices, which in turn led to an improvement in capital markets activity.

NON-JEWISH COMPANY

BMO uses certain non-GAAP measures to assess performance. Securities regulatorsrequire that companies caution readers that earnings and other measures adjusted to abasis other than generally accepted accounting principles (GAAP) do not havestandardized meanings under GAAP and are unlikely to be comparable to similarmeasures used by other companies. In 1993 they indicated that management and certain

other observers believe that analyzing results excluding non-recurring items can enhanceanalysis of financial performance. However, the Securities and Exchange Commission inthe United States enacted rules in the past year that, going forward restrict the designationof items as non-recurring.

This impairs the usefulness of such measures, and as a result they have discontinued theirpractice of reporting results excluding non-recurring items. As such, there were no itemsdesignated as non-recurring in fiscal 1994. In 1993, $62 million ($39 million after tax) ofacquisition related costs incurred by Private Client Group were designated as non-recurring, increasing EPS in 1993 by $0.08 when stated on a basis that excludes non-recurring items. Cash earnings and productivity measures may enhance comparisons

between periods when there has been an acquisition, particularly because the purchasedecision may not consider the amortization of intangible assets to be a relevant expense.

Cash EPS measures are also useful because analysts often focus on this measure, andcash EPS is used by Thomson First Call to track third-party earnings forecasts that arefrequently reported in the media. Cash measures add the after-tax amortization ofgoodwill and intangible assets to GAAP earnings to derive cash income (and associatedEPS) and deduct the amortization of intangible assets from non-interest expenses to



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derive cash productivity measures. BMO, like many banks, analyzes revenue on a taxableequivalent basis (teb). This basis includes an adjustment that increases GAAP revenuesand the provision for income taxes by an amount that would increase revenues on certain

tax-exempt securities a level that would incur tax at the statutory rate. Net economicprofit is another non-GAAP measure. It represents cash earnings available to commonshareholders less a charge for capital.

PROVISIONFOR CREDIT LOSSES

The provision for credit losses for 1994 declined $365 million to $455 million. Theprovision represents 0.30% of average net loans and acceptances, including securitiespurchased under resale agreements, down from 0.56% a year ago. The lower provision isattributable to the improved credit performance experienced over the year. BMOs target

for 1993 is a provision for credit losses of $500 million or less. Their disciplinedapproach to portfolio management and diversification continues to ensure there are noundue sector or industry concentrations. BMOs regular, comprehensive quarterly reviewof credit portfolios ensures consistency and adequacy in their provisioning. The provisionfor credit losses on consumer loans and acceptances of $141 million was relativelyunchanged from a year ago. The provision for credit losses on commercial and corporateloans and acceptances was $314 million, compared with $676 million in 1993.

Provisions on loans to the manufacturing, utilities (particularly electric powergeneration), service industries, forest products and transportation Interest rate trading-related revenues benefited from strong credit derivatives performance, while revenue in

1993 was affected by a write-down of positions in Teleglobe7. Equities trading-relatedrevenues included $70 million of taxable equivalent basis revenue in 1994, as explainedon page 22. Other trading-related revenues grew because of higher commodityderivatives trading related revenue, including revenue on termination of positions with acounterparty that is the subject of legal action.

Provision levels in 1993 were particularly affected by the $399 million provision onloans and acceptances to companies in the troubled communications sector, particularly



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those in the telecom and cable sub-sectors. Provisions on loans and acceptances tocommunications companies declined to $7 million in 1994 due to a significant decline innew problem loans emerging in the sector in 1994, proactive management that reduced

their exposure to the sector and the appropriateness of their provisioning in 1993. Grossimpaired loans and acceptances totaled $1,918 million in 1994, down from $2,337million a year ago.

Gross impaired loans and acceptances as a percentage of equity and allowances for creditlosses improved to 12.15% from 15.16% a year ago. Gross impaired loans andacceptances formations totalled $1,303million, down from $1,945 million in 1993. BMOsold $288 million of non-performing loans, having a net book value of $226 million, forproceeds of $249 million during the year, while write-offs totalled $566 million, downfrom $884 million in 1993. Specific allowances for credit losses totalled $611 million atthe end of 1994, down from $769 million in 1993. The decline in specific allowances

related to improved credit quality, the lower level of impaired loans and acceptances andthe lower Canadian/U.S. dollar exchange rate. The general allowance for credit lossesremained unchanged from a year ago at $1,180 million.

It represents 91 basis points of risk-weighted assets at year end, up from 90 basis pointsa year ago. Impaired loans and acceptances, after deduction of specific allowances forcredit losses, totalled $1,313 million, compared with $1,568 million at the end of lastyear. Impaired loans and acceptances, after deduction of specific allowances and thegeneral allowance for credit losses, totalled $133 million, compared with $388 million atthe end of last year. The reduction was largely attributable to lower net impaired loans tocompanies in the telecom and cable sectors.

Both gross and net impaired loans and acceptances to the electric power generationsectorwere up from a year ago, as credit quality in this industry worsened in 1994.BMOs impaired loans and acceptances formations rose in the fourth quarter because ofthe deterioration of a number of U.S.-based corporate accounts in this sector. The netloans and acceptances exposure to Canadian cattle farming and related sectors wasapproximately $1.4 billion, or 1.0% of total net loans and acceptances. They haverecorded specific allowances for credit losses of $3 million on the $18 million of loans toCanadian cattle farming and related sectors classified as impaired.

