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Allowance for Credit Losses represents an amount deemed adequate to absorb credit-related losses. Earnings Per Share is calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Asset-backed Commercial Paper is a short-term investment with a maturity that is typically less than 180 days.
Allowance for Credit Losses represents an amount deemed adequate to absorb credit-related losses. Earnings Per Share is calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Asset-backed Commercial Paper is a short-term investment with a maturity that is typically less than 180 days.
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Allowance for Credit Losses represents an amount deemed adequate to absorb credit-related losses. Earnings Per Share is calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Asset-backed Commercial Paper is a short-term investment with a maturity that is typically less than 180 days.
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Allowance for Credit Losses represents Earnings Per Share (EPS) is calculated Mark-to-Market represents the Provision for Credit Losses is an amount deemed adequate by by dividing net income, after deduc- valuation of securities and deriva- a charge to income that represents management to absorb credit-related tion of preferred dividends, by the tives at market rates as of the an amount deemed adequate by losses on loans and acceptances and average number of common shares balance sheet date, where required management to fully provide for other credit instruments. Allowances outstanding. Diluted EPS, which is by accounting rules. impairment in loans and acceptances for credit losses can be specific or our basis for measuring performance, and other credit instruments, given Net Economic Profit (NEP) represents general and are recorded on the bal- adjusts for possible conversions of the composition of the portfolios, the cash net income available to common ance sheet as a deduction from loans financial instruments into common probability of default, the economic shareholders, less a charge for capital. and acceptances or, as they relate to shares if those conversions would environment and the allowance NEP is an effective measure of eco- credit instruments, as other liabilities. reduce EPS. for credit losses already established. nomic value added. NEP is a non-GAAP P 40, 82, 119 P 36, 153 P 43, 82, 119 measure. P 37, 91 Assets under Administration Forwards and Futures are contrac- Return on Equity or Return on and under Management refers tual agreements to either buy or Common Shareholders’ Equity (ROE) Net Interest Income is comprised to assets administered or managed sell a specified amount of a currency, is calculated as net income, less of earnings on assets, such as loans by a financial institution that are commodity, interest-rate-sensitive preferred dividends, as a percentage and securities, including interest and beneficially owned by clients and financial instrument or security at a of average common shareholders’ dividend income and BMO’s share of therefore not reported on the specific price and date in the future. equity. Common shareholders’ equity income from investments accounted for balance sheet of the administering is comprised of common share capital, Forwards are customized contracts using the equity method of accounting, or managing financial institution. contributed surplus, accumulated transacted in the over-the-counter less interest expense paid on liabili- other comprehensive income (loss) Asset-Backed Commercial Paper market. Futures are transacted in ties, such as deposits. and retained earnings. is a short-term investment with standardized amounts on regulated P 40 P 37 a maturity that is typically less than exchanges and are subject to daily 180 days. The commercial paper cash margining. Net Interest Margin is the ratio of Securities Borrowed or Purchased is backed by physical assets such as P 129 net interest income to earning assets, under Resale Agreements are trade receivables, and is generally expressed as a percentage or in basis low-cost, low-risk instruments, often used for short-term financing needs. General Allowance is maintained points. Net interest margin is some- supported by the pledge of cash to cover impairment in the existing times computed using total assets. Assets-to-Capital Multiple is defined collateral, which arise from trans- credit portfolio that cannot yet be P 40 as assets plus guarantees and letters actions that involve the borrowing associated with specific credit assets. of credit, net of specified deductions or purchasing of securities. Our approach to establishing and Notional Amount refers to the (or adjusted assets), divided by maintaining the general allowance principal used to calculate interest Securities Lent or Sold under total capital. is based on the guideline issued and other payments under derivative Repurchase Agreements are low-cost, Average Earning Assets represents by our regulator, OSFI. The general contracts. The principal amount does low-risk liabilities, often supported the daily or monthly average balance allowance is reviewed on a quarterly not change hands under the terms by cash collateral, which arise from of deposits with other banks and loans basis and a number of factors are of a derivative contract, except in the transactions that involve the