BMO Financial Group
198th Annual Report 2015
There are many ways to talk about what lies
ahead: Change. Disruption. Opportunity. Growth.
We’ve gotten closer to our customers. Made
banking simpler. Unified our businesses. Expanded
our footprint. Invested in new platforms. Embraced
a better rulebook. And through it all, delivered
consistently strong results.
now it gets
interesting
Business Review
Financial Snapshot/Who We Are
2
4
Year in Review
10 Chairman’s Message
11 CEO’s Message
16 Executive Committee
17 Our Strategic Footprint
18 Reasons to Invest in BMO
20 Corporate Governance
21 Board of Directors
Financial Performance and Condition at a Glance
Financial Review
23 CFO’s Foreword to the Financial Review
24
26 Management’s Discussion and Analysis
118 Supplemental Information
132 Statement of Management’s Responsibility
for Financial Information
133 Independent Auditors’ Report of Registered
Public Accounting Firm
134 Report of Independent Registered Public
Accounting Firm
135 Consolidated Financial Statements
140 Notes to Consolidated Financial
Statements
Resources and Directories
202 Glossary of Financial Terms
204 Where to Find More Information
IBC Shareholder Information
Financial Snapshot
As at or for the year ended October 31
(Canadian $ in millions, except as noted)
2015
2014
2015
2014
Reported 1
Adjusted 1,2
Revenue3 (p 38)
19,389
18,223
19,391
18,223
Insurance claims, commissions
and changes in policy benefit
liabilities3 (CCPB) (p 41)
1,254
1,505
1,2544
1,505
Revenue, net of CCPB (p 38)
18,135
16,718
18,137
16,718
Provision for credit losses (p 42)
612
561
612
561
Non-interest expense (p 43)
12,182
10,921
11,819 10,761
Net income (p 34)
4,405
4,333
4,681
4,453
Earnings per share –
diluted ($) (p 34)
Return on equity (p 35)
Operating leverage,
net of CCPB (p 43)
Basel III Common Equity
6.6 5757
6.41
7.00
6.59
12.5%
14.0%
13.3% 14.4%
(3.0)%
(2.7)%
(1.3)% (1.6)%
Tier 1 Ratio (p 35)
10.7%
10.1%
10.7%% 10.1%
Net Income by Segment
Canadian P&C (p 48)
U.S. P&C (p 51)
Wealth Management (p 55)
2,104
2,016
2,108
2,020
827
850
654
780
880
995555
706
843
BMO Capital Markets (p 58)
1,032
1,077
1,034
1,078
Corporate Services4 (p 62)
(408)
(194)
(296)
(194)
Net income (p 34)
4,405
4,333
444,6,6,681
4,453
U.S. P&C (US$ in millions) (p 51)
659
597
701011
644
1 Effective November 1, 2014, BMO adopted several new and amended accounting pronouncements
issued by the International Accounting Standards Board, which are outlined in Note 1 on page 140
of the financial statements. The adoption of these new and amended accounting standards only
impacted our results prospectively. Certain other prior year data has been reclassified to conform
with the current year’s presentation. See pages 45 and 46.
2 Adjusted results are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Management assesses performance on a reported basis and on an adjusted basis and considers
both to be useful in assessing the underlying ongoing business performance. Presenting results on
both bases provides readers with a better understanding of how management assesses results.
3 Effective the first quarter of 2015, insurance claims, commissions and changes in policy benefit
liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance
revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
4 Corporate Services, including Technology & Operations.
Bank of Montreal brands the organization’s member companies as BMO Financial Group.
Note 28 on page 196 of the financial statements lists the intercorporate relationships among
Bank of Montreal and its significant subsidiaries.
Who We Are
Established in 1817, BMO Financial Group is
a highly diversified financial services provider
based in North America. With total assets of
$642 billion and close to 47,000 employees,
BMO provides a broad range of personal and
commercial banking, wealth management and
investment banking products and services to
more than 12 million customers and conducts
business through three operating groups: Personal
and Commercial Banking, Wealth Management
and BMO Capital Markets.
Mark Gilbert,
Commercial Account Manager,
Mid Market.
2 BMO Financial Group 198th Annual Report 2015
2
BMO Financial Group 198th Annual Report 2015 3
3
We’re not waiting for things to
change. For five years we’ve
been investing in transformative
technology that is literally
reshaping our bank.
We’ve dramatically extended BMO’s technology capabilities to meet a clear set of goals:
More personalized, intuitive applications built to respond in the moment. A more unified
experience across all channels, products, services and geographies. More customer-
specific solutions – delivered to market at greater speed and at a lower cost. Enhanced risk
management. And the digitization of business processes to further boost productivity.
The result? We’re reaching a new level of operating efficiency as we expand and rethink
how to give customers a deeper sense of control over their finances.
“The technology architecture we’ve built
has moved us right where we want
to be competitively as we continue to
reimagine the customer experience.”
Jean-Michel Arès
BMO’s Chief Technology & Operations Officer
For the third consecutive
year, BMO was recognized
by global financial services
research firm Celent with
a 2015 Model Bank Award
for excellence in the digital
banking category.
Russell Pereira,
Management Governance Analyst,
Barrie Computer Centre.
How our in-the-moment IT architecture
delivers value right now:
Integrate
everything
+
Build
once
+
Understand
more
=
A sophisticated
connector grid brings
together more than
1,400 applications
across the bank.
Over 1,000 reusable
software-based
services can be
employed to create
applications quickly
and easily.
Bank-wide data
aggregation and
distributed platforms
enable detailed analytics
of everything from risk
to sales and marketing.
A more
personal bank
for a digital
world
Sensing and responding
to customers’ needs.
Intuitive, consistent experience
across all channels.
Boosted productivity and fast
speed to market.
4 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 5
We’re using new tools, insights
and ways of connecting to make
banking more personal and intuitive.
Our customers experience a
bank that’s built for them.
Smart branches where digital and human interactions blend seamlessly. ABMs with video
tellers offering immediate expert help. Ideas tailored to customers’ needs using data-driven
insights. Fast, secure mobile payments, and cash withdrawals using only a smartphone.
A tablet app that integrates personal banking with investing and financial management.
A callback feature that actually calls you back. And access to all of our products and services
through single points of contact. This is what we’re here to help means in the digital age.
We make banking easier. Smarter. And flexible enough to fit comfortably into our customers’
busy, connected lives.
Honey Rejzek,
Director, Business Finance,
Commercial Banking.
Best of 2015
Best Commercial
Bank in Canada
Best Wealth Management
Bank Canada
Best Domestic
Private Bank, U.S.
– World Finance Magazine
– International Finance Magazine
– Global Financial Market Review
Live Agent & Automated
Telephone Banking (Big
Five Banks) award winner
– Ipsos Best Banking Awards
Best Full-Service
Investment Advisory
in Canada
– Global Banking &
Finance Review
Best Supply Chain Finance
Bank in North America
World’s Best Metals &
Mining Investment Bank
Best Wealth Management
in Canada
– Trade Finance magazine
– Global Finance magazine
– Global Banking &
Finance Review
6 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 7
Sister Edna Lonergan,
President and founder of
Milwaukee’s St. Ann Center
for Intergenerational Care,
speaking with Chuck Roedel,
VP, Business Banking,
BMO Harris Bank.
Our customers create their own
futures, knowing the help we
provide is anchored by integrity,
accountability and shared values.
You can’t buy trust, or invent it.
Trust is earned.
Consistently in the top rankings for sound corporate governance. Solid capital
strength, with the longest-running dividend payout record of any company
in Canada. A champion of financial literacy. A pioneer in Aboriginal banking.
Contributing $56.9 million in corporate donations across North America in 2015,
and funding US$947.3 million in U.S. community development loans. This is
who we are: diverse, inclusive, socially engaged and accountable to each new
generation of stakeholders – who expect us to fulfill our responsibilities as a
vital intermediary while constantly refining our disciplined approach to risk.
The AML Opportunity
BMO’s anti-money laundering (AML) group is working to turn responsibility into
opportunity. Our AML team used to spend 80% of their time analyzing vast amounts
of data and only 20% gaining insights into customers’ choices. Now we are working
to change that ratio. Using tools developed by our Technology & Operations group,
we’re learning more about how, when and where people bank with us, helping us
deliver an experience that delights in every way.
Insights
Data
Generosity
More than 90% of BMO employees
participated in the bank’s 2015 Employee
Giving Campaign. Over 42,000 of us
personally donated over $18 million to
United Ways and other charities.
How we
help
Best 50
BMO has been named one
of the Best 50 Corporate
Citizens in Canada for
13 consecutive years by
Corporate Knights.
8 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 9
Chairman’s message
Strong, Strategic Growth
Chief Executive Officer’s message
Here and Now
J. Robert S. Prichard
Chairman of the Board
William A. Downe
Chief Executive Officer
Being able to produce good results under favourable
conditions is always welcome – but it is also expected.
However, producing strong results in times of uncertainty
is evidence both of a successful business strategy and a
highly effective management team.
As your representatives on the Board of Directors, we are
pleased to report that your bank had another year of good
results, despite challenges in the global economy and here
at home. We congratulate the bank’s employees and the
management team for raising the bar yet again. All of us as
shareholders have benefitted from the team’s efforts under
the excellent leadership of our Chief Executive.
The core businesses of the bank continued to show strong
growth in 2015. The investments we have made in recent
years are producing solid results, and we expect these will
continue to grow. Of particular note are the investments
we are making in the bank’s technology platform to better
respond to customers’ needs as they choose to manage
their finances in new and different ways.
Such changes bring new and different risks as well. Your
board has worked closely with the management team, as
well as our regulators and supervisors, to ensure we remain
on the leading edge of these developments. We have made
significant investments in risk management and compliance
that make us stronger and more resilient. I am also pleased
that the bank’s capital base remains strong, giving us the
flexibility to make acquisitions such as the purchase of GE
Capital Corporation’s transportation finance business in the
U.S. and Canada, a transaction that closed on December 1.
digital strategies in pursuit of a differentiated customer
experience, efficiency and quality earnings growth – is
supported by the consistent track record of a bank that has
always acted with responsibility, transparency and integrity.
Since last year’s Annual Report, we have had two excellent
additions to the BMO board. Lorraine Mitchelmore and Dr. Martin
Eichenbaum, both elected at the last annual meeting, have
brought valuable experience and fresh insights to our deliberations.
In the meantime, however, Dr. Martha Piper, former president of
the University of British Columbia, stepped down from the board
as she returned to UBC to serve as interim president. Martha was
a superb director for a decade and we will miss her enduring
contributions to the effectiveness of this board. Martha was an
outstanding chair of the Governance and Nominating Committee
but she was much more than that. She was an inspiration to
management and directors alike as she brought her passion for
Canada and the bank to our work and set high expectations
for all of us to meet. On behalf of all shareholders, we thank
her for being such a splendid colleague and contributor.
The coming year will be an important one for all of us.
We continue to have great confidence in the long-term
success of the bank: the strategy is sound and management
is focused. We look forward to working closely with Bill
Downe and the bank’s senior leaders, supporting their efforts
as they capitalize on new opportunities and ensure the
bank is positioned for the future.
As your representatives, we thank all of our shareholders for
your continuing confidence in BMO and the management team.
It is a privilege to serve you.
All of these building blocks rest on a deeper foundation: the
trust that your bank has earned from its customers and other
stakeholders. Our confidence – as we introduce high-quality
J. Robert S. Prichard
We’re using technology to create new business models – and to unlock
new sources of value for our customers and shareholders. Because in our
experience, a changing landscape conveys advantage to those who are
willing to disrupt, accept some degree of trial and error, and try again.
The strategy of BMO Financial Group is summed up in a set
of clear, concise statements that frame our decision-making
and guide how we execute our business activities. These
strategic priorities take a long-term perspective, providing
a touchstone we can return to regularly as we gauge our
progress and define new areas of focus. While remaining
consistent at the core, they have evolved to reflect the
changing business environment and our response to it.
Our priorities have been refined to highlight the investments
we’ve been making in the underlying architecture of the
bank’s technology platform (as detailed on pages 4–5),
and to recognize technology’s potential to transform the
business of banking. Of course, technology has played
an important role in our thinking for decades; this year
we’re bringing it to the forefront as a fundamental element
of our strategy.
As we publish this 2015 Annual Report, with the 2016
fiscal year already well underway, these are BMO’s strategic
priorities:
1. Achieve industry-leading customer loyalty by
delivering on our brand promise
2. Enhance productivity to drive performance and
shareholder value
3. Accelerate deployment of digital technology to
transform our business
4. Leverage our consolidated North American platform
and expand strategically in select global markets to
deliver growth
5. Ensure our strength in risk management underpins
everything we do for our customers
The tremendous opportunities we see to enhance proven
business models – and replace inefficient ones – are
evident throughout this introductory section of the annual
report, which sets BMO’s recent performance in the context
of our longer-term view. The record results we achieved
in 2015 (detailed in the Management’s Discussion and
Analysis section) are key indicators of progress. From the
bank’s perspective, they are underscored by our sense
of purpose.
Our success lies in earning the trust of our customers,
ensuring that any actions we take to help them reach their
goals are anchored by integrity and a shared set of values.
And we’re differentiated by our deep desire to connect
with customers: in making banking more personal, we’re
forging relationships that represent sustainable value.
10 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 11
Chief Executive Officer’s message
This mindset shapes how we think about the
role technology should play in deepening customer
loyalty, driving profitability and rewarding our
shareholders.
Technology is part of our strategy
Without question, 2015 confirmed how much our
substantial – and forward-looking – investment in
technology transformation has been reshaping the bank.
Over the past five years, we’ve reengineered our systems
to enable a clear, relationship-based view of all relevant
information with a bank-wide data aggregation platform
and distributed analytic capabilities. We’re making it easy
for customers and their bankers to access a wealth of
knowledge as they explore options and make better
decisions. And through what can only be described as a
passion for deepening customers’ sense of control over
their own finances, we’re also giving them confidence that
we’ll uphold our promise to protect their interests while
keeping their information secure and managing risk.
As we integrate advanced digital and mobile capabilities into
all of our businesses – from our award-winning smartphone
and tablet apps to BMO SmartFolio, our automated
investment portfolio – each new solution is built on the
powerful platform we’ve put in place. Our highly reliable
core systems have been configured to efficiently meet the
competing demands of multiple stakeholders – the most
fundamental of which is customers’ anticipation that their
needs will be perfectly met. Equally important is the
expectation that BMO’s various businesses will deliver
services as one bank, and our employees’ corresponding
need to have a single view of every customer. And right
alongside is the drive to adopt more agile work processes,
with faster release cycles for new products and services;
the rigour we’ve brought to strengthening compliance
disciplines such as anti-money laundering; and our
continued vigilance around issues of privacy, information
security and consumer protection.
To simultaneously address these interrelated goals,
achieving each without compromising the others, has
required an unprecedented investment of time, energy,
capital and creativity. We’ve been listening closely to
customers’ feedback, and sharpening our analytics to
better understand their priorities and behaviours, as we
expand and rethink the banking experience. Expectations
around response times in a mobile, connected world
have dramatically increased the speed at which innovation
needs to happen. And because our work calls for new
knowledge and skills, we’re developing and recruiting
people with the specialized expertise to find alternative
solutions and reinvent existing models – including our own.
As we accelerate these efforts, we’re alert to the potential in
collaborating with third parties who are using technology in
new and interesting ways that complement our own thinking.
We’ve long seen the value of working with external specialists
in the service of our customers. BMO was a founding partner
of the 10-million-member AIR MILES rewards program. We
work closely with companies such as Shell Canada to offer
more rewards to BMO MasterCard customers. And in the past
year we announced relationships with two providers of
specialized services to small businesses: FreshBooks for
financial management tools, and e8ight Business Services
Inc. for help managing online and social media presence.
Collaboration makes sense when we can see the opportunity
to speed up change at an advantageous cost.
Technology is one part of innovation
It’s sometimes suggested that banks themselves need to
become technology companies. In BMO’s case, we have
a legacy of technological innovation dating from initial
signs of digitization in the 1970s, when we were the first
Canadian bank to connect our branches nationwide across
a real-time network. From the earliest fully automated
cheque-processing systems in the United States to ABM
cash withdrawals requiring only a smartphone, we have
a long history of combining breakthrough thinking with
continuous experimentation to make banking better for
our customers.
What’s different today is that instead of simply finding
faster, smarter ways of doing what banks have always
done, we’re using technology to unlock new sources of
value for our customers and shareholders. Because in our
experience, a changing landscape conveys advantage to
those who are willing to disrupt, accept some degree of
trial and error, and try again.
Our bank has an advantage that would be challenging for
a startup to duplicate: more than 12 million customers
who are ready to try new solutions and provide invaluable
input as we refine and enhance them. We’re able to assess
the impact of smart ideas quickly, and we can spread the
investment over a diverse, established base. Above all, we
know that unless a new development yields tangible
Our
strategic
priorities*
*Updated fiscal 2016
1
Achieve
industry-leading
customer loyalty
by delivering on our
brand promise
2
Enhance
productivity to
drive performance
and shareholder
value
3
Accelerate
deployment of
digital technology
to transform our
business
4
Leverage our consolidated
North American platform
and expand strategically in
select global markets to
deliver growth
5
Ensure our strength
in risk management
underpins everything
we do for our
customers
12 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 13
Chief Executive Officer’s message
Our bank has important strategic
advantages – technology expertise,
a wealth of customer data, deep
capital strength, a well-established
brand, a solid record of regulatory
compliance and a prudent,
disciplined approach to risk.
benefits in both customer satisfaction and return on
investment, it’s not sustainable. We never lose sight of
our ultimate objective: to delight the maximum number
of people at the lowest cost consistent with our brand.
Technology is helping us reduce operating costs and
eliminate work that doesn’t add value. It’s allowing us
to approach tasks differently and execute them more
quickly. And as we meet the demand for increasingly
sophisticated digital capabilities, especially through the
mobile channel, we’re attracting and retaining more
customers – and in the process, earning higher revenue
with less expense. Becoming more connected to our
customers and delivering services more cost-effectively
are not mutually exclusive goals.
The fact is our bank has many strategic advantages –
technology expertise, a wealth of customer data, deep
capital strength, a well-established brand, a solid record
of regulatory compliance and a prudent, disciplined
approach to risk – that enable us to compete successfully
with disruptors and traditional players alike. And the
single thread tying together all of these competitive
advantages is trust.
Trust remains the foundation of loyalty
You can create an app in an instant – and it can take
about the same amount of time to erode trust that has
required years to build. You can’t attract trust with
features or purchase it with rewards. Trust must be
earned. Even as the pace of change continues to
accelerate – in fact, precisely because the world has
become so complex and fast-moving – we see that
our customers sense what BMO stands for: that we act
responsibly, not only in our interactions with them,
but in everything we do.
In the downturn of 2008–2009, after having declared
dividends to shareholders every year since 1829 – a payout
record unequalled by any other Canadian company – we
took steps to protect that dividend because we knew how
important it was to individual shareholders. The bank has a
history spanning generations of social change and evolving
expectations. We understand that trust can only be built
over time, through the accumulation of consistent actions
by everyone at BMO. We’re rightly judged not by what we
say, but by what we do.
It’s relevant to all of our stakeholders that we act with
integrity, transparency and accountability. We earn trust
by managing our business responsibly and upholding the
highest standards of governance. We reinforce it by giving
back to the communities where we live and work – and
by fostering an inclusive, socially conscious culture in
which employees feel empowered to show their own
remarkable generosity. None of these things can be
accomplished by technology alone.
Customers remain the key to value creation
Our business is built on relationships. We base our brand
promise on the recognition that money is personal, and the
investment we’re making in technology is entirely focused
on that belief. We’re creating tools that empower our
customers while helping us understand their preferences
and priorities. And we’re blending virtual and face-to-face
conversations to ensure we’re delivering value at every
touch point, providing customers with quick, clear,
knowledgeable support – and more, when that’s what
they’re looking for.
As we work to deepen our relationships with existing
customers, the best measure of our strategy’s success
is the growth of the bank through our ability to attract
new business – which translates into top-line revenue
growth. This is why we so closely measure both net new
customers and product categories per customer in every
business. Our progress over the past year is reflected in
the bank’s adjusted annual net revenue growth of 8%, to
$18.1 billion. Adjusted net income for 2015 was $4.7 billion,
or $7.00 in earnings per share, an increase of 6% over
the previous year.
A relevant strategy drives results
Critical to achieving the strategic priorities that ultimately
drive BMO’s performance are our principal areas of operating
focus: extending the digital experience across all channels;
leveraging data to manage our business and serve customers
better; simplifying and automating for greater efficiency;
and elevating the brand of the bank. Results from our principal
operating groups show that this consistent strategic focus
is paying off:
In 2015, adjusted annual net income grew by 4% year over
year in Canadian Personal and Commercial Banking, by 9%
(on a U.S. dollar basis) in U.S. Personal and Commercial
Banking and by 13% in Wealth Management, while
BMO Capital Markets earned over $1 billion for the third
consecutive year.
These results underline the importance of BMO’s diversified
business mix in driving growth. In the past year, we
surpassed the ambitious goal we set in 2011 to generate
more than $1 billion of after-tax earnings from our Personal
and Commercial Banking and Wealth Management
businesses in the United States. Performance measures for
all of our businesses confirm that the clear priorities we’ve
mapped out are delivering sustainable value.
Based on these positive results, we raised the bank’s
dividend by $0.16 per share, a year-over-year increase of
5%. Our one-year total shareholder return (TSR), although
negative 3%, was better than the average of our Canadian
bank peer group and the overall market return in Canada.
Moreover, our three-year TSR was also better than peer
average at positive 13.5%. At the same time, our success in
further strengthening our capital position was reflected in
a Common Equity Tier 1 Ratio of 10.7% at year-end.
BMO’s market leadership in commercial banking in
the United States and Canada was further strengthened with
the announcement, in September 2015, of our planned
acquisition of the Transportation Finance division of General
Adjusted Net Revenue
(C$ billions)
Adjusted Net Income
(C$ billions)
Basel III Common
Equity Tier 1 Ratio
(%)
18.1
16.7
15.4
4.7
4.5
4.2
10.7
9.9
10.1
2013
2014
2015
2013
2014
2015
2013
2014
2015
14 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 15
Chief Executive Officer’s message
Electric Capital Corporation – North America’s largest provider
of truck and trailer financing. This extends our reach across
the entire transportation supply chain – including original
equipment manufacturers, dealers and end users – and positions
us well in the context of improving economic conditions.
The purchase closed on December 1, 2015.
The here and now
We aren’t waiting for the future to come to us – we’re
on it. As technology opens up new opportunities, BMO’s
47,000 bankers understand that working together more
productively not only yields higher returns for our
shareholders, but also leads to more meaningful work and
greater prospects for personal growth. Together, we’re
eliminating geographical boundaries and those between
lines of business. We’re using the knowledge we’ve gained
– from our belief in rigorous risk management and a level
of regulatory engagement that once seemed a daunting
challenge – to be more proactive and adaptive in
everything we do. And above all, we’re leveraging
technology to understand our customers better, to make
their banking experience more personal and intuitive.
Propelled forward by the momentum of growth, we’re
meeting customers’ changing priorities in ways that
reinforce our brand and resonate in the digital marketplace.
And after multiple consecutive years of investment,
we’re confidently executing on our strategy in a world
that reveals new potential – and becomes more
interesting – every day.
A Downe
William A. Downe
lli
Chief Executive Officer,
BMO Financial Group
Executive Committee*
William A. Downe
Chief Executive Officer,
BMO Financial Group
Frank Techar
Chief Operating Officer,
BMO Financial Group
Jean-Michel Arès
Chief Technology
& Operations Officer,
BMO Financial Group
Christopher Begy
U.S. Country Head &
Chief Executive Officer,
BMO Financial Corp.
David R. Casper
President & Chief Executive Officer,
BMO Harris Bank N.A. and Group
Head, Commercial Banking
Cameron Fowler
Group Head,
Canadian Personal and Commercial
Banking, BMO Financial Group
Alexandra Dousmanis-Curtis
Group Head,
U.S. Retail and Business Banking
Simon A. Fish
General Counsel,
BMO Financial Group
Thomas E. Flynn
Chief Financial Officer,
BMO Financial Group
Gilles G. Ouellette
Group Head,
Wealth Management
Surjit Rajpal
Chief Risk Officer,
BMO Financial Group
Lynn Roger
Chief Transformation Officer,
BMO Financial Group
Joanna Rotenberg
Head, Personal Wealth Management,
BMO Financial Group
Richard Rudderham
Chief Human Resources Officer,
BMO Financial Group
Connie Stefankiewicz
Chief Marketing Officer,
BMO Financial Group
Darryl White
Group Head,
BMO Capital Markets
*As at January 5, 2016.