PROVISIONFOR INCOME TAXES

The provision for income taxes reflected in the Consolidated Statement of Income isbased upon transactions recorded in income, regardless of when such transactions aresubject to income taxes, with the exception of the repatriation of retained earnings fromforeign subsidiaries. BMO adjusts revenue to a taxable equivalent basis for analysis, withan offsetting adjustment to the provision for income taxes. As such, the provision forincome taxes and associated tax rates are stated on a taxable equivalent basis in this



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MD&A. On a taxable equivalent basis, the provision for income taxes in theConsolidated Statement of Income was $840 million in 1992, compared with $530million in 1991. The increase was attributable to higher income and a higher effective tax

rate.

On a taxable equivalent basis, the effective tax rate was 30.8% in 1992, compared with26.4% in 1991. The year-over-year change related to the recognition of proportionatelyhigher tax benefits in 1991, a higher portion of income derived from higher tax-ratejurisdictions in 1992 and the expanded application of their taxable equivalent basisaccounting, the components of variances between the effective and statutory Canadiantax rates are outlined in Note of the financial statements. They estimate that the tax rate in1993 will be approximately 1.5% and consider that rate to be sustainable. BMO hedgesthe foreign exchange risk arising from its net investments in foreign operations byfunding the net investment in U.S. dollars.

Under this program, the gain or loss on hedging and the unrealized gain or loss ontranslation of the net investments in foreign operations are charged or credited to retainedearnings, but usually are approximately equal and offsetting. For income tax purposes,the gain or loss on hedging activities incurs an income tax charge or credit in the currentperiod, which is charged or credited to retained earnings, while the associated unrealizedgain or loss on the net investments in foreign operations does not incur income taxes untilthe investment is liquidated. The income tax charge/benefit arising from a hedgingpain/loss is a function of fluctuations in exchange rates from period to period. The

hedging gains in 1992 were subject to an income tax charge in retained earnings of $601million. Refer to the Consolidated Statement of Changes in Shareholders of the financialstatements for further details. The $1,761millionof total government levies and taxesincurred by BMO in 1992.

ENTERPRISE-WIDE CAPITAL MANAGEMENT

BMOs Capital Management Framework is designed to maintain an optimum level ofcapital in a cost-effective structure that: meets their target regulatory ratios; supports theirinternal assessments of required capital (i.e. economic capital); results in targeted creditratings; funds their selected operating group business strategies; and builds long-term

shareholder value. Their approach includes establishing limits, goals and performancemeasures for management of balance sheet positions, risk levels and minimum capitalamounts, as well as issuing and redeeming capital instruments to obtain the most cost-effective capital structure possible. These are approved by the Board of Directorspursuant to its annual review of their capital management policy and capital plan.

At the consolidated enterprise level, their targeted capital levels are set in support of theirrisk appetite, while still satisfying regulatory and legal requirements. At the line of



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business level, performance measurement is assessed on allocated economic capital,which is based primarily on the assessment and measurement of capital at risk outlinedon page 46. Internal capital allocation ensures that they maintain a well capitalized

position to protect their stakeholders from the risks inherent in their various businesses,while still allowing the flexibility to deploy resources in high-return or strategic growthactivities of their operating groups to meet or exceed established enterprise targets.Generally, BMO generates earnings that are sufficient to meet new capital requirements.

As such, managements primary challenge is achieving the most cost-effective capitalstructure, rather than procuring sufficient capital to fund expansion initiatives. Dividendsare generally increased in line with long-term trends in earnings per share growth, whilesufficient earnings are retained to support anticipated business growth, fund strategicinvestments and provide continued support for depositors. BMOs policy is to achieve adividend payout ratio of 35% to 45% of net income available to shareholders, over time.

CRITICAL ACCOUNTING POLICIES

The Notes to Bank of Montreals October 31, 1993 consolidated financial statementsoutline BMOs significant accounting policies. The policies discussed below areconsidered particularly important, as they require significant judgments by management.BMO has established detailed policies and control procedures that are intended to ensurethese judgments are well controlled, independently reviewed and consistently appliedfrom period to period. In addition, the policies and procedures are intended to ensure thatthe process for changing methodologies proceeds in an appropriate manner. They believe

that their estimates for determining the valuation of their assets and liabilities areappropriate.

Allowance for Credit LossesThe allowance for credit losses adjusts the value of credit assets to reflect their estimatedrealizable value. In assessing their estimated realizable value, they must rely on estimatesand exercise judgment regarding matters for which the ultimate outcome is unknown.These include economic factors, developments affecting companies in particularindustries and specific issues with respect to single borrowers. Changes in circumstancesmay cause future assessments of credit risk to be materially different from currentassessments, which could require an increase or decrease in the allowance for credit

losses.

Financial Instruments Measured at Fair ValueBMO records trading securities and trading derivatives at fair value. They adjust thecarrying value of investment securities to fair value when they identify a decline in valuethat is other than temporary. Fair value represents their estimate of the proceeds theywould receive in a current transaction between willing parties. The fair value of mostfinancial instruments is determined using quoted market prices. In situations where listed



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prices or quotes are not available, management must estimate fair value using discountedcash flows or option pricing models. Managements estimates may affect the fair valueand resulting gain or loss reported.

