BMO Financial Group Reports Fourth Quarter and Fiscal 2021 Results - Form 6-K

BMO Financial Group Reports Fourth Quarter and Fiscal 2021 Results

Fourth Quarter 2021 Earnings Release

BMO's 2021 audited annual consolidated financial statements and accompanying Management Discussion and Analysis (MD&A) are available online at www.bmo.com/investorrelations and at www.sedar.com.

Financial Results Highlights

Fourth Quarter 2021 Compared With Fourth Quarter 2020:

Fiscal 2021 Compared With Fiscal 2020:

Toronto, December 3, 2021 - For the fourth quarter ended October 31, 2021, BMO Financial Group recorded net income of $2,159 million or $3.23 per share on a reported basis, and net income of $2,226 million or $3.33 per share on an adjusted basis.

"We delivered another quarter of strong performance with positive operating leverage in each of our diversified businesses, contributing to strong earnings for fiscal 2021. This year, we significantly advanced our strategy to build a digitally-enabled, future-ready bank, underpinned by our Purpose and a winning culture. We've taken action to improve our competitive position through a disciplined approach to expense management, capital allocation and investment in future growth, while meaningfully improving our efficiency ratio and return on equity over the last several years," said Darryl White, Chief Executive Officer, BMO Financial Group.

"Strong, consistent financial performance enables us to continue to invest in improving the well-being of our employees, customers and communities. We continue to be recognized as a global leader in sustainability as one of only five Canadian companies included in the Dow Jones Sustainability World Index - a confirmation of the progress we're making on our bold commitments for a thriving economy, a sustainable future and an inclusive society. We will continue to act as a catalyst for positive change, including serving as our clients' lead partner in the transition to a net zero world."

"Looking ahead to 2022, we will continue to position BMO for growth with the ensuing economic recovery. We are making targeted investments in technology and talent to drive enhanced customer experiences and deliver market-leading advice to help them make real financial progress. Today we announced a 25% dividend increase and our intention to repurchase up to 22.5 million shares, reflecting the strength of our capital position and confidence in delivering sustained, long-term performance for our shareholders," concluded Mr. White.

Concurrent with the release of results, BMO announced a first quarter 2022 dividend of $1.33 per common share, an increase of $0.27 or 25% from the prior quarter and the prior year. The quarterly dividend of $1.33 per common share is equivalent to an annual dividend of $5.32 per common share.

The foregoing section contains forward-looking statements. Refer to the Caution Regarding Forward-Looking Statements.

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

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Fourth Quarter Performance Review

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

Adjusted results and ratios, and U.S. dollar amounts and ratios in this Fourth Quarter Performance Review section are on a non-GAAP basis and discussed in the Non-GAAP and Other Financial Measures section.

Reported and adjusted net income increased from the prior year, driven by revenue growth, an increase in expenses, and a recovery of the provision for credit losses. Net income increased across all operating groups. Adjusted results in the current quarter excluded expenses of $52 million ($62 million pre-tax) from the impact of divestitures related to the sale of our EMEA Asset Management business and the sale of our Private Banking business in Hong Kong and Singapore. Adjusted results also excluded the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior years.

Canadian P&C

Reported net income was $921 million, an increase of $274 million or 42% and adjusted net income was $921 million, an increase of $273 million or 42% from the prior year. Results were driven by a 13% increase in revenue, with higher net interest income and non-interest revenue, higher expenses, and a recovery of the provision for credit losses compared with a provision in the prior year.

U.S. P&C

Reported net income was $512 million, an increase of $188 million or 58% from the prior year and adjusted net income was $518 million, an increase of $185 million or 55%. The impact of the weaker U.S. dollar reduced net income growth by 8%, revenue growth by 6% and expense growth by 5%.

On a U.S. dollar basis, reported net income was US$408 million, an increase of US$162 million or 66% from the prior year, and adjusted net income was US$412 million, an increase of US$158 million or 63%. Reported and adjusted results were driven by a 9% increase in revenue, with higher net interest income and non-interest revenue, higher expenses and a recovery of the provision for credit losses compared with a provision in the prior year.

