BMO Financial Group Reports Fourth Quarter Net Income of $560 Million

TORONTO, Nov. 25, 2008 (Canada NewsWire via COMTEX) -- BMO | Quote | Chart | News | PowerRating -- << Fourth Quarter 2008 Report to Shareholders BMO Financial Group Reports Fourth Quarter Net Income of $560 Million ------------------------------------------------------------------------ Good Overall Performance in the Context of Current Economic and Market Conditions P&C Canada Demonstrates Tangible Progress on its Strategic Agenda, Earning Annual Net Income of More than $1.3 billion with Strong Quarterly Results Private Client Group's Results Reflect Good Underlying Performance as Annual Earnings Match Record Results of a Year Ago BMO Capital Markets Earns $285 Million for the Quarter, Reflecting Good Results in a Number of Core Businesses ------------------------------------------------------------------------- Financial Results Highlights: Fourth Quarter 2008 Compared with Fourth Quarter 2007: - Net income of $560 million compared with $452 million - EPS(1) of $1.06 compared with $0.87 and cash EPS(2) of $1.08 compared with $0.89 - Strong Tier 1 Capital Ratio, at 9.77% on a Basel II basis - Return on equity at 14.0% reflects the benefits of our diversified businesses - Transferred $2.0 Billion of Securities from our Trading Portfolio to our Available-for-Sale Portfolio and Recognized $123 Million After-Tax of Unrealized Losses in Shareholders' Equity Fiscal 2008 Compared with a Year Ago: - Net income of $1,978 million compared with $2,131 million - EPS of $3.76 compared with $4.11 and cash EPS of $3.83 compared with $4.18 - Return on equity of 13.0% compared with 14.4% in 2007 >>

For the fourth quarter ended October 31, 2008, BMO Financial Group reported a 24% year-over-year increase in net income, earning $560 million. Earnings per share were $1.06, up $0.19 or 22%.

"We have maintained our strong Tier 1 Capital Ratio and earned a return on equity of 14% in the quarter and 13% for the year. These results reflect BMO's relative strength and stability among global financial institutions," said Bill Downe, President and Chief Executive Officer, BMO Financial Group.

"Our overall performance in the quarter was good and while we are not immune to the difficulties of the current market environment, we are focused on our core operations and serving our customers. This is reflected in our results this quarter and further gains in market share in our priority businesses in Canadian retail banking.

"P&C Canada, our Canadian personal and commercial banking unit, again reported very good results, increasing both revenues and earnings in each quarter of the year and capping off a solid performance in 2008 with year-over-year earnings growth of 19% for the quarter.

"We have a well-earned reputation for working together with our customers through the different phases of the credit cycle. In today's economic environment, we continue to apply our consistent underwriting standards to make credit available to Canadians and their businesses. Customers and prospects alike have recognized our commitment and this approach strengthens our relationships and positions our Canadian retail bank well for the future. Personal loans were up a strong 21% year over year, due in part to our successful HomeOwner Readiline, and commercial loans were up a healthy 12% in the $1-to-$5 million segment. Our market share of personal loans and personal deposits increased year over year and quarter over quarter.

"Private Client Group's results for the fiscal year matched the record performance of a year ago. Results were down in the quarter, having been affected by charges related to our offer to purchase certain holdings from clients in the difficult market environment. Adjusted for those charges, results in the quarter and underlying operating performance were good," added Mr. Downe.

Results in our U.S. personal and commercial banking group were lower, having been affected by higher levels of integration costs, as we completed the integration of our Wisconsin acquisitions, and by an increase to a previously-disclosed Visa litigation reserve and the impact on revenues and expenses of the difficult market environment. Net income fell to US$11 million in the quarter or to US$24 million adjusted for the litigation charge and integration costs, reflecting the challenging environment. We continue to focus on meeting our customers' needs in the difficult environment and strengthening our relationships to build a solid base for when the U.S. economy recovers.

"Results in BMO Capital Markets improved for the third consecutive quarter and were up significantly from a year ago. Although some businesses are clearly affected by low activity levels and charges related to current market conditions, a number of our core businesses have benefited from solid growth in the quarter, including our interest-rate-sensitive businesses, foreign exchange trading business and the structured-products trading business within Trading Products," concluded Mr. Downe. Detail on charges recorded in the quarter is provided in the Effects of the Capital Markets Environment on Fourth Quarter Results section.

BMO's revenues increased 28% year over year, compared with 10% expense growth. Net income growth was affected by higher credit losses. Provisions for credit losses totalled $465 million for the quarter, of which $333 million was recorded in Corporate Services under our expected loss provisioning methodology. There was a $150 million increase in the general allowance. Specific provisions of $315 million were down quarter over quarter but up appreciably relative to a year ago due to U.S. economic weakness, particularly in U.S. real estate markets.

The effective tax rate in the quarter was a recovery rate of 9.2%, and included the benefit of $73 million of recoveries of prior-period income taxes. Excluding the impact of the increase in the general allowance, tax recoveries, and a higher proportion of income from lower-tax-rate jurisdictions, the effective tax rate in the current quarter would be within the expected sustainable range of 16% to 20%.