Accounting for SecuritizationsWhen loans are securitized, they record a gain (loss) on sale. In determining the gain(loss), management must estimate future cash flows by relying on estimates of theamount of interest and fees that will be collected on the securitized assets, the yield to bepaid to investors, the portion of the securitized assets that will be repaid before theirscheduled maturity, expected credit losses, the fair value cost of servicing, and the rate atwhich to discount these expected future cash flows. Actual cash flows may differsignificantly from those estimated by management. If managements estimate of futurecash flows had been different, their gains on securitization recognized in income wouldalso have been different.

Pensions and Other Future Employee BenefitsTheir pensions and other future employee benefits expense is calculated by their actuariesbased on assumptions determined by management. If actual experience differs from theassumptions made by management, their pension and other future employee benefitsexpense could increase or decrease in future years as a result.

Other than Temporary ImpairmentInvestment securities that are carried at cost or amortized cost or accounted for using the

equity method are reviewed at each quarter-end reporting period to determine whetherthe fair value is below the current recorded value. When the fair value of any of theirinvestment securities has declined below its recorded value, management is required toassess whether the decline is other than temporary. In making this assessment, theyconsider such factors as the type of investment, the length of time and extent to which thefair value has been less than the recorded value, the financial condition and near-termprospects of the issuer, and their intent and ability to hold the investment long enough toallow for any anticipated recovery. The decision to record a write-down, its amount andthe period in which it is recorded could change if managements assessment of the abovefactors were different.

Income TaxesThe provision for income taxes is calculated based on the expected tax treatment oftransactions recorded in their Consolidated Statements of Income or Changes inShareholders Equity. In determining their provision for income taxes, they interpret taxlegislation in a variety of jurisdictions as well as make assumptions about the expectedtiming of the reversal of future tax assets and liabilities. If their interpretations differ fromthose of tax authorities or if the timing of reversals is not as anticipated, their provisionfor income taxes could increase or decrease in future periods.



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GoodwillGoodwill is assessed for impairment at least annually to ensure that the fair value of the

business associated with the goodwill is greater than or equal to its carrying value. Indetermining fair value, they use valuation models that consider such factors as projectedearnings, price/earnings multiples and discount rates. Management must apply judgmentin the selection of the approach to determining fair value and any necessary assumptions.These judgments may affect the fair value and any resulting impairment write-down.

In summary, the financials for BMO, as far as the limited data can suggest, present ahealthy picture. Though only two years worth of observations in a fast changing bankingenvironment cannot be conclusive to any degree, but it does provide a framework uponwhich we believe the management at BMO can feel justified in the continued success of

their strategies.

International Business

Risk is a matter of perception. Basically risk refers to the chance of commercial orpersonal loss .As something may be risky from my perspective but not risky to othersbecause risk varies from person to person. Many companies are doing businesses globallyand before entering a particular country they should do country risk analysis. Most risksare invisible. Invisible risks are those risks that we cannot see, and we do not think aboutthem explicitly. Thus, before entering into any foreign market (in this case U.S. market),a foreign investor (in our case: Bank of Montreal) must know what risk factors are thereand how to face them competently.

Country risk relates to the likelihood that changes in the business environment will occurthat reduce the profitability of doing business in a country. These changes can adverselyaffect operating profits as well as the value of assets.

Business in a foreign country always involves a risk. It can be attributed to many issueslike the political stability/instability in the country. Often, governments can changeovernight and at dawn its a whole new ball game. It can be attributed to economicfactors like the country's GDP and GNP. It can be attributed to the markets in thatparticular country. It also involves the risk of operating within the country. Security risk,operational risk, manufacturing risk etc are there. The analysis of country risk isprerequisite before entering into any country.

BMO should follow these during the country risk analysis:



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First of all, they should make a proper communication channel from top tolower level of Management and a culture should be developed which encouragesrational findings, not supervisors wishes.

Conduct an extensive research on culture.

Inter organizational bargaining and politics has to be kept in zero bases.

Before finalizing, evolution by the senior management is a must.

Risk

Visible risks

Invisible risks include

1. Corruption

BriberyDisguised beneficial ownershipNepotismCronyism

2. Bureaucracy

Red TapeDeliberate delayCultural habitsLocal & regional interference

3. Counterfeiting & Theft

FraudWhite collar theftBlue collar theftProduct adulteration

4. Cultural issues

Tradition/Customs

7. Unfair Trade

Minority quota

8. Unfair Competition

Commercial espionageLobbyingPlantsLitigation

9. Asset Security

Treat to premises

Minority groupsEnvironmentalistsNatural disasters

10. Extremism

Terrorist activities- ReligiousTerrorist activities- Political



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Corporate cultureLanguage

5. Legal safeguardsIndustrial actionTrade Union influenceNationalizationTax

6. Organized Crime

Kidnap/RansomSmugglingCyber-crime

1. Corruption

Corruption is a highly complex and diverse phenomenon with many differentmanifestations. It can be grand or petty, incidental, systematic or systemic. It can bejudicial, administrative, legislative or political in nature. It can occur in the public, privateor civil society sector. It can involve groups or individuals. Academics from variousdisciplines (including lawyers, historians, moralists, economists and political scientists)and international organization experts define it in various ways. Usually, corruption is-

the giving, offering, or agreeing to give a benefit to an official or agent and the receiving,obtaining or agreeing to receive or attempting to obtain a benefit by a public official oragent. We will discuss very briefly that what can be Bank of Montreals considerationsregarding corruption in the U.S. market.