BMO Wealth Management

Reported net income was $369 million, an increase of $49 million or 15% from the prior year and adjusted net income was $373 million, an increase of $45 million or 14%. Results were driven by higher revenue, partially offset by an increase in expenses. Traditional Wealth reported net income was $318 million, an increase of $65 million or 26% and adjusted net income was $322 million, an increase of $61 million or 24%, driven by higher revenue, primarily from growth in client assets, including stronger global markets, partially offset by higher expenses. Insurance net income was $51 million, a decrease from $67 million in the prior year, primarily due to prior-year benefits from changes in investments to improve asset-liability management.

BMO Capital Markets

Reported net income was $536 million, an increase of $157 million or 41% from the prior year, and adjusted net income was $541 million, an increase of $154 million or 40%. Reported and adjusted results were driven by continued strong revenue performance, with higher Investment and Corporate Banking revenue partially offset by lower Global Markets revenue, relatively unchanged expenses and a recovery of credit losses compared with a provision in the prior year.

Corporate Services

Reported net loss was $179 million and adjusted net loss was $127 million, compared with a reported and adjusted net loss of $86 million in the prior year. Reported and adjusted results decreased due to lower revenue, driven by treasury-related activities, higher expenses, and the impact of a more favourable tax rate in the prior year.

Capital

BMO's Common Equity Tier 1 (CET1) Ratio was 13.7% as at October 31, 2021, an increase from 13.4% at the end of the third quarter of fiscal 2021, driven by retained earnings growth, partially offset by higher source currency risk-weighted assets.

Credit Quality

Total recovery of the provision for credit losses was $126 million, compared with a provision for credit losses of $432 million in the prior year. The total recovery of credit losses as a percentage of average net loans and acceptances ratio was 11 basis points, compared with a provision for credit losses ratio of 37 basis points in the prior year. The provision for credit losses on impaired loans was $84 million, a decrease of $255 million from $339 million in the prior year. The provision for credit losses on impaired loans as a percentage of average net loans and acceptances ratio was 7 basis points, compared with 29 basis points in the prior year. There was a $210 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $93 million provision in the prior year. The $210 million recovery in the current quarter largely reflected an improving economic outlook and positive credit migration, partially offset by growth in loan balances, while the $93 million provision in the prior year reflected a more severe adverse scenario, partially offset by an improving economic outlook and reduced balances.

Refer to the Accounting Policies and Critical Accounting Estimates section of BMO's 2021 Annual MD&A and Note 4 of our audited annual consolidated financial statements for further information on the allowance for credit losses as at October 31, 2021.

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Supporting a Sustainable and Inclusive Recovery

At BMO, we have a long-standing commitment to support a thriving economy, a sustainable future and an inclusive society, and we are acting with purpose. In support of our customers, communities and employees, BMO recently:

Regulatory Filings

BMO's continuous disclosure materials, including interim filings, annual Management's Discussion and Analysis and audited annual consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular, are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators' website at www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange Commission's website at www.sec.gov. Information contained in or otherwise accessible through our website (www.bmo.com), or any third party websites mentioned herein, does not form part of this document.

Caution

The extent to which the COVID-19 pandemic impacts BMO's business, results of operations, reputation, financial performance and condition, including the potential for credit, counterparty and mark-to-market losses, its credit ratings and regulatory capital and liquidity ratios, as well as impacts to its customers and competitors will depend on future developments. Such developments are highly uncertain and cannot be predicted, including the scope, severity and duration of the pandemic and actions taken by third parties, governments, and governmental and regulatory authorities, which could vary by country and region. The COVID-19 pandemic may also impact the bank's ability to achieve, or the timing to achieve, certain previously announced targets, goals and objectives.

For additional information, refer to the Risks That May Affect Future Results section of BMO's 2021 Annual 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.

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Financial Review

Management's Discussion and Analysis (MD&A) commentary is as at December 3, 2021. The material that precedes this section comprises part of this MD&A. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended October 31, 2021, included in this document, as well as the audited annual consolidated financial statements for the year ended October 31, 2021, and the MD&A for fiscal 2021, contained in BMO's 2021 Annual Report.

BMO's 2021 Annual MD&A includes a comprehensive discussion of its businesses, strategies and objectives, and can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

Bank of Montreal's management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as at October 31, 2021, of Bank of Montreal's disclosure controls and procedures (as defined in the rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2021, which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of inherent limitations, disclosure controls and procedures and internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.

As in prior quarters, Bank of Montreal's Audit and Conduct Review Committee reviewed this document and Bank of Montreal's Board of Directors approved the document prior to its release.