<< (1) All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise. (2) The adjustments that change results under generally accepted accounting principles (GAAP) to cash results are outlined in the Non- GAAP Measures section at the end of Management's Discussion and Analysis (MD&A), where all non-GAAP measures and their closest GAAP counterparts are outlined. >>

Operating Segment Overview

P&C Canada

Net income was $344 million, up $57 million or 19% from a year ago. Results were strong and revenues and net income have risen in each quarter of 2008. There was good volume growth across most products. We earned net income of $1,320 million in fiscal 2008, up $53 million or 4.1% from a year ago. Net income a year ago included $6 million arising from three items, a $43 million recovery of prior year income taxes and two items that lowered revenue by a net $78 million ($37 million after-tax): a MasterCard gain and an adjustment to the liability for customer redemptions related to our credit card loyalty rewards program.

Revenue in the fourth quarter rose $202 million or 18% year over year. Adjusted for the above items, revenue rose $124 million or 10%. Volume growth remained strong notwithstanding the emergence of weakness in the economy. There were improved revenues in each of personal banking, commercial banking and especially cards and payment services. Net interest margin was up year over year but was unchanged from the third quarter. Compared to the prior year, margin benefited from the interest on tax refunds, favourable product mix changes and increased product yields, partially offset by higher funding costs and lower mortgage refinancing fees.

Expenses increased $38 million or 5.7% from a year ago due to higher employee costs and higher capital taxes. We continue to invest strategically in the business, including the expansion and renovation of our branch network, credit and debit card chip technology, as well as increasing the size of our mortgage specialist and financial planner workforce. In fiscal 2008, we opened 16 new branches, closed 10, relocated 11 and expanded seven.

In personal banking, there continues to be growth in most products. Our personal loan growth was a strong 21% year over year with market share increasing 89 basis points from the prior year and 33 basis points from the third quarter. Our HomeOwner Readiline remains an important contributor to our accelerating personal loan growth. Our mortgage portfolio grew as new originations outpaced the impact of exiting from the broker mortgage channels. Personal deposit balances were up slightly from a year ago, with the number of active chequing account customers continuing to rise and the number of products per household showing positive trends. Personal deposits market share was up 6 basis points from a year ago and 1 basis point from the third quarter as competition remains intense.

In commercial banking, there was solid loan growth at 7.2% in softer market conditions. Market share of business banking improved 67 basis points from the prior year but fell 5 basis points from the third quarter. BMO ranks second in Canadian business banking market share at 19.84% and our objective is to be the market leader. In the deposit category, year-over-year balance growth of 4.9% was accompanied by steady growth in the number of commercial operating deposit customers.

We are pleased with our improved loyalty scores in personal and commercial banking where we have made broad-based gains relative to our competition.

Cards and payment services revenues grew a strong 15% year over year, adjusted for last year's unusual items. The growth was driven by transactions and accelerating balance growth as well as higher revenues from Moneris, our investment in a joint venture, and one of North America's leading processors of debit and credit payment transactions. Our most recent AIR MILES and Cashback rewards offers have broad appeal to customers which, combined with our pricing and credit strategies, have continued to drive strong revenue growth in a highly competitive environment. Cards and payment services are also seeing improvements in customer loyalty. In 2008, the group was awarded the Global Quality Platinum award from MasterCard Worldwide, which acknowledges performance in the key areas that affect the customer experience when making a purchase, including satisfaction at the point of sale through issuer availability and satisfaction with the authorization process.

P&C U.S. (all amounts in U.S.$)

Net income was $11 million, compared with a particularly strong $33 million a year ago. Results included $15 million of integration costs, lower than the $16 million to $18 million we estimated last quarter, as we focus on expense efficiency. Acquisition-integration costs were $13 million ($9 million after tax) higher than a year ago. Results were also affected by an additional $4 million after-tax charge for a Visa litigation reserve. Adjusted for the impact of these items, net income was $24 million in the quarter. The weak credit environment is affecting results as there are higher levels of non- performing loans and costs of managing our portfolio have increased.

Revenue was up $23 million or 11%, with the Wisconsin acquisitions contributing three-quarters of the growth and the balance attributable to core revenue improvements. Net interest margin decreased due to a portfolio transfer earlier in the year, the higher levels of non-performing loans and product mix.

Private Client Group

Net income was $78 million, compared with $103 million a year ago. Results were affected by $31 million ($19 million after tax) of charges in respect of actions taken to support U.S. clients in the weak capital markets environment. They included charges related to securities of Lehman Brothers Holdings Inc. (Lehman's) and in respect of the valuation of auction-rate securities that we have offered to purchase from client accounts. Adjusted for the charges, underlying performance in the quarter was good. Notwithstanding the charges, net income for the year was very strong, at $395 million, matching the record levels of a year ago.

Revenue for the quarter rose $17 million or 2.9% from a year ago, excluding the foregoing charges. Deposit balances have increased in the brokerage businesses and term investment products. There were also increases in loans and deposits in North American Private Banking.

Assets under management and administration and term deposits have been affected by softer market conditions and decreased $27.4 billion or 9.7%, excluding the impact of foreign exchange.