Bribery

Bribery means, doing a job and in return demanding money or favor from the person forwhom we have done the job. Gift giving and bribery is not a common practice in U.S.A.Most government and private firm officers in U.S.A, from the top to the bottom, are mostlikely to be not corrupted. Gift giving is not a common practice in U.S. and not essentialfor commerce. This is an area that BMO can trust on.

Disguised beneficial ownership in U.S.

This occurs when someone has shares in a company but the public is not aware or has noidea that who is the owners of the company. This is also not a common practice in U.S.A.BMO can put their reliance here too.



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Nepotism

It means directly favoring ones friends or family by giving them a business opportunity,

which they do not deserve. This practice can hardly be seen in U.S.

Cronyism

Cronyism is a broader term than nepotism, and covers situations where preferences aregiven to friends and colleagues. Not common in U.S.A.

2. Bureaucracy

Red Tape/deliberate delay in U.S.A

Red tape is a part of invisible risk where everything is delayed. Red tape refers to thelong period of time it takes for the file to move from one table to another due to briberyand deliberate delay. This is not common in the U.S and BMO can be sure that red tapeproblem is not going to occur in the U.S.

Cultural habit / Local or regional interference

The foreign companies like BMO working in U.S. doesnt face problem in completingcontracts because local or regional interference is very less there.

3. Counterfeiting & theft

It is not that counterfeiting & theft is in zero level in U.S.A but there counterfeiting &theft is not common like in Bangladesh. Counterfeiting & theft should not be a bigheadache for Bank of Montreal operating in U.S.A.

4. Cultural issues

Cultural issues are also not going to be a big factor because cultures of Canada and U.S.Aare similar.

5. Legal safeguards

It will be big time challenge for BMO to be threatened by the US laws and other legalbarriers in that market. The laws may create immovable obstacles in that region.

6. Organized crime in U.S.A

All employees will fall under these criteria to get rid of the local threats of criminalactivities.



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7. Unfair trade

In banking sector it is nearly impossible to have some unfair trade. All transactions are

made within a closed system and can not be easily violated, so, unfair trade will beminimal in that case.

8. Unfair competition

Unfair competition can hardly be seen in the government sectors. Commercial espionage,lobbying, litigation etc are not common practices in the U.S. market.

9. Asset security

BMO should not face threat to premises in U.S.A. Extreme environmentalists are there.Every company doing business in U.S. keeps them in mind for sure. Natural disasters arenot very common in U.S.A.

10. Extremism

Politics within U.S. is not a very big concern for the operating companies but politicalrelation with other countries with U.S.A can be a concern for the foreign companies.After 9/11, religious extremism is a big concern for the foreign companies operating inthe U.S.

Market ScreeningMarket screening is a method of market analysis and assessment that permitsmanagement to identify a small number of desirable markets by eliminating those judged

to be less attractive. This is accomplished by subjecting the countries to a series ofscreening based on the environmental forces.

INITIAL SCREENING

Basic need potential and foreign trade &investment

SECOND SCREENING

Economic and financial forces

THIRD SCREENING

Political and legal forces

FOURTH SCREENING

Sociocultural forces

FIFTH SCREENING

Competitive forces



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FINAL SELECTION

Personal visits

INITIAL SCREENING

BASICNEEDPOTENTIAL

An initial screening based on the basic need potential is a logical first step, because if theneed is lacking, no reasonable expenditure of effort and money will enable the firm tomarket its goods or services. Is there basic need for more banking systems?- it isimportant.

FOREIGN TRADEAND INVESTMENT

If the nature of good or service is such that a definite basic need potential cannot bereadily established, analysts can learn from the United Nations international tradestatistics yearbook.

SECOND SCREENING- financial & economic forces

Trends in the rates of inflation, exchange, and interest are among the major financialpoints of concern for the Bank of Montreal. Other financial factors such as credit,availability, paying habits of customers, and rates of return are also very important.Economic data may be employed in a number of ways but two measures of marketdemand based on them are especially useful. These are market indicators and market

factors.

Second Screening

Market Market Regression Trend Cluster Indicators factors analysis analysis analysis

Size Intensity growth

Market Indicators

Market indicators are economic data that serve as yardsticks for measuring the relativemarket strengths of various geographic areas. e.g. The Buying power index. The purpose



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of this index is to enable marketers to compare the relative buying power of countries andcities in the United States. The indicators include population, GDP, private consumptionexpenditure and production & consumption of energy. These indicators are weighted and

combined to form composite indexes of-

1. Market size,2. Market intensity,3. Market growth.

1. Market size: It shows the relative size of each market as a percentage of the totalmarket. The market size index is a measurement of the potential market for goods andservices.Marketsize = 2 (POP)+POPU+PCE+KWH+STL+CEM+TEL+CAR+TV X100index 2(POPR)+POPUR+PCER+KWHR+STLR+CEMR+TELR+CARR+TVR

where,POP= total populationPOPU= urban populationPCE= private final consumption in $USKWH= electricity productionSTL= apparent crude steel consumptionCEM= cement productionTEL= telephones in useCAR= cars in useTV= television sets in use

Variables ending in R are regional totals, 2 before a variable indicates double weighing.

2. Market Intensity: It measures the degree of concentrated purchasing power the marketrepresents as compared to the world intensity of 1.00. this is actually the richness of themarket.