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Caution Regarding Forward-Looking Statements

As noted in the following Caution Regarding Forward-Looking Statements, all forward-looking statements and information, by their nature, are subject to inherent risks and uncertainties, both general and specific, which may cause actual results to differ materially from the expectations expressed in any forward-looking statement. The Enterprise-Wide Risk Management section of BMO's 2021 Annual MD&A describes a number of risks, including credit and counterparty, market, insurance, liquidity and funding, operational non-financial, legal and regulatory, strategic, environmental and social, and reputation risk. Should our risk management framework prove ineffective, there could be a material adverse impact on our financial position and results.

Bank of Montreal's public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the "safe harbor" provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements in this document may include, but are not limited to, statements with respect to our objectives and priorities for fiscal 2022 and beyond, our strategies or future actions, our targets and commitments (including with respect to net zero emissions), expectations for our financial condition, capital position or share price, the regulatory environment in which we operate, the results of, or outlook for, our operations or for the Canadian, U.S. and international economies, and the COVID-19 pandemic, and include statements made by our management. Forward-looking statements are typically identified by words such as "will", "would", "should", "believe", "expect", "anticipate", "project", "intend", "estimate", "plan", "goal", "commit", "target", "may", "might", "schedule", "forecast" and "could" or negative or grammatical variations thereof.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct, and that actual results may differ materially from such predictions, forecasts, conclusions or projections. The uncertainty created by the COVID-19 pandemic has heightened this risk, given the increased challenge in making assumptions, predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements, as a number of factors - many of which are beyond our control and the effects of which can be difficult to predict - could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including, but not limited to: general economic and market conditions in the countries in which we operate, including labour challenges; the severity, duration and spread of the COVID-19 pandemic, and possibly other outbreaks of disease or illness, and its impact on local, national or international economies, as well as its heightening of certain risks that may affect our future results; information, privacy and cyber security, including the threat of data breaches, hacking, identity theft and corporate espionage, as well as the possibility of denial of service resulting from efforts targeted at causing system failure and service disruption; benchmark interest rate reforms; technological changes and technology resiliency; political conditions, including changes relating to, or affecting, economic or trade matters; climate change and other environmental and social risk; the Canadian housing market and consumer leverage; inflationary pressures; global supply-chain disruptions; changes in monetary, fiscal, or economic policy; changes in laws, including tax legislation and interpretation, or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes on funding costs; weak, volatile or illiquid capital or credit markets; the level of competition in the geographic and business areas in which we operate; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; failure of third parties to comply with their obligations to us; our ability to execute our strategic plans and to complete proposed acquisitions or dispositions, including obtaining regulatory approvals; critical accounting estimates and the effects of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks, including with respect to reliance on third parties; changes to our credit ratings; global capital markets activities; the possible effects on our business of war or terrorist activities; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; and our ability to anticipate and effectively manage risks arising from all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding, operational non-financial, legal and regulatory, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section of BMO's 2021 Annual MD&A, all of which outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting shareholders and analysts in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook section of BMO's 2021 Annual MD&A, as well as in the Allowance for Credit Losses section of BMO's 2021 Annual MD&A. Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, we primarily consider historical economic data, past relationships between economic and financial variables, changes in government policies, and the risks to the domestic and global economy.

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Financial Highlights

na - not applicable

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Non-GAAP and Other Financial Measures

Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from our audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS. We use a number of financial measures to assess our performance, as well as the performance of our operating businesses, including measures and ratios that are presented on a non-GAAP basis, as described below. We believe that these non-GAAP amounts, measures and ratios, read together with our GAAP results, provide readers with a better understanding of how management assesses results.

Non-GAAP amounts, measures and ratios do not have standardized meanings under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from, or as a substitute for, GAAP results.

Certain information contained in BMO's Management's Discussion and Analysis as at October 31, 2021 (2021 Annual MD&A) is incorporated by reference into this document. Further information regarding the composition of our non-GAAP and other financial measures, including supplementary financial measures, is provided in the Glossary of Financial Terms in BMO's 2021 Annual MD&A and available online at www.bmo.com/investorrelations and at www.sedar.com.