16 BMO Financial Group 198th Annual Report 2015
Our Strategic Footprint
BMO’s strategic footprint spans strong regional economies.
Our three operating groups serve individuals, businesses, governments and corporate customers across Canada and
the United States with a focus in six U.S. Midwest states – Illinois, Indiana, Wisconsin, Minnesota, Missouri and Kansas.
Our significant presence in North America is bolstered by operations in select global markets in Europe, Asia and the
Middle East, allowing us to provide all our customers with access to economies and markets around the world.
YT
NT
NU
BC
AB
SK
MB
NL
QC
ON
WI
MI
IN
IL
WA
OR
CA
MT
MN
NE
IA
UT
CO
KS
MO
AZ
TX
Mexico City and
Rio de Janeiro
PE
NB
NS
Personal & Commercial
Banking and Wealth
Management footprint
Other Commercial
Banking offices
Other Wealth
Management offices
BMO Capital Markets
offices
NY
MA
CT
VA
GA
FL
Our European and Middle Eastern presence
Our Asia-Pacific presence
London
Edinburgh
Stockholm
Dublin
Lisbon
Paris
Madrid
Amsterdam
Frankfurt
Munich
Milan
Luxembourg
Zurich
Abu Dhabi
Guangzhou
Beijing
Shanghai
Taipei
Hong Kong
Singapore
Sydney
Melbourne
BMO Financial Group 198th Annual Report 2015 17
Reasons to
Invest in BMO
A consistent strategy. Top-tier shareholder returns. Great customer
experience. Innovative technology. And a solid foundation of trust. It all
adds up to a compelling set of reasons to invest in BMO.
Clear opportunities for growth across a
diversified North American footprint:
• Large North American commercial banking
business with advantaged market share.
• Well-established, highly profitable core
banking business in Canada.
• Fast-growing, award-winning wealth
franchise.
• Leading Canadian and growing mid-cap
focused U.S. capital markets business.
• U.S. operations well-positioned to capture
benefit of improving economic conditions.
Strong capital position with an attractive
dividend yield.
Focus on efficiency through technology
innovation, simplifying and automating
processes, and extending the digital experience
across our channels.
Customer-centric operating model guided by
disciplined loyalty measurement program.
Adherence to the highest standards of business
ethics and corporate governance.
Operating Group
Performance
BMO’s performance in 2015 reflects the benefits of our
diversified business mix, with Canadian and U.S. banking
and Wealth Management all contributing to the bank’s
growth. Canadian and U.S. Personal and Commercial
Banking and Wealth Management had record years in
adjusted net income. Wealth Management’s performance
reflected good organic growth and the addition of F&C
Asset Management plc. BMO Capital Markets results
were solid given market conditions.
+4%
2,108
2,020
+25% +13%
880
706
955
843
–4%
1,078 1,034
Canadian P&C
U.S. P&C
Wealth
Management
BMO Capital
Markets
Adjusted Net Income (C$ millions)
2014
2015
13.5%
BMO’s total
shareholder return
(TSR) outperformed our
Canadian bank peer group
average and the overall
market return in Canada
and yielded an average
annual TSR of 13.5% over
the past three years.
Strength in
Commercial Banking
BMO is a market leader in North
American commercial banking.
In U.S. Personal and Commercial
Banking, the C&I (commercial and
industrial) portfolio continues to
experience robust growth, increasing
by $4.3 billion or 16% from a year
ago to $30.9 billion.
U.S. Commercial and
Industrial Loans (US$ billions)
+16%
26.6
30.9
2014
2015
Our Dividend Record
BMO Financial Group has the longest-running dividend payout record
of any company in Canada, at 187 years. BMO common shares had an
annual dividend yield of 4.26% at October 31, 2015.
Dividends Declared ($ per share)
Compound annual growth rate:
8.2%
BMO 15-year
3.0%
BMO 5-year
1.34
1.59
1.85
2.26
2.71
2.80
2.80
2.80
2.80
2.82
2.94
3.08
3.24
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
18 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 19
Corporate Governance
Board of Directors1
When we measure BMO’s performance,
shareholder return is an important metric –
but only as it reflects a more fundamental
commitment to earning the trust of all
stakeholders. We have a responsibility not
simply to meet regulatory requirements, but
to act in accordance with our stated values.
And the cornerstone of our efforts is sound
corporate governance.
Our board oversees our business
Our Board of Directors provides stewardship, including
direction-setting and general oversight of our management
and operations. Its members have sophisticated expertise
and a range of perspectives. The board approves the
bank’s overall strategy and makes decisions based on
BMO’s values, emphasizing long-term performance over
short-term gain.
The board operates independently of management
The Chairman of the Board and our directors, other than
the Chief Executive Officer, operate independently of
management. Board meetings include time for the
independent directors to meet without management
or non-independent directors present.
Our focus on diversity reflects our values
The board has adopted a written Board Diversity Policy
to facilitate more effective governance. In so doing, the
board positions itself to be made up of highly-qualified
directors whose diverse backgrounds reflect the changing
demographics of the markets in which we operate, the
talent available with the expertise required, and the bank’s
evolving customer and employee base. The Board Diversity
Policy includes the goal that each gender comprise at least
one-third of the independent directors. A diverse board
helps us make better decisions.
In addition, the board oversees the development of the next
generation of leaders at BMO, ensuring the bank has a solid,
diverse team of executives to keep BMO strong and growing
in the years to come.
We compensate our directors and executives
in ways that encourage good decisions
Our model for compensating directors and executives
follows best practices for good governance. We use a
pay-for-performance model for executives that includes
clawbacks and discourages unreasonable risk-taking.
Directors and executives must own shares, in order to align
their interests with those of other shareholders. We do not
allow directors and employees to hedge their investments
in our shares, securities or related financial instruments.
We maintain a strong focus on ethical conduct
BMO’s Code of Conduct is approved by the board and is
rooted in our values of integrity, empathy, diversity and
responsibility. Every year, all directors and employees are
required to confirm that they have read, understood,
complied with and will continue to comply with the code.
The Chief Ethics Officer is responsible for ensuring that
awareness and understanding of ethical business principles
are embedded in all aspects of our business, and reports on
the state of ethical conduct across our organization to the
Audit and Conduct Review Committee of the board.
Our ethical culture is supported by an environment where
concerns can be raised without fear of retaliation. We
provide various means for raising concerns, including the
ability to report them on an anonymous basis. All reports
are investigated, and breaches of the code are dealt
with swiftly and decisively.
Our board and management stay connected
with our shareholders
We engage and inform our shareholders through our
annual meeting of shareholders, annual report, management
proxy circular, annual information form, sustainability report,
corporate responsibility report, quarterly reports, news
releases, earnings conference calls, industry conferences and
other meetings. Our website provides extensive information
about the board, its mandate, the board committees and
their charters, and our directors.
To promote alignment of our strategic goals across all our businesses, each director sits on at least one board committee and the Chief Executive
Officer is invited to all committee meetings. We review the membership of all committees annually.
www.bmo.com/corporategovernance
Janice M. Babiak
Sophie Brochu
George A. Cope
William A. Downe
Christine A. Edwards
Dr. Martin S. Eichenbaum
Ronald H. Farmer
Eric R. La Flèche
Lorraine Mitchelmore
Philip S. Orsino
J. Robert S. Prichard
Don M. Wilson III
Janice M. Babiak
Former Managing Partner,
Ernst & Young
Board/Committees: Audit and
Conduct Review, Risk Review,
The Pension Fund Society of
the Bank of Montreal
Other public boards: Experian PLC,
Walgreens Co.
Director since: 2012
Sophie Brochu
President and Chief Executive Officer,
Gaz Métro
Board/Committees: Audit and
Conduct Review
Other public boards: BCE Inc.
Director since: 2011
George A. Cope
President and Chief Executive Officer,
Bell Canada and BCE Inc.
Board/Committees: Governance
and Nominating, Human Resources
Other public boards: BCE Inc.
Director since: 2006
William A. Downe
Chief Executive Officer,
BMO Financial Group
Board/Committees: Attends all
committee meetings as an invitee
Other public boards:
ManpowerGroup
Director since: 2007
Christine A. Edwards
Capital Partner, Winston & Strawn
Board/Committees: Governance
and Nominating (Chair),
Human Resources, Risk Review,
The Pension Fund Society of
the Bank of Montreal (Chair)
Director since: 2010
Dr. Martin S. Eichenbaum
Charles Moskos Professor of
Economics, Northwestern University
Board/Committees: Audit and
Conduct Review, Risk Review
Director since: 2015
Ronald H. Farmer
Managing Director,
Mosaic Capital Partners
Board/Committees: Audit
and Conduct Review, Governance and
Nominating, Human Resources (Chair)
Other public boards: Valeant
Pharmaceuticals International Inc.
Director since: 2003
Eric R. La Flèche
President and Chief
Executive Officer, Metro Inc.
Board/Committees:
Risk Review
Other public boards:
Metro Inc.
Director since: 2012
Lorraine Mitchelmore
President and Country Chair,
Shell Canada Limited and Executive
Vice President, Heavy Oil for
Upstream Americas
Director since: 2015
Philip S. Orsino, O.C., F.C.P.A., F.C.A.
President and Chief Executive Officer,
Brightwaters Strategic Solutions, Inc.
Board/Committees: Audit and
Conduct Review (Chair), Governance
and Nominating
Director since: 1999
J. Robert S. Prichard, O.C., O.Ont.
Chairman of the Board, BMO Financial
Group, and Chair of Torys LLP
Board/Committees: Governance
and Nominating, Human Resources,
Risk Review, The Pension Fund
Society of the Bank of Montreal
Other public boards: George Weston
Limited, Onex Corporation
Director since: 2000
Don M. Wilson III
Corporate Director
Board/Committees: Governance
and Nominating, Human Resources,
Risk Review (Chair), The Pension Fund
Society of the Bank of Montreal
Director since: 2008
1 As at October 31, 2015.
Honorary Directors
Robert M. Astley, Waterloo, ON
Stephen E. Bachand, Ponte Vedra Beach, FL, USA
Ralph M. Barford, Toronto, ON
Matthew W. Barrett, O.C., LL.D., Oakville, ON
David R. Beatty, O.B.E., Toronto, ON
Peter J.G. Bentley, O.C., O.B.C., LL.D., Vancouver, BC
Robert Chevrier, F.C.A., Montreal, QC
Tony Comper, C.M., LL.D., Toronto, ON
C. William Daniel, O.C., LL.D., Toronto, ON
A. John Ellis, O.C., LL.D., O.R.S., Vancouver, BC
John F. Fraser, O.C., LL.D., O.R.S., Winnipeg, MB
David A. Galloway, Toronto, ON
Richard M. Ivey, C.C., Q.C., Toronto, ON
Betty Kennedy, O.C., LL.D., Campbellville, ON
Harold N. Kvisle, Calgary, AB
Eva Lee Kwok, Vancouver, BC
J. Blair MacAulay, Oakville, ON
Ronald N. Mannix, O.C., Calgary, AB
Robert H. McKercher, Q.C., Saskatoon, SK
Bruce H. Mitchell, Toronto, ON
Eric H. Molson, Montreal, QC
Jerry E.A. Nickerson, North Sydney, NS
Dr. Martha C. Piper, O.C., O.B.C., FRSC, Vancouver, BC
Jeremy H. Reitman, Montreal, QC
Lucien G. Rolland, O.C., Montreal, QC
Guylaine Saucier, F.C.P.A., F.C.A., C.M., Montreal, QC
Nancy C. Southern, Calgary, AB
20 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 21
Financial Review
CFO’s Foreword to the Financial Review
23
24
26
CFO’s Foreword to the Financial Review
Financial Performance and Condition at a Glance
Management’s Discussion and Analysis
118 Supplemental Information
132 Statement of Management’s Responsibility
for Financial Information
133 Independent Auditors’ Report of Registered Public
Accounting Firm
134 Report of Independent Registered Public
Accounting Firm
135 Consolidated Financial Statements
140 Notes to Consolidated Financial Statements
Resources and Directories
202 Glossary of Financial Terms
204 Where to Find More Information
IBC Shareholder Information
“ We have an advantaged business mix, a strong
capital position and a customer-centric operating
model that provide clear opportunities for growth
across a diversified North American footprint.”
Thomas E. Flynn, CPA, CA
Chief Financial Officer, BMO Financial Group
BMO had a strong finish to 2015, with record financial
performance driven by operating group performance.
Reported net income was $4.4 billion. On an adjusted basis,
net income was $4.7 billion and EPS was $7.00, up 6% from
last year, with record results in Personal and Commercial
Banking on both sides of the border as well as in Wealth
Management. We maintained a strong capital position,
ending the year with a Common Equity Tier 1 Ratio of 10.7%,
and we increased our dividend twice. Our disciplined
approach to capital management also gave us the flexibility
to buy back 8 million shares and to complete the acquisition
of GE Capital’s transportation finance business, which
closed on December 1, 2015.
Our performance continues to generate attractive returns
for BMO’s shareholders. Our three-year average annual total
shareholder return was 13.5%, outperforming our Canadian
bank peer group average and the S&P/TSX Composite Index.
In the Management’s Discussion and Analysis (MD&A) that
follows, we examine our results and performance in detail.
We are proud that our commitment to ensuring that
investors receive timely and informative financial reporting
was recently recognized with the Chartered Professional
Accountants of Canada’s 2015 Award of Excellence in
Corporate Reporting in Financial Services.
We have an advantaged business mix, a strong capital
position and a customer-centric operating model that
provide clear opportunities for growth across a diversified
North American footprint:
• Our large North American commercial banking business
has advantaged market share positions.
• Our Canadian core banking business is well-established
and highly profitable.
• Our wealth franchise is fast-growing and award-winning.
• We have a leading Canadian and growing mid-cap
focused U.S. capital markets business.
• Our U.S. operations are well-positioned to capture the
benefit of improving economic conditions.
• We are focused on driving efficiency through technology
innovation, simplifying and automating processes and
extending the digital experience across our channels.
As we head into 2016, we are well-positioned to build on
our results in 2015, while adhering to the highest standards
of business ethics and corporate governance.
Thomas E. Flynn
22 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 23
Financial Performance and Condition at a Glance
Our Performance (Note 1)
Peer Group Performance
Our Performance (Note 1)
Peer Group Performance
Total Shareholder Return (TSR)
(cid:138) P 32
• BMO shareholders have earned a strong average annual return
of 13.5% over the past three years, which outperformed our
Canadian bank peer group average and was above the 6.0%
return on the S&P/TSX Composite Index.
• The one-year TSR of negative 3.0% and the five-year average
annual return of 9.5% both outperformed the S&P/TSX
Composite Index, and the one-year TSR also outperformed
our Canadian bank peer group average.
16.7
11.5
13.5
TSR (%)
• The Canadian peer group three-year average annual
TSR was 11.5%. The one-year TSR was negative 4.6%,
and the five-year average annual TSR was 9.7%.
• The North American peer group three-year average
annual TSR was 12.4%, the one-year TSR was negative
0.7%, and the five-year average annual TSR was
10.8%, each above the Canadian peer group averages.
Graph shows average annual three-year TSR.
2013
2014
2015
Earnings per Share (EPS) Growth
• Adjusted EPS grew $0.41 or 6% to $7.00, primarily reflecting
higher earnings. Reported EPS grew $0.16 or 2% to $6.57.
(cid:138) P 34
• On an adjusted basis, higher revenue exceeded incremental costs,
contributing to growth in net income. There were lower credit
recoveries and a slightly higher effective income tax rate.
EPS Growth (%)
• The Canadian peer group average EPS growth
was 6%, with all banks in the peer group reporting
increases in EPS.
• Average EPS growth for the North American peer
group was 2%, with significant variability among
our U.S. peer banks.
6
6
22
4
4
1
All EPS measures are stated on a diluted basis.
2013
2014
2015
North American peer group data is not to scale.
Return on Equity (ROE)
(cid:138) P 35
• Adjusted ROE was 13.3% and reported ROE was 12.5% in 2015,
compared with 14.4% and 14.0%, respectively, in 2014. ROE
declined in 2015 primarily due to growth in common equity
exceeding growth in income. There was growth in both earnings
and adjusted earnings available to common shareholders.
Average common shareholders’ equity increased primarily due
to the impact of the stronger U.S. dollar on our investments
in foreign operations and higher capital to support regulatory
capital ratios.
*
Revenue Growth
• On a net revenue basis*, revenue increased $1,417 million or
8% to $18,135 million, mainly due to growth in Canadian P&C
and Wealth Management, as well as the impact of the stronger
U.S. dollar. Total revenue increased $1,166 million or 6% in 2015
to $19,389 million.
(cid:138) P 38
ROE (%)
• The Canadian peer group average ROE of 16.4% was
lower than the average return of 17.3% in 2014, as
ROE declined for all but one bank in our Canadian
peer group.
• Average ROE for the North American peer group was
11.5%, compared to 12.2% in 2014, with ROE declining
for all but two banks in our North American peer group.
Revenue Growth (%)
• Revenue growth for the Canadian peer group
averaged 5%, significantly lower than the average
growth of 9% in 2014.
• Average revenue growth for the North American peer
group of 2% was consistent with the prior year.
14.9
15.0
14.0
14.4
13.3
12.5
2013
2014
2015
9
8
8
4
3
1
*Graph shows net revenue, calculated using total revenue net of claims,
commissions and changes in policy benefit liabilities.
2013
2014
2015
Credit Losses
• Provisions for credit losses (PCL) totalled $612 million,
up from $561 million in 2014 due to lower recoveries in
Corporate Services and higher provisions in BMO Capital
Markets, partially offset by reduced provisions in the
P&C businesses.
(cid:138) P 42, 96
• PCL as a percentage of average net loans and acceptances
was 0.19% in 2015, consistent with the prior year.
New provisions were lower across both our consumer
and commercial loan portfolios, compared to 2014.
Impaired Loans
• Gross impaired loans and acceptances (GIL) decreased
to $1,959 million from $2,048 million in 2014, and
represented 0.58% of gross loans and acceptances,
compared with 0.67% a year ago.
(cid:138) P 96
• Formations of new impaired loans and acceptances,
a key driver of provisions for credit losses, totalled
$1,921 million, down from $2,142 million in 2014,
reflecting decreases in formations in both Canada
and the United States.
Capital Adequacy
• BMO’s Common Equity Tier 1 (CET1) Ratio is strong
and exceeds regulatory requirements.
• Our CET1 Ratio was 10.7%, up from 10.1% in 2014,
(cid:138) P 35, 70
primarily due to higher capital from accumulated other
comprehensive income and retained earnings, partially
offset by an increase in risk-weighted assets.
0.22
0.19
0.19
2013
2014
2015
0.91
0.67
0.58
2013
2014
2015
9.9
10.1
10.7
2013
2014
2015
Provision for Credit Losses as a % of Average
Net Loans and Acceptances
• The Canadian peer group average PCL represented
30 basis points of average net loans and acceptances,
down slightly from 31 basis points in 2014.
• The North American peer group average PCL represented
26 basis points, unchanged from 2014, and lower than
the average PCL for the Canadian peer group.
Gross Impaired Loans and Acceptances
as a % of Gross Loans and Acceptances
• The Canadian peer group average ratio of GIL as a
percentage of gross loans and acceptances was 0.58%,
down slightly from 0.59% in 2014.
• The average ratio for our North American peer group
improved from 1.40% a year ago to 1.15% in 2015,
but continues to be higher than the average for the
Canadian peer group.
Capital Adequacy
• The Canadian peer group average Basel III CET1 Ratio
was 10.3% in 2015, compared with an average CET1 Ratio
of 9.9% a year ago.
• The basis for computing capital adequacy ratios in Canada
and the United States is not completely comparable.
(cid:138) P 110
Credit Rating
• Credit ratings for BMO’s long-term debt, as assessed by the four major rating
agencies, are listed below and all four ratings are considered to indicate
high-grade, high-quality issues. Moody’s and DBRS have a negative outlook
on the long-term credit ratings of BMO and other Canadian banks in response
to the federal government’s proposed bail-in regime for senior unsecured
debt. On December 11, 2015, Standard and Poor’s (S&P) revised its outlook
to stable from negative on BMO and other systemically important
Canadian banks.
Credit Rating
• The Canadian peer group median credit ratings were unchanged from 2014.
• The North American peer group median credit ratings were unchanged from 2014,
and remain slightly lower than the median of the Canadian peer group for three
of the ratings.
Efficiency Ratio
(Expense-to-Revenue Ratio)
• The adjusted efficiency ratio was 60.9% and the reported efficiency
(cid:138) P 43
ratio was 62.8% in 2015. On a net revenue basis*, the adjusted
efficiency ratio increased 80 basis points from 2014 to 65.2%,
primarily due to the impact of the stronger U.S. dollar.
63.7
63.5
65.3
64.4
67.2
65.2
• On a net revenue basis, excluding the impact of the stronger
U.S. dollar and purchased loan accounting impacts, the efficiency
ratio would have been 40 basis points lower year over year.
*Graph shows the efficiency ratio on a net revenue basis, calculated using
revenue net of claims, commissions and changes in policy benefit liabilities.
2013
2014
2015
Efficiency Ratio (%)
• The Canadian peer group average efficiency ratio was
60.2%, up from 59.5% in 2014 as growth in expenses
exceeded growth in revenue.
• The average efficiency ratio for the North American
peer group was 63.3%, up from the group’s average
ratio of 62.5% in 2014, and worse than the average
of our Canadian peer group.
BMO Financial Group
Canadian peer group median*
North American peer group median*
DBRS
Fitch
Moody’s
S&P
2013
AA
AA–
Aa3
A+
2014
AA
AA–
Aa3
A+
2015
AA
AA–
Aa3
A+
DBRS
Fitch
Moody’s
S&P
2013
AA
AA–
Aa3
A+
2014
AA
AA–
Aa3
A+
2015
AA
AA–
Aa3
A+
DBRS
Fitch
Moody’s
S&P
2013
AAL
AA–
A1
A
2014
AAL
AA–
A1
A
2015
AAL
AA–
A1
A
*Data for all years reflects the peer group composition in the most recent year.
Note 1: Adjusted results in this section are non-GAAP. Please see the Non-GAAP Measures section on page 33.
Effective November 1, 2014, BMO and our Canadian peers adopted several new and amended accounting pronouncements issued by the International
Accounting Standards Board (IASB), which are outlined in Note 1 on page 140 of the financial statements. The adoption of these new and amended
accounting standards only impacted our results prospectively. Effective November 1, 2013, BMO and our Canadian peers adopted several new and
amended accounting pronouncements issued by the IASB. The consolidated financial statements for fiscal 2013 have been restated. U.S. peer group
data continues to be reported in accordance with U.S. GAAP.
BMO reported
BMO adjusted
Canadian peer group average
North American peer group average
The Canadian peer group averages exclude BMO and are based on the performance of Canada’s five other largest banks: Canadian Imperial Bank
of Commerce, National Bank of Canada, Royal Bank of Canada, Scotiabank and TD Bank Group. The North American peer group averages are based
on the performance of 12 of the largest banks in North America. These include the Canadian peer group, except National Bank of Canada, as well
as BB&T Corporation, Bank of New York Mellon Corporation, Fifth Third Bancorp, KeyCorp, The PNC Financial Services Group Inc., Regions Financial
Corporation, SunTrust Banks Inc. and U.S. Bancorp.
Results are as at or for the years ended October 31 for Canadian banks and as at or for the years ended September 30 for U.S. banks.
BMO reported
BMO adjusted
Canadian peer group average
North American peer group average
24 BMO Financial Group 198th Annual Report 2015
BMO Financial Group 198th Annual Report 2015 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Discussion and Analysis
BMO’s Chief Executive Officer and its Chief Financial Officer have signed a statement outlining management’s responsibility for financial information in
the annual consolidated financial statements and Management’s Discussion and Analysis (MD&A). The statement, which can be found on page 132,
also explains the roles of the Audit and Conduct Review Committee and Board of Directors in respect of that financial information.
The MD&A comments on BMO’s operations and financial condition for the years ended October 31, 2015 and 2014. The MD&A should be read in
conjunction with our consolidated financial statements for the year ended October 31, 2015. The MD&A commentary is as of December 1, 2015.