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3. Market growth: It is an average of the percentage growth of the following indicatorsover the past 5 years: population, steel consumption, electricity production, andownership of cars, trucks, buses and TV sets.

Market factors

Economic data that correlate highly with market demand for a product.

Regression analysis

Statistical technique utilizing a linear model to establish relationships betweenindependent variables and the dependent variable. Here, instead of using just one variableas in the case of market factors, the domestic division may be utilizing a linear modelwith several independent variables.

Trend analysis

When the historic growth rates of either the pertinent economic variables or imports of aproduct are known, future growth can be forecast by means of trend analysis. Trendanalysis is a statistical technique by which successive observations of a variable atregular time intervals are analyzed to establish regular patterns that are used forestablishing future values.

Cluster analysis

Cluster analysis is a statistical technique that divides objects into groups so that theobjects within each group are similar. For cluster analysis various computer programs are

available.Bank of Montrealcan use cluster analysis to identify a group of markets wherea single promotional approach can be employed.

THIRD SCREENING- political & legal forces

Entry Barriers

Import restrictions can be positive or negative, depending on whether management isconsidering exporting or setting up a foreign plant. If BMOs objective is 100%ownership, will the U.S.A laws permit it, or is some local participation required? Will

U.S. government accept a minority local ownership, or must a minimum of 51% of thesubsidiary be in the hands of nationals? Depending on the circumstances and howstrongly management wishes to enter the market, any one of these conditions may besufficient cause for eliminating a nation from further consideration.



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Profit Remittance Barriers and other factors

When there are no objectionable requisites for entry, a nation may still be excluded if

there are what management believes to be undue restrictions on the reparation ofearnings. A nation may have a history of inability to provide foreign exchange for profitremittance.Other factors such that stability of government, unrest among public, political climate,safety standards, price controls, legal forces etc are also very important.

FOURTH SCREENING- Sociocultural forces

A screening of the remaining candidates on the basis of socio-cultural factors is arduousbecause these facts are highly subjective. The analyst, unless he or she is a specialist inthe country, must rely on the opinion of others. It is possible to hire consultants, but they

are expensive.

FIFTH SCREENING- Competitive forces

In this screening, the analyst examines markets on the basis of such elements of thecompetitive forces as:

1. The number, size and financial strength of the competitors.

2. Their market shares.3. Their apparent marketing strategies.4. The apparent effectiveness of their promotional programs.5. The quality level of their product/service lines.6. Their sources.7. Their pricing policies.8. The level of their after-sales service.9. Their distribution channels.10. Their coverage of the market.

Final selection of USA as a new marketAn executive of BMO should visit those countries that still appear to be good prospects.Complete data review has to be there for clarity and confirmation. Also searching for newopportunities in new sphere of this banking industry could make them a step ahead thantheir competitors. So, for an ultimate selection for illustrated version of US market and itsrelativity has to be focused in the BMOs future strategic decisions.



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Marketing

Competitive diamond model

In 1990, Michael Porter attempted to determine why some nations succeed and others failin international competition. According to Porter, four attributes of a nation shape theenvironment in which local firms compete and these attributes promote or impede thecreation of competitive advantage.

Porter is also particularly recognized for his competitive 'diamond' model, used forassessing relative competitive strength of nations, and by implication their industries:

Factor Conditions: production factors required for a given industry, eg., skilled labour,

logistics and infrastructure.

Demand Conditions: extent and nature of demand within the nation concerned for theproduct or service.

Related Industries: the existence, extent and international competitive strength of otherindustries in the nation concerned that support or assist the industry in question.



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Corporate Strategy, Structure and Rivalry: the conditions in the home market thataffect how corporations are created, managed and grown; the idea being that firms thathave to fight hard in their home market are more likely to be able to succeed in

international markets.

Factor endowments

Factor endowments means that extend to which a country is endowed with such resourcesas land, labor and capital. From Porters view, a nations position in factors of productionsuch as skilled labor or the infrastructure is necessary to compete in a given industry. Inaddition, he distinguishes between basic factors (e.g. natural resource, climate, locationand demographics) and advanced factors (communication infrastructure, sophisticatedand skilled labor, research facilities, and technological know-how). In fact, advancedfactors are more important than basic factors because the more a nation or governmentinvest on the advanced factors (investment on higher education, improvement educationstandard etc. will rise the number of skilled labor force)

In this case there is less emphasis for the production factor, but few more advancedfactors are mentioned:The Canadian banks were at the earlier stage of technological developmentTelephone banking was supposed to be the latest buzz in the banking industry. The USregional banks made a significant commitment to serve the client through telephone. Onthe other hand Canadian banks though started to give importance to this type of banking;they were far behind in comparison to their US counterparts. On the whole, the Canadianbanks were at an earlier stage of development and did not offer the same banking as theleading US players.

Harris had unsuccessful information system

As Harris was involved commodity business, the need for latest information system is amust. That is because the speed and accuracy of the system can give any company thecompetitive advantage from others. The major competitors had invested heavily ininformation system. Harris had spent huge amount of money to build an informationsystem, but it failed. Later on they subcontracted third party for the installation of thenew system. As technology played a vital role in the banking industry, they suffered a lotignoring it at the initial stages.