BMO Capital Markets

Net income of $285 million increased $239 million from a year ago. Results for the quarter were lowered by $14 million ($8 million after tax) of charges related to the capital markets environment. Net income a year ago was lowered by $227 million after tax for similar charges and commodities losses. See the Effects of the Capital Markets Environment on Fourth Quarter Results section for more details of the capital markets environment charges. Results for the quarter were raised by the group's $52 million share of BMO's recovery of prior-period income taxes.

Revenue rose $294 million to $715 million due in part to strong performance from our interest-rate-sensitive businesses and higher trading revenue. The charges noted above lowered revenue by $14 million in the current period and $342 million a year ago. We continued to focus on improving our risk-return profile by lowering the volatility of our earnings and by concentrating on our core, profitable client relationships. In response to market conditions, certain trading strategies were adjusted to reduce our risk exposures. As explained in note 5 to the attached financial statements, during the quarter, the Canadian Institute of Chartered Accountants (CICA) amended accounting and reporting rules on transfers of financial instruments. Since we intend to hold certain securities impacted by current market issues for the foreseeable future rather than trading them in the short term, we elected to transfer the securities from our trading portfolio to our available-for-sale portfolio. This aligns well with our previously-stated strategy of reducing the volatility of our group's results. The value of the transferred securities on August 1, 2008 was $2.0 billion. The transfer resulted in $183 million of pre-tax mark-to-market valuation charges being recognized in other comprehensive income rather than the income statement.

BMO Capital Markets was involved in 49 new issues in the quarter including 21 corporate debt deals, nine government debt deals, seven issues of preferred shares and 12 common equity transactions, raising $23.5 billion.

Performance Targets

We achieved one of our five performance targets in 2008, maintaining a strong Tier 1 Capital Ratio. We indicated at the end of the first quarter that we did not expect to achieve four of our five annual targets given the challenging economic environment.

The weak economic environment as well as difficult credit and capital market conditions create added uncertainty in the estimation of future financial performance. Therefore, we will not be disclosing financial targets for 2009. However, BMO has a rigorous business planning process that considers many potential economic scenarios. There is clear and direct accountability for performance against internal benchmarks and progress against strategic priorities including financial measures. This is aligned with our medium-term objectives of, over time, increasing EPS by an average of 10% per year, earning average ROE of between 17% and 20%, achieving average annual cash operating leverage of at least 2%, and maintaining a strong regulatory capital position.