Unless otherwise indicated, all amounts are stated in Canadian dollars and have been derived from financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). References to generally accepted accounting principles (GAAP) mean IFRS.
Since November 1, 2011, BMO’s financial results have been reported in accordance with IFRS. Results for years prior to 2011 have not been
restated and are presented in accordance with Canadian GAAP as defined at that time (CGAAP). As such, certain growth rates and compound annual
growth rates (CAGR) may not be meaningful. On November 1, 2013, BMO adopted several new and amended accounting pronouncements issued by
the International Accounting Standards Board. The consolidated financial statements for comparative periods in the fiscal years 2013 and 2012 have
been restated. Certain other prior year data has been reclassified to conform with the current year’s presentation. The adoption of new IFRS standards
in 2015 only impacted our results prospectively. Prior periods have been reclassified for methodology changes and transfers of certain businesses
between operating groups. See pages 45 and 46.
A
&
D
M
Index
27 Who We Are provides an overview of BMO Financial Group, explains the
68
links between our financial objectives and our overall vision, and
outlines “Reasons to Invest in BMO” along with relevant key
performance data.
28
30
30
Enterprise-Wide Strategy outlines our enterprise-wide strategy and
the context in which it is developed, as well as our progress in relation
to our priorities.
Caution Regarding Forward-Looking Statements advises readers
about the limitations and inherent risks and uncertainties of forward-
looking statements.
Economic Developments and Outlook includes commentary on the
Canadian, U.S. and international economies in 2015 and our
expectations for 2016.
32 Value Measures reviews financial performance on the four key
measures that assess or most directly influence shareholder return. It
also includes explanations of non-GAAP measures, a reconciliation to
their GAAP counterparts for the fiscal year, and a summary of adjusting
items that are excluded from results to assist in the review of key
measures and adjusted results.
Total Shareholder Return
Non-GAAP Measures
Summary Financial Results and Earnings per Share Growth
Return on Equity
Basel III Common Equity Tier 1 Ratio
32
33
34
35
35
36 2015 Financial Performance Review provides a detailed review of
BMO’s consolidated financial performance by major income statement
category. It also includes a summary of the impact of changes in foreign
exchange rates.
45 2015 Operating Groups Performance Review outlines the strategies
and key priorities of our operating groups and the challenges they face,
along with their strengths and value drivers. It also includes a summary
of their achievements in 2015, their focus for 2016, and a review of
their financial performance for the year and the business environment
in which they operate.
46
47
48
51
55
58
62
Summary
Personal and Commercial Banking
Canadian Personal and Commercial Banking
U.S. Personal and Commercial Banking
BMO Wealth Management
BMO Capital Markets
Corporate Services, including Technology and Operations
63 Review of Fourth Quarter 2015 Performance, 2014 Financial
Performance Review and Summary Quarterly Earnings Trends provide
commentary on results for relevant periods other than fiscal 2015.
Financial Condition Review comments on our assets and liabilities by
major balance sheet category. It includes a review of our capital
adequacy and our approach to optimizing our capital position to
support our business strategies and maximize returns to our
shareholders. It also includes a review of off-balance sheet
arrangements and certain select financial instruments.
68
70
76
77
Summary Balance Sheet
Enterprise-Wide Capital Management
Select Financial Instruments
Off-Balance Sheet Arrangements
78 Accounting Matters and Disclosure and Internal Control reviews
critical accounting estimates and changes in accounting policies in
2015 and for future periods. It also outlines our evaluation of
disclosure controls and procedures and internal control over financial
reporting, and provides an index of disclosures recommended by the
Enhanced Disclosure Task Force.
Critical Accounting Estimates
Changes in Accounting Policies in 2015
Future Changes in Accounting Policies
Transactions with Related Parties
Management’s Annual Report on Disclosure Controls and Procedures
and Internal Control over Financial Reporting
Shareholders’ Auditors’ Services and Fees
Enhanced Disclosure Task Force
Enterprise-Wide Risk Management outlines our approach to
managing key financial risks and other related risks we face.
Overview
Risks That May Affect Future Results
Framework and Risks
Credit and Counterparty Risk
Market Risk
Liquidity and Funding Risk
Operational Risk
Model Risk
Insurance Risk
Legal and Regulatory Risk
Business Risk
Strategic Risk
Reputation Risk
Environmental and Social Risk
Supplemental Information presents other useful financial tables and
more historical detail.
78
80
80
81
82
83
84
86
87
87
89
94
100
105
111
112
114
114
116
116
116
117
118
Regulatory Filings
Our continuous disclosure materials, including our interim financial statements and interim MD&A, annual audited consolidated financial statements and annual MD&A, Annual
Information Form and Notice of Annual Meeting of Shareholders and Management 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 SEC’s website at www.sec.gov. BMO’s Chief Executive Officer and its Chief
Financial Officer certify the appropriateness and fairness of BMO’s annual and interim consolidated financial statements, MD&A and Annual Information Form, the effectiveness
of BMO’s disclosure controls and procedures and the effectiveness of, and any material weaknesses relating to, BMO’s internal control over financial reporting.
26 BMO Financial Group 198th Annual Report 2015
Who We Are
Established in 1817, BMO Financial Group is a highly diversified financial services provider based in North America. With total assets of $642 billion
and close to 47,000 employees, BMO provides a broad range of personal and commercial banking, wealth management and investment banking
products and services to more than 12 million customers. We serve eight million customers across Canada through our Canadian personal and
commercial arm, BMO Bank of Montreal. We also serve customers through our wealth management businesses: BMO Global Asset Management, BMO
Nesbitt Burns, BMO Private Banking, BMO Insurance and BMO InvestorLine. BMO Capital Markets, our investment and corporate banking and trading
products division, provides a full suite of financial products and services to North American and international clients. In the United States, BMO serves
customers through BMO Harris Bank, based in the U.S. Midwest with more than two million retail, small business and commercial customers. BMO
Financial Group conducts business through three operating groups: Personal and Commercial Banking, Wealth Management and BMO Capital Markets.
Our Financial Objectives
BMO’s medium-term financial objectives for certain important performance measures are set out below. We believe that we will deliver top-tier total
shareholder return and meet our medium-term financial objectives by aligning our operations with, and executing on, our strategic priorities, along
with our vision and guiding principle, as outlined on the following page. We consider top-tier returns to be top-quartile shareholder returns relative to
our Canadian and North American peer group.
BMO’s business planning process is rigorous, sets ambitious goals and considers the prevailing economic conditions, our risk appetite, our
customers’ evolving needs and the opportunities available across our lines of business. It includes clear and direct accountability for annual
performance that is measured against both internal and external benchmarks and progress toward our strategic priorities.
Over the medium term, our financial objectives on an adjusted basis are to achieve average annual earnings per share (adjusted EPS) growth of
7% to 10%, earn an average annual return on equity (adjusted ROE) of 15% or more, generate average annual adjusted net operating leverage of 2%
or more and maintain strong capital ratios that exceed regulatory requirements. These objectives are key guideposts as we execute against our
strategic priorities, and we believe they are consistent with delivering top-tier total shareholder return. In managing our operations and risk, we
recognize that current profitability and the ability to meet these objectives in a single period must be balanced with the need to invest in our
businesses for their future long-term health and growth prospects.
Our five-year average annual adjusted EPS growth rate was 7.9%, in line with our target growth range of 7% to 10%. We did not meet our
medium-term objective of generating above 2% average annual adjusted operating leverage due to lower than expected source currency revenue.
We remain focused on improving efficiency and generated improved operating leverage on a net revenue basis through 2015. Our five-year average
annual adjusted ROE of 14.8% was slightly below our target range as we held increased levels of common shareholders’ equity to meet increased
capital expectations for banks. Our capital position is strong, with a Common Equity Tier 1 Ratio of 10.7%.
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Reasons to Invest in BMO
‰ Clear opportunities for growth across a diversified North American footprint:
‰ Large North American commercial banking business with advantaged market share.
‰ Well-established, highly profitable core banking business in Canada.
‰ Fast-growing, award-winning wealth franchise.
‰ Leading Canadian and growing mid-cap focused U.S. capital markets business.
‰ U.S. operations well-positioned to capture benefit of improving economic conditions.
‰ Strong capital position and an attractive dividend yield.
‰ Focus on efficiency through technology innovation, simplifying and automating processes and extending the digital experience across our
channels.
‰ Customer-centric operating model guided by disciplined loyalty measurement program.
‰ Adherence to the highest standards of business ethics and corporate governance.
Canadian banks have been ranked the world’s soundest for the 8th year in a row(1)
(1) Based on the Global Competitiveness Report by the World Economic Forum.
As at and for the periods ended October 31, 2015 (%, except as noted)
Average annual total shareholder return
Average growth in annual adjusted EPS
Average annual adjusted ROE
Average growth in annual EPS
Average annual ROE
Compound growth in annual dividends declared per share
Dividend yield**
Price-to-earnings multiple**
Market value/book value ratio**
Common Equity Tier 1 Ratio (Basel III basis)
1-year
5-year*
10-year*
(3.0)
6.2
13.3
2.5
12.5
5.2
4.3
11.6
1.35
10.7
9.5
7.9
14.8
7.1
14.5
3.0
4.3
11.6
1.53
na
7.7
5.1
15.7
5.4
14.4
5.8
4.6
12.7
1.70
na
* 5-year and 10-year growth rates reflect growth based on CGAAP in 2010 and 2005, respectively, and IFRS in 2015.
** 1-year measure as at October 31, 2015. 5-year and 10-year measures are the average of year-end values.
na – not applicable
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
The Our Financial Objectives section above and the Enterprise-Wide Strategy and Economic Developments and Outlook sections that follow contain certain forward-looking
statements. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. Please refer to the Caution
Regarding Forward-Looking Statements on page 30 of this MD&A for a discussion of such risks and uncertainties and the material factors and assumptions related to the
statements set forth in such sections.
BMO Financial Group 198th Annual Report 2015 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Strategy
Our Vision
To be the bank that defines great customer experience.
Our Guiding Principle
We aim to deliver top-tier total shareholder return and balance our commitments to financial performance, our customers and employees, the
environment and the communities where we live and work.
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Our 2015 Strategy in Context
The economic environment is constantly evolving. As we navigate through this constant change, we continue to remain grounded in our brand
promise. We’re here to help is a simple statement meant to inspire and guide what we do every day. We aim to help customers feel valued,
understood and confident in the decisions they make.
Our strategic priorities have proven to be robust, providing us with consistent direction in the midst of evolving expectations, increasingly intense
competitive activity and continued market uncertainty. Digital technologies continue to play a critical role across our strategic priorities in enabling our
objectives. We believe that the strength of our business model, customer base, balance sheet, risk management framework and leadership team,
along with the advantages offered by the scale of our consolidated North American platform, will continue to generate sustainable growth and help
us deliver on our vision and brand promise.
Our commitment to stakeholders is evident in our focus on delivering an industry-leading customer experience, managing revenues and
expenses to achieve our financial goals, and maintaining a prudent approach to risk management. We have made good progress on our enterprise
strategic priorities, with select accomplishments outlined below, as well as on our group strategies, detailed in the 2015 Operating Groups
Performance Review, which starts on page 45.
Our 2015 Priorities and Progress
1. Achieve industry-leading customer loyalty by delivering on our brand promise.
‰ Developed further capabilities in digital banking and investing to help customers in new and innovative ways:
‰ Launched Touch ID log-in in Canada and the United States, enabling customers to log in to the BMO mobile banking application using fingerprint
‰
recognition. Within a month of the launch in Canada, approximately 115,000 new users registered for the mobile app.
Introduced Mobile Cash in the United States, allowing customers to withdraw money from a BMO Harris automated banking machine (ABM)
using their smartphone; we now have the largest network of mobile-enabled cardless ABMs in the United States.
‰ Launched a new BMO Banking and InvestorLine portal, becoming the first major Canadian bank to provide customers with access to both
personal banking and self-directed investment accounts all in one place.
‰ Enhanced our cash management offerings with the launch of BMO DepositEdge™ in Canada, enabling business customers to deposit cheques
remotely, and BMO Spend Dynamics™, giving corporate card clients convenient access to their transaction data and the ability to analyze their
program spend.
‰ For the third consecutive year, BMO was recognized by global financial services research firm Celent with a 2015 Model Bank Award for
excellence in the digital banking category.
‰ Completed the successful launch of BMO’s refreshed brand with innovative tactics, including the “Help Given” social media campaign, which
generated over 7.7 million views in Canada and the United States, and sponsorship of The Amazing Race Canada, which allowed BMO to reach
millions of Canadians during its 12-week season.
‰ Recognized with awards across our groups, including Best Wealth Management in Canada, 2015 (Global Banking and Finance Review), Best Full-
Service Investment Advisory in Canada, 2015 (Global Banking and Finance Review), 2015 Greenwich Quality Leader in Canadian Equity Sales and
Corporate Access and 2015 Greenwich Share Leader for Canadian Fixed Income Research (Greenwich Associates) and, for the sixth consecutive year,
World’s Best Metals & Mining Investment Bank (Global Finance).
‰
2. Enhance productivity to drive performance and shareholder value.
‰ Continued to make our processes more efficient, enabling front-line employees to add new customers and strengthen existing relationships:
In Canadian P&C, our automated leads management engine, which uses data to identify customer opportunities, has generated incremental
revenue by presenting customers with proactive needs-based product and service offers.
In U.S. P&C, launched a new Home Lending Loan Origination system with e-disclosures, online loan tracker and digital loan processing.
‰
‰ Across the business, improved online sales processes driving growth in sales volumes. Online retail banking sales volumes across Canada are
now equivalent to sales at over 100 branches.
‰ Optimized our cost structure to deliver greater efficiencies:
‰ Continued to roll out new branch formats offering smaller, more flexible and more cost-effective points of distribution across North America,
including the introduction of our Smart Branch format in the United States, which allows customers to conduct transactions with ABM video-
tellers and makes day-to-day banking easier and more convenient.
‰ Continued to expand eStatements participation across North America, as more customers move to the paperless option.
‰ Divested our retirement services and municipal bond trading businesses to increase focus on our core Wealth and Capital Markets businesses.
‰
Improved data and analytical capabilities, which helped generate revenues and improved management of BMO’s expense base.
28 BMO Financial Group 198th Annual Report 2015
3. Leverage our consolidated North American platform to deliver quality earnings growth.
‰ Continued to develop consolidated North American capabilities and platforms in priority areas:
‰ Provided consistent brand messaging across the Canadian and U.S. businesses, building on shared customer insights to address the changing
expectations of the banking industry.
‰ Completed a reorganization of Trading Products by asset class to further enhance customer experience and North American franchise value.
‰ Maintained key North-South leadership mandates to achieve greater consistency, eliminate duplication and leverage best practices.
‰ Continued to expand our business and capabilities in the United States:
‰ Announced the signing of an agreement to acquire General Electric Capital Corporation’s (GE Capital) Transportation Finance business with net
earning assets on closing of approximately $11.9 billion (US$8.9 billion). The acquisition builds on our position as a market leader in commercial
banking, and enhances our business position in the United States by further diversifying net income, adding scale and enhancing profitability
and margins.
Improved sales productivity across key products and segments through enhanced coaching and performance management, and deployment of
customer acquisition programs.
‰
‰
Introduced compelling offers in Canada that increased sales and established and strengthened client relationships, including the new Savings
Builder Account, Spring Home Financing and Summer Everyday Banking Campaigns.
4. Expand strategically in select global markets to create future growth.
‰ Completed the integration of F&C Asset Management plc (F&C), and rebranded it as BMO Global Asset Management. This acquisition strengthens
the position of BMO Global Asset Management as a top 50 global asset manager.
‰ BMO served as a co-chair of the Toronto Financial Services Alliance (TFSA) Renminbi (RMB) Working Group, which played a crucial role in
establishing an offshore renminbi clearing hub in Canada. The Canadian hub facilitates settlements in renminbi, with the intention of encouraging
trade and strengthening ties between Canadian companies and their Chinese business partners.
‰ Ranked among top 20 global investment banks and 12th largest investment bank in North and South America, based on fees, by Thomson Reuters.
5. Ensure our strength in risk management underpins everything we do for our customers.
‰ Leveraged our capital processes to enhance our risk appetite and limit framework through further alignment with our businesses’ capacity to
bear risk.
‰ Developed and embedded our stress testing capabilities in business management processes and provided additional risk insights.
‰ Continued to improve risk culture as evidenced by internal and external surveys.
‰ Responded to rising regulatory expectations, evidenced by improvements in stress testing, market risk measurement and anti-money laundering.
‰ Continued to develop the next generation of our risk infrastructure by integrating, automating and upgrading our foundational capabilities.
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BMO Financial Group 198th Annual Report 2015 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
Factors That May Affect Future Results
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 starting on page 86 describes a number of risks, including
credit and counterparty, market, liquidity and funding, operational, model, insurance, legal and regulatory, business, strategic, reputation,
environmental and social. Should our risk management framework prove ineffective, there could be a material adverse impact on our financial
position.
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 2016 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, U.S. and
international economies.
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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, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal, tax or
economic policy; the level of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including
capital, interest rate and liquidity requirements and guidance; 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, including obtaining regulatory approvals; the anticipated
benefits from the acquisition of the GE Capital Transportation Finance business are not realized in the time frame anticipated or at all; critical accounting estimates and the effect
of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; general political conditions;
global capital markets activities; the possible effects on our business of war or terrorist activities; outbreaks of disease or illness that affect local, national or international
economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; and our ability to
anticipate and effectively manage risks associated with 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 see the
discussion in the Risks That May Affect Future Results section on page 87, and the sections related to credit and counterparty, market, liquidity and funding, operational, model,
insurance, legal and regulatory, business, strategic, reputation and environmental and social risk, which begin on page 94 and outline certain key factors and risks that may affect
Bank of Montreal’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 and risks, 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 statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The
forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods
ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.
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, 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. See the Economic
Developments and Outlook section of this document.
Assumptions about current and expected capital requirements, GE Capital’s Transportation Finance business revenues and expenses, potential for earnings growth as well as
costs associated with the transaction and expected synergies, were material factors we considered in estimating the impact of the acquired business on our net income,
profitability and margins in 2016 and beyond.
Assumptions about current and expected capital requirements and our models used to assess those requirements under applicable capital guidelines, GE Capital’s
Transportation Finance business revenues and expenses, potential for earnings growth as well as costs associated with the transaction and expected synergies were material
factors we considered in estimating the impact on our capital ratios in 2016 and beyond.
Economic Developments and Outlook
Economic Developments in 2015 and Outlook for 2016
Growth in the Canadian economy weakened in the first half of 2015, largely due to a sharp reduction in investment in the oil-producing regions and
to continued weakness in the mining sector. Still, growth remained steady across most of the country, supported by an upturn in exports, as well as
stable consumer spending and housing markets. Exports have benefitted from the effects of stronger U.S. demand, a weaker Canadian dollar and a
modest pickup in the Eurozone economy, offset in part by slower growth in most emerging-market economies, notably China. While growth in
Canadian consumer spending has moderated as a result of elevated debt levels, it continues at a healthy rate, reflecting record sales of motor
vehicles and steady demand for services. Home sales remain strong in the Vancouver and Toronto regions, supported by immigration and the
millennial generation, many of whom are now in their prime home-buying years. Real GDP growth is expected to improve from an estimated 1.1% in
2015 to 2.0% in 2016, supported by modestly expansionary federal fiscal policy. Canadian households should continue to help sustain the economic
expansion, as growth in employment remains healthy and interest rates are low, while the downturn in business investment is projected to stabilize
in response to an expected partial recovery in oil prices. Growth in residential mortgages is expected to slow modestly to around 5% in 2016, and
consumer credit should expand by close to 3%. Growth in business loans is projected to moderate from recent rates of around 8% this year to about
6%, reflecting lower levels of capital expenditures in the resource sector. After two rate reductions in 2015, the Bank of Canada is expected to hold
interest rates steady in 2016, before shifting to a tightening stance in early 2017. The Canadian dollar is projected to weaken modestly in response to
expected higher U.S. interest rates, before an anticipated upturn in oil prices provides some support in 2016.
30 BMO Financial Group 198th Annual Report 2015
After a slow start to 2015 due to severe winter weather, shipping disruptions and a reduction in oil drilling activity, the U.S. economy has
strengthened over the course of the year. Consumer spending has been sustained by improvements in household finances and steady growth in
employment, while the housing market continues to benefit from low mortgage rates and less restrictive lending standards. Economic growth has
also been impacted by weakness in exports due to the strong dollar, a decline in agriculture investment owing to low crop prices, and the effects of
the downturn in the oil industry. Overall, real GDP is expected to grow by 2.5% in 2015 and 2.6% in 2016. Despite an expected modest increase in
borrowing costs, growth in consumer credit and residential mortgages is expected to strengthen in 2016, supported by rising consumer confidence
and robust demand for automobiles. Business loan growth should also remain healthy, supported by lower costs for imported machinery. With the
unemployment rate projected to fall below 5% in 2016, the Federal Reserve is expected to increase interest rates. However, we anticipate a very
modest tightening cycle in the face of global economic headwinds and continued low inflation. This should help to keep long-term interest rates
relatively low in 2016.
Following modest economic growth in recent years, the pace of expansion in the U.S. Midwest region, which includes the six contiguous states
comprising the BMO footprint, should improve to 1.8% in 2015 and 2.1% in 2016 in response to an increase in automobile production, the recovery in
housing markets and generally expansionary fiscal policies. However, because of the ongoing weakness in exports, the region could continue to lag
the national average.
This Economic Developments and Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking
Statements.
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Real Growth in Gross
Domestic Product (%)
2.4 2.4
2.5
2.6
2.0
2.0
1.5
1.1
2013
2014
2015*
2016*
Canada
United States
*Forecast
The Canadian and U.S.
economies are expected to
grow moderately in 2016.
Consumer Price Index
Inflation (%)
1.5
0.9
1.9
1.6
1.8
1.7
1.1
0.1
2013
2014
2015*
2016*
Canada
United States
*Forecast
Inflation is expected to turn
higher but remain low.
Canadian and U.S.
Unemployment Rates (%)
7.0
6.6
6.6
5.7
7.0
6.8
5.0
4.6
Jan
2014
Oct
2014
Canada
United States
Oct
2015
Oct
2016*
*Forecast
Unemployment rates in
Canada and the United States
are projected to decline modestly.
Canadian and U.S.
Interest Rates (%)
1.00
1.00
1.13
0.50 0.50
0.13
0.13
0.13
Jan
2014
Oct
2014
Oct
2015
Oct
2016*
Canadian overnight rate
U.S. federal funds rate
*Forecast
The Federal Reserve will likely
raise interest rates moderately,
while the Bank of Canada
remains on the sidelines.
Housing Starts
(in thousands)
250
200
150
100
1500
1000
500
0
09 10 11 12 13 14 15* 16*
Canada
United States
*Forecast
Housing market activity should
moderate in Canada but
strengthen in the United States.
Canadian/U.S. Dollar
Exchange Rates
1.09
1.12
1.31 1.31
Jan
2014
Oct
2014
Oct
2015
Oct
2016*
*Forecast
The Canadian dollar is expected
to stabilize against the U.S. dollar
as oil prices recover.
Note: Data points are averages for the month, quarter or year, as appropriate. References to years are calendar years.
BMO Financial Group 198th Annual Report 2015 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Value Measures
Total Shareholder Return
The average annual total shareholder return (TSR) is a key measure of shareholder value, and confirms that our strategic priorities drive value creation
for our shareholders. Our one-year TSR of negative 3% was better than the average of our Canadian bank peer group and the overall market return in
Canada. Our three-year average annual TSR of 13.5% was strong, outperforming our Canadian bank peer group and the overall market return in
Canada. Our five-year average annual TSR of 9.5% outperformed the overall market return in Canada, although it was slightly below our Canadian
bank peer group.
The table below summarizes dividends paid on BMO common shares over the past five years and the movements in BMO’s share price.
An investment of $1,000 in BMO common shares made at the beginning of fiscal 2011 would have been worth $1,576 at October 31, 2015,
assuming reinvestment of dividends, for a total return of 57.6%.
On December 1, 2015, BMO announced that the Board of Directors had declared a quarterly dividend payable to common shareholders of $0.84
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per common share, an increase of $0.02 per share or 2% from the prior quarter and up $0.04 per share or 5% from a year ago. The dividend is
payable on February 26, 2016 to shareholders of record on February 2, 2016. We have increased our quarterly dividend declared four times over the
past two years from $0.76 per common share for the first quarter of 2014. Dividends paid over a ten-year period have increased at an average annual
compound rate of 5.9%.