Our non-GAAP measures broadly fall into the following categories:

Adjusted measures and ratios

Management considers both reported and adjusted results and measures useful in assessing underlying ongoing business performance. Adjusted results and measures remove certain specified items from revenue, non-interest expense and income taxes, as detailed in the following table. Adjusted results and measures presented in this document are non-GAAP. Presenting results on both a reported basis and an adjusted basis permits readers to assess the impact of certain items on results for the periods presented, and to better assess results excluding those items that may not be reflective of ongoing business performance. As such, the presentation may facilitate readers' analysis of trends. Except as otherwise noted, management's discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results.

Measures net of insurance claims, commissions and changes in policy benefit liabilities (CCPB)

We also present reported and adjusted revenue on a basis that is net of insurance claims, commissions and changes in policy benefit liabilities (CCPB), and our efficiency ratio and operating leverage are calculated on a similar basis, as reconciled in the Revenue section. Measures and ratios presented on a basis net of CCPB are non-GAAP. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets, caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities are predominantly fixed income assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair value changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in CCPB. The presentation and discussion of revenue, efficiency ratios and operating leverage on a net basis reduces this variability, which allows for a better assessment of operating results. For more information refer to the Insurance Claims, Commissions and Changes in Policy Benefit Liabilities section.

Presenting results on a taxable equivalent basis (teb)

We analyze consolidated revenue on a reported basis. In addition, we analyze revenue on a taxable equivalent basis (teb) at the operating group level, consistent with the Canadian peer group. Revenue and the provision for income taxes in BMO Capital Markets and U.S. P&C are increased on tax-exempt securities to an equivalent pre-tax basis. These adjustments are offset in Corporate Services. Presenting results on a teb basis reflects how our operating groups manage their business and is useful to facilitate comparisons of income between taxable and tax-exempt sources. The effective tax rate is also analyzed on a teb basis for consistency of approach, with the offset to operating segment adjustments recorded in Corporate Services.

Tangible common equity and return on tangible common equity

Tangible common equity is calculated as common shareholders' equity less goodwill and acquisition-related intangible assets, net of related deferred tax liabilities. Return on tangible common equity is commonly used in the North American banking industry and is meaningful because it measures the performance of businesses consistently, whether they were acquired or developed organically.

Presenting results on a U.S. dollar basis

Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on BMO's U.S. segment are non-GAAP. Refer to the Foreign Exchange section for a discussion of the effects of changes in exchange rates on our results.

We present our U.S. P&C business results, as well as select U.S. segment information for the bank, BMO Wealth Management, BMO Capital Markets and Corporate Services, on a U.S. dollar basis. Presenting these results on a U.S. dollar basis is useful in assessing the underlying performance without the variability caused by changes in foreign exchange rates.

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Non-GAAP and Other Financial Measures

Certain comparative figures have been reclassified to conform with the current year's presentation.

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Summary of Reported and Adjusted Results by Operating Group

Net Revenue, Efficiency Ratio and Operating Leverage

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Return on Equity and Return on Tangible Common Equity

Capital is allocated to the operating segments based on the amount of regulatory capital required to support business activities. Unallocated capital is reported in Corporate Services. Capital allocation methodologies are reviewed annually.

Return on Equity by Operating Segment

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Foreign Exchange

The Canadian dollar equivalents of BMO's U.S. segment results that are denominated in U.S. dollars decreased relative to 2020 due to changes in the Canadian/U.S. dollar exchange rate. The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on BMO's U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated amounts recorded outside of BMO's U.S. segment.

Economically, our U.S. dollar income stream was not hedged against the risk of changes in foreign exchange rates during 2021 and 2020. We regularly determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on our net income. Changes in exchange rates will affect future results measured in Canadian dollars, and the impact on those results is a function of the periods in which revenue, expenses, provisions for (recoveries of) credit losses and income taxes arise.

Refer to the Enterprise-Wide Capital Management section of BMO's 2021 Annual MD&A for a discussion of the impact that changes in foreign exchange rates can have on BMO's capital position.

Effects of Changes in Exchange Rates on BMO's U.S. Segment Reported and Adjusted Results

Adjusted results in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.

Net Income

Q4 2021 vs. Q4 2020

Reported net income was $2,159 million, an increase of $575 million or 36% from the prior year, and adjusted net income was $2,226 million, an increase of $616 million or 38%. Adjusted results in the current quarter excluded expenses of $52 million ($62 million pre-tax) from the impact of divestitures related to the sale of our EMEA Asset Management business and the sale of our Private Banking business in Hong Kong and Singapore. Adjusted results also excluded the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior years. Reported EPS was $3.23, an increase of $0.86 from the prior year, and adjusted EPS was $3.33, an increase of $0.92.