<< ------------------------------------------------------------------------- Annual Targets for 2008 Performance to October 31, 2008* - 10% to 15% EPS growth from a - EPS of $4.08, down 22% from base of $5.24(1) $5.24 a year ago - ROE of 18% to 20% - ROE of 14.1% - Specific provision for credit - Specific provision for losses of $475 million or less credit losses of $1,070 million - Tier 1 Capital Ratio of at least - Tier 1 Capital Ratio of 9.77% 8.0% on a Basel II basis on a Basel II basis - Cash operating leverage of at - Cash operating leverage of least 2.0% - 5.3% * Excluding changes in the general allowance ------------------------------------------------------------------------- (1) The 2007 base excluded the impact of restructuring, changes in the general allowance and commodities losses. Performance excludes the increase in the general allowance and is measured relative to the base, as appropriate. ------------------------------------------------------------------------- Management's Discussion and Analysis MD&A commentary is as of November 25, 2008. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with Canadian generally accepted accounting principles (GAAP). The MD&A should be read in conjunction with the unaudited consolidated financial statements for the period ended October 31, 2008, included in this document, and the annual MD&A for the year ended October 31, 2007, included in BMO's 2007 Annual Report. The material that precedes this section comprises part of this MD&A. ------------------------------------------------------------------------- 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. ------------------------------------------------------------------------- Summary Data (Unaudited) (Canadian $ in Increase Increase millions, except (Decrease) (Decrease) as noted) Q4-2008 vs. Q4-2007 vs. Q3-2008 ------------------------------------------------------------------------- Net interest income 1,413 217 18% 127 10% Non interest revenue 1,400 396 39% (60) (4%) ------------------------------------------------------------------------- Revenue 2,813 613 28% 67 2% Specific provision for credit losses 315 214 +100% (119) (27%) Increase in the general allowance 150 100 +100% 100 +100% ------------------------------------------------------------------------- Total provision for credit losses 465 314 +100% (19) (4%) Non-interest expense 1,826 195 12% 44 2% Restructuring charge (recovery) (8) (32) (+100%) (8) (100%) ------------------------------------------------------------------------- Total non-interest expense 1,818 163 10% 36 2% Income taxes (49) 28 36% 10 16% Non-controlling interest in subsidiaries 19 - - 1 2% ------------------------------------------------------------------------- Net income 560 108 24% 39 8% Amortization of intangible assets (after tax) 10 1 8% 1 7% Cash net income(1) 570 109 24% 40 8% Earnings per share - basic ($) 1.06 0.17 19% 0.06 6% Earnings per share - diluted ($) 1.06 0.19 22% 0.08 8% Cash earnings per share - diluted ($)(1) 1.08 0.19 21% 0.08 8% Return on equity (ROE) 14.0% 1.8% 0.5% Cash ROE(1) 14.3% 1.8% 0.6% Productivity ratio 64.6% (10.6%) (0.3%) Cash productivity ratio(1) 64.2% (10.5%) (0.3%) Operating leverage 18.0% nm nm Cash operating leverage(1) 18.0% nm nm Net interest margin on earning assets 1.71% 0.24% 0.12% Effective tax rate (9.2%) 10.1% 3.0% Capital Ratios(2) Tier 1 Capital Ratio 9.77% nm (0.13%) Total Capital Ratio 12.17% nm (0.12%) Net income: Personal and Commercial Banking 356 36 11% (15) (4%) P&C Canada 344 57 19% 1 - P&C U.S. 12 (21) (63%) (16) (57%) Private Client Group 78 (25) (25%) (32) (30%) BMO Capital Markets 285 239 +100% 26 10% Corporate Services, including Technology and Operations (159) (142) (+100%) 60 28% ------------------------------------------------------------------------- BMO Financial Group Net Income 560 108 24% 39 8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Increase Fiscal- (Decrease) 2008 vs. Fiscal-2007 ----------------------------------------------------- Net interest income 5,087 244 5% Non interest revenue 5,118 612 14% ----------------------------------------------------- Revenue 10,205 856 9% Specific provision for credit losses 1,070 767 +100% Increase in the general allowance 260 210 +100% ----------------------------------------------------- Total provision for credit losses 1,330 977 +100% Non-interest expense 6,902 460 7% Restructuring charge (recovery) (8) (167) (+100%) ----------------------------------------------------- Total non-interest expense 6,894 293 4% Income taxes (71) (260) (+100%) Non-controlling interest in subsidiaries 74 (1) (2%) ----------------------------------------------------- Net income 1,978 (153) (7%) Amortization of intangible assets (after tax) 35 (3) (9%) Cash net income(1) 2,013 (156) (7%) Earnings per share - basic ($) 3.79 (0.39) (9%) Earnings per share - diluted ($) 3.76 (0.35) (9%) Cash earnings per share - diluted ($)(1) 3.83 (0.35) (8%) Return on equity (ROE) 13.0% (1.4%) Cash ROE(1) 13.3% (1.4%) Productivity ratio 67.6% (3.0%) Cash productivity ratio(1) 67.1% (3.0%) Operating leverage 4.8% nm Cash operating leverage(1) 4.7% nm Net interest margin on earning assets 1.56% (0.03%) Effective tax rate (3.6%) (11.5%) Capital Ratios(2) Tier 1 Capital Ratio 9.77% nm Total Capital Ratio 12.17% nm Net income: Personal and Commercial Banking 1,416 33 2% P&C Canada 1,320 53 4% P&C U.S. 96 (20) (17%) Private Client Group 395 - - BMO Capital Markets 692 275 66% Corporate Services, including Technology and Operations (525) (461) (+100%) ----------------------------------------------------- BMO Financial Group Net Income 1,978 (153) (7%) ----------------------------------------------------- ----------------------------------------------------- (1) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section at the end of the MD&A, which outlines the use of non-GAAP measures in this document. (2) Variances to the prior year have not been provided as the basis of computation is no longer comparable. In 2008, capital ratios are computed under Basel II versus on a Basel I basis in prior periods. On a Basel I basis, at the end of the current quarter, the Tier 1 capital ratio was 9.41% and the total capital ratio was 12.06 (Q3 2008: 9.45% and 12.07%; Q4 2007: 9.51% and 11.74%). See the Capital Management section. nm - not meaningful. ------------------------------------------------------------------------- >>

Management's Responsibility for Financial Information

BMO's 2008 Annual Report will contain a statement signed by the President & Chief Executive Officer (CEO) and the Interim Chief Financial Officer (Interim CFO) outlining management's responsibility for financial information contained in the report. In addition, BMO's CEO and Interim CFO are expecting to sign certifications relating to the appropriateness of the financial disclosures in our annual filings and the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting.

BMO's internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of BMO; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with Canadian generally accepted accounting principles and the requirements of the Securities and Exchange Commission (SEC) in the United States, as applicable, and that receipts and expenditures of BMO are being made only in accordance with authorizations of management and directors of BMO; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of BMO's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no changes in our internal control over financial reporting in fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. BMO Financial Group's management, under the supervision of the CEO and Interim CFO, has evaluated the effectiveness of our internal control over financial reporting using the framework and criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management is expecting to conclude that internal control over financial reporting was effective as of October 31, 2008.

BMO will file the applicable Canadian and U.S. CEO and CFO certifications with the Canadian Securities Administrators and the SEC in the United States in December 2008 when we file our Annual Report and other annual disclosure documents.

As in prior quarters, BMO's audit committee reviewed this document, including the attached unaudited interim consolidated financial statements, and BMO's Board of Directors approved the document prior to its release.

A comprehensive discussion of our businesses, strategies and objectives can be found in Management's Discussion and Analysis in BMO's 2007 Annual Report, which can be accessed on our web site at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

<< ------------------------------------------------------------------------- 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 may involve, but are not limited to, comments with respect to our objectives and priorities for 2009 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary policy; the degree of competition in the geographic and business areas in which we operate; changes in laws; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital market activities; the possible effects on our business of war or terrorist activities; disease or illness that impacts on local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply; and technological changes.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion on pages 28 and 29 of BMO's 2007 Annual Report, which outlines in detail certain key factors that may affect BMO's future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statement, 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 and our strategic priorities and objectives, and may not be appropriate for other purposes.

Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality and risk of default and losses on default of the underlying assets of the structured investment vehicles were material factors we considered when establishing our expectations regarding the structured investment vehicles discussed in this document including the amount to be drawn under the BMO liquidity facilities and the expectation that the first-loss protection provided by the subordinate capital notes will exceed future losses. Key assumptions included that assets would continue to be sold with a view to reducing the size of the structured investment vehicles, under various asset price scenarios, that the level of defaults and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding continuing difficult market conditions.

Assumptions about the level of defaults and losses on defaults were material factors we considered when establishing our expectation of the future performance of the transactions that Apex Trust has entered into. Key assumptions included that the level of defaults and losses on defaults would be consistent with historical experience. Material factors which were taken into account when establishing our expectations of the future risk of credit losses in Apex Trust included industry diversification in the portfolio, initial credit quality by portfolio and the first-loss protection incorporated into the structure.

Assumptions about the performance of the Canadian and U.S. economies in 2009 and how that will affect our businesses were material factors we considered when setting our strategic priorities and objectives, and our outlook for our businesses. Key assumptions included that the Canadian and the U.S. economies will contract in the first half of 2009, and that interest rates and inflation will remain low. We also assumed that housing markets in Canada will weaken in 2009 and strengthen in the second half of the year in the United States. We assumed that capital markets will improve somewhat in the second half of 2009 and that the Canadian dollar will strengthen modestly relative to the U.S. dollar. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies. Tax laws in the countries in which we operate, primarily Canada and the United States, are material factors we consider when determining our sustainable effective tax rate.

<< ------------------------------------------------------------------------- Regulatory Filings >>

Our continuous disclosure materials, including our interim filings, annual MD&A and audited consolidated financial statements, our Annual Information Form and the Notice of Annual Meeting of Shareholders and Proxy Circular are available on our web site at www.bmo.com/investorrelations, on the Canadian Securities Administrators' web site at www.sedar.com and on the EDGAR section of the SEC's web site at www.sec.gov. We expect to file our fiscal 2008 year end continuous disclosure materials on or about December 10, 2008.

<< ------------------------------------------------------------------------- Economic Review and Outlook >>

The Canadian economy grew at a modest pace in 2008, as exports continued to decline in response to weak U.S. demand. Growth in consumer spending moderated from last year's rapid pace, as employment growth and confidence weakened. Business investment also slowed in response to persistent uncertainty about the impact of the global credit crisis on the economy. Housing sales declined from last year's record levels, reflecting reduced affordability. The softer economy led to some slowing in residential mortgages and business and personal credit in the second half of the year, although growth remained relatively brisk. Rising commodity prices in the first half of the year lifted inflation to the highest level in five years; however, most prices continue to rise modestly and in some cases (such as books and motor vehicles) are falling. The Bank of Canada reduced overnight lending rates 225 basis points in the fiscal year to address the economic slowdown, the recent downturn in commodity prices and credit concerns in the market.

The U.S. economy grew modestly in the first half of 2008 and likely contracted in the second half, despite aggressive monetary and fiscal stimulus and strong export gains. The worsening credit conditions and housing slump, coupled with record-high energy costs, significantly affected consumers and businesses. Interbank lending spreads widened to all-time highs in early October amid the collapse or forced takeover of a number of banks and Wall Street brokers, severely curtailing the availability of credit and raising borrowing costs for businesses and consumers. While the downward trend in housing sales appears to have stabilized, the large number of unsold homes continues to weigh on prices. Growth in residential mortgages and personal and business loans slowed in 2008. The Federal Reserve aggressively reduced interest rates and expanded its liquidity provisions to support bank lending and the economy.

The Canadian economy is expected to contract moderately in the first half of 2009 as exports decline further, before recovering modestly in the second half of the year in response to low interest rates and recent weakness in the currency. The unemployment rate is expected to remain low but climb about one percentage point in late 2009 to just above 7%. Consumer and business spending will likely remain soft, further moderating credit growth. Housing activity should continue to decline, dampening demand for residential mortgages. The Bank of Canada is expected to reduce interest rates further as inflation falls and the Canadian dollar is expected to strengthen modestly relative to the U.S. dollar in the second half of the year, supported by steadier commodity prices.

The U.S. economy is expected to continue contracting in the first half of 2009, before improving slightly as the housing market stabilizes and credit conditions ease. Personal and business credit and residential mortgage demand will likely remain weak, at least in the first half of the year. U.S. unemployment has climbed steadily in the past year and is expected to rise about two percentage points to 8.5 % in 2009, well above Canada's rate. The Federal Reserve may continue to reduce interest rates to support the economy. Weakness in capital markets is expected to extend into early 2009, with some improvement expected in the second half of the year as the economy recovers and housing prices stabilize.

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

Effects of the Capital Markets Environment on Fourth Quarter Results

Financial markets remain unsettled with continuing concerns in respect of capital markets and the extent and severity of the economic downturn. In the fourth quarter, capital markets continued to be affected by volatility in credit spreads, impacting mark-to-market valuations. Equity valuations in the quarter were especially hard hit with many sectors recording significant declines.