One-Year Total
Shareholder Return (%)
-3.0
-4.6
-4.6
S&P/TSX
Composite
Index
Canadian
Peer Group
Average
BMO
Common
Shares
Three-Year Average Annual
Total Shareholder Return (%)
13.5
11.5
Five-Year Average Annual
Total Shareholder Return (%)
9.7
9.5
6.0
4.3
S&P/TSX
Composite
Index
Canadian
Peer
Group
Average
BMO
Common
Shares
S&P/TSX
Composite
Index
Canadian
Peer
Group
Average
BMO
Common
Shares
All returns represent total returns.
All returns represent total returns.
All returns represent total returns.
BMO’s one-year TSR was better
than the average of our Canadian
peer group.
BMO’s three-year average
annual return was strong.
BMO’s five-year average annual
return outperformed the overall
market return in Canada.
The average annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common shares
made at the beginning of a fixed period. The return includes the change in share price and assumes that dividends received were reinvested in
additional common shares.
Total Shareholder Return
For the year ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)
Increase (decrease) in share price (%)
Total annual shareholder return (%) (2)
2015
76.04
3.20
4.3
(7.0)
(3.0)
2014
81.73
3.04
3.8
12.5
17.1
2013
72.62
2.92
4.0
23.0
28.8
2012
59.02
2.80
4.8
0.2
5.2
2011
58.89
2.80
4.8
(2.2)
2.4
3-year
CAGR (1)
5-year
CAGR (1)
8.8
4.6
nm
nm
13.5
4.8
2.7
nm
nm
9.5
(1) Compound annual growth rate (CAGR) expressed as a percentage.
(2) Total annual shareholder return assumes reinvestment of quarterly dividends and therefore does not equal the sum of dividend and share price returns in the table.
nm – not meaningful
32 BMO Financial Group 198th Annual Report 2015
Non-GAAP Measures
Results and measures in this MD&A are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain
items as set out in the following table. Management assesses performance on a reported basis and on an adjusted basis and considers both to be
useful in assessing underlying ongoing business performance. Presenting results on both bases provides readers with a better understanding of how
management assesses results. It also permits readers to assess the impact of certain specified items on results for the periods presented and to
better assess results excluding those items if they consider the items to not be reflective of ongoing results. As such, the presentation may facilitate
readers’ analysis of trends, as well as comparisons with our competitors. Adjusted results and measures are non-GAAP and as such do not have
standardized meaning 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.
(Canadian $ in millions, except as noted)
2015
2014
2013
Reported Results
Revenue (1)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net Income
Diluted EPS ($)
Adjusting Items (Pre-tax) (2)
Credit-related items on the purchased performing loan portfolio (3)
Acquisition integration costs (4)
Amortization of acquisition-related intangible assets (5)
Decrease in the collective allowance for credit losses (6)
Run-off structured credit activities (7)
Restructuring costs (8)
Adjusting items included in reported pre-tax income
Adjusting Items (After tax) (2)
Credit-related items on the purchased performing loan portfolio (3)
Acquisition integration costs (4)
Amortization of acquisition-related intangible assets (5)
Increase in the collective allowance for credit losses (6)
Run-off structured credit activities (7)
Restructuring costs (8)
Adjusting items included in reported net income after tax
Impact on diluted EPS ($)
Adjusted Results
Revenue (1)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net Income
Diluted EPS ($)
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19,389
(1,254)
18,135
(612)
(12,182)
5,341
(936)
4,405
6.57
–
(53)
(163)
–
–
(149)
(365)
–
(43)
(127)
–
–
(106)
(276)
(0.43)
19,391
(1,254)
18,137
(612)
(11,819)
5,706
(1,025)
4,681
7.00
18,223
(1,505)
16,718
(561)
(10,921)
5,236
(903)
4,333
6.41
–
(20)
(140)
–
–
–
(160)
–
(16)
(104)
–
–
–
(120)
(0.18)
18,223
(1,505)
16,718
(561)
(10,761)
5,396
(943)
4,453
6.59
16,830
(767)
16,063
(587)
(10,226)
5,250
(1,055)
4,195
6.17
406
(251)
(125)
2
40
(82)
(10)
250
(155)
(89)
(9)
34
(59)
(28)
(0.04)
16,139
(767)
15,372
(357)
(9,755)
5,260
(1,037)
4,223
6.21
Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.
(1) Effective the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance
revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
(2) Adjusting items are included in Corporate Services with the exception of the amortization of acquisition-related intangible assets, which is charged to the operating groups, and acquisition integration
costs in 2015 and 2014 related to F&C, which are charged to Wealth Management.
(3) Credit-related items on the purchased performing portfolio in 2013 were comprised of revenue of $638 million, provisions for credit losses of $232 million and provisions for income taxes of
$156 million, resulting in an increase in reported net income after tax of $250 million. Effective the first quarter of 2014, Corporate Services adjusted results include credit-related items in respect of
the purchased performing loan portfolio, including $103 million of revenue and $5 million of specific provisions for credit losses in 2015 ($238 million and $82 million in 2014, respectively).
(4) Acquisition integration costs related to F&C are charged to Wealth Management and acquisition integration costs related to Marshall & Isley Corporation and GE Capital’s Transportation Finance
business are charged to Corporate Services. Acquisition integration costs are primarily recorded in non-interest expense.
(5) These expenses were included in the non-interest expense of the operating groups. Before and after-tax amounts for each operating group are provided on pages 47, 49, 53, 56 and 60.
(6) In 2013, the impact of the purchased performing portfolio on the collective allowance is reflected in credit-related items.
(7) Primarily comprised of valuation changes associated with these activities that are mainly included in trading revenues in non-interest revenue.
(8) Primarily due to restructuring to drive operational efficiencies. The charge in 2015 also includes the settlement of a legacy legal matter from an acquired entity.
BMO Financial Group 198th Annual Report 2015 33
EPS ($)
6.17 6.21
7.00
6.59
6.57
6.41
2013
2014
2015
EPS
Adjusted EPS
Growth demonstrates the
benefits of our diversified
business mix.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary Financial Results and Earnings per Share Growth
The year-over-year percentage change in earnings per share (EPS) and in adjusted EPS are our key measures for
analyzing earnings growth. All references to EPS are to diluted EPS, unless indicated otherwise.
EPS was $6.57, up $0.16 or 2% from $6.41 in 2014. Adjusted EPS was $7.00, up $0.41 or 6% from $6.59 in
2014. Our five-year average annual adjusted EPS growth rate was 7.9%, in line with our current medium-term
objective of achieving average annual adjusted EPS growth of 7% to 10%. EPS growth in both 2015 and 2014
primarily reflected increased earnings. Adjusted net income available to common shareholders was 67% higher
over the five-year period, while the average number of diluted common shares outstanding increased 15% over
the same period.
Net income was $4,405 million in 2015, up $72 million or 2% from the previous year. Adjusted net income
was $4,681 million, up $228 million or 5%.
On an adjusted basis, there was solid revenue growth in 2015. Higher revenue exceeded incremental costs,
contributing to growth in net income. There were modestly higher provisions for credit losses and a slightly
higher effective income tax rate in 2015.
There was good adjusted net income growth in Canadian P&C, Wealth Management and U.S. P&C, a decline
in BMO Capital Markets and lower results in Corporate Services. In addition to operating performance, adjusted
net income benefitted from the stronger U.S. dollar. This benefit was more than offset by lower purchased loan
accounting benefits.
Canadian P&C adjusted net income increased $88 million or 4% to $2,108 million, due to continued revenue
growth as a result of higher balances and improved non-interest revenue, with stable net interest margin,
partially offset by higher expenses. Expenses rose primarily due to continued investment in the business, net of
expense management, and higher costs associated with a changing business and regulatory environment.
Canadian P&C results are discussed in the operating group review on page 48.
U.S. P&C adjusted net income increased $174 million or 25% to $880 million, and increased $57 million or
9% to $701 million on a U.S. dollar basis, primarily due to lower provisions for credit losses. Revenue was stable
as higher balances and increased mortgage banking revenue offset the effects of lower net interest margin. Non-
interest expenses also remained stable. U.S. P&C results are discussed in the operating group review on page 51.
Wealth Management adjusted net income was $955 million, up $112 million or 13% from a year ago.
Adjusted net income in traditional wealth was $715 million, up $158 million or 28% from a year ago, due to good
organic growth from the businesses, a gain on the sale of BMO’s U.S. retirement services business, and the full
year benefit from the acquired F&C business. Adjusted net income in insurance was $240 million, compared to
$286 million a year ago, primarily due to higher taxes in the current year and higher actuarial benefits in the prior
year. Wealth Management results are discussed in the operating group review on page 55.
BMO Capital Markets adjusted net income decreased $44 million or 4% to $1,034 million as the benefit of
the stronger U.S. dollar was more than offset by higher provisions in the current year compared to net recoveries
in the prior year. BMO Capital Markets results are discussed in the operating group review on page 58.
Corporate Services adjusted net loss for the year was $296 million, compared with an adjusted net loss of
$194 million a year ago. Adjusted results decreased mainly due to lower purchased loan portfolio revenues and
lower credit recoveries. Corporate Services results are discussed in the operating group review on page 62.
Changes to reported and adjusted net income for each of our operating groups are discussed in more detail
in the 2015 Operating Groups Performance Review, which starts on page 45.
Earnings per share (EPS) is calculated by dividing net income attributable to bank shareholders, after deduction of preferred dividends, by the
average number of common shares outstanding. Diluted EPS, which is our basis for measuring performance, adjusts for possible conversions of
financial instruments into common shares if those conversions would reduce EPS, and is more fully explained in Note 25 on page 191 of the
financial statements. Adjusted EPS is calculated in the same manner using adjusted net income.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
34 BMO Financial Group 198th Annual Report 2015
Return on Equity
Increased capital expectations for banks internationally have resulted in increased levels of common
shareholders’ equity over the last several years which, all else being equal, negatively impacts return on equity
(ROE). ROE was 12.5% in 2015 and adjusted ROE was 13.3%, compared with 14.0% and 14.4%, respectively, in
2014. ROE declined in 2015 primarily due to growth in common equity exceeding growth in income. There was
an increase of $96 million in earnings ($252 million in adjusted earnings) available to common shareholders in
2015. Average common shareholders’ equity increased by $4.5 billion from 2014, primarily due to the impact of
the stronger U.S. dollar on our investments in foreign operations and increased retained earnings. Adjusted return
on tangible common equity (ROTCE) was 16.4%, compared with 17.4% in 2014. Book value per share increased
17% from the prior year to $56.31, given the substantial increase in shareholders’ equity. ROTCE is meaningful
both because it measures the performance of businesses consistently, whether they were acquired or developed
organically, and because it is commonly used in the North American banking industry.
Return on common shareholders’ equity (ROE) is calculated as net income, less non-controlling interest in
subsidiaries and preferred dividends, as a percentage of average common shareholders’ equity. Common
shareholders’ equity is comprised of common share capital, contributed surplus, accumulated other
comprehensive income (loss) and retained earnings. Adjusted ROE is calculated using adjusted net income
rather than net income.
Adjusted return on tangible common equity (ROTCE) is calculated as adjusted net income available to
common shareholders as a percentage of average 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 Equity and Adjusted Return on Tangible Common Equity
ROE (%)
17.3
17.4
14.9
15.0
14.014.4
16.4
13.3
12.5
2013
2014
2015
ROE
Adjusted ROE
Adjusted ROTCE
ROE remains strong.
M
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(Canadian $ in millions, except as noted)
For the year ended October 31
Reported net income
Attributable to non-controlling interest in subsidiaries
Preferred dividends
Net income available to common shareholders
Average common shareholders’ equity
Return on equity (%)
Adjusted net income available to common shareholders
Adjusted return on equity (%)
Average tangible common equity
Adjusted return on tangible common equity (%)
2015
4,405
(35)
(117)
4,253
34,135
12.5
4,529
13.3
2014
4,333
(56)
(120)
4,157
29,680
14.0
4,277
14.4
2013
4,195
(65)
(120)
4,010
26,956
14.9
4,038
15.0
2012
4,156
(74)
(136)
3,946
24,863
15.9
3,849
15.5
2011*
3,114
(73)
(146)
2,895
19,145
15.1
3,056
16.0
27,666
24,595
22,860
20,798
16,790
16.4
17.4
17.3
18.0
17.9
* 2011 has not been restated to reflect the IFRS standards adopted in 2014.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Basel III Common Equity Tier 1 Ratio
BMO’s Basel III Common Equity Tier 1 (CET1) Ratio is the last of our four key value measures. BMO’s CET1 Ratio
is strong and exceeds the Office of the Superintendent of Financial Institutions Canada’s requirements for large
Canadian banks. Our CET1 Ratio was 10.7% at October 31, 2015, compared to 10.1% at October 31, 2014.
The CET1 Ratio increased by 60 basis points from the end of fiscal 2014 primarily due to higher capital, partially
offset by an increase in risk-weighted assets. The acquisition of GE Capital’s Transportation Finance business is
expected to reduce BMO’s CET1 Ratio by approximately 70 basis points on closing in the first quarter of 2016.
Basel III Common Equity Tier 1 (CET1) Ratio is calculated as CET1 capital, which is comprised of common
shareholders’ equity less deductions for goodwill, intangible assets, pension assets, certain deferred tax assets
and other items, divided by risk-weighted assets for CET1.
Basel III CET1 Ratio (%)
9.9
10.1
10.7
2013
2014
2015
BMO’s CET1 Ratio has been
consistently strong.
BMO Financial Group 198th Annual Report 2015 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
2015 Financial Performance Review
This section provides a review of our enterprise financial performance for 2015 that focuses on the Consolidated Statement of Income included in our
consolidated financial statements, which begin on page 135. A review of our operating groups’ strategies and performance follows the enterprise
review. A summary of the enterprise financial performance for 2014 appears on page 64. This section contains adjusted results, which are non-GAAP
and are disclosed in more detail in the Non-GAAP Measures section on page 33.
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Highlights
‰ On a net revenue basis(1), revenue increased $1,417 million or 8% in
2015 to $18,135 million. Adjusted revenue increased $1,419 million
or 8% to $18,137 million. Revenue growth was due to the benefits
of our diversified business mix and successful execution against our
strategic priorities. The impact of the stronger U.S. dollar increased
adjusted net revenue growth by $732 million or 4%. The remaining
increase was mainly due to revenue growth in Canadian P&C and
Wealth Management.
‰ Revenue growth in Canadian P&C reflected higher balances and
improved non-interest revenue. U.S. P&C revenue increased
$458 million or 15% on a Canadian dollar basis, and was stable on a
U.S. dollar basis as strong commercial loan growth and increased
mortgage banking revenue offset the effects of lower net interest
margin. Wealth Management revenue growth was driven by
traditional wealth growth of 20%, including the full year contribution
from the acquired F&C business. Insurance net revenue declined due
to higher actuarial benefits in the prior year. BMO Capital Markets
revenue increased, driven by the stronger U.S. dollar. Corporate
Services adjusted revenue declined mainly due to lower revenue
related to the purchased loan portfolio.
‰ Provisions for credit losses totalled $612 million in the current year,
up from $561 million in 2014, primarily due to lower recoveries in
Corporate Services and higher provisions in BMO Capital Markets,
partially offset by reduced provisions in the P&C businesses.
‰ Adjusted non-interest expense increased $1,058 million or 10%
to $11,819 million, of which approximately 6% was due to the
stronger U.S. dollar, 2% was due to the inclusion of F&C results for
two additional quarters relative to a year ago, and 2% was due to
business growth.
‰ The effective income tax rate in 2015 was 17.5%, compared with
17.2% in 2014. The adjusted effective income tax rate(2) was
18.0%, compared with 17.5% in 2014. The higher adjusted
effective tax rate was attributable to a lower proportion of income
from lower tax rate jurisdictions.
(1) See page 38 for a description of net revenue.
(2) The adjusted rate is computed using adjusted net income rather than net income in the
determination of income subject to tax.
36 BMO Financial Group 198th Annual Report 2015
Foreign Exchange
The U.S. dollar was stronger compared to the Canadian dollar at October 31, 2015 than at October 31, 2014. BMO’s U.S.-dollar-denominated assets
and liabilities are translated at year-end rates. The average exchange rate over the course of 2015, which is used in the translation of BMO’s
U.S.-dollar-denominated revenues and expenses, was higher in 2015 than in 2014. Consequently, the Canadian dollar equivalents of BMO’s
U.S.-dollar-denominated net income, revenues, expenses, recovery of (provision for) credit losses and income taxes in 2015 increased relative to
the preceding year. The table below indicates average Canadian/U.S. dollar exchange rates in 2015, 2014 and 2013 and the impact of changes in
the average rates on our U.S. segment results. At October 31, 2015, the Canadian dollar traded at $1.3075 per U.S. dollar. It traded at $1.1271 per
U.S. dollar at October 31, 2014.
Changes in the exchange rate will affect future results measured in Canadian dollars and the impact on those results is a function of the periods
in which revenues, expenses and provisions for (recoveries of) credit losses arise. If future results are consistent with results in 2015, each one cent
increase (decrease) in the Canadian/U.S. dollar exchange rate, expressed in terms of how many Canadian dollars one U.S. dollar buys, would be
expected to increase (decrease) the Canadian dollar equivalent of U.S.-dollar-denominated adjusted net income before income taxes for the year by
$10 million in the absence of hedging transactions.
Economically, our U.S. dollar income stream was largely unhedged to changes in foreign exchange rates during the year. During 2015, we
hedged a portion of the forecasted BMO Capital Markets U.S. dollar net income. These hedges are subject to mark-to-market accounting, which
resulted in a $21 million after tax loss in 2015, which was recorded in our BMO Capital Markets business.
We regularly determine whether to execute hedging transactions to mitigate the impact of foreign exchange rate movements on net income.
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Effects of Changes in Exchange Rates on BMO’s Reported and Adjusted Results
(Canadian $ in millions, except as noted)
Canadian/U.S. dollar exchange rate (average)
2015
2014
2013
Effects on reported results
Increased net interest income
Increased non-interest revenue
Increased revenues
Increased provision for credit losses
Increased expenses
Increased income taxes
Increased reported net income before impact of hedges
Hedging losses in current year after tax
Increased reported net income
Effects on adjusted results
Increased net interest income
Increased non-interest revenue
Increased revenues
Increased provision for credit losses
Increased expenses
Increased income taxes
Increased adjusted net income before impact of hedges
Hedging losses in current year after tax
Increased adjusted net income
Caution
This Foreign Exchange section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
2015 vs.
2014
1.2550
1.0937
2014 vs.
2013
1.0937
1.0235
409
351
760
(5)
(598)
(33)
124
(21)
103
409
351
760
(15)
(578)
(34)
133
(21)
112
183
150
333
(1)
(262)
(14)
56
(10)
46
183
150
333
(2)
(255)
(15)
61
(10)
51
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Revenue(1)
Revenue increased $1,166 million or 6% in 2015 to $19,389 million. On a basis that nets insurance claims, commissions and changes in policy benefit
liabilities (CCPB) against insurance revenue (net revenue), revenue increased $1,417 million or 8% to $18,135 million.
Amounts in the rest of this Revenue section are stated on an adjusted basis.
Net revenue increased $1,419 million or 8% to $18,137 million, including a $732 million or 4% impact of the stronger U.S. dollar, mainly due to
growth in Canadian P&C and Wealth Management. BMO analyzes revenue at the consolidated level based on GAAP revenues as reported in the
financial statements, and on an adjusted basis. Consistent with our Canadian peer group, we analyze revenue on a taxable equivalent basis (teb) at
the operating group level. The teb adjustments for 2015 totalled $524 million, up from $476 million in 2014.
Canadian P&C revenue increased $235 million or 4% as a result of higher balances and improved non-interest revenue, with stable net interest
margin.
U.S. P&C revenue increased $458 million or 15% on a Canadian dollar basis and remained stable at $2,877 million on a U.S. dollar basis, as higher
balances and increased mortgage banking revenue offset the effects of lower net interest margin.
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Wealth Management revenue increased $676 million or 18% to $4,509 million on a net revenue basis, with traditional wealth growth of 20%
due to good growth in client assets, including the full year benefit from the acquired F&C business. Net insurance revenue decreased due to higher
actuarial benefits in the prior year.
BMO Capital Markets revenue increased $153 million or 4% to $3,873 million due to the stronger U.S. dollar. Higher trading revenues, including
the prior year unfavourable impact of implementing a funding valuation adjustment, and higher lending revenues were offset by lower investment
banking fees and reduced securities gains.
Corporate Services adjusted revenue declined by $105 million, mainly due to lower revenue related to the purchased loan portfolio.
(1) Commencing in 2015, insurance claims, commissions and changes in policy benefit liabilities are reported separately. They were previously reported as a reduction in insurance revenue in non-
interest revenue. Prior period amounts and ratios have been reclassified. Insurance can experience variability arising from fluctuations in the fair value of insurance assets and the related liabilities.
The investments which support actuarial liabilities are predominantly fixed income assets recorded at fair value with changes in the fair values 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 insurance claims, commissions and changes
in policy benefit liabilities. The discussion of revenue on a net basis reduces this variability in the results, which allows for a better discussion of operating results.
Taxable equivalent basis (teb) Revenues of operating groups are presented in our MD&A on a taxable equivalent basis (teb). The teb adjustment
increases GAAP revenue and the provision for income taxes by an amount that would increase revenue on certain tax-exempt items to a level that
would incur tax at the statutory rate, to facilitate comparisons. This adjustment is offset in Corporate Services.
Revenue and Adjusted Revenue (1)
(Canadian $ in millions, except as noted)
For the year ended October 31
Net interest income
Year-over-year growth (%)
Non-interest revenue
Year-over-year growth (%)
Total revenue
Cdn./U.S. dollar translation effect
Year-over-year growth (%)
Impact of Cdn./U.S. dollar translation effect (%)
Adjusted net interest income
Year-over-year growth (%)
Adjusted non-interest revenue
Year-over-year growth (%)
Total adjusted revenue (2)
Year-over-year growth (%)
Total adjusted revenue, net of CCPB (2)
Cdn./U.S. dollar translation effect
Year-over-year growth (%)
Impact of Cdn./U.S. dollar translation effect (%)
2015
8,970
6
10,419
7
19,389
732
6
4
8,971
6
10,420
7
19,391
6
18,137
732
8
4
2014
8,461
(3)
9,762
20
18,223
319
8
2
8,461
5
9,762
20
18,223
13
16,718
319
9
2
2013
8,677
(3)
8,153
–
16,830
87
(2)
1
8,020
(2)
8,119
3
16,139
1
15,372
78
3
1
2012
8,937
20
8,166
8
17,103
98
14
1
8,158
13
7,882
4
16,040
8
14,866
85
8
1
2011*
7,474
20
7,587
8
15,061
(188)
14
1
7,248
16
7,612
8
14,860
12
13,742
(173)
12
1
* Growth rates for 2011 reflect growth based on CGAAP in 2010 and IFRS in 2011. 2011 has not been restated to reflect the new IFRS standards adopted in 2014.
(1) Commencing in the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in
insurance revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
(2) Adjusted revenue for 2011-2013 excludes the portion of the credit mark recorded in net interest income on the purchased performing loan portfolio and income or losses from run-off structured credit
activities recorded in non-interest revenue, which are recorded in Corporate Services, as discussed in the Non-GAAP Measures section on page 33.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
38 BMO Financial Group 198th Annual Report 2015
Net Interest Income
Net interest income for the year was $8,970 million, an increase of $509 million or 6% from 2014, due to the impact of the stronger U.S. dollar
and volume growth, partially offset by lower net interest margin and lower revenue from the purchased loan portfolio. The impact of the stronger
U.S. dollar increased net interest income by $409 million.
BMO’s average earning assets increased $51 billion or 10% in 2015, including a $32 billion increase as a result of the stronger U.S. dollar.
There was growth in all operating groups.
The main drivers of BMO’s overall net interest margin are the individual group margins, changes in the magnitude of each operating group’s
average earning assets and changes in net interest income in Corporate Services. Changes are discussed in the 2015 Operating Groups Performance
Review section starting on page 45.
Table 5 on page 122 and Table 6 on page 123 provide further details on net interest income and net interest margin.