lending and securities, over a one-year period. considered when determining its case of cross-currency swaps. or selling of securities. appropriate level. We employ a gen- Bankers’ Acceptances (BAs) are Operating Leverage is the difference Specific Allowances reduce the eral allowance model that applies bills of exchange or negotiable between revenue and expense growth carrying value of specific credit assets historical expected and unexpected instruments drawn by a borrower for rates. Cash operating leverage is the to the amount we expect to recover loss rates, based on probabilities of payment at maturity and accepted difference between revenue and cash- if there is evidence of deterioration default and loss given default factors, by a bank. BAs constitute a guarantee based expense growth rates. in credit quality. to current balances. of payment by the bank and can be P 30 P 43, 82, 119 P 43, 82, 119 traded in the money market. The bank earns a “stamping fee” for providing Options are contractual agreements Swaps are contractual agreements Hedging is a risk management tech- this guarantee. that convey to the buyer the right but between two parties to exchange nique used to neutralize or manage not the obligation to either buy or a series of cash flows. The various Basis Point: One one-hundredth of interest rate, foreign currency, equity, sell a specified amount of a currency, swap agreements that we enter a percentage point. commodity or credit exposures arising commodity, interest-rate-sensitive into are as follows: from normal banking activities. Derivatives are contracts whose financial instrument or security at a • Commodity swaps – counterparties value is “derived” from movements Impaired Loans are loans for which fixed future date or at any time within generally exchange fixed and floating in interest or foreign exchange there is no longer reasonable assurance a fixed future period. rate payments based on a notional rates, or equity or commodity prices. of the timely collection of principal P 129 value of a single commodity. Derivatives allow for the transfer, or interest. modification or reduction of current Productivity Ratio (or Expense-to- • Credit default swaps – one counter- Innovative Tier 1 Capital: OSFI allows or expected risks from changes in Revenue Ratio) is our key measure party pays the other a fee in exchange banks to issue instruments that qualify rates and prices. of productivity. It is calculated as for that other counterparty agreeing as “Innovative” Tier 1 capital. In order non-interest expense divided by total to make a payment if a credit event to qualify, these instruments have to revenues, expressed as a percentage. occurs, such as bankruptcy or failure be issued indirectly through a special The cash productivity ratio is calculated to pay. purpose vehicle, be permanent in in the same manner, after removing nature and receive acceptable account- • Cross-currency interest rate swaps – the amortization of acquisition-related ing treatment. Innovative Tier 1 capital fixed and floating rate interest intangible assets from non-interest cannot comprise more than 20% of payments and principal amounts are expenses. net Tier 1 capital, at time of issue, exchanged in different currencies. with 15% qualifying as Tier 1 capital P 44, 91 and the remaining 5% included in total capital.
166 BMO Financial Group 192nd Annual Report 2009
• Cross-currency swaps – fixed rate Total Capital includes Tier 1 interest payments and principal and Tier 2 capital, net of certain amounts are exchanged in differ- deductions. Tier 2 capital is pri- Risk-Related Definitions ent currencies. marily comprised of subordinated Business Risk arises from the specific Liquidity and Funding Risk is the debentures and the eligible business activities of a company and potential for loss if BMO is unable to • Equity swaps – counterparties portion of the general allowance the effects these could have on the meet financial commitments in a exchange the return on an for credit losses. Deductions earnings of the company. Business risk timely manner at reasonable prices as equity security or a group of from Tier 2 capital are primarily due to earnings volatility measures they fall due. Financial commitments equity securities for the return comprised of our investments the risk that volumes will decrease or include liabilities to depositors and based on a fixed or floating in non-consolidated subsidiaries margins will shrink with no opportunity suppliers, and lending, investment interest rate or the return on being available to offset the revenue and pledging commitments. and other substantial another equity security or group declines with a reduction in costs. investments. P 86, 123 of equity securities. P 89 Total Capital Ratio is defined Market Risk is the potential for a • Interest rate swaps – counter- as total capital divided by risk- Credit and Counterparty Risk is the negative impact on the balance sheet parties generally exchange weighted assets. potential for loss due to the failure and/or income statement resulting fixed and floating rate interest P 63, 146 of a borrower, endorser, guarantor from adverse changes in the value of payments based on a notional or counterparty to repay a loan financial instruments as a result of value in a single currency. Total Shareholder Return (TSR): or honour another predetermined changes in certain market