Results were driven by strong revenue growth and the impact of lower provisions for credit losses, partially offset by an increase in expenses. All operating groups recorded higher net income, while Corporate Services recorded a higher net loss.

Q4 2021 vs. Q3 2021

Reported net income was $2,159 million, a decrease of $116 million or 5% from the prior quarter, and adjusted net income was $2,226 million, a decrease of $66 million or 3%. Adjusted results excluded the impact of divestitures of $52 million ($62 million pre-tax) in the current quarter and $18 million ($24 million pre-tax) in the prior quarter. Adjusted results in the prior quarter excluded a partial reversal of previously recorded restructuring charges related to severance of $18 million ($24 million pre-tax). Adjusted results also excluded the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior quarters. Reported EPS decreased $0.18 or 5% from the prior quarter, and adjusted EPS decreased $0.11 or 3%.

Results were primarily driven by lower revenue and an increase in expenses, partially offset by the impact of a larger recovery of the provision for credit losses. Net income increased in Canadian P&C and was partially offset by decreases in U.S. P&C, BMO Wealth Management and BMO Capital Markets. Corporate Services recorded a higher net loss.

For further information on non-GAAP amounts, measures and ratios in this Net Income section, refer to the Non-GAAP and Other Financial Measures section.

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Revenue

Q4 2021 vs. Q4 2020

Reported revenue was $6,573 million, an increase of $587 million or 10% from the prior year. On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue was $6,476 million, an increase of $490 million or 8% from the prior year.

Revenue increased in Canadian P&C due to higher net interest income and higher non-interest revenue, in BMO Wealth Management, largely from growth in client assets, including stronger global markets, partially offset by lower insurance revenue, in BMO Capital Markets due to higher Investment and Corporate Banking revenue, partially offset by lower Global Markets revenue, and in U.S. P&C due to higher net interest income and higher non-interest revenue. Corporate Services revenue decreased from the prior year. The impact of the weaker U.S. dollar reduced total revenue by 2%.

Net interest income was $3,756 million, an increase of $226 million from the prior year. Non-trading net interest income was $3,217 million, an increase of $199 million or 7%, primarily driven by higher net interest income in Canadian P&C. Higher source currency net interest income in U.S. P&C was partially offset by the impact of the weaker U.S. dollar. Trading-related net interest income was $539 million, an increase of $27 million or 5%.

Average earning assets were $918.3 billion, an increase of $41.9 billion or 5%, primarily due to loan growth, higher cash and higher securities balances, partially offset by the impact of the weaker U.S. dollar.

BMO's overall net interest margin of 1.62% increased 2 basis points from the prior year. On a basis that excludes trading-related interest income and earning assets, net interest margin of 1.66% increased 6 basis points, primarily driven by higher margins in our P&C businesses and lower balances of low-yielding assets in BMO Capital Markets.

Non-interest revenue, net of CCPB, was $2,720 million, an increase of $264 million or 11% from the prior year, with increases across most categories, including higher securities gains, other than trading, and higher revenue from underwriting and advisory fees, mutual funds, investment management and custodial fees and card fees, partially offset by lower trading revenue and the impact of the weaker U.S. dollar.

Gross insurance revenue increased $80 million from the prior year, primarily due to changes in the fair value of investments and business growth. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities are predominantly fixed income and equity assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. The impact of these fair value changes was largely offset by changes in policy benefit liabilities, which are discussed in the Insurance Claims, Commissions and Changes in Policy Benefits section.

Q4 2021 vs. Q3 2021

Revenue was $6,573 million, a decrease of $989 million or 13% from the prior quarter. Revenue, net of CCPB, was $6,476 million, a decrease of $102 million or 2%.

Revenue increased in Canadian P&C due to higher net interest income and non-interest revenue and in U.S. P&C, primarily due to the stronger U.S. dollar. Revenue decreased in BMO Capital Markets with lower revenue in both Global Markets and Investment and Corporate Banking. Revenue was relatively unchanged in BMO Wealth Management, as higher revenue in Traditional Wealth was offset by lower insurance revenue. Corporate Services revenue decreased from the prior quarter.