Net interest income is comprised of earnings on assets, such as loans and securities, including interest and dividend income and BMO’s share of
income from investments accounted for using the equity method of accounting, less interest expense paid on liabilities, such as deposits.
Net interest margin is the ratio of net interest income to average earning assets, expressed as a percentage or in basis points.
Average Earning Assets and
Net Interest Margin
485
1.79
1.65
529
1.60
1.60
579
1.55
1.55
Net Interest Income
and Net Non-Interest Revenue
($ billions)
18.1
18.1
16.7
16.7
8.2
8.2
9.1
9.1
16.1
15.4
7.4
7.4
8.7
8.0
8.5
8.5
9.0
9.0
Net Revenue
($ billions)
Net Revenue by Country (%)
16.1 15.4
16.7 16.7
18.1 18.1
64
65
62
33
30
32
3
5
6
2013
2014
2015
2013
2014
2015
2013
2014
2015
2013
2014
2015
Average earning assets ($ billions)
Net interest margin (%)
Adjusted net interest margin (%)
Average earning assets
increased 10% and adjusted net
interest margin decreased in the
low-rate environment.
Net interest income
Net non-interest revenue
Adjusted net interest income
Adjusted net non-interest revenue
There was growth in adjusted
net non-interest revenue and
net interest income, reflecting
good underlying business
growth.
Total net revenue
Total net adjusted revenue
Canada
United States
Other countries
Canadian P&C and Wealth
Management drove net revenue
growth.
The change in net revenue in
other countries is primarily due
to the F&C acquisition.
Change in Net Interest Income, Average Earning Assets and Net Interest Margin
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(Canadian $ in millions, except as noted)
For the year ended October 31
Canadian P&C
U.S. P&C
Personal and Commercial Banking (P&C)
Wealth Management
BMO Capital Markets
Corporate Services
Total BMO reported
U.S. P&C (US$ in millions)
nm – not meaningful
Net interest income (teb)
Average earning assets
Change
Change
2015
2014
4,937
2,834
7,771
642
1,334
(777)
8,970
2,259
4,780
2,482
7,262
560
1,177
(538)
8,461
2,269
%
3
14
7
15
13
44
6
–
2015
2014
189,505 183,406
68,312
81,965
23,784
271,470 251,718
21,169
238,916 222,471
33,428
45,301
579,471 528,786
65,319
62,443
%
3
20
8
12
7
36
10
5
Net interest margin
(in basis points)
2015
2014
Change
261
346
286
270
56
nm
155
346
261
363
289
265
53
nm
160
363
–
(17)
(3)
5
3
nm
(5)
(17)
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Revenue
Non-interest revenue, which comprises all revenue other than net interest income, increased $908 million or 11% on a net revenue basis to
$9,165 million. Excluding the impact of the stronger U.S. dollar, net non-interest revenue increased 7% with the majority of the growth driven by
strong performance in Wealth Management, as well as growth in the P&C businesses.
Mutual fund revenue increased $312 million and investment management and custodial fees increased $254 million, both due to good organic
growth in client assets and the contribution from six additional months of revenue from the F&C business relative to a year ago and the impact of the
stronger U.S. dollar.
Deposit and payment service charges increased $75 million, due to the impact of the stronger U.S. dollar and growth in Canadian P&C.
Lending fees increased $57 million, due to the impact of the stronger U.S. dollar and growth in lending activity in BMO Capital Markets and in
the Canadian P&C loan portfolio.
Trading revenues increased $38 million and are discussed in the Trading-Related Revenues section that follows.
Securities commissions and fees increased $19 million. These revenues consist largely of brokerage commissions within Wealth Management,
which account for about three-quarters of the total, and institutional equity trading commissions within BMO Capital Markets. The increase is due to
the stronger U.S. dollar and higher client activity in BMO Capital Markets, partially offset by lower securities commissions in Wealth Management due
to softer equity markets.
Insurance revenue decreased $246 million from a year ago, when lower long-term interest rates increased the fair value of insurance
investments, partially offset by increased underlying business premium income in 2015. The decrease in insurance revenue was largely offset by
lower insurance claims, commissions and changes in policy benefit liabilities as discussed on page 41.
Underwriting and advisory fees decreased $38 million, due to more challenging market conditions, offset in part by the impact of the stronger
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U.S. dollar.
Other non-interest revenue includes various sundry amounts and increased by $186 million from the prior year, primarily due to a gain on sale of
BMO’s U.S. retirement services business and a legal settlement.
Foreign exchange, other than trading, securities gains and card fees were largely consistent with the prior year.
Table 3 on page 120 provides further details on revenue and revenue growth.
Non-Interest Revenue (1)
(Canadian $ in millions)
For the year ended October 31
Securities commissions and fees
Deposit and payment service charges
Trading revenues
Lending fees
Card fees
Investment management and custodial fees
Mutual fund revenues
Underwriting and advisory fees
Securities gains, other than trading
Foreign exchange, other than trading
Insurance revenue (1)
Other
Total BMO reported (1)
BMO reported, net of CCPB
Insurance revenue, net of CCPB
2015
953
1,077
987
737
460
1,500
1,385
706
171
172
1,762
509
10,419
9,165
508
2014
934
1,002
949
680
462
1,246
1,073
744
162
179
2,008
323
9,762
8,257
503
Change
from 2014
(%)
2
8
4
8
–
20
29
(5)
6
(4)
(12)
58
7
11
1
2013
846
916
849
603
461
971
832
659
285
172
1,212
347
8,153
7,386
445
(1) Commencing in the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in
insurance revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
40 BMO Financial Group 198th Annual Report 2015
Trading-Related Revenues
Trading-related revenues are dependent on, among other things, the volume of activities undertaken for clients who enter into transactions with BMO
to mitigate their risks or to invest. BMO earns a spread or profit on the net sum of its client positions by profitably managing, within prescribed limits,
the overall risk of the net positions. On a limited basis, BMO also earns revenue from principal trading positions.
Interest and non-interest trading-related revenues increased $86 million or 9%. Excluding the impact of the stronger U.S. dollar and the result
of hedging a portion of U.S. net income, trading-related revenues increased by $75 million or 8%. Interest rate trading-related revenues increased
$82 million or 25%, including the prior year unfavourable impact of implementing a funding valuation adjustment, primarily due to increased client
activity in our fixed income businesses. Foreign exchange trading-related revenues were up $25 million or 7%, driven by increased client activity in
response to, among other things, the Bank of Canada rate changes and potential changes by the U.S. Federal Reserve. Equities trading-related
revenues increased $7 million or 1%, reflecting increased activity with corporate and investor clients. Commodities trading-related revenues increased
$3 million or 6% due to increased client hedging activity.
The Market Risk section on page 100 provides more information on trading-related revenues.
Trading-related revenues include net interest income and non-interest revenue earned from on and off-balance sheet positions undertaken for
trading purposes. The management of these positions typically includes marking them to market on a daily basis. Trading-related revenues also
include income (expense) and gains (losses) from both on-balance sheet instruments and interest rate, foreign exchange (including spot
positions), equity, commodity and credit contracts.
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Interest and Non-Interest Trading-Related Revenues (1)
(Canadian $ in millions)
(taxable equivalent basis)
For the year ended October 31
Interest rates
Foreign exchange
Equities
Commodities
Other (2)
Total (teb)
Teb offset
Reported Total
Reported as:
Net interest income
Non-interest revenue – trading revenues
Total (teb)
Teb offset
Reported Total, net of teb offset
Adjusted net interest income, net of teb offset
Adjusted non-interest revenue – trading revenues
Adjusted total, net of teb offset
2015
422
364
638
56
6
1,486
467
1,019
499
987
1,486
467
1,019
32
987
1,019
2014
325
356
626
46
13
1,366
433
933
417
949
1,366
433
933
(16)
949
933
Change
from 2014
(%)
30
2
2
21
(54)
9
8
9
20
4
9
8
9
+100
4
9
2013
479
285
499
43
29
1,335
309
1,026
486
849
1,335
309
1,026
157
815
972
(1) Trading-related revenues are presented on a taxable equivalent basis.
(2) Includes nominal revenues from run-off structured credit activities and hedging exposures in BMO’s structural balance sheet. Prior to 2014, the structured credit revenues were adjusting items and
excluded from adjusted trading-related revenues.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities were $1,254 million in the current year, down $251 million from
$1,505 million in 2014 when lower long-term interest rates increased the fair value of investments backing our policy benefit liabilities, partially
offset by increased underlying business premium income in 2015. The decline was largely offset in revenue.
BMO Financial Group 198th Annual Report 2015 41
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Provision for Credit Losses
The provision for credit losses (PCL) was $612 million in the current year, up from $561 million in 2014. There was no net change to the collective
allowance in the year. The increase in PCL was due to lower recoveries in Corporate Services and higher provisions in BMO Capital Markets, partially
offset by reduced provisions in the P&C businesses.
PCL as a percentage of average net loans and acceptances was 0.19% in 2015, consistent with the prior year.
On an operating group basis, most of our provisions relate to Personal and Commercial Banking. In Canadian P&C, PCL decreased by $32 million
to $496 million in 2015, reflecting lower provisions in both the consumer and commercial portfolios. U.S. P&C PCL was $119 million, down $58 million
from 2014, reflecting better credit quality in both the consumer and commercial loan portfolios and loan sale benefits. Wealth Management
provisions increased to $7 million in 2015, compared to a net recovery of $3 million in the previous year. BMO Capital Markets recorded provisions of
$26 million, compared to net recoveries of $18 million in the prior year. Corporate Services recoveries of credit losses of $36 million in 2015 were
down from $123 million in 2014, primarily reflecting lower recoveries.
On a geographic basis, the majority of our provisions relate to our Canadian loan portfolio. Specific PCL in Canada and other countries (excluding
the United States) was $498 million, compared to $527 million in 2014. Specific PCL in the United States was $114 million, up from $34 million in
2014, reflecting lower Corporate Services loan recoveries in 2015. Note 4 on page 148 of the financial statements provides PCL information on a
geographic basis. Table 15 on page 130 provides further PCL segmentation information.
Provision for Credit Losses
(Canadian $ in millions, except as noted)
For the year ended October 31
New specific provisions
Reversals of previously established allowances
Recoveries of loans previously written off
Specific provision for credit losses
Decrease in collective allowance
Provision for credit losses (PCL)
PCL as a % of average net loans and acceptances (annualized)
Provision for Credit Losses by Operating Group
(Canadian $ in millions)
For the year ended October 31
Canadian P&C
U.S. P&C
Personal and Commercial Banking
Wealth Management
BMO Capital Markets
Corporate Services, including T&O (1)
Impaired real estate loans
Interest on impaired loans
Purchased credit impaired loans
Purchased performing loans (1)
Adjusted provision for credit losses
Purchased performing loans (1)
Decrease in collective allowance
Provision for credit losses
2015
1,278
(210)
(456)
612
–
612
0.19
2015
496
119
615
7
26
28
17
(86)
5
612
–
–
612
2014
1,413
(228)
(624)
561
–
561
0.19
2014
528
177
705
(3)
(18)
21
26
(252)
82
561
–
–
561
2013
1,636
(267)
(772)
597
(10)
587
0.22
2013
559
236
795
3
(36)
(43)
48
(410)
–
357
240
(10)
587
(1) Effective the first quarter of 2014, Corporate Services adjusted results include credit-related items in respect of the purchased performing loan portfolio. Further details are provided in the Non-GAAP
Measures section on page 33.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
42 BMO Financial Group 198th Annual Report 2015
Non-Interest Expense
Non-interest expense increased $1,261 million or 12% to $12,182 million in 2015. Reported results in 2015 included a $149 million charge, primarily
due to restructuring to drive operational efficiencies.
Amounts in the rest of this Non-Interest Expense section are stated on an adjusted basis, unless otherwise noted.
Adjusted non-interest expense excludes acquisition integration costs for certain significant acquisitions and amortization of acquisition-related
intangible assets in 2015, 2014 and 2013, and restructuring costs in 2015 and 2013 to align our cost structure with the environment.
Adjusted non-interest expense increased $1,058 million or 10% to $11,819 million, of which approximately 6% was due to the stronger U.S.
dollar, and 2% was due to the inclusion of F&C results for two additional quarters, excluding which adjusted non-interest expense increased by 2%
due to business growth.
The dollar and percentage changes in expense by category are outlined in the adjacent Adjusted Non-Interest Expense and Non-Interest Expense
table. Table 4 on page 121 provides more detail on expenses and expense growth.
Performance-based compensation was unchanged, excluding the impact of the stronger U.S. dollar and the inclusion of F&C’s results for two
additional quarters relative to a year ago. On the same basis, other employee compensation, which includes salaries, benefits and severance,
increased $214 million or 5%, primarily due to merit increases and higher pension costs.
Premises and equipment costs increased $143 million or 7%, excluding the impact of the stronger U.S. dollar, mainly due to higher costs related
to technology investments.
Other adjusted expenses declined $20 million or 1%, excluding the impact of the stronger U.S. dollar.
BMO’s reported efficiency ratio was 62.8% and its adjusted efficiency ratio was 60.9% in 2015. On a net revenue basis, the adjusted efficiency
ratio increased 80 basis points to 65.2% from 2014, primarily due to the currency impact of our foreign operations. On a basis that excludes the
impact of the stronger U.S. dollar and purchased loan accounting impacts, operating leverage was 0.6% and the efficiency ratio would have been
lower year over year.
Canadian P&C is BMO’s largest operating segment, and its reported efficiency ratio of 50.3% increased by 60 basis points, mainly due to lower
revenue growth.
The adjusted efficiency ratio in U.S. P&C increased by 60 basis points to 64.2% due to modestly higher expenses in a challenging revenue growth
environment for U.S. banks.
The adjusted efficiency ratio in Wealth Management on a net revenue basis improved by 40 basis points to 71.5%.
BMO Capital Markets reported efficiency ratio increased by 100 basis points to 64.2%, as the stronger U.S. dollar increased the weighting of its
higher efficiency U.S. business.
On a net revenue basis, reported operating leverage was negative 3.0% in 2015 and adjusted operating leverage was negative 1.3%. On a net
revenue basis and excluding the impact of the stronger U.S. dollar, adjusted operating leverage was negative 0.3%, and also excluding purchased
loan accounting impacts it was positive 0.5%. Our ongoing focus on improving efficiency and generating positive operating leverage, by driving
revenue growth through a strong customer focus and maintaining disciplined cost management, resulted in positive adjusted operating leverage on a
net revenue basis in each of the last two quarters of 2015.
Examples of initiatives to enhance productivity are outlined in the 2015 Operating Groups Performance Review, which starts on page 45.
(1) This ratio is calculated excluding insurance claims, commissions and changes in policy benefit liabilities (CCPB).
The efficiency ratio (or expense-to-revenue ratio) is a key measure of productivity. It is calculated as non-interest expense divided by total
revenue (on a taxable equivalent basis in the operating groups), expressed as a percentage. The adjusted efficiency ratio is another key
measure of productivity and is calculated in the same manner, utilizing adjusted revenue and expense.
Contribution to Growth in Adjusted Non-Interest Expense and Non-Interest Expense (%)
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Significant businesses acquired
Canadian/U.S. dollar translation effect, excluding acquisitions
Other
Total adjusted non-interest expense growth
Impact of adjusting items
Total non-interest expense growth
2015
2.3
5.4
2.1
9.8
1.7
11.5
2014
1.5
2.5
6.3
10.3
(3.5)
6.8
2013
0.4
0.8
2.5
3.7
(2.8)
0.9
BMO Financial Group 198th Annual Report 2015 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
Adjusted Non-Interest Expense and Non-Interest Expense
(Canadian $ in millions, except as noted)
For the year ended October 31
Performance-based compensation
Other employee compensation (1)
Total employee compensation
Premises and equipment
Other
Amortization of intangible assets
Total adjusted non-interest expense
Adjusting items
Total non-interest expense
Adjusted non-interest expense growth (%)
Non-interest expense growth (%)
(1) Includes restructuring costs in 2015 and 2013 to align our cost structure with the environment.
na – not applicable
Efficiency Ratio by Group (teb) (%)
For the year ended October 31
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Efficiency Ratio
Canadian P&C
U.S. P&C
Wealth Management
BMO Capital Markets
Total BMO
Adjusted Efficiency Ratio
Canadian P&C
U.S. P&C
Wealth Management
Wealth Management, net of CCPB
BMO Capital Markets
Total BMO
Total BMO, net of CCPB
2015
2,087
4,835
6,922
2,130
2,519
248
11,819
363
12,182
9.8
11.5
2014
1,939
4,294
6,233
1,908
2,378
242
10,761
160
10,921
10.3
6.8
Change
from 2014
(%)
8
12
11
12
6
2
10
+100
12
na
na
2013
1,682
4,026
5,708
1,743
2,083
221
9,755
471
10,226
3.7
0.9
2015
2014
2013
50.3
66.1
58.3
64.2
62.8
50.2
64.2
55.9
71.5
64.1
60.9
65.2
49.7
65.9
53.2
63.2
59.9
49.6
63.6
51.7
71.9
63.2
59.1
64.4
50.7
64.6
55.8
61.5
60.8
50.7
61.8
54.9
67.1
61.5
60.4
63.5
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
Provision for Income Taxes
The provision for income taxes reflected in the Consolidated Statement of Income is based upon transactions recorded in income, regardless of when
such transactions are subject to taxation by tax authorities, with the exception of the repatriation of retained earnings from foreign subsidiaries, as
outlined in Note 24 on page 189 of the financial statements.
Management assesses BMO’s consolidated results and associated provisions for income taxes on a GAAP basis. We assess the performance of the
operating groups and associated income taxes on a taxable equivalent basis and report accordingly.
The provision for income taxes was $936 million in 2015, compared with $903 million in 2014. The reported effective tax rate in 2015 was
17.5%, compared with 17.2% in 2014. The adjusted provision for income taxes(1) was $1,025 million in 2015, compared with $943 million in 2014.
The adjusted effective tax rate in 2015 was 18.0%, compared with 17.5% in 2014. The change in the tax rate from year to year is attributable to a
lower proportion of income from lower tax rate jurisdictions.
BMO partially hedges the foreign exchange risk arising from its foreign operations by funding the investments in the corresponding foreign
currency. The gain or loss on hedging and the unrealized gain or loss on translation of foreign operations are charged or credited to shareholders’
equity. For income tax purposes, the gain or loss on the hedging activities results in an income tax charge or credit in the current period, which is
charged or credited to shareholders’ equity, while the associated unrealized gain or loss on the foreign operations does not incur income taxes until
the investments are liquidated. The income tax charge/benefit arising from a hedging gain/loss is a function of the fluctuations in exchange rates
from period to period. Hedging of the foreign operations has given rise to an income tax recovery in shareholders’ equity of $167 million for the
year, compared with $144 million in 2014. Refer to the Consolidated Statement of Changes in Equity on page 138 of the financial statements for
further details.
Table 4 on page 121 details the $1,651 million of total net government levies and income tax expense incurred by BMO in 2015. The increase
from $1,505 million in 2014 was primarily due to higher payroll levies and sales taxes.
(1) The adjusted rate is computed using adjusted net income rather than net income in the determination of income subject to tax.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
44 BMO Financial Group 198th Annual Report 2015
2015 Operating Groups Performance Review
This section includes an analysis of the financial results of our operating groups and descriptions of their businesses, strategies, strengths, challenges,
key value drivers, achievements and outlooks.
Personal and Commercial Banking (P&C) (pages 47 to 54)
Net income was $2,931 million in 2015, an increase of $261 million or 10% from 2014. Adjusted net income was $2,988 million, an increase of
$262 million or 10%. Personal and Commercial Banking is comprised of two operating segments: Canadian Personal and Commercial Banking
(Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C).
Wealth Management (pages 55 to 57)
Net income was $850 million in 2015, an increase of $70 million or 9% from 2014. Adjusted net income was $955 million, an increase of
$112 million or 13%.
BMO Capital Markets (BMO CM) (pages 58 to 61)
Net income was $1,032 million in 2015, a decrease of $45 million or 4% from 2014. Adjusted net income was $1,034 million, a decrease of
$44 million or 4%.
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Corporate Services, including Technology and Operations (page 62)
Net loss was $408 million in 2015, compared with a net loss of $194 million in 2014. Adjusted net loss was $296 million, compared with an adjusted
net loss of $194 million in 2014.
Allocation of Results
The basis for the allocation of results geographically and among operating groups is outlined in Note 27 on page 194 of the financial statements.
Certain prior year data has been restated, as explained on the following page, which also provides further information on the allocation of results.
Adjusted Net Income by Operating Segment*
Adjusted Net Income by Country
2015
2014
2015
2014
Canadian P&C 42%
U.S. P&C 18%
Wealth Management 19%
BMO CM 21%
Canadian P&C 44%
U.S. P&C 15%
Wealth Management 18%
BMO CM 23%
Canada 71%
U.S. 22%
Other countries 7%
Canada 74%
U.S. 20%
Other countries 6%
Results provide attractive diversification across businesses and geographies.
*Percentages determined excluding results in Corporate Services.
BMO Financial Group 198th Annual Report 2015 45
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Average assets
Total Revenue
Canada
United States
Other countries
Total Expenses
Canada
United States
Other countries
Net Income
Canada
United States
Other countries
MANAGEMENT’S DISCUSSION AND ANALYSIS
Contributions to Revenue, Expenses, Net Income and Average Assets by Operating Group and by Location
(Canadian $ in
millions, except as
noted)
For the year ended
October 31
Personal and
Commercial Banking
Wealth
Management
BMO
Capital Markets
Corporate
Services
Total
Consolidated
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
Operating Groups Relative Contribution to BMO’s Performance (%)
Revenue
52.4
Expenses
48.2
Net income
61.6
Adjusted net
income
53.6
48.8
57.3
29.3
26.0
18.0
29.7
27.6
19.3
52.9
47.0
66.5
25.1
23.0
19.7
61.2
44.5
58.3
43.7
20.4
4.4
18.9
4.2
20.2
4.0
63.8
43.0
20.0
20.4
23.4
22.1
43.7
20.4
21.5
24.9
24.2
43.7
20.1
20.4
24.8
24.7
44.4
(2.6)
5.0
(9.2)
(6.3)
8.9
(2.1)
4.3
(4.5)
(4.3)
7.6
1.2
7.8
(1.8)
(3.2)
7.9
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
6,639
3,609
1
6,403
3,151
2
6,019
3,000
1
3,279
1,016
1,468
3,739
788
811
2,795
910
511
2,298
1,379
196
2,249
1,261
210
2,167
1,064
152
(447)
(108)
59
(374)
(39)
22
(262)
467
6
11,769
5,896
1,724
12,017
5,161
1,045
10,719
5,441
670
10,249
9,556
9,020
5,763
5,338
4,216
3,873
3,720
3,383
(496)
(391)
211
19,389
18,223
16,830
3,340
2,386
–
3,188
2,071
–
3,051
1,940
–
1,969
818
570
1,824
721
295
1,651
599
101
1,171
1,116
199
1,186
970
195
1,084
842
156
5,726
5,259
4,991
3,357
2,840
2,351
2,486
2,351
2,082
252
336
25
613
97
326
48
471
194
575
33
802
6,732
4,656
794
6,295
4,088
538
5,980
3,956
290
12,182
10,921
10,226
2,103
827
1
2,011
658
1
1,813
588
1
2,931
2,670
2,402
Adjusted Net Income
Canada
United States
Other countries
2,107
880
1
2,015
710
1
1,818
643
1
2,988
2,726
2,462
497
127
226
850
534
150
271
955
498
58
224
780
516
80
247
843
425
206
196
827
426
228
200
854
851
178
3
815
235
27
832
207
1
(249)
(184)
25
(45)
(120)
(29)
(173)
117
(18)
3,202
948
255
3,279
831
223
2,897
1,118
180
1,032
1,077
1,040
(408)
(194)
(74)
4,405
4,333
4,195
851
180
3
814
237
27
832
209
1
(143)
(186)
33
(45)
(120)
(29)
(88)
(26)
(21)
3,349
1,024
308
3,300
907
246
2,988
1,054
181
1,034
1,078
1,042
(296)
(194)
(135)
4,681
4,453
4,223
Average Assets
Canada
United States
Other countries
196,739 190,053 177,015
65,764
74,371
18
39
88,905
49
19,907 18,368 17,438
3,527
4,055
1,178
2,557
4,888
4,352
160,547 142,859 133,513
94,840
97,228
106,540
18,349
19,659
23,238
24,973 19,407 17,737
34,175 25,261 25,345
707
71
78
402,166 370,687 345,703
234,508 200,915 189,476
20,252
22,326
27,717
285,693 264,463 242,797
29,147 24,980 22,143
290,325 259,746 246,702
59,226 44,739 43,789
664,391 593,928 555,431
How BMO Reports Operating Group Results
Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more closely
align BMO’s organizational structure with its strategic priorities. In addition, revenue and expense allocations are updated to more accurately align
with current experience. Results for prior periods are restated to conform to the current presentation.