variables. P 129 The five-year average annual total financial obligation. These variables include interest rates, shareholder return (TSR) represents P 80 foreign exchange rates, equity and Tangible Common Equity reflects commodity prices and their implied the average annual total return common equity net of certain volatilities, as well as credit spreads, earned on an investment in BMO Earnings Volatility (EV) is a measure deductions. There is no standard credit migration and default. common shares made at the of the adverse impact of potential industry definition of this measure. changes in market parameters on the P 82, 123 beginning of a five-year period. P 63 The return includes the change projected 12-month after-tax net income in share price and assumes that of a portfolio of assets, liabilities and Market Value Exposure (MVE) is a Tangible Common Equity off-balance sheet positions, measured measure of the adverse impact of dividends received were reinvested to Risk-Weighted Assets Ratio at a 99% confidence level over a changes in market parameters on the in additional common shares. represents tangible common specified holding period. market value of a portfolio of assets, The one-year TSR also assumes equity divided by risk-weighted P 83 liabilities and off-balance sheet posi- that dividends were reinvested assets. tions, measured at a 99% confidence in shares. P 63 Economic Capital is our internal level over a specified holding period. P 35 The holding period considers current assessment of the risks underlying Taxable Equivalent Basis (teb): BMO’s business activities. It represents market conditions and the composition Trading-Related Revenues of the portfolios to determine how Revenues of operating groups management’s estimation of the likely include net interest income and magnitude of economic losses that long it would take to neutralize the reflected in our MD&A are presented non-interest revenue earned from could occur if adverse situations arise, market risk without adversely affecting on a taxable equivalent basis on and off-balance sheet positions and allows returns to be adjusted market prices. For trading and under- (teb). The teb adjustment increases undertaken for trading purposes. for risks. Economic capital is calculated writing activities, MVE is comprised GAAP revenues and the provision The management of these positions for various types of risk – credit, of Value at Risk and Issuer Risk. for income taxes by an amount typically includes marking them market (trading and non-trading), P 83 that would increase revenues on to market on a daily basis. operational and business – where certain tax-exempt securities to Trading revenues include income measures are based on a time horizon Operational Risk is the potential a level that would incur tax at of one year. (For further discussion for loss resulting from inadequate or (expense) and gains (losses) the statutory rate, to facilitate of these risks, refer to the Enterprise- failed internal processes or systems, from both cash instruments and comparisons. Wide Risk Management section human interactions or external interest rate, foreign exchange P 40 (including spot positions), equity, on page 75.) Economic capital is a events, but excludes business risk. commodity and credit contracts. key element of our risk-based capital P 87 Tier 1 Capital represents more management process. P 42 permanent forms of capital, and P 37, 91 Reputation Risk is the risk of primarily consists of common negative impacts resulting from the Variable Interest Entities (VIEs) shareholders’ equity, preferred Environmental Risk is the risk of deterioration of BMO’s reputation include entities with equity that shares and innovative hybrid loss or damage to BMO’s reputation with key stakeholders. These impacts is considered insufficient to finance instruments, less a deduction resulting from environmental concerns include revenue loss, reductions in our the entity’s activities or in which for goodwill and excess intangible related to BMO or its customers. customer or client base and declines the equityholders do not have in BMO’s share price. assets and certain other deduc- Environmental risk is often associated a controlling financial interest. with credit and operational risk. tions required under Basel II. P 90 We are required to consolidate P 90 Tier 1 Capital Ratio is defined VIEs if the investments we hold in Value at Risk (VaR) is measured as Tier 1 capital divided by risk- these entities and/or the relation- Issuer Risk arises in BMO’s trading for specific classes of risk in BMO’s weighted assets. ships we have with them result in and underwriting portfolios, and trading and underwriting activities: P 63, 146 us being exposed to the majority measures the adverse impact of interest rate, foreign exchange rate, of their expected losses, being credit spread, credit migration and equity and commodity prices and able to benefit from a majority default risks on the market value their implied volatilities. This of their expected residual returns, of fixed income instruments and measure calculates the maximum or both, based on a calculation similar securities. Issuer risk is mea- likely loss from portfolios, measured determined by standard setters. sured at a 99% confidence level at a 99% confidence level over a P 71 over a specified holding period. specified holding period. P 83 P 83