Net interest income increased $235 million or 7% from the prior quarter. Non-trading net interest income increased $83 million or 3%, primarily in our P&C businesses. Higher net interest income in U.S. P&C was primarily due to the impact of the stronger U.S. dollar. Trading-related net interest income increased $152 million or 39%.

Average earning assets increased $31.0 billion, primarily due to loan growth, higher securities and cash balances, and the impact of the stronger U.S. dollar.

BMO's overall net interest margin increased 5 basis points, primarily due to higher trading-related interest income. On a basis that excludes trading-related interest income and earning assets, net interest margin decreased 1 basis point.

Non-interest revenue, net of CCPB, decreased $337 million or 11% from the prior quarter, largely due to lower revenue from trading, underwriting and advisory fees, and securities gains, other than trading, partially offset by the impact of the stronger U.S. dollar.

Gross insurance revenue decreased $914 million from the prior quarter, primarily due to changes in the fair value of investments. The decrease in insurance revenue was largely offset by changes in CCPB, as discussed in the Insurance Claims, Commissions and Changes in Policy Benefits section.

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

For further information on non-GAAP amounts, measures and ratios, and results presented on a net revenue basis in this Revenue section, refer to the Non-GAAP and Other Financial Measures section.

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Change in Net Interest Income, Average Earning Assets and Net Interest Margin

na - not applicable

Certain comparative figures have been reclassified to conform with the current year's presentation.

For further information, refer to the Non-GAAP and Other Financial Measures section.

Total Provision for Credit Losses

Q4 2021 vs. Q4 2020

Total recovery of the provision for credit losses was $126 million, compared with a provision for credit losses of $432 million in the prior year. The total recovery of credit losses as a percentage of average net loans and acceptances ratio was 11 basis points, compared with a provision for credit losses ratio of 37 basis points in the prior year. The provision for credit losses on impaired loans was $84 million, a decrease of $255 million from $339 million in the prior year. The provision for credit losses on impaired loans as a percentage of average net loans and acceptances ratio was 7 basis points, compared with 29 basis points in the prior year. There was a $210 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $93 million provision in the prior year. The $210 million recovery in the current quarter largely reflected an improving economic outlook and positive credit migration, partially offset by growth in loan balances, while the $93 million provision in the prior year reflected a more severe adverse scenario, partially offset by an improving economic outlook and reduced balances.

Q4 2021 vs. Q3 2021

Total recovery of the provision for credit losses was $126 million, compared with a recovery of $70 million in the prior quarter. The total recovery of credit losses as a percentage of average net loans and acceptances ratio was 11 basis points, compared with 6 basis points in the prior quarter. The provision for credit losses on impaired loans increased $13 million from the prior quarter, largely due to lower recoveries of provisions in U.S. P&C and BMO Capital Markets. The provision for credit losses on impaired loans as a percentage of average net loans and acceptances ratio was 7 basis points, compared with 6 basis points in the prior quarter. There was a $210 million recovery of the provision for credit losses on performing loans in the current quarter, compared with a $141 million recovery in the prior quarter. The recovery in the current quarter largely reflected an improving economic outlook and positive credit migration, partially offset by growth in loan balances, while the prior quarter reflected an improving economic outlook and positive credit migration, partially offset by the impact of the uncertain economic environment on future credit conditions, as well as growth in loan balances.

Provision for Credit Losses by Operating Group

Certain comparative figures have been reclassified to conform with the current year's presentation.

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Provision for Credit Losses Performance Ratios

Certain comparative figures have been reclassified to conform with the current year's presentation.

Impaired Loans

Total gross impaired loans (GIL) were $2,169 million, compared with $3,638 million in the prior year, with the largest decrease in impaired loans attributable to the oil and gas industry. GIL decreased $261 million from $2,430 million in the prior quarter.

Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the quarter totalled $295 million, compared with $662 million in the prior year and $390 million in the prior quarter.

Changes in Gross Impaired Loans (GIL)⁽¹⁾and Acceptances

Certain comparative figures have been reclassified to conform with the current year's presentation.

Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $97 million, compared with $nil in the prior year. Results increased, largely due to changes in the fair value of policy benefit liabilities. CCPB decreased $887 million from the prior quarter due to changes in the fair value of policy benefit liabilities. The changes were largely offset in revenue.