Corporate Services results reflect certain items in respect of the purchased loan portfolio, including the recognition of a portion of the credit mark
that is reflected in net interest income over the term of the purchased loans and provisions and recoveries of credit losses on the purchased portfolio.
Restructuring costs are also included in Corporate Services. Amounts excluded from adjusted results in prior years included credit-related items in
respect of the purchased performing loan portfolio, acquisition integration costs and run-off structured credit activities.
Starting in the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately.
They were previously reported as a reduction in insurance revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
Effective November 1, 2014, we adopted several new and amended accounting pronouncements issued by the International Accounting
Standards Board (IASB), which are outlined in Note 1 on page 140 of the financial statements.
BMO analyzes revenue at the consolidated level based on GAAP revenue reflected in the consolidated financial statements rather than on a
taxable equivalent basis (teb), which is consistent with our Canadian peer group. Like many banks, we analyze revenue on a teb basis at the
operating group level. This basis includes an adjustment that increases GAAP revenue and the GAAP provision for income taxes by an amount that
would raise revenue on certain tax-exempt items 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 revenue and income tax provisions.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
46 BMO Financial Group 198th Annual Report 2015
Personal and Commercial Banking
The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and business banking operating segments,
Canadian P&C and U.S. P&C. These operating segments are reviewed separately in the sections that follow.
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue
Total revenue (teb)
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets (1)
Adjusted net income
Key Performance Metrics and Drivers
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Return on equity (%)
Adjusted return on equity (%)
Operating leverage (teb) (%)
Adjusted operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Adjusted efficiency ratio (teb) (%)
Net interest margin on average earning assets (teb) (%)
Average common equity
Average earning assets
Average current loans and acceptances
Average deposits
Assets under administration
Full-time equivalent employees
Canadian P&C
U.S. P&C
Total P&C
2015
2014
2013
2015
2014
2013
2015
2014
2013
4,937
1,703
6,640
496
3,340
2,804
700
2,104
4
2,108
4.4
4.4
3.7
5.0
4.9
(1.3)
(1.2)
50.3
50.2
2.61
4,780
1,625
6,405
528
3,182
2,695
679
2,016
4
2,020
11.2
11.2
6.4
4.2
4.2
2.2
2.2
49.7
49.6
2.61
4,536
1,484
6,020
559
3,055
2,406
594
1,812
5
1,817
2.3
2.4
2.0
3.4
3.4
(1.4)
(1.4)
50.7
50.7
2.66
189,505 183,406
194,199 187,788
132,767 124,925
24,150
15,795
22,848
15,715
170,739
174,534
113,901
23,190
15,879
2,834
775
3,609
119
2,386
1,104
277
827
53
880
26.5
24.8
14.6
14.9
15.6
(0.3)
(1.0)
66.1
64.2
3.46
2,482
669
3,151
177
2,077
897
243
654
52
706
10.7
9.2
5.1
7.3
8.1
(2.2)
(3.0)
65.9
63.6
3.63
81,965
73,455
77,795
68,312
60,414
65,412
126,513 123,082
7,835
7,661
2,321
679
3,000
236
1,936
828
238
590
55
645
6.9
3.7
(2.5)
(3.2)
(2.4)
0.7
(0.1)
64.6
61.8
3.88
59,813
53,033
61,344
112,732
7,991
7,771
2,478
10,249
615
5,726
3,908
977
2,931
57
2,988
7,262
2,294
9,556
705
5,259
3,592
922
2,670
56
2,726
9.8
9.7
7.3
8.9
9.1
16.1
16.4
(1.6)
(1.8)
55.9
55.1
2.86
17,848
11.1
10.7
5.9
5.4
5.7
16.7
17.1
0.5
0.2
55.0
54.2
2.89
15,410
271,470 251,718
267,654 248,202
210,562 190,337
149,361 147,232
23,630
23,376
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6,857
2,163
9,020
795
4,991
3,234
832
2,402
60
2,462
3.4
2.7
0.5
0.7
1.1
16.9
17.4
(0.2)
(0.6)
55.3
54.4
2.97
13,723
230,552
227,567
175,245
135,922
23,870
(1) Before tax amounts of $73 million in 2015, $75 million in 2014 and $87 million in 2013 are included in non-interest expense.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking provides a full range of
financial products and services to eight million customers. We’re here
to help our customers make the right financial decisions as they do
business with us seamlessly across our channels: getting advice from our
16,000 employees at their place of business, in our branches, on their
mobile devices, online, over the telephone, and through our automated
banking machines.
Cameron Fowler
Group Head
Canadian Personal and Commercial Banking, BMO Financial Group
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Lines of Business
Personal Banking provides customers with a wide range of products and
services, including chequing and savings accounts, credit cards, mortgages,
creditor insurance and everyday financial and investment advice.
Our employees are focused on providing exceptional service to all of our
customers every time they interact with us.
Commercial Banking provides small business and commercial banking
customers with a broad suite of commercial products and services,
including business deposit accounts, commercial credit cards, business
loans and commercial mortgages, cash management solutions, foreign
exchange and specialized banking programs. Our Commercial bankers
partner with our customers to help them grow and manage their
business.
Strengths and Value Drivers
‰ Strong commercial banking business, reflected by BMO’s number two ranking in Canadian market share for business loans of $25 million or less.
‰ Largest MasterCard® issuer in Canada, and one of the top commercial card issuers in North America.
‰ Leading issuer of AIR MILES®, Canada’s premier coalition loyalty program.
‰ Recognized for the third consecutive year by the global financial services research firm Celent with a 2015 Model Bank Award for excellence in the
digital banking category.
‰ Proud to be the official bank of the Canadian defence community, serving the unique needs of the Canadian military.
‰ Consistently applied credit risk management practices that provide customers with reliable access to appropriate financing solutions in all economic
conditions.
Strategy and Key Priorities
Our strategy is focused on capturing key growth and loyalty opportunities while capitalizing on the shift to digital to improve efficiency.
Continued our focus on customer loyalty and growth
2015 Achievements
Improved our industry-leading employee engagement score by another two percentage points in our annual survey.
‰
‰ Established new customer service standards across all channels to provide a differentiated experience for our customers and build their loyalty.
‰ Redesigned our fraud recovery and personal estate processes, in order to make our customers’ involvement easier for them in moments that
matter.
Personal banking
‰ Achieved personal lending (excluding retail cards) and deposit growth of 2% and 6%, respectively.
‰
‰ Our Spring Home Financing and Summer Everyday Banking Campaigns were a success. Our Summer Everyday Banking Campaign resulted in
Increased share of wallet, demonstrating that our products continue to meet the needs of our valued customers.
everyday banking plan sales growing 26% compared to last year.
Introduced the BMO Savings Builder Account, becoming the first Canadian bank to reward customers with bonus interest for saving monthly.
‰
‰ World Elite MasterCard® recognized as the Best Travel Reward Credit Card and Best Travel Points Credit Card.
‰ BMO’s Premium CashBack MasterCard for Business was named #1 in MoneySense™ magazine’s annual ranking of Canada’s Best Business Cash Back.
Commercial banking
‰ Achieved 7% growth in both commercial lending and deposits.
‰ Launched the BMO Biz Basic™ Plan, to help small business owners easily manage their daily banking simply and cost-effectively.
‰ Expanded our cash management offerings with the launch of BMO DepositEdge™, enabling our clients to deposit cheques remotely, and BMO Spend
Dynamics™, giving corporate card clients convenient access to their transaction data and the ability to analyze their program spend.
‰ Named as the Best Commercial Bank in Canada by World Finance Magazine in recognition of our commitment to building long-term customer
relationships and innovative solutions with a strong regional and industry focus, particularly in the areas of Aboriginal Banking and Women in
Business.
2016 Focus
‰ Focus on improving customer loyalty to deepen relationships. In personal banking, increase personal share of wallet and in commercial banking,
target opportunities across geography, segment and industry.
48 BMO Financial Group 198th Annual Report 2015
Accelerating our digital channel strategy
2015 Achievements
‰ Digital channel sales volume continued to grow, rising ~14% from last year, which is equivalent to the total sales volume at ~100 branches.
‰ First major Canadian financial institution to offer Touch ID, allowing mobile banking features to be securely accessed with the touch of a button.
‰ Launched a new BMO Banking and InvestorLine portal, becoming the first major Canadian bank to provide customers with online access to both
personal banking and self-directed investment accounts, as well as a personal finance management tool, all in one place.
‰ Provided Interac® e-Transfers for all business customer services through our digital channels (Online Banking, Mobile Banking and Online Banking
for Business).
‰ Opened or upgraded 24 branches across Canada and expanded our channel network with more than 400 ABMs at Shell locations. We have
improved the network with image-enabled ABM technology that offers enhanced interface and transactional capabilities.
2016 Focus
‰ Focus on continuing to accelerate our channel strategy and increase our digital capabilities.
Continued our strong risk leadership and operating discipline
2015 Achievements
‰ Enhanced our risk appetite framework with more effective linkages to strategic planning.
‰ Provisions for credit losses declined by 6% and gross impaired loan formations were 11% lower year over year.
‰ Continued to make enhancements to our automated leads management engine, which leverages data to identify banking opportunities that we can
present to our customers; these relevant and timely offers support our front-line bankers in increasing share of wallet.
‰ Continued to invest in maintaining strong anti-money laundering capabilities to protect our customers.
2016 Focus
‰ Continue to focus on our strength in productivity and risk management.
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Canadian P&C
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income
Non-interest revenue
Total revenue (teb)
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets (1)
Adjusted net income
Key Performance Metrics and Drivers
Personal revenue
Commercial revenue
Net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Operating leverage (%)
Efficiency ratio (%)
Net interest margin on average earning assets (%)
Average earning assets
Average current loans and acceptances
Average deposits
Full-time equivalent employees
2015
4,937
1,703
6,640
496
3,340
2,804
700
2,104
4
2,108
2014
4,780
1,625
6,405
528
3,182
2,695
679
2,016
4
2,020
2013
4,536
1,484
6,020
559
3,055
2,406
594
1,812
5
1,817
4,415
2,225
4.4
3.7
5.0
(1.3)
50.3
2.61
189,505
194,199
132,767
15,715
4,237
2,168
11.2
6.4
4.2
2.2
49.7
2.61
183,406
187,788
124,925
15,795
3,993
2,027
2.3
2.0
3.4
(1.4)
50.7
2.66
170,739
174,534
113,901
15,879
(1) Before tax amounts of $5 million in 2015, $4 million in 2014 and $5 million in 2013 are included in non-interest expense.
Reported Net Income
($ millions)
2,016
2,104
1,812
2013
2014
2015
Average Current Loans and Acceptances
($ billions)
141.2
129.1
138.1
Personal
Commercial
45.4
49.7
53.0
2013
2014
2015
Average Deposits
($ billions)
Personal
Commercial
72.5
79.6
84.1
41.4
45.3
48.7
2013
2014
2015
BMO Financial Group 198th Annual Report 2015 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Review
Canadian P&C reported net income of $2,104 million, up $88 million or 4% from a year ago, with improved performance in the second half of the
year. Revenue increased $235 million or 4% to $6,640 million as a result of higher balances and improved non-interest revenue, with stable net
interest margin.
Revenue increased $178 million or 4% in our personal banking business as a result of higher balances and improved non-interest revenue.
In our commercial banking business, revenue increased $57 million or 3%, mainly driven by higher balances.
Our credit performance improved, as provisions for credit losses declined $32 million or 6% to $496 million, due to lower provisions in both the
consumer and commercial portfolios.
Non-interest expense was $3,340 million, up $158 million or 5% from a year ago, primarily due to continued investment in the business, net of
expense management, and higher costs associated with a changing business and regulatory environment. Adjusted operating leverage improved
over the course of the year, demonstrating the benefit of actions we took related to containing expenses.
Average current loans and acceptances increased $6.4 billion or 3% from a year ago to $194.2 billion. Total personal lending balances (excluding
retail cards) increased 2% year over year, with solid residential mortgage growth partially offset by declines in indirect auto loans. Credit card
balances were consistent with the prior year in both retail and corporate cards. Commercial loan balances (excluding corporate cards) increased 7%
year over year with growth across a number of industry sectors.
Average deposits increased $7.8 billion or 6% to $132.8 billion. Personal deposit balances increased 6%, driven by strong growth in primary
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chequing accounts. Commercial deposit growth was broad-based, with balances growing 7% year over year.
Business Environment, Outlook and Challenges
Canada’s economic growth and employment are expected to improve in 2016, benefitting from firm demand from the United States, the lower
Canadian dollar, and a moderate rise in oil prices. Interest rates are expected to stay low.
In the Canadian personal banking sector, retail operating deposits are projected to grow by approximately 4% in 2016, in line with growth in
personal income. Credit card loan balances are expected to continue to grow at a pace a little below 4%, as a result of increasing customer
preferences for prime-based lines of credit. Residential mortgage balance growth is projected to approximate 5% in 2016.
In the commercial banking sector, growth in commercial operating deposits and short-term business credit is expected to ease moderately to
just under 6% in 2016, partly reflecting a carry-over from weak conditions in the resource sector in 2015.
We expect to generate growth by increasing our customer share of wallet, improving sales force productivity and targeting commercial
opportunities across geography, segment and industry. We will continue to operate within the parameters of our risk appetite and our effective
governance framework should position us well as information security needs increase and high regulatory expectations continue. Our evolving digital
capabilities are expected to help us improve productivity over time as customer transactions migrate to digital channels and this, combined with our
strong employee engagement, will improve customer loyalty.
The Canadian economic environment in 2015 and outlook for 2016 are discussed in more detail in the Economic Developments and Outlook
section on page 30.
Caution
This Canadian P&C Banking section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
50 BMO Financial Group 198th Annual Report 2015
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U.S. Personal and Commercial Banking
We’re here to help our more than two million customers feel confident
in their financial decisions by providing a banking experience with a
human touch. Our retail and small and mid-sized business banking
customers are served through more than 500 branches, contact centres,
online and mobile banking platforms and more than 1,300 ABMs across
eight states. Our commercial banking customers are offered in-depth
specific industry knowledge, as well as strategic capital markets
solutions.
Alexandra Dousmanis-Curtis
Group Head
U.S. Retail and Business Banking
David R. Casper
Group Head
Commercial Banking and President and CEO,
BMO Harris Bank
Lines of Business
Personal Banking offers a broad range of products and services to
individuals, as well as small and mid-sized business customers, including
deposits, mortgages, consumer credit, business lending, credit cards and
other banking services.
Commercial Banking provides business customers that have annual
revenue above $20 million with a broad range of banking products and
services, including lending, deposits, treasury management and risk
management.
Strengths and Value Drivers
‰ Rich heritage of more than 160 years in the U.S. Midwest, with a deep commitment to our communities and helping our customers succeed.
‰ Strong, experienced leadership team that knows how to compete and excel in our markets.
‰ Unique, differentiated platform for profitable growth provided by our attractive branch footprint and top-tier deposit market share in key U.S.
Midwest markets.
‰ Large-scale, relationship-based national commercial banking business centred in the U.S. Midwest, complemented by in-depth industry knowledge
in select sectors.
‰ Comprehensive and integrated control structure that allows us to actively manage risks and regulatory compliance.
Strategy and Key Priorities
We aim to grow our business and be a leader in our markets by creating a differentiated, intuitive customer experience and advising our customers
on a wide range of financial topics, leveraging our brand reputation, local presence and high-performance teams.
Deliver a great customer experience to a loyal, profitable and growing customer base
2015 Achievements
‰ Delivered strong and improving net promoter score (NPS) results for the commercial banking segment, as we revitalized our internal and external
customer experience initiatives to build greater loyalty.
‰ Our NPS for the retail and business banking segments improved year over year, as we continued to focus on customer feedback.
‰ Enhanced sales coaching with a focus on the customer experience drove significant year-over-year improvements:
‰ Consumer deposit sales per retail banker increased 7%.
‰ Consumer loan sales per retail banker increased 27%.
‰ Mortgage sales per mortgage banker and sales of loans and deposits to our mass affluent customers per team both increased in excess of 25%.
2016 Focus
‰ Maintain strong customer loyalty and increase brand awareness, while growing our customer base in high-opportunity segments, including mass
affluent customers.
Continue to improve our product and channel capabilities to meet our customers’ evolving needs
2015 Achievements
‰ Continued our multi-year investment in improving our treasury management capabilities and services, including significant enhancements to our
‰
online banking solution.
Introduced our Smart Branch format, which allows customers to conduct transactions with ABM video tellers and makes day-to-day banking easier
and more convenient.
‰ BMO Harris was named as the Most Innovative Financial Institution at this year’s ATM & Mobile Innovation Summit, which recognizes innovators in
ATM and mobile technology, by Networld Media Group, publishers of ATMmarketplace.com and MobilePaymentsToday.com.
‰ With the introduction of Mobile Cash, which allows customers to withdraw money from an ABM using their smartphones, we now have the largest
network of mobile-enabled cardless ABMs in the United States.
‰ Enhanced our mobile banking application with the addition of Touch ID and Passcode for a faster and more secure log-in process.
2016 Focus
‰ Build on our mobile and online channel capabilities as we continue to enhance our customer experience.
BMO Financial Group 198th Annual Report 2015 51
MANAGEMENT’S DISCUSSION AND ANALYSIS
Improve financial performance by growing revenue and effectively managing costs
2015 Achievements
‰ Maintained stable revenue in a low interest rate environment and a highly competitive U.S. personal and commercial banking market.
‰ Total loans increased by $3.3 billion or 6%, while the total commercial loan portfolio grew by $4.5 billion or 14%.
‰ Deposits grew by $2.2 billion or 4% as a result of strong chequing account growth of $3.7 billion or 11%. In the Chicago and Wisconsin areas, we
maintained our strong second place rankings, while holding the number four market share position within our primary footprint of Illinois,
Wisconsin, Missouri, Kansas, Indiana and Minnesota and increasing our overall market share to 6.4%.
‰ Managed expenses effectively while continuing to invest in our business.
2016 Focus
‰ Continue to focus on profitable growth by deepening existing client relationships and acquiring new customers, while managing costs.
Continue to deploy our unique commercial operating model by delivering local access and industry expertise to our clients across a broad
geographic footprint
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2015 Achievements
‰ Continued strong growth in commercial and industrial (C&I) loans and commercial real estate loans, with year-over-year increases of $4.3 billion
or 16% and $0.5 billion or 15%, respectively.
‰ Announced the signing of an agreement with General Electric Capital Corporation (GE Capital) to acquire its Transportation Finance business.
GE Capital’s Transportation Finance business is the largest provider of financing for the truck and trailer sector in North America, with over 40 years
of experience servicing the complete supply chain.
‰ Launched the “One Bank” initiative to better serve customers with operations across North America.
‰ Deepened customer relationships by providing treasury management services, driving a 6% increase in fee income year over year.
2016 Focus
‰ Continue to leverage our North American commercial franchise and partnerships to deliver a “One Bank” customer experience and successfully
integrate the acquired GE Capital Transportation Finance business.
Continue our strong risk leadership and operating discipline
2015 Achievements
‰ Provision for credit losses improved by 41% over the prior year.
‰ Actively managed risks and regulatory compliance through a reinforced oversight and control structure.
‰ Continued to invest in maintaining strong anti-money laundering capabilities to protect our customers.
2016 Focus
‰ Continue to focus on our strength in productivity and risk management.
52 BMO Financial Group 198th Annual Report 2015
U.S. P&C
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Total revenue (teb)
Reported net income
Adjusted net income
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
(US$ in millions, except as noted)
Net interest income (teb)
Non-interest revenue
Total revenue (teb)
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets (1)
Adjusted net income
Key Performance Metrics and Drivers (US$ basis)
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Operating leverage (teb) (%)
Adjusted operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Adjusted efficiency ratio (teb) (%)
Net interest margin on average earning assets (teb) (%)
Average earning assets
Average current loans and acceptances
Average deposits
Full-time equivalent employees
Adjusted Net Income
($ millions)
Canadian Dollar
U.S. Dollar
645
633
880
706
644
701
2013
2014
2015
Average Current Loans and Acceptances
(US$ billions)
Personal
Commercial
35.4
30.8
26.9
25.1
24.4
23.1
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2013
2014
2015
Average Deposits
(US$ billions)
Personal
Commercial
39.5
37.7
37.4
20.4
22.1
24.6
2013
2014
2015
2015
3,609
827
880
26.5
24.8
14.6
14.9
15.6
2,259
618
2,877
95
1,901
881
222
659
42
701
10.3
8.8
(0.2)
0.1
0.7
(0.3)
(0.9)
66.1
64.2
3.46
65,319
58,520
61,962
7,661
2014
3,151
654
706
10.7
9.2
5.1
7.3
8.1
2,269
611
2,880
162
1,899
819
222
597
47
644
3.2
1.8
(1.8)
0.4
1.2
(2.2)
(3.0)
65.9
63.6
3.63
62,443
55,224
59,804
7,835
2013
3,000
590
645
6.9
3.7
(2.5)
(3.2)
(2.4)
2,268
664
2,932
230
1,892
810
231
579
54
633
5.1
1.9
(4.4)
(5.1)
(4.4)
0.7
–
64.6
61.8
3.88
58,432
51,955
59,941
7,991
(1) Before tax amounts of $55 million in 2015, $67 million in 2014 and $81 million in 2013 are included in non-interest expense.
Financial Review
Net income of $827 million increased $173 million or 26%. Adjusted net income of $880 million increased $174 million or 25%. Revenue grew
$458 million or 15% to $3,609 million. All amounts in the remainder of this section are on a U.S. dollar basis.
Net income of $659 million increased $62 million or 10% from a year ago. Adjusted net income of $701 million increased $57 million or 9%.
Revenue remained stable at $2,877 million as higher balances and increased mortgage banking revenue offset the effects of lower net interest
margin.
In our commercial banking business, revenue increased $27 million or 2% to $1,431 million, reflecting strong loan volume growth, primarily in
the C&I loan portfolio, partially offset by the impact of competitive spread compression.
In our personal banking business, revenue decreased by $30 million or 2% to $1,446 million, primarily due to declines in loan spreads and
balances and reduced fees from deposits and credit cards, partially offset by increased mortgage banking revenue and chequing balance growth.
Net interest margin decreased by 17 basis points to 3.46%, driven by competitive loan pricing, changes in mix including loans growing faster
than deposits and the low rate environment.
Provisions for credit losses of $95 million improved by $67 million or 41% from a year ago, primarily due to lower provisions in both the
consumer and commercial loan portfolios and loan sale benefits.
Non-interest expense of $1,901 million remained stable. Adjusted non-interest expense of $1,846 million increased $14 million, or less than 1%,
as we continue to focus on expense management while making selective investments in the business.
Average current loans and acceptances increased $3.3 billion or 6% to $58.5 billion. The C&I loan portfolio continues to experience strong growth,
increasing by $4.3 billion or 16% from a year ago to $30.9 billion. We have grown our commercial real estate portfolio by $0.5 billion or 15%.
These increases offset decreases in home equity and mortgage loans, due in part to the effects of our continued practice of selling most mortgage
originations in the secondary market.
Average deposits of $62.0 billion increased $2.2 billion, as growth in our commercial business and in our personal chequing accounts was
partially offset by a reduction in higher-cost personal money market and time deposit accounts.
BMO Financial Group 198th Annual Report 2015 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
Business Environment, Outlook and Challenges
U.S. P&C has a significant footprint in eight states, primarily concentrated in six contiguous states in the U.S. Midwest region (Illinois, Wisconsin,
Indiana, Minnesota, Missouri and Kansas).
Following modest growth in recent years, the U.S. Midwest economy is expected to improve to 1.8% in 2015 and 2.1% in 2016. Growth in
consumer and commercial loans strengthened this year. Consumer loan volumes are expected to trend higher in 2016 due to relatively low interest
rates, improvements in household finances, rising consumer confidence and steady demand for automobiles. Residential mortgage growth shows
improvement as housing remains relatively healthy. Commercial loan growth, including non-residential mortgages, should remain strong in response
to improvements in economic growth and business confidence across our footprint.