BMO's results in the fourth quarter were affected by capital markets environment charges of $45 million ($27 million after tax and $0.06 per share) reflected in BMO Capital Markets and Private Client Group. The charges in BMO Capital Markets included $14 million ($8 million after tax) comprised of:

<< - charges of $258 million ($173 million after tax) in respect of exposures related to Apex, a Canadian credit protection vehicle ($170 million pre-tax), and mark-to-market valuations on counterparty credit exposures on derivative contracts largely as a result of corporate counterparties credit spreads widening relative to BMO's ($88 million pre-tax); - a charge of $49 million ($33 million after tax) for other-than- temporary impairment on securities in our portfolios including $29 million in respect of securities transferred from the trading to available-for-sale portfolio; - a benefit of $133 million ($90 million after tax) for mark-to-market valuations on credit default swaps related to BMO Capital Markets' loan portfolio; - a benefit of $89 million ($60 million after tax) related to our liabilities recorded at fair value as a result of our credit spreads widening; and - a number of other valuation adjustments and trading activities resulting in a net benefit of $71 million ($48 million after tax), including an $81 million pre-tax gain primarily related to portfolios where certain securities were transferred to the available-for-sale portfolio. The charges in Private Client Group included Cdn$31 million (Cdn$19 million after tax) in respect of management actions taken to support our U.S. clients in the weak capital markets environment including: - a net charge of Cdn$19 million related to securities of Lehman's; and - a charge of Cdn$12 million in respect of the valuation of auction rate securities that we expect to be tendered to our offer to purchase them from client accounts. >>

The above capital markets environment charges of $45 million were all reflected in non-interest revenue. There was $181 million of losses in securities gains (losses), other than trading, a reduction of $30 million in other revenue and a $166 million increase in trading non-interest revenue.

As explained in the preceding BMO Capital markets section, during the quarter, the CICA amended accounting and reporting rules applicable to financial instruments. As a result of the amendments, we elected to transfer certain securities from our trading portfolio to our available-for-sale portfolio. We subsequently recorded mark-to-market charges on these securities totalling $212 million ($143 million after tax), of which $29 million ($20 million after tax) was charged to earnings, as part of the other-than- temporary impairments outlined above, and $183 million ($123 million after tax) was charged to other comprehensive income rather than trading revenue in the statement of income.

The effects of notable items affecting comparative period results are discussed at the end of this MD&A.

Given the uncertainty in the capital markets environment, our investments in asset-backed commercial paper (ABCP), structured investment vehicles (SIVs), structured finance vehicles and mark-to-market investments could experience further gains and losses. This Effects of the Capital Markets Environment on Fourth Quarter Results section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Foreign Exchange

The Canadian dollar equivalents of BMO's U.S. dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were raised relative to the fourth quarter of 2007 and the third quarter of 2008 by the strengthening of the U.S. dollar. They were lowered in fiscal 2008 relative to fiscal 2007 by a weaker U.S. dollar, on average, over the course of the year. The average Canadian/U.S. dollar exchange rate in the fourth quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, rose by 11% from a year ago and 10% from the prior quarter. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.

<< Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results Fiscal- Q4-2008 2008 vs. vs. vs. Fiscal- (Canadian $ in millions, except as noted) Q4-2007 Q3-2008 2007 ------------------------------------------------------------------------- Canadian/U.S. dollar exchange rate (average) Current period 1.1107 1.1107 1.0321 Prior period 0.9986 1.0122 1.0926 Increased (Decreased) revenue 55 48 (63) Decreased (Increased) expense (45) (40) 93 Decreased (Increased) provision for credit losses (30) (26) 28 Decreased (Increased) income taxes 6 5 (6) ------------------------------------------------------------------------- Increased (Decreased) net income (14) (13) 52 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>

At the start of each quarter, BMO enters into hedging transactions that are expected to partially offset the pre-tax effects of exchange rate fluctuations in the quarter on our expected U.S. dollar net income for that quarter. As such, these activities partially mitigate the impact of exchange rate fluctuations within a single quarter; however, the hedging transactions are not designed to offset the impact of year-over-year or quarter-over- quarter fluctuations in exchange rates. The U.S. dollar strengthened moderately in the first and second quarters, more modestly in the third quarter and dramatically in the fourth quarter as the exchange rate increased from Cdn$1.0240 per U.S.dollar at July 31, 2008 to an average over the fourth quarter of Cdn$1.1107. Hedging transactions resulted in an after-tax loss of $4 million in the quarter and an after-tax loss of $11 million for fiscal 2008. The gain or loss from hedging transactions in future periods will be determined by both future currency fluctuations and the amount of underlying future hedging transactions, since the transactions are entered into each quarter in relation to expected U.S.-dollar-denominated net income for the next three months.

The effect of currency fluctuations on our investments in foreign operations is discussed in the Income Taxes section.

Net Income

Q4 2008 vs Q4 2007

Net income was $560 million for the fourth quarter of 2008, up $108 million or 24% from a year ago. Earnings per share were $1.06, compared with $0.87. Results for the quarter include $27 million after tax ($0.06 per share) in respect of the capital markets environment charges as set out in the preceding Effects of the Capital Markets Environment on Fourth Quarter Results section. Results a year ago included $227 million after tax ($0.45 per share) in aggregate for capital markets environment charges and a small charge for commodities losses in BMO Capital Markets as set out in the Notable Items section that follows at the end of the MD&A.