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Demand Conditions

Demand conditions measures the nature of home demand for the industrys product or

service. When the local demand for certain products or services is very high, the industryhas to response to the demand in such way a that creates cost pressure and for innovationand quality among the competitors in the industry. Thus, the characteristics of localdemand play important role in shaping the attributes of domestically made products.Therefore, Porter argues that sophisticated and demanding customers will create pressureon the local firms to meet high standard of product with low cost, and help the nationsfirm become more efficient and gain competitive advantage.

The expansion of US commercial and midmarket was athriving move of Harris

The business was subdivided into three segments: the upper middle market, special

industries and the lower middle market. The upper middle included industrial companieswith sales up to $500 million annually. The lower middle segment included companieswith annual sales between $5 million and $50 million within 100 million radius ofChicago. So, according to their strategy the total customer base of 560 upper midmarketcompanies would be catered by the bank.

The bank wanted to develop a strong position in theaffluent consumer area

Ninety nine percent of the US citizens were wealthy and had approximately 65% of thenations net worth. The high net worth of the market was large growing and concentratedand Chicago was the third wealthiest area. The population was ageing and the net worthincreases with the age. Harris was believed to have an excellent reputation with highincome individuals which provided an advantage in Chicago and Midwest market.

The seven county Chicgoland was an attractive market forBMO

The suburbs were a growing market and consisted a huge number of affluent and closely

knit communities. It had a customer base of $7.5 million. BMOs long term vision was tobuild a retail franchise to be competitive in the Chicagoland market through the turn ofthe century.



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The consumers were more attracted towards otherbanking products

At the end of the century many consumers wanted some other services other than onlybanking services. The consumers were moving away from traditional banking services toother products like mutual funds and annuities. These were more often provided by onbank institutions. There were possibilities of this trend to continue.

Enhanced customer satisfaction provided an addedadvantage for the PCFS business

PCFs business continued show strong productivity improvement and revenue earnings.It had the highest ROE of its business area. The number of customers served by the bankincreased significantly. One of the major reasons behind this is strong and improving

customer satisfaction in important affluent and commercial market segments.

Midmarket was an opportunity for the bank

The US midmarket was lucrative sector for the banking industry. The region includesOhio, Michigan, Indiana, Illinois, Wisconsin, Missouri, Iowa and Minnesota. After hit byrecession, it had shown exceptionally resiliency and it was expected to continue. The emarket was considered to be most attractive market of the country. The gross sale productof $1 trillion and one fifth of the nations population was an added advantage for thebank. Moreover, the banks of that region had shown strong performance in stock price.Harris found it attractive grow though the acquisition of the other Midwest bank which

could grant them a strong foothold in the strong banking industry.

Relating and Supporting Industries

It indicates the presence or absence supplier industries and related industries that areinternationally competitive. When the related and supporting industries are strong(capable to compete internationally) in their areas, it also affect positively to thatparticular industry; because, the quality suppliers provide quality factors of production,which causes quality output or products, and enables that industry to compete in theinternational market. Consequently, the related successful industries within the countrytend to be grouped in clusters. This cluster helps and benefits each other with flow of

knowledge and skills within the geographic area.

Four operating company

Central to the vision 2002 which was the North American strategy the bank reorganizesitself as the four main operating companies which would provide the bank the foundationupon which it would expand. A Canadian supperregional bank based upon the existingpersonal and commercial services group (PCFS), a US regional and supperregional



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personal and commercial build around Harris bank, CIFS which is a continental andcorporate and institutional bank.

These four operating companies ere supported by a group of common utilities. These areoperations, corporate services and risk management. The operations services group wasto serve the operating companies through integrating computer services. Corporateservices were to provide an integrated approach to support functions including finance,internal audit, human resource, legal and corporate affairs, real estate, public affairs,economies and corporate planning. Risk management was to have a responsibility forbank wide policies and practices relating to credit, trading positions and operating risks.These utilities already serviced the domestic personal and commercial, corporate andinstitutional businesses.

Suburban and Harris shared common commitment

In 1994, Harris acquired Suburban Bankcorp. Two organizations should have same goalor similarity of interest in order to integrate their functions. In this they can complementeach other and have positive synergy. that is what happened with Suburban and Hariss.Although the operations of these two companies were far different, both of theorganization had the same commitment to community banking. They had the sameculture and mode of transaction.

Firm Strategy, Structure and Rivalry

It indicates the conditions governing how companies are created, organized, and managedand the nature of domestic rivalry. According to Porter, different nation with differentmanagement ideology may be helpful or not helpful to build national competitiveadvantage. Moreover, Porter also argues that vigorous local rivalries induce the firms tofind more efficient ways of running business, which enable them to more efficientcompetitors in the international market. Domestic rivalry creates pressure to innovate, toimprove efficiency, to minimize cost, and to invest on and upgrade the advanced factors.All these steps help create world-class competitors.

Many banks choose to focus a specific business line

Some of the US banks concentrated on a single business line insisted of going in differentdirections. Bank one was primarily a personal bank. It had large credit card and



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residential mortgages and did small business lending. It did not participate in largecorporate lending. There were some other highly specialized banks. Delaware basedMBNA focused only in credit cards, specifically for affinity groups and shared twice the

market share of its close rival group. With disintermediation, banks generated more oftheir revenues from other services other than deposit taking and lending.