Non-Interest Expense

Reported non-interest expense was $3,803 million, an increase of $255 million or 7% from the prior year, including $62 million of expenses from the impact of divestitures in the current year. Adjusted non-interest expense was $3,720 million, an increase of $205 million or 6%. The increase in expenses was primarily due to higher employee-related costs, including performance-based costs, travel and business development costs, computer and equipment costs, and professional fees, partially offset by the impact of the weaker U.S. dollar that reduced expenses by 2%.

Reported non-interest expense increased $119 million or 3% from the prior quarter. Adjusted non-interest expense increased $58 million or 2%. The increase in reported and adjusted expenses was primarily due to higher computer and equipment costs, professional fees and travel and business development costs, partially offset by lower employee-related costs. The impact of the stronger U.S. dollar increased expenses by 1%.

The reported gross efficiency ratio was 57.9%, compared with 59.3% in the prior year. On a net revenue basis, the reported efficiency ratio was 58.7%, compared with 59.3% in the prior year, and the adjusted efficiency ratio was 57.4%, compared with 58.7% in the prior year.

Reported gross operating leverage was positive 2.6%. On a net revenue basis, reported operating leverage was positive 1.0% and adjusted operating leverage was positive 2.4%.

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

For further information on non-GAAP amounts, measures and ratios in this Non-Interest Expense section, refer to the Non-GAAP and Other Financial Measures section.

Provision for Income Taxes

The provision for income taxes was $640 million, an increase of $218 million from the fourth quarter of 2020, and a decrease of $49 million from the third quarter of 2021. The effective tax rate for the current quarter was 22.9%, compared with 21.1% in the fourth quarter of 2020, and 23.2% in the third quarter of 2021.

The adjusted provision for income taxes was $656 million, an increase of $227 million from the fourth quarter of 2020, and a decrease of $38 million from the third quarter of 2021. The adjusted effective tax rate was 22.7% in the current quarter, compared with 21.1% in the fourth quarter of 2020, and 23.2% in the third quarter of 2021. The effective tax rate and adjusted effective tax rate were lower in the prior year primarily due to earnings mix, including the impact of lower pre-tax income in the prior year.

For further information on non-GAAP amounts, measures and ratios in this Provision for Income Taxes and Other Taxes section, refer to the Non-GAAP and Other Financial Measures section.

14 BMO Financial Group Fourth Quarter Report 2021

Capital Management

BMO continues to manage its capital within the framework described in the Enterprise-Wide Capital Management section of BMO's 2021 Annual MD&A.

Fourth Quarter 2021 Regulatory Capital Review

BMO's Common Equity Tier 1 (CET1) Ratio was 13.7% as at October 31, 2021, an increase from 13.4% at the end of the third quarter of fiscal 2021, driven by retained earnings growth, partially offset by higher source currency risk-weighted assets (RWA).

CET1 Capital was $44.5 billion as at October 31, 2021, an increase from $43.3 billion as at July 31, 2021, primarily due to retained earnings growth.

RWA were $325.4 billion as at October 31, 2021, an increase from $322.5 billion as at July 31, 2021, primarily due to increased asset size and to a lesser extent, higher market risk, partially offset by changes in asset quality.

Our Tier 1 and Total Capital Ratios were 15.4% and 17.6%, respectively, as at October 31, 2021, compared with 15.1% and 17.4%, respectively, as at July 31, 2021. The Tier 1 and Total Capital Ratios were higher than the prior quarter, due to the factors affecting the CET1 Ratio.

The impact of foreign exchange movements on capital ratios was largely offset. BMO's investments in foreign operations are primarily denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated RWA and capital deductions may result in variability in the capital ratios. We may manage the impact of foreign exchange movements on our capital ratios and did so during the current quarter. Any such activities could also impact our book value and return on equity.

BMO's Leverage Ratio was 5.1% as at October 31, 2021, an increase from 5.0% as at July 31, 2021, as higher Tier 1 Capital was partially offset by higher leverage exposures.

Regulatory Capital

Regulatory capital requirements for BMO are determined in accordance with the Capital Adequacy Requirements (CAR) Guideline and the Leverage Requirements (LR) Guideline issued by the Office of the Superintendent of Financial Institutions (OSFI), which is based on the capital standards developed by the Basel Committee on Banking Supervision. For more information refer to the Enterprise-Wide Capital Management section of BMO's 2021 Annual MD&A.

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