The U.S. Midwest banking environment continues to be highly competitive, and the low interest rate environment remains a challenge for the
banking industry. We continue to concentrate on our customer-focused growth strategy, offering multiple product packages and attracting new
customers through our differentiated channel offerings, while deepening our existing client relationships by focusing on cross-selling and delivering a
“One Bank” experience. We expect to deliver growth from executing on our strategies, while still operating within the parameters of our risk appetite
and the GE Capital Transportation Finance business acquisition. We are also positioned to benefit from rising interest rates. We will continue to
actively manage risks and regulatory compliance through a reinforced oversight and control structure.
The U.S. economic environment in 2015 and the outlook for 2016 are discussed in more detail in the Economic Developments and Outlook
section on page 30.
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Caution
This U.S. P&C Banking section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
54 BMO Financial Group 198th Annual Report 2015
BMO Wealth Management
BMO’s wealth business serves a full range of client segments, from
mainstream to ultra-high net worth and institutional, with a broad
offering of wealth management products and services including
insurance. Wealth Management is a global business with an active
presence in markets across Canada, the United States, Europe and Asia.
Gilles Ouellette
Group Head
Wealth Management
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BMO Global Asset Management is a global investment organization
that provides investment management, and trust and custody services
to institutional, retail and high net worth investors around the world.
BMO Insurance operates in Canada and internationally. In Canada,
we manufacture life insurance, accident and sickness insurance, and
annuity products that are marketed both to brokers and directly to
individuals. Our creditor insurance division markets group creditor
insurance, and internationally, we provide reinsurance solutions.
Lines of Business
Our Personal wealth businesses provide wealth management solutions to
retail clients in Canada, the United States and Asia:
BMO Nesbitt Burns, our full-service investing business in Canada, offers
comprehensive and client-focused investment and wealth advisory
services leveraging strong financial planning capabilities.
BMO InvestorLine is an online investing service that offers clients two
ways to invest: our top-ranked self-directed service, which provides
tools to help investors make independent investment decisions; or
adviceDirect™, which provides investors with online advice and
investment recommendations for their portfolios.
BMO’s Private Banking businesses operate in Canada, the United
States, Hong Kong and Singapore, offering a comprehensive range of
financial services and solutions to high net worth and ultra-high net
worth clients and, under BMO Harris Financial Advisors, to mass affluent
clients in the United States.
Strengths and Value Drivers
‰ Planning and advice-based approach that integrates investment, insurance, specialized wealth management and core banking solutions.
‰ Team of highly skilled wealth professionals who are committed to providing an exceptional client experience.
‰ Prestigious brand that is broadly recognized and trusted.
‰ Strong presence in North America, and globally in asset management and private banking in select markets, including Europe and Asia.
‰ Diversified portfolio of digital investment solution platforms, ranging from self-directed investing to professional money management.
‰ Access to BMO’s broad client base and distribution networks.
‰ Transparent and effective risk management framework.
Strategy and Key Priorities
Our aim is to be the wealth management solutions provider that defines great client experience. Our strategy is to deliver on our clients’ wealth
management needs now and in the future by enhancing the client experience, while focusing on productivity and investing for future growth.
Enhance our clients’ experience by delivering on their evolving wealth management needs
‰
2015 Achievements
Improved financial planning capabilities through the use of remote and in-field training and the addition of financial planning professionals, as well
as enhancements to financial planning software.
‰ Expanded wealth management offerings, solutions and programs for targeted growth demographics, such as millennials and women investors.
‰ Strong focus on collaboration across BMO, in order to offer our clients holistic solutions to their financial needs at every stage of their lives.
‰ BMO Global Asset Management is now positioned as a Top 50 Asset Manager Worldwide in the “personal investments” category by Pensions &
Investments, and BMO Funds was rated second among U.S. mutual fund families by the annual Barron’s/Lipper Fund Family Ranking.
‰ Received numerous awards, including Best Wealth Management in Canada, 2015 (Global Banking and Finance Review); Best Wealth Management
Bank Canada, 2015 (International Finance Magazine); BMO Harris Private Banking was named Best Private Bank in Canada, 2015 (Global Banking
and Finance Review); BMO Nesbitt Burns was named the Best Full-Service Investment Advisory in Canada, 2015 (Global Banking and Finance
Review) and recognized as having the Best Integrated Investment Advisor Digital Platform in Canada, 2015 (Global Banking and Finance Review);
and BMO InvestorLine was named Best Overall Discount Brokerage, 2015 (Money Sense).
2016 Focus
‰ Attract new clients and focus on delivering a great client experience.
Drive productivity and increase revenue per employee
2015 Achievements
Introduced automated sales processes across our business, including Insurance.
‰
BMO Financial Group 198th Annual Report 2015 55
‰ Enhanced our data analytics capabilities to increase sales force capacity and efficiency.
‰ Launched a comprehensive training program to develop best-in-class sales and relationship management capabilities.
‰ Divested our U.S. retirement services business to focus on core businesses.
‰ Accelerated credit portfolio growth with improvements in lending processes and expansion in select areas.
‰ Effectively managed within our risk appetite and responded to heightened regulatory expectations.
2016 Focus
‰ Continue to improve productivity, while managing our risks with an emphasis on increasing revenue per employee.
Invest in our people, products, technology and footprint to drive future growth
2015 Achievements
‰ Completed the integration of F&C Asset Management plc (F&C) and rebranded it as BMO Global Asset Management. This acquisition strengthens the
position of BMO Global Asset Management as a globally significant money manager, adding scale, capabilities and resources to its asset
management platform and providing attractive cross-selling opportunities.
‰ Launched tablet application with retail online banking to provide self-directed clients with a seamless “One Bank” experience, as well as launched
the BMO Market Pro platform to cater to clients who are active traders.
‰ Continued to onboard, train and expand our sales force in strategically important segments.
2016 Focus
‰ Selectively invest in our sales force and continue to enhance technology to drive revenue growth.
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Adjusted Net Income
($ millions)
854
843
955
2013
2014
2015
Assets under Management and Administration
($ billions)
357.6
379.6
414.5
398.0
465.7
Assets under
administration
Assets under
management
194.2
2013
2014
2015
2015 Net Revenue by Line of Business
(%)
28% BMO Nesbitt Burns
4% BMO InvestorLine
24% BMO’s Private Banking
Businesses
34% BMO Global Asset
Management
10% BMO Insurance
Wealth Management
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income
Non-interest revenue (1)
Total revenue (1)
Insurance claims, commissions and changes in policy benefit
liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Reported net income
Acquisition integration costs (2)
Amortization of acquisition-related intangible assets (3)
Adjusted net income
Key Performance Metrics and Drivers
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%) (1)
Revenue growth, net of CCPB
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Return on equity (%)
Adjusted return on equity (%)
Operating leverage (%) (1)
Adjusted operating leverage, net of CCPB (%)
Efficiency ratio (%) (1)
Adjusted efficiency ratio, net of CCPB (%)
Net interest margin on average earning assets (%)
Average common equity
Average earning assets
Average current loans and acceptances
Average deposits
Assets under administration
Assets under management
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue
Non-interest expense
Reported net income
Adjusted net income
Average earning assets
Average current loans and acceptances
Average deposits
2015
642
5,121
5,763
1,254
4,509
7
3,357
1,145
295
850
37
68
955
8.9
13.3
8.0
17.6
18.2
16.9
14.8
16.6
(10.2)
0.7
58.3
71.5
2.70
5,688
23,784
14,502
27,377
465,742
397,959
6,477
806
652
99
118
3,242
2,938
6,010
2014
560
4,778
5,338
1,505
3,833
(3)
2,840
996
216
780
16
47
843
(5.7)
(1.3)
26.6
11.2
20.8
19.1
18.4
19.9
5.8
(7.9)
53.2
71.9
2.65
4,181
21,169
12,897
24,912
414,547
379,606
6,649
720
658
53
73
3,028
2,629
5,834
2013
558
3,658
4,216
767
3,449
3
2,351
1,095
268
827
–
27
854
57.8
56.7
3.5
18.9
6.0
5.7
28.4
29.3
(2.5)
13.2
55.8
67.1
2.87
2,884
19,399
11,909
23,337
357,594
194,158
6,012
886
585
199
220
2,687
2,510
4,947
(1) Commencing in the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are
reported separately. They were previously reported as a reduction in insurance revenue in non-interest revenue. Prior period
amounts and ratios have been reclassified.
(2) F&C acquisition integration costs before tax amounts of $46 million in 2015 and $20 million in 2014 are included in
non-interest expense.
(3) Before tax amounts of $88 million in 2015, $62 million in 2014 and $36 million in 2013 are included in non-interest expense.
56 BMO Financial Group 198th Annual Report 2015
Financial Review
Wealth Management net income was $850 million, up $70 million or 9% from a year ago. Adjusted net income, which excludes the amortization of
acquisition-related intangible assets and acquisition integration costs, was $955 million, up $112 million or 13% from a year ago.
Adjusted net income in traditional wealth was $715 million, up $158 million or 28% from a year ago, due to good growth from the businesses, a
gain on the sale of BMO’s U.S. retirement services business, as well as the benefit from the full year contribution from the acquired F&C business.
Adjusted net income in insurance was $240 million compared to $286 million a year ago, primarily due to higher taxes in the current year and higher
actuarial benefits in the prior year.
Revenue was $5,763 million, up $425 million or 8% from a year ago. Revenue was $4,509 million on a basis that nets CCPB with insurance
revenue, up $676 million or 18% from the prior year. Revenue in traditional wealth was $4,057 million, up $687 million or 20% primarily due to
good growth in client assets, including the full year contribution from the acquired F&C business. Insurance revenue, net of CCPB, was $452 million,
compared to $463 million a year ago, due to higher actuarial benefits in the prior year. The stronger U.S. dollar increased revenue by $133 million
or 4%.
The provision for credit losses was $7 million compared to a $3 million net recovery a year ago.
Non-interest expense was $3,357 million, up $517 million or 18%. Adjusted non-interest expense was $3,223 million, up $465 million or 17%,
of which 4% is due to the stronger U.S. dollar, 9% is due to the inclusion of F&C results for two additional quarters and 4% was primarily due to
higher revenue-based costs.
Assets under management and administration grew by $70 billion or 9% from a year ago to $864 billion, driven by favourable foreign exchange
movements and market appreciation.
Net income in Wealth Management U.S. businesses was US$99 million. Adjusted net income in Wealth Management U.S. businesses was
US$118 million, up $45 million or 59% from a year ago, due to a gain on sale of BMO’s U.S. retirement services business in the current year and
higher costs related to the settlement of a legal matter in the prior year.
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Business Environment, Outlook and Challenges
Growth in the Canadian economy slowed in the first half of 2015, and it is estimated that GDP will grow 1.1% in fiscal 2015, while the United States
GDP is expected to grow approximately 2.5%. Canadian and U.S. stock markets continued to perform well in the first half of the year, but experienced
declines in the second half. We recorded growth in client assets despite the softer equity markets towards the end of the year as a result of our
strategic focus on enhancing the client experience, product innovation and sales force investments. The Bank of Canada reduced interest rates twice
and the Federal Reserve held interest rates steady in 2015, putting pressure on our brokerage net interest income for much of the year. The overall
investment climate was unfavourable during the latter part of the year, which was reflected in low levels of client trading activity.
Moderate growth of 2.0% is expected in the Canadian economy in 2016, and we anticipate that a sustained level of higher activity in equity
markets will continue to positively affect both transaction volumes and asset levels. The Bank of Canada is expected to hold interest rates steady in
2016, before shifting to a tightening stance in early 2017, while the Federal Reserve is expected to slowly increase interest rates in 2016.
Changing demographics, particularly in the retirement, mass affluent and high net worth sectors, will continue to drive the wealth management
industry over the longer term. Tailoring our offering for key client segments, enhancing our team-based client service model to provide a holistic
approach that supports clients as they move through different life stages and keeping pace with advances in technology, are ways in which we can
continue to meet our clients’ evolving needs.
We have experienced significant growth, both organically and through strategic acquisitions. Our F&C acquisition further strengthens our position
as a globally significant money manager and supports our plans to offer truly global services to our clients across our international footprint.
The Canadian and U.S. economic environment in fiscal 2015 and the outlook for fiscal 2016 are discussed in more detail in the Economic
Developments and Outlook section on page 30.
Caution
This Wealth Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Capital Markets
BMO Capital Markets is a North American-based financial services
provider offering a complete range of products and services to corporate,
institutional and government clients. BMO Capital Markets has
approximately 2,200 professionals in 29 locations around the world,
including 16 offices in North America.
Darryl White
Group Head
BMO Capital Markets
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Lines of Business
Investment and Corporate Banking offers clients debt and equity
capital-raising services, as well as loan origination and syndication,
balance sheet management solutions and treasury management
services. We provide strategic advice on mergers and acquisitions,
restructurings and recapitalizations, as well as valuation and fairness
opinions. We also offer trade finance and risk mitigation services to
support the international business activities of our clients, and we
provide a wide range of banking and other operating services tailored
to North American and international financial institutions.
Trading Products offers research and access to global markets for
institutional, corporate and retail clients through an integrated suite
of sales and trading solutions that include debt, foreign exchange,
interest rate, credit, equity, securitization and commodities. We also
offer new product development and origination services, as well as
risk management (derivatives) advice and services to hedge
against fluctuations in a variety of key inputs, including interest
rates and commodities prices. In addition, we provide funding and
liquidity management to our clients.
Strengths and Value Drivers
‰ Unified coverage approach and integrated distribution creates an exceptional client experience across our North American platform, together with a
complementary international presence in select industry sectors.
Innovative ideas and expertise delivered through our top-tier coverage team, dedicated to understanding and meeting our core clients’ needs.
‰
‰ Top-ranked economic equity and fixed income research, sales and trading capabilities with deep expertise in core sectors.
‰ Focus on first-line-of-defence risk management capabilities, enabling effective decision-making in support of our strategy and client experience.
Strategy and Key Priorities
BMO Capital Markets’ aim is to be the lead investment bank that enables our clients to achieve their ambitions. We offer an integrated platform that
is differentiated by leading ideas and unified coverage.
Continue to earn leading market share in Canada without taking outsized risk
2015 Achievements
‰ Named 2015 Greenwich Quality Leader for Canadian Equity Sales and Corporate Access, Canadian Mergers and Acquisitions, and Large Corporate
Cash Management and Large Corporate Trade Finance by Greenwich Associates.
‰ Ranked #1 (tied) as a 2015 Greenwich Share Leader for Overall Canadian Fixed Income Market Share by Greenwich Associates.
‰ Ranked #2 as a 2015 Greenwich Share Leader for Canadian Equity Trading and #2 (tied) for Canadian Foreign Exchange Market Share by Greenwich
Associates.
‰ Ranked #3 as a 2015 Greenwich Share Leader for Canadian Equity Research/Advisory Vote Share by Greenwich Associates.
2016 Focus
‰ Continue to earn leading market share in Canada by delivering leading ideas through our top-tier coverage team.
Continue to serve global clients with North American interests and leverage our global leadership in select strategic sectors
2015 Achievements
‰ Completed a reorganization of Trading Products by asset class to further enhance customer experience and North American franchise value.
‰ Named World’s Best Metals & Mining Investment Bank for the sixth consecutive year by Global Finance magazine.
‰ Named Best Supply Chain Finance Bank in North America for the second consecutive year by Trade Finance magazine.
‰ Named Best Bank in Canadian Dollar Foreign Exchange for the fifth consecutive year by FX Week magazine.
‰ Named 2015 Greenwich Quality Leader for Canadian Fixed Income Research by Greenwich Associates.
‰ Acted as joint lead on an issue for KfW Development Bank, attracting strong interest from Asia and Europe that resulted in the largest outstanding
sovereigns, supranationals and agencies (SSA) issue in the Canadian market.
‰ BMO served as a co-chair of the TFSA RMB Working Group, which played a crucial role in establishing an offshore renminbi clearing hub in Canada.
The Canadian hub facilitates settlements in renminbi, with the intention of encouraging trade and strengthening ties between Canadian companies
and their Chinese business partners. BMO Capital Markets initiated the first renminbi trade to celebrate the hub’s official launch.
58 BMO Financial Group 198th Annual Report 2015
2016 Focus
‰ Leverage our strong North American capabilities and presence in select international markets.
Continue to drive performance in our U.S. client franchise with a greater weighting in corporate banking to further support our clients and
the stability of future earnings
2015 Achievements
‰ Continued to leverage our full-service capabilities to gain a competitive advantage against our U.S. mid-market and boutique competitors.
‰ Closed the sale of GKST, our municipal bond trading business, which will allow us to focus resources on our core U.S. fixed income business.
‰ The number of M&A transactions closed this year was up 23%, totalling $13.9 billion.
‰ Named 2014 Mid-Market Equity House of the Year by International Financing Review.
‰ Ranked among Top 20 global investment banks and 12th-largest investment bank in North and South America, based on fees, by Thomson Reuters.
‰ Average lending assets increased 20% in the United States from the prior year.
2016 Focus
‰ Continue to drive performance in our U.S. platform with a focused strategy and selectively grow our corporate bank where we are competitively
advantaged.
Continue to enhance our risk management, regulatory and compliance practices
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‰
2015 Achievements
Investments in our compliance, risk and regulatory infrastructure and processes have improved our capabilities in each of these areas and
positioned us well for future regulatory changes.
‰ Compliant with all key regulations, including full implementation of systems for Volcker Rule compliance.
2016 Focus
‰ Continue to enhance our first-line-of-defence risk management, regulatory and compliance practices.
BMO Financial Group 198th Annual Report 2015 59
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MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Capital Markets
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue
Total revenue (teb)
Provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets (1)
Adjusted net income
Key Performance Metrics and Drivers
Trading Products revenue
Investment and Corporate Banking revenue
Net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Return on equity (%)
Operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Net interest margin on average earning assets (teb) (%)
Average common equity
Average earning assets
Average assets
Average current loans and acceptances
Average deposits
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb)
Non-interest expense
Reported net income
Average earning assets
Average assets
Average current loans and acceptances
Average deposits
Reported Net Income
($ millions)
1,040
1,077
1,032
Revenue
($ millions)
2013
2014
2015
3,720
3,873
3,383
2013
2014
2015
Revenue by Geography
(%)
Canada and
other countries
United States
69%
66%
64%
31%
2013
34%
36%
2014
2015
2015
1,334
2,539
3,873
26
2,486
1,361
329
1,032
2
1,034
2,412
1,461
(4.2)
4.1
5.7
14.9
(1.6)
64.2
0.56
6,538
238,916
290,325
37,416
141,275
2,223
1,099
890
142
76,630
84,872
10,969
55,942
2014
1,177
2,543
3,720
(18)
2,351
1,387
310
1,077
1
1,078
2,257
1,463
3.6
9.9
12.9
19.1
(3.0)
63.2
0.53
5,422
222,471
259,746
30,101
133,405
2,270
1,154
887
216
79,958
88,902
9,536
57,754
2013
1,197
2,186
3,383
(36)
2,082
1,337
297
1,040
2
1,042
2,126
1,257
5.4
4.2
5.0
17.9
(0.8)
61.5
0.59
5,582
202,062
246,702
24,807
121,193
2,163
1,040
823
203
76,984
92,690
8,502
60,116
(1) Before tax amounts of $2 million in 2015, $3 million in 2014 and $2 million in 2013 are included in non-interest expense.
Financial Review
BMO Capital Markets net income decreased $45 million or 4% to $1,032 million as the benefit of the stronger U.S. dollar was more than offset by
higher provisions in the current year compared to net recoveries in the prior year. Return on equity of 14.9% declined by 4.2% from the prior year,
largely due to higher allocated capital.
Revenue increased $153 million or 4% to $3,873 million. Excluding the impact of the stronger U.S. dollar, revenue was stable year over year as
higher trading revenues, including the prior year unfavourable impact of implementing a funding valuation adjustment, and higher lending revenues
were offset by lower investment banking fees and reduced securities gains.
Trading Products revenue increased $155 million or 7%. Excluding the impact of the stronger U.S. dollar, revenue increased $69 million or 3%,
reflecting higher trading revenues related to stronger client trading activity.
Investment and Corporate Banking revenue was consistent with the prior year. Excluding the impact of the stronger U.S. dollar, revenue
decreased $65 million or 4%, as growth in lending revenue was more than offset by lower investment banking client activity and reduced
securities gains.
Provision for credit losses was $44 million higher due to higher provisions compared with net recoveries in the prior year.
Non-interest expense increased $135 million or 6% to $2,486 million. Excluding the impact of the stronger U.S. dollar, non-interest expense
decreased $7 million primarily due to lower employee-related expenses, partially offset by higher support costs related to a changing business and
regulatory environment.
Average assets of $290.3 billion increased $30.6 billion from the prior year. Excluding the impact of the stronger U.S. dollar, average assets
increased $16.9 billion. Higher levels of net loans and acceptances due to increases in corporate banking activity and higher repo and derivative
financial assets were partially offset by decreases in securities and cash balances.
BMO Capital Markets participated in 1,355 new global issues in 2015, comprised of 571 corporate debt deals, 558 government debt deals and
226 equity transactions, raising $3,650 billion.
60 BMO Financial Group 198th Annual Report 2015
Business Environment, Outlook and Challenges
BMO Capital Markets’ performance in fiscal 2015 reflected our balanced, diversified and client-focused business model, as well as our disciplined
approach to risk management in an environment influenced by market factors that contribute to variability in results.
In fiscal 2015, we experienced challenging markets, including a financial crisis in Greece, Bank of Canada rate cuts, volatility in commodities and
energy prices at new lows. While market volatility persists, and equity markets remain challenging, our Capital Markets strategy remains constant.
We continue to concentrate on our growth strategy, while leveraging our diversified business model and focusing on the United States as our largest
market opportunity and growth engine.
Looking ahead to fiscal 2016, we expect economic growth in the United States to be sustained and healthy, with some improvement anticipated
in Canada. Low inflation rates and the decline in unemployment are expected to continue in the United States, with a modest rise anticipated in
interest rates. Unemployment rates should hold steady in Canada, as low interest rates, a weak currency and a partial recovery in oil prices provide
an offset to a still-challenging global economic backdrop.
The Canadian and U.S. economic environment in fiscal 2015 and the outlook for fiscal 2016 are discussed in more detail in the Economic
Developments and Outlook section on page 30.
Caution
This BMO Capital Markets section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
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BMO Financial Group 198th Annual Report 2015 61
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporate Services, including Technology and Operations
Corporate Services consists of Corporate Units and Technology and Operations (T&O). Corporate Units provide enterprise-wide expertise and
governance support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, marketing,
communications and human resources. T&O manages, maintains and provides governance over information technology, operations services, real
estate and sourcing for BMO Financial Group.
The costs of these Corporate Units and T&O services are largely transferred to the three client operating groups (P&C, Wealth Management and
BMO Capital Markets), and only relatively minor amounts are retained in Corporate Services results. As such, Corporate Services adjusted operating
results largely reflect the impact of certain asset-liability management activities, the elimination of taxable equivalent adjustments, the results from
certain impaired real estate secured assets and purchased loan accounting impacts. Corporate Services reported results in 2013 and prior years
reflected a number of items and activities that were excluded from BMO’s adjusted results to help assess BMO’s performance. These adjusting items
were not reflective of core operating results. They are itemized in the Non-GAAP Measures section on page 33.
Corporate Services focuses on enterprise-wide priorities that improve service quality and efficiency to deliver an excellent customer experience.
Notable achievements during the year included:
‰ Simplifying and automating our processes for greater efficiency: digitized cheque image capture and digital statements; improved commercial and
retail lending systems for quicker customer response and more efficient workflow.
‰ Leveraging data to better serve our customers: building enterprise-level data solutions which both meet regulatory expectations and help us
intuitively anticipate customer needs.
‰ Extending the digital experience across all channels: improvements to our mobile and online platforms for security and convenience; improvements
to our ABM network in the United States to allow customers to withdraw cash using their mobile device.
‰ Realizing real estate synergies and improving our technology capabilities in channels, products, functions and infrastructure.
‰ Meeting regulatory expectations: continued delivery of programs that meet evolving expectations of our regulators, for example, in credit risk
management and risk reporting, stress testing and anti-money laundering.
Financial Review
Corporate Services reported net loss for the year was $408 million, compared with a reported net loss of $194 million a year ago. Reported results
in 2015 included certain acquisition integration costs and a $106 million charge, primarily due to restructuring to drive operational efficiencies.