Provisions for credit losses increased $314 million from a year ago to $465 million. Specific provisions of $315 million increased $214 million from a year ago due to higher levels of impaired loans and the overall deterioration in credit conditions. There was a $150 million increase in the general allowance, compared with a $50 million increase in the fourth quarter of 2007.

P&C Canada net income increased $57 million or 19% from a year ago. While we continue to experience strong volume growth across most products, in particular cards and consumer lending, the current market conditions and interest rate environment have put pressures on our revenue growth. There were also increases in trading non-interest revenue from securitization activities as well as higher Moneris revenue and net interest margin, partially offset by net investment securities losses. Margin improved due to the interest on tax refunds. The impact of improved product mix and yields was offset by higher funding costs and lower mortgage-refinancing fees. As anticipated, expenses rose due to higher employee costs and higher capital taxes.

P&C U.S. net income decreased US$22 million or 66% from strong results a year ago. As expected, results were affected by higher levels of integration costs, as we completed the integration of our Wisconsin acquisitions. In addition, net income was lowered by an additional charge for the Visa litigation reserve and was affected by reduced revenues and increased costs in the difficult credit environment.

Private Client Group net income decreased $25 million or 25%. Results reflect charges of $31 million ($19 million after tax) in respect of actions taken to support U.S. clients in the weak capital markets environment. Excluding the charges, net income was $97 million, down $6 million or 6.9% from a year ago. Operating performance was good, especially in the context of the more difficult environment.

BMO Capital Markets net income increased $239 million to $285 million. The capital markets environment remains challenging, but our interest-rate- sensitive businesses continue to perform well and there have been improvements from the prior year in several of our trading businesses. Merger and acquisition fees and underwriting fees were down from the strong levels of a year ago. Results were affected by charges related to the capital markets environment of $8 million after tax in the current quarter and $211 million after tax a year ago. As explained in note 5 to the attached financial statements, during the quarter, the CICA amended accounting and reporting rules on transfers of financial instruments. Since we intend to hold certain securities impacted by current market issues for the foreseeable future rather than trading them in the short term, we elected to transfer the securities from our trading portfolio to our available-for-sale portfolio. Because the securities were held in the available-for-sale portfolio, mark-to-market valuation charges of $183 million ($123 million after tax) were recorded in other comprehensive income rather than trading revenue in the statement of income. Results for the quarter were raised by the group's $52 million share of BMO's recovery of prior-period income taxes.

Corporate Services results were $142 million lower than in the prior year primarily due to higher specific and general provisions for credit losses, partially offset by increased mark-to-market gains on hedging activities. BMO charges the operating groups with expected credit losses and charges/credits the balance of actual provisions for credit losses to Corporate Services. Results include the remaining $21 million share of BMO's recovery of prior-period income taxes.

Q4 2008 vs Q3 2008

Net income increased $39 million or 7.5%. The increase was largely attributable to improved trading revenues and better results in Corporate Services. Results in the third quarter were affected by capital markets environment charges of $134 million ($96 million after tax) and a $50 million ($33 million after tax) increase in the general allowance. See the Notable Items section for more details.

In P&C Canada, net income increased $1 million or 0.2%. Revenue growth was driven by volume growth across most products and higher revenues included in trading non-interest revenue from securitization activities, partially offset by net investment securities losses. Net interest margin remained flat as interest on tax refunds was offset by higher funding costs. Non-interest expense rose due to increased strategic initiative spending and advertising.

P&C U.S. net income fell US$17 million to US$11 million and by US$9 million excluding acquisition-integration costs in both periods. The decline was largely attributable to the impact of credit markets on revenues and expenses as well as the additional Visa litigation reserve.

Private Client Group net income decreased $32 million or 30% and $13 million or 13% excluding the charges previously outlined. Revenue decreased $50 million or 9.1% and $19 million or 3.5% excluding the impact of the charges, primarily driven by lower commission revenue in Full-Service Investing and lower fee-based revenue across our businesses. Revenues increased in term investment products.

BMO Capital Markets net income increased $26 million or 10%. Conditions in the fourth quarter remained challenging but there was strength in our trading and interest-rate-sensitive businesses and higher merger and acquisition activity. There were increased net securities losses and lower debt and equity underwriting fees. Results in both periods were affected by charges related to the capital markets environment and recoveries of prior periods' income taxes.

Corporate Services results improved by $60 million due primarily to improved revenues from mark-to-market gains on hedging activities and a higher gain from a credit card securitization in the current quarter, as well as reduced provisions for credit losses.

Fiscal 2008 vs Fiscal 2007

Net income decreased $153 million or 7.2% to $1,978 million.

Net income for the current year was lowered by the $585 million after tax impact of notable items consisting of $625 million ($419 million after-tax) of charges related to the capital markets environment and a $260 million ($166 million after-tax) increase in the general allowance for credit losses.