Competitors in Midwest region

The bank decided to expand the existing Chicago Franchise of Harris Bankcorp. It wouldseek a strong position in Chicago and its surrounding area. It would focus on: a retailbanking network, personal financial services and the commercial mid market. In thisregion the major competitors were supperregional which had been consolidating to buildconsumer banking franchises and emerging as dominant banks in the Midwest.

Non bank institutions posed threat for the bankingindustry

US financial services industry was populated by non bank institutions. These firmsprovided other services like insurance that us banks were not allowed to supply. AT & Twas a provider of credit cards. General motors through its subsidiaries provided creditcards. General electronic was large commercial lender and leaser.

Technology also posed threat for the banking industries. The potential merger of

Microsoft and Intuit which is a developer of personal financial software could be thegenesis in the transfer of information between consumers and their financial institutes

US industry moving to consolidation gave the company anopportunity

At the end of the nineties the industry sought opportunity through the mergers andacquisitions with the leading foreign companies. All the lading banks of other countriestried to grab the opportunity by hooking with the leading US banks. Bank of Montreal

was eager to move to the US market and the biggest reason behind the banking industryof that country was moving towards consolidation. So, more foreign banks were trying toharness this opportunity and wanted to get a foothold in the US industry. This wouldcreate new horizon of business opportunity for their banking industry.



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Competition in Chicago market was from three othercompanies

Competition in Chicago market was a bit more complex. As the place is an attractiveplace for the banking industry, so a number of competitors were there to grab it. Therewere four financial institutes which controlled the Chicago market. Other than Harristhere were Northern trust, continental and first Chicago. These three competitorscontrolled almost 75% of the total business.

There were some low cost competitors

Consolidation was occurring frequently in the businesses. As trust was scale sensitivebusiness there were some very large and low cost competitor which had driven industrymargin very down. This could be a problem for Harris/ BMOs corporate and institutional

trust business.

The emergence of swift supperregional banks could be athreat for the company

Harris was mostly into the community banking. Due the loosening rules of thegovernment many companies took the advantage to localization. There was emergence ofsome supperregional banks in US which could be a potential threat for the Harris as itwas focusing mostly in the Midwest regions.

Two Other Variables: Chance & Government

Porter also mentions about two other variables that can influence the Diamond structure.They are chance and government. Chance events (e.g. major innovations) can reshape theindustry and provide the opportunity for one nations firms to supplant anothers.Government, by its choice of policies, can detract from or improve national advantage.

Harris faced difficulty to meet the CRA requirement

Under the CRA requirement, a retail bank had to define its community subject toregulatory approval and was obliged to invest throughout its community. Althoughregulators did not have to fine the banks which fell short of their CRA requirements, theywould refuse to permit initiatives, such as acquisitions which required regulatoryapproval. Based on that Harris received unsatisfactory rating which prevented theacquisition of any community bank.



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The loosening of government rules gave birth to a numberof supperregional

In 1994, a bill was passed in the US congress that could permit interstate branching. Thelegislation would eliminate the separate holding companies in every state. There wereseveral changes which took place in the banking industry. A number of supperregionalhad been expanding their networks and were close to being nationwide in their scope.

Deregulations and consolidation were two importantfactors of Canadian banking industry

In 1993 major Canadian business took the advantage of deregulation to expand rapidly inthe trust and in insurance business. Most of the growth was through acquisitions. Theroyal bank purchased the principal Canadian firms. In 1993, the bank modestly expanded

its insurance activities with the purchase of Voyageur travel insurance. In the same waythe Canadian imperial bank of commerce provided personal trust services through 26offices. In 1994 it purchased the personal insurance company and offered a range ofinsurance products.

Canadian rules went against the acquisition of Midwestbanks

The Canadian banks faced strong disadvantage in comparison to other US banks. Thegovernment rules of Canada were the one of the biggest disadvantage for the bank. TheCanadian rules required purchase price premium to be fully recorded. On the other hand

US acquirers used pooling method in which involved merging of both parties balancesheet without purchase premium booked. Another thing was Canadian banks traded at alower market price than the US banks. The higher the banks overbook the stronger itscurrency in the acquisition and less its dilution in earnings. With these calculations BMOhad a market to book ratio of 1:3 in comparison to other competitor banks.

Human Resource Management

Human Resource Planning Process (HRPP)is the process of anticipating and makingprovision for the movement of people into, within, and out of the organization. Itspurpose is to deploy those resources as effectively as possible, where and when they areneeded in order to accomplish the organizational goals. Other, more specific purposes ofHRP include anticipating labor shortages and surpluses; providing more employment



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opportunities for women and minorities, and the disabled; and mapping out employeetraining programs. In fact, HRP provides a launching point for most all of the activitiesthat are subsumed under Human Resource Management (HRM).

The information gathered from external environmental scanning and assessment ofinternal strengths and weaknesses is used to predict, or forecast, HR supply and demandin light of organizational goals and strategies. Forecasting uses information from the pastand present to identify expected future conditions

From the analysis of the case Bank of Montreal (B1): A North American personal andcommercial finances strategy, we will discuss the key elements that are necessary forforecasting the demand and supply of employees that are essential in the HumanResource Planning Process.