Net income for fiscal 2007 was reduced by the $787 million after-tax impact of notable items. They included $440 million after tax in respect of commodities losses of $853 million net of $120 million of reduced performance- based compensation. They also included $318 million ($211 million after tax) of charges related to the capital markets environment, a $159 million ($103 million after-tax) restructuring charge and a $50 million ($33 million after tax) increase in the general allowance for credit losses.

Specific provisions for credit losses were up $767 million from a year ago due to the credit environment and weakness in U.S. housing markets.

P&C Canada net income of $1,320 million increased $53 million or 4.1%, but increased $105 million or 8.6% adjusted for the $52 million net impact in 2007 of an insurance gain, investment gains, an adjustment to the loyalty rewards program liability and a recovery of prior-period income taxes. Revenue included solid volume growth in most product areas, while net interest margin increased by 1 basis point as better volumes in more profitable products were offset by increased funding costs. Expenses were higher due to increased initiatives spending, including expansion and renovation of the branch network, credit and debit card chip technology; as well as higher operating costs and higher Moneris costs.

P&C U.S. net income of US$95 million fell US$12 million or 11%, largely due to the more difficult credit environment. Results also included the US$9 million after-tax impact of the gain on the Visa IPO (net of litigation costs) and increased acquisition-integration costs of US$9 million (US$6 million after tax).

Private Client Group net income of $395 million was unchanged from the record results of a year ago, but increased $19 million or 4.7% excluding the impact of the charges taken in the fourth quarter. Market conditions were softer and the year-over-year revenue increase was lowered by the impact of the weaker U.S. dollar and a $7 million investment gain in 2007. There was growth in revenues from mutual fund fees, North American Private Banking and term investment products.

BMO Capital Markets net income of $692 million increased $275 million. Capital markets conditions were more challenging for many of our businesses in 2008 than in 2007 but interest-rate-sensitive businesses continued to perform well. Results in 2008 were affected by charges of $594 million ($400 million after tax) related to deterioration in capital markets but benefited from a recovery of prior years' income taxes. Results in 2007 were affected by charges of $1,171 million ($651 million after tax) comprised of the net impact of $318 million ($211 million after tax) of charges related to the capital markets environment and $853 million of losses in our commodities business ($440 million after tax and associated performance-based compensation).

Corporate Services net loss was $525 million, primarily due to higher provisions for credit losses including increases in the general allowance for credit losses. Results in 2007 included a $159 million ($103 million after tax) restructuring charge.

Revenue

BMO analyzes consolidated revenues on a GAAP basis. However, like many banks, BMO analyzes revenue of its operating groups and associated ratios computed using revenue on a taxable equivalent basis (teb). This basis includes an adjustment that increases GAAP revenues and the GAAP provision for income taxes by an amount that would raise revenues on certain tax-exempt securities to a level equivalent to amounts that would incur tax at the statutory rate. The offset to the group teb adjustments is reflected in Corporate Services revenues.

Total revenue of $2,813 million for the fourth quarter of 2008 increased $613 million or 28% from a year ago. There was strong revenue growth in P&C Canada and BMO Capital Markets. Revenue growth benefited from reduced charges related to the capital markets environment in the current quarter. A stronger U.S. dollar raised revenue growth by $55 million or 2.5 percentage points.

Revenue increased $67 million or 2.4% from the third quarter. There were lower charges related to the capital markets environment in the current quarter. A stronger U.S. dollar raised revenue growth by $48 million or 1.8 percentage points.

Revenue of $10,205 million for fiscal 2008 increased $856 million or 9.2% from the prior year. Growth benefited from reduced charges in respect of the capital markets environment and commodities losses and there was solid growth in P&C Canada and P&C U.S. A weaker U.S. dollar lowered revenue growth by $63 million or 0.7 percentage points.

Changes in net interest income and non-interest revenue are reviewed in the sections that follow.

Net Interest Income

Net interest income of $1,413 million increased $217 million or 18% from a year ago. There was growth in each of the operating groups and a reduction in Corporate Services. Average earning assets increased $7 billion to $329 billion with growth in P&C Canada, P&C U.S. and Private Client Group. P&C Canada earning assets increased by $6 billion with growth in all lines of business. There was comparable growth in P&C U.S. as average earning assets increased $8 billion due to a portfolio transfer in the first quarter, acquisitions and organic loan growth. BMO Capital Markets average earning assets decreased $4 billion due to a reduction in trading assets, partially offset by increased corporate loans. Corporate Services average earning assets decreased due to securitization activity. The stronger U.S. dollar was a significant contributor to increased average assets, but has no impact on net interest margin.

Relative to the third quarter, net interest income increased $127 million or 10%. There was growth in each of the operating groups including Corporate Services. BMO's average earning assets increased $7 billion with growth in all groups except Corporate Services, which decreased due to securitization activity. The stronger U.S. dollar contributed significantly to increased average assets. During the quarter, we securitized $4.2 billion of mortgage loans and $1.6 billion of credit card loans.

In fiscal 2008, net interest income of $5,087 million increased $244 million or 5.0%. There was growth in each of the operating groups and a reduction in Corporate Services. Average earning assets increased $22 billion. P&C Canada earning assets increased $6 billion. BMO Capital Markets average earning assets increased $14 billion due to growth in corporate loans and money market assets. The stronger U.S. dollar contributed signific

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