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Management Information Systems:

Management Information Systems (MIS) is a general name for the academic disciplinecovering the application of people, technologies, and procedures collectively calledinformation systems to solve business problems. MIS are distinct from regularinformation systems in that they are used to analyze other information systems applied inoperational activities in the organization. Academically, the term is commonly used to

http://en.wikipedia.org/wiki/Information_systemshttp://en.wikipedia.org/wiki/Information_systems


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refer to the group of information management methods tied to the automation or supportof human decision making, e.g. Decision Support Systems, Expert systems, andExecutive information systems. Now they are Delivered technology enhancements that

integrate customer information from both front-line and direct banking sources.Employees can tailor their conversations with customers based on comprehensivecustomer data, driving increased capacity and improved customer service.

Strictly speaking, there are two incarnations to this definition. One implies themanagement of a collection of systems, infrastructure, and information that resides onthem. Another implies the management of information technologies as a businessfunction.

The first definition stems from the practice ofIT Portfolio Management and is the subject

of technical manuals and publications of various information technologies providers;while the second definition stems from the discussion and formation of the InformationTechnology Infrastructure Library.

This has been in practice throughout regions of the world mainly conducted by IT serviceproviders consulting companies. The relative paucity in the use of the best practice setcan be attributed to a lack of awareness among IT practitioners. However the lack ofready-to-use tools also presents a significant barrier.

Some organizations that value such practices tend to engage consultants to introduce thepractice. Such implementations can conflict with the home-grown culture due to a lack of

internal buy-in. Other organizations implement the practices by spending resources todevelop in-house tools. Most in-house developed tools tend to focus on one or a fewspecific areas where the orgnizations feel the most pains. To reap the full advantages,tools will need to be integrated with the organization's IT data in the center.

Corporate SupportCorporate Support includes Technology and Solutions (T&S) and the Corporate unitsthat provide expertise and governance support in areas such as strategic planning, law,finance, internal audit, risk management, corporate communications, economics,corporate marketing, human resources and learning. Operating results for CorporateSupport include revenues and expenses associated with certain securitization activities,the hedging of foreign-source earnings and activities related to the management of certainbalance sheet positions and their overall asset liability structure.

http://en.wikipedia.org/wiki/Decision_Support_Systemhttp://en.wikipedia.org/wiki/Expert_systemhttp://en.wikipedia.org/wiki/Executive_information_systemhttp://en.wikipedia.org/wiki/IT_Portfolio_Managementhttp://en.wikipedia.org/wiki/Information_Technology_Infrastructure_Libraryhttp://en.wikipedia.org/wiki/Information_Technology_Infrastructure_Libraryhttp://en.wikipedia.org/wiki/Decision_Support_Systemhttp://en.wikipedia.org/wiki/Expert_systemhttp://en.wikipedia.org/wiki/Executive_information_systemhttp://en.wikipedia.org/wiki/IT_Portfolio_Managementhttp://en.wikipedia.org/wiki/Information_Technology_Infrastructure_Libraryhttp://en.wikipedia.org/wiki/Information_Technology_Infrastructure_Library


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T&S manages and maintains information technology, processing, real estate and sourcingfor the Bank. The unit focuses on enterprise-wide priorities and integrates common

infrastructure and service standards to maximize operational quality, effectiveness andefficiency. Operating results for T&S are included with Corporate Support for reportingpurposes. However, costs of T&S services are transferred to P&C, PCG and IBG andonly minor amounts are retained in T&S results. As such, results for Corporate Supportlargely reflect operating results of Corporate units. Corporate Support also includesresidual revenues and expenses representing the differences between actual amountsincurred and the amounts allocated to operating groups.

Technology Disposal Program

As part of theirTechnology Disposal Program, they first ensure that the privacy andconfidentiality of their employees and customers are safeguarded. Machines that are no

longer usable, including computers, fax machines and cellphones, are then disposed ofusing environmentally friendly methods. In 1993, they safely disposed of 14,590 piecesof equipment.



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Economics:

Canadian and U.S. Economic Developments in 1994

After slowing markedly in 1993 in response to a series of shocks, the Canadian economystrengthened in 1994. Consumer spending led the way, with declining interest ratesfostering a pickup in personal loans. Demand for housing increased, boosting mortgagegrowth and residential construction. Business investment strengthened as risingcommodity prices improved corporate profitability. Export growth reboundedunexpectedly in 1994 as strong U.S. demand more than offset the negative effects of ahigher Canadian dollar. The strengthening economy reduced the unemployment rate in1994, yet inflation stayed low. The Bank of Canada began raising overnight rates inSeptember to forestall potential cost pressures as the excess capacity in the economydiminished.

After accelerating in 1993, U.S. economic growth remained strong in 1994. Supported bylow interest rates and reductions in personal income taxes, consumer spending moderatedonly slightly in the face of rising energy costs. Home sales remained brisk, hitting recordhighs in the spring and spurring strong demand for residential mortgages. Auto salesdownshifted modestly from earlier highs, slowing the pace of personal lending. Businessspending gathered momentum in 1994, with the export-oriented manufacturing sectorbenefiting from past weakness in the U.S. dollar. However, demand for business loansremained tepid as firms continued to finance spending from their cash flows and byaccessing capital markets. Growing business confidence in the durability of the expansionhas led to a pickup in employment. Although inflation remained tame in 1994, in thesummer the Federal Reserve began raising overnight rates from 46-year lows to unwindsome of the excessive monetary stimulus. Equity markets retained their sharp gains of theprevious year, supporting BMOs brokerage businesses an

The Bank of Montreal (B1): A North American Personal and Commercial Finances Strategy

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