The adjusted net loss for the year was $296 million, compared with an adjusted net loss of $194 million a year ago. Excluding the impact of the
group teb adjustment on revenue and taxes, results were lower mainly due to lower purchased loan portfolio revenues and lower credit recoveries.
Adjusted non-interest expense was down modestly.
Corporate Services, including Technology and Operations
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income before group teb offset
Group teb offset
Net interest income (teb)
Non-interest revenue
Total revenue (teb)
Recovery of credit losses
Non-interest expense (1)
Loss before income taxes
Recovery of income taxes (teb)
Reported net loss
Adjusted total revenue (teb)
Adjusted recovery of credit losses
Adjusted non-interest expense
Adjusted net loss
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb)
Recovery of credit losses
Non-interest expense
Provision for (recovery of) income taxes (teb)
Reported net income (loss)
Adjusted total revenue (teb)
Adjusted recovery of credit losses
Adjusted non-interest expense
Adjusted net loss
(1) Includes restructuring costs in 2015 and 2013 to align our cost structure with the environment.
62 BMO Financial Group 198th Annual Report 2015
2015
(253)
(524)
(777)
281
(496)
(36)
613
(1,073)
(665)
(408)
(494)
(36)
459
(296)
14,277
(87)
(79)
272
(133)
(147)
(87)
(30)
228
(148)
2014
(62)
(476)
(538)
147
(391)
(123)
471
(739)
(545)
(194)
(391)
(123)
471
(194)
14,229
(31)
(120)
298
(103)
(106)
(31)
(117)
298
(105)
2013
409
(344)
65
146
211
(175)
802
(416)
(342)
(74)
(480)
(405)
456
(135)
13,586
459
(256)
564
38
113
(169)
(398)
307
(28)
Corporate Services Provision for Credit Losses
(Canadian $ in millions)
As at or for the year ended October 31
Impaired real estate loans
Interest on impaired loans
Purchased credit impaired loans
Purchased performing loans (1)
Recovery of credit losses, adjusted basis
Purchased performing loans (1)
Decrease in collective allowance
Recovery of credit losses, reported basis
Average loans and acceptances
Year-end loans and acceptances
2015
28
17
(86)
5
(36)
–
–
(36)
242
182
2014
21
26
(252)
82
(123)
–
–
(123)
452
306
2013
(43)
48
(410)
–
(405)
240
(10)
(175)
972
526
(1) Effective the first quarter of 2014, Corporate Services adjusted results include credit-related items in respect of the purchased performing loan portfolio. Further details are provided in the Non-GAAP
Measures section on page 33.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
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Review of Fourth Quarter 2015 Performance
Reported net income was $1,214 million for the fourth quarter of 2015, up $144 million or 13% from the prior year. Adjusted net income was
$1,264 million, up $153 million or 14% from the prior year, with good income growth across all of our operating groups. Adjusted results for the
quarter exclude the amortization of acquisition-related intangible assets of $43 million ($33 million after-tax) which were charged to the non-interest
expense of the operating groups and acquisition integration costs of $20 million ($17 million after-tax) which were primarily recorded in non-interest
expense. Acquisition integration costs related to F&C were charged to Wealth Management and acquisition integration costs related to GE Capital’s
Transportation Finance business were charged to Corporate Services.
Reported EPS of $1.83 and adjusted EPS of $1.90 were both up 17% from the prior year. Return on equity was 12.9% and adjusted return on
equity was 13.5%.
Amounts in the rest of this Review of Fourth Quarter 2015 Performance section are stated on an adjusted basis. Summary income statements
and data for the quarter and comparative quarters are outlined on page 67.
The combined P&C banking business adjusted net income of $782 million was up 11%. Canadian P&C results increased 7%, driven by higher
revenue and strong credit performance, partially offset by higher expenses. U.S. P&C adjusted net income increased 22% on a Canadian dollar basis
and increased 3% on a U.S. dollar basis, driven by lower provisions for credit losses. Wealth Management adjusted net income was $271 million, up
8% from a year ago. Adjusted net income in traditional wealth was $214 million, driven by a gain on sale and underlying business growth, despite
softer equity markets, partially offset by a legal reserve. Adjusted net income in traditional wealth was up $79 million or 60%. Adjusted net income in
insurance was $57 million, compared to $117 million a year ago, primarily due to high actuarial benefits in the prior year. BMO Capital Markets results
increased 27% due to higher revenue. Corporate Services adjusted results were better as lower revenue was more than offset by lower expenses,
and credit loss recoveries.
Total revenue of $4,984 million increased $344 million or 7% from the fourth quarter a year ago. On a net revenue basis, revenue increased
$377 million or 9%, including the 6% impact of the stronger U.S. dollar. Canadian P&C revenue increased due to higher balances across most products
and increased non-interest revenue. U.S. P&C revenue increased 19% on a Canadian dollar basis and was consistent with the prior year on a
U.S. dollar basis as higher loan and deposit volume and mortgage banking revenue were offset by lower net interest margin. Wealth Management
results increased on a net revenue basis, with traditional wealth revenue benefitting from a gain on sale and higher fee-based revenue, partially
offset by lower brokerage commissions. Net insurance revenue decreased mainly due to high actuarial benefits in the prior year. BMO Capital Markets
revenue was up due to higher trading revenue, including the unfavourable impact of implementing a funding valuation adjustment in the prior year
and higher securities commissions and fees. Investment and Corporate Banking revenue increased due to higher lending revenue. Both Trading
Products and Investment and Corporate Banking revenue were impacted by lower securities gains. Corporate Services revenue was lower due to a
higher group teb adjustment and lower treasury-related revenue.
Net interest income of $2,367 million increased $189 million or 9% from a year ago, due to the impact of the stronger U.S. dollar and volume
growth, partially offset by lower net interest margin. BMO’s overall net interest margin decreased by 3 basis points to 1.57%. Average earning assets
increased $58 billion or 11% to $597 billion, including a $42 billion increase as a result of the stronger U.S. dollar.
Non-interest revenue increased $188 million or 9% on a net revenue basis to $2,350 million. Excluding the impact of the stronger U.S. dollar, net
non-interest revenue increased 3%. Increases in other non-interest revenue and mutual fund revenues were partially offset by lower net insurance
revenue, underwriting and advisory fees, and securities gains.
The total provision for credit losses was $128 million, a decrease of $42 million from the prior year, due to net recoveries in Corporate Services
and lower provisions in Canadian P&C. There was no net change to the collective allowance in the quarter.
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $265 million, down $35 million from the fourth quarter a year
ago, when lower long-term interest rates increased our policy benefit liabilities, partially offset by increased underlying business premiums in the
current quarter. The decrease was largely offset in revenue.
Adjusted non-interest expense increased $198 million or 7% to $3,032 million. Excluding the impact of the stronger U.S. dollar, adjusted non-
interest expense was well controlled, up by $9 million or less than 1%. On a net revenue basis, adjusted operating leverage was positive 1.8% year
over year. On a net revenue basis and excluding the impact of the stronger U.S. dollar, adjusted operating leverage was positive 2.6% year over year.
The adjusted efficiency ratio was 60.8%, and was 64.2% on a net revenue basis, improving 110 basis points from the prior year.
The adjusted provision for income taxes of $295 million increased $70 million from a year ago. The adjusted effective tax rate was 18.9% in the
current quarter, compared with 16.8% a year ago. The higher adjusted tax rate was primarily due to a higher proportion of income from higher tax-
rate jurisdictions. On a teb basis, the adjusted effective tax rate for the quarter was 24.7%, compared with 22.6% a year ago.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
2014 Financial Performance Review
The preceding discussions in the MD&A focused on our performance in fiscal 2015. This section summarizes our performance in fiscal 2014 relative to
fiscal 2013. As noted on page 26, certain prior year data has been reclassified to conform to the presentation in 2015, including restatements arising
from transfers between operating groups. In addition, commencing in the first quarter of 2015, insurance claims, commissions and changes in policy
benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance revenue in non-interest revenue. Further
information on restatements is provided on page 46.
Net Income
Net income increased $138 million or 3% to $4,333 million in 2014 and EPS increased $0.24 or 4% to $6.41. Adjusted net income increased
$230 million or 5% to $4,453 million and adjusted EPS increased $0.38 or 6% to $6.59, reflecting strong adjusted net income growth of 11% in
Canadian P&C, 4% growth in BMO Capital Markets and 2% growth in U.S. P&C on a U.S. dollar basis. There was a modest decline in Wealth
Management, due to a $121 million after-tax security gain in the prior year, and lower results in Corporate Services.
Adjusting items are detailed in the Non-GAAP Measures section on page 33.
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Return on Equity
Return on equity and adjusted return on equity were 14.0% and 14.4%, respectively, in 2014, compared with 14.9% and 15.0%, respectively, in
2013. There was an increase of $147 million in earnings ($239 million in adjusted earnings) available to common shareholders. In 2014, we held
higher levels of average common shareholders’ equity as a result of increased capital expectations for banks internationally. Average common
shareholders’ equity increased $2.7 billion from 2013.
Revenue
Revenue increased $1,393 million or 8% to $18,223 million in 2014. Adjusted revenue increased $2,084 million or 13% to $18,223 million. Excluding
the impact of the stronger U.S. dollar, adjusted revenue increased $1,761 million or 11%, due to growth in Wealth Management, Canadian P&C and
BMO Capital Markets.
Provisions for Credit Losses
The provision for credit losses was $561 million in 2014, down from $587 million in 2013 and up from $357 million in 2013 on an adjusted basis.
There were no adjusting items in 2014. The increase in adjusted PCL was due to a significant reduction in recoveries on the purchased credit impaired
portfolio and the inclusion of provisions on the purchased performing loan portfolio in adjusted PCL in 2014, offset in part by reduced provisions in
Canadian P&C and U.S. P&C.
Non-Interest Expense
Non-interest expense increased $695 million or 7% to $10,921 million in 2014. Adjusted non-interest expense increased $1,006 million or 10% to
$10,761 million. Excluding the impact of the stronger U.S. dollar, adjusted non-interest expense increased 8%, primarily due to continued investment
in the business, higher employee-related costs, including severance, increased regulatory costs and the acquired F&C business.
Provision for Income Taxes
The provision for income taxes was $903 million in 2014, compared with $1,055 million in 2013. The reported effective tax rate in 2014 was
17.2%, compared with 20.1% in 2013. The adjusted provision for income taxes was $943 million in 2014, compared with $1,037 million in 2013.
The adjusted effective tax rate in 2014 was 17.5%, compared with 19.7% in 2013. The lower adjusted effective tax rate was mainly attributable
to higher tax-exempt income and a lower proportion of income from higher tax-rate jurisdictions.
Canadian P&C
Canadian P&C reported net income of $2,016 million in 2014, up $204 million or 11% from 2013. Revenue increased $385 million or 6% to
$6,405 million. Revenue growth was at or above 6% in each quarter of 2014. Revenue increased $244 million or 6% in our personal banking business
and revenue increased $141 million or 7% in our commercial banking business, mainly driven by growth in balances and fees across most products.
Non-interest expense was $3,182 million, up $127 million or 4% from the prior year, primarily due to continued investment in the business, net of
expense management.
U.S. P&C
Net income in U.S. P&C of $654 million in 2014 increased $64 million or 11% from 2013, while adjusted net income of $706 million increased
$61 million or 9%. All amounts in the remainder of this section are on a U.S. dollar basis.
Net income of $597 million in 2014 increased $18 million or 3% from the prior year. Adjusted net income of $644 million increased $11 million
or 2%. Revenue decreased $52 million or 2% to $2,880 million, as the benefits of strong commercial loan growth were more than offset by the
effects of lower net interest margin and reduced mortgage banking revenue. Non-interest expense of $1,899 million increased $7 million. Adjusted
non-interest expense of $1,832 million increased $21 million, as we continued to focus on productivity while making selective investments in the
business and responding to regulatory changes.
Wealth Management
Wealth Management net income was $780 million in 2014, compared to $827 million in 2013. Adjusted net income was $843 million in 2014,
compared to $854 million in 2013. Results in 2014 reflected the contribution from the acquired F&C business and results in 2013 included a
$121 million after-tax security gain. Adjusted net income in traditional wealth was $557 million in 2014, compared to $593 million in 2013, as strong
growth from the businesses of $85 million or 18%, including the contribution from the acquired F&C business, was more than offset by the impact of
the security gain in the prior year. Adjusted net income in insurance was $286 million, up $25 million or 9%. Wealth Management revenue of
$3,833 million in 2014 increased $384 million or 11% on a basis that nets CCPB with insurance revenue. Revenue in traditional wealth increased
$525 million or 19%, excluding the security gain in the prior year, reflecting growth in client assets and a contribution from the F&C acquisition.
64 BMO Financial Group 198th Annual Report 2015
Insurance revenue, net of CCPB, increased $50 million or 12%, due to continued growth in both the underlying creditor and life insurance businesses
of 10% and the impact of beneficial changes in actuarial reserves. The stronger U.S. dollar increased revenue, net of CCPB, by $50 million or 1%.
Insurance claims, commissions and changes in policy benefit liabilities were $1,505 million, up $738 million from the prior year. Non-interest expense
was $2,840 million in 2014, up $489 million or 21%. Adjusted non-interest expense was $2,758 million, up $443 million or 19%. The increase was
due primarily to the impact of the F&C acquisition and higher revenue-based costs. The stronger U.S. dollar increased expenses by $44 million or 2%.
BMO Capital Markets
BMO Capital Markets net income increased $37 million or 4% to $1,077 million in 2014. The increase reflected growth in revenue across both
Investment and Corporate Banking and Trading Products, with good contributions from our U.S. businesses, partially offset by an increase in expenses.
Revenue increased $337 million or 10% to $3,720 million, driven by higher securities gains and increases in trading revenues, lending revenues and
investment banking fees, particularly in our U.S. platform. Investment and Corporate Banking revenue increased $206 million, reflecting higher
securities gains and higher activity levels, particularly in equity underwriting, as well as growth in lending revenue. Trading Products revenue
increased $129 million, reflecting growth in trading revenues, particularly from equity trading and foreign exchange trading related to more
favourable market conditions, as well as higher securities commissions and fees. The stronger U.S. dollar increased revenue by $82 million.
Non-interest expense increased $269 million or 13% to $2,351 million, resulting from higher employee-related expenses and increased support
costs, both driven by a changing business and regulatory environment, as well as by stronger performance. The stronger U.S. dollar increased
expenses by $62 million.
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Corporate Services
Corporate Services reported and adjusted net loss was $194 million in 2014, compared with a reported net loss of $74 million and an adjusted net
loss of $135 million in 2013. Commencing in 2014, the impact from the purchased performing loan portfolio was included in adjusted results.
Adjusted revenue improved $89 million in 2014, mainly due to the inclusion of purchased performing loan revenue of $238 million, partially offset by
a higher group teb offset of $132 million. Adjusted recoveries of credit losses of $123 million in 2014 were $282 million lower than the prior year,
primarily due to $158 million lower loan recoveries. Adjusted non-interest expense of $471 million in 2014 was up $15 million from the prior year,
mainly due to higher technology investments and regulatory-related costs.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary Quarterly Earnings Trends
BMO’s results and performance measures for the past eight quarters are outlined on page 67.
Periodically, certain business lines and units within the business lines are transferred between client operating groups to more closely align
BMO’s organizational structure and its strategic priorities. Comparative figures have been restated to conform to the current presentation.
Over the past two years, we have remained focused on executing our strategic priorities. Economic conditions have weakened in Canada due
to the downturn in oil and other resource prices, but have remained healthy in the United States.
Seasonality
BMO’s quarterly earnings, revenue and expense are modestly affected by seasonal factors. Since our second fiscal quarter has 89 days (90 in a leap
year) and other quarters have 92 days, second-quarter results are lower relative to other quarters because there are fewer calendar days, and thus
fewer business days. The months of July (third quarter) and August (fourth quarter) are typically characterized by lower levels of capital markets
activity, which has an effect on results in Wealth Management and BMO Capital Markets. The December holiday season also contributes to a
slowdown in some activities.
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Canadian P&C
Canadian P&C delivered strong net income performance throughout 2014, moderating in the first half of 2015, with improved performance in the
last two quarters. Improved net income in the second half of 2015 has been a result of strong credit performance, moderating expense growth, and
stable revenue growth. Revenue growth has been driven by higher balances and non-interest revenue, with relatively stable net interest margins
each quarter. Expenses have grown as a result of continued investment in the business net of a continued focus on expense management. Provisions
for credit losses have remained relatively low, with particularly strong credit performance over the past two quarters.
U.S. P&C
Results have been improving since the second quarter of 2014 due to lower provisions for credit losses and disciplined expense management in a
challenging revenue environment. Results in the fourth quarter of 2015 reflected a slight decline in net income growth due to lower fee income and
investments in the business.
Wealth Management
Wealth Management’s overall results have reflected good momentum since the second half of 2013, driven by double-digit organic revenue growth
in traditional wealth for nine of the past ten quarters. Traditional wealth operating results have benefitted from the acquired F&C business since the
second half of fiscal 2014. Quarterly results in the insurance businesses have been subject to variability, resulting primarily from changes in long-term
interest rates and methodology and actuarial assumptions changes.
BMO Capital Markets
BMO Capital Markets delivered good performance in the first three quarters of 2014, leveraging our consistent and diversified strategy, and benefiting
from favourable market conditions. In the fourth quarter of 2014 and the first quarter of 2015, we experienced slower activity and were unfavourably
affected by credit and funding valuation adjustments. The remainder of the year reflects improved performance in both our Trading Products and
Investment and Corporate Banking businesses, with reduced activity in certain markets in the fourth quarter of 2015.
Provisions for Credit Losses
BMO’s PCL measured as a percentage of loans and acceptances has generally been declining since 2012 and has stabilized in recent quarters.
Corporate Services
Adjusted quarterly net income can vary from quarter to quarter but has been relatively stable in 2014 and 2015, despite reduced benefits from the
purchased loan portfolio.
Foreign Exchange
The U.S. dollar strengthened significantly in 2014 and 2015, with the exception of a slight weakening in the third quarter of 2014 and in the second
quarter of 2015. A stronger U.S. dollar increases the translated value of U.S.-dollar-denominated revenues, expenses, provisions for (recoveries of)
credit losses, income taxes and net income.
Provision for Income Taxes
The effective income tax rate can vary, as it depends on the timing of resolution of certain tax matters, recoveries of prior periods’ income taxes and
the relative proportion of earnings attributable to the different jurisdictions in which we operate.
Caution
This Summary Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
66 BMO Financial Group 198th Annual Report 2015
Summarized Statement of Income and Quarterly Financial Measures
(Canadian $ in millions, except as noted)
Q4-2015
Q3-2015
Q2-2015
Q1-2015
Q4-2014
Q3-2014
Q2-2014
Q1-2014
Net interest income
Non-interest revenue (1)
Total revenue (1)
Insurance claims, commissions and changes in policy benefit
liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for credit losses – specific (see below)
Provision for (recovery of) credit losses – collective
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Reported net income (see below)
Adjusted net income (see below)
Provision for credit losses – specific
Canadian P&C
U.S. P&C
Personal and Commercial Banking
Wealth Management
BMO Capital Markets
Corporate Services
BMO Financial Group provision for credit losses – specific
Operating group reported net income
Canadian P&C
U.S. P&C
Personal and Commercial Banking
Wealth Management
BMO Capital Markets
Corporate Services
BMO Financial Group net income
Operating group adjusted net income
Canadian P&C
U.S. P&C
Personal and Commercial Banking
Wealth Management
BMO Capital Markets
Corporate Services
2,367
2,615
4,982
265
4,717
128
–
3,093
1,496
282
1,214
1,264
112
42
154
1
(2)
(25)
128
560
207
767
243
242
(38)
2,272
2,554
4,826
218
4,608
160
–
2,971
1,477
285
1,192
1,230
109
19
128
3
14
15
160
556
222
778
210
273
(69)
1,214
1,192
561
221
782
271
243
(32)
557
235
792
233
274
(69)
2,112
2,414
4,526
24
4,502
161
–
3,112
1,229
230
999
1,146
143
18
161
1
5
(6)
161
486
206
692
238
296
(227)
999
487
219
706
265
296
(121)
2,219
2,836
5,055
747
4,308
163
–
3,006
1,139
139
1,000
1,041
132
40
172
2
9
(20)
163
502
192
694
159
221
(74)
2,178
2,462
4,640
300
4,340
170
–
2,887
1,283
213
1,070
1,111
129
47
176
(1)
(7)
2
170
526
169
695
225
191
(41)
2,107
2,628
4,735
520
4,215
130
–
2,756
1,329
203
1,126
1,162
129
57
186
(3)
(6)
(47)
130
525
161
686
189
305
(54)
2,063
2,306
4,369
328
4,041
162
–
2,594
1,285
209
1,076
1,097
131
52
183
2
(4)
(19)
162
480
157
637
192
305
(58)
2,113
2,366
4,479
357
4,122
99
–
2,684
1,339
278
1,061
1,083
139
21
160
(1)
(1)
(59)
99
485
167
652
174
276
(41)
1,000
1,070
1,126
1,076
1,061
503
205
708
186
221
(74)
527
182
709
252
191
(41)
526
174
700
211
305
(54)
481
170
651
198
306
(58)
486
180
666
182
276
(41)
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BMO Financial Group adjusted net income
1,264
1,230
1,146
1,041
1,111
1,162
1,097
1,083
Information per Common Share ($)
Dividends declared
Basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
Book value
Market price
High
Low
Close
Financial Measures (%)
Dividend yield
Return on equity
Adjusted return on equity
Net interest margin on average earning assets
Adjusted net interest margin on average earning assets
Efficiency ratio (1)
Adjusted efficiency ratio (1)
Adjusted efficiency ratio, net of CCPB
Operating leverage (1)
Adjusted operating leverage, net of CCPB
PCL as a % of average net loans and acceptances
Effective tax rate
Adjusted effective tax rate
Canadian/U.S. dollar as at exchange rate ($)
Canadian/U.S. dollar average exchange rate ($)
Cash and securities-to-total assets
Capital Ratios (%)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
0.82
1.83
1.83
1.90
56.31
78.50
64.01
76.04
4.3
12.9
13.5
1.57
1.57
62.1
60.8
64.2
0.3
1.8
0.15
18.8
18.9
1.3075
1.3191
27.8
10.7
12.3
14.4
0.82
1.81
1.80
1.86
55.36
79.43
71.27
72.98
4.5
13.6
14.0
1.55
1.55
61.6
60.5
63.4
(5.9)
1.4
0.20
19.3
19.4
1.3080
1.2671
29.3
10.4
11.7
13.7
0.80
1.49
1.49
1.71
51.65
80.76
73.12
78.82
4.1
11.4
13.2
1.51
1.51
68.7
64.3
64.7
(16.3)
(2.0)
0.20
18.8
19.8
1.2064
1.2412
30.0
10.2
11.4
13.5
0.80
1.47
1.46
1.53
52.98
84.39
72.87
72.93
4.4
11.8
12.3
1.55
1.55
59.5
58.4
68.5
0.9
(6.8)
0.21
12.2
12.6
1.2711
1.1923
30.1
10.1
11.4
13.4
0.78
1.57
1.56
1.63
48.18
85.71
76.41
81.73
3.8
13.1
13.7
1.60
1.60
62.2
61.1
65.3
(4.5)
(5.9)
0.23
16.6
16.8
1.1271
1.1114
30.2
10.1
12.0
14.3
0.78
1.68
1.67
1.73
46.69
82.79
74.28
81.27
3.8
14.4
14.9
1.58
1.58
58.2
57.2
64.2
6.8
(1.1)
0.18
15.3
15.6
1.0904
1.0807
33.0
9.6
11.4
13.3
0.76
1.61
1.60
1.63
45.94
76.68
67.04
75.55
4.0
14.3
14.6
1.59
1.59
59.4
58.8
63.5
1.3
1.2
0.22
16.2
16.5
1.0960
1.1029
32.1
9.7
11.1
13.0
0.76
1.58
1.58
1.61
45.60
74.69
68.01
68.06
4.5
14.2
14.5
1.62
1.62
59.9
59.2
64.3
2.6
(0.3)
0.14
20.8
20.9
1.1138
1.0800
32.3
9.3
10.6
12.4
(1) Commencing in the first quarter of 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in
insurance revenue in non-interest revenue. Prior period amounts and ratios have been reclassified.
In the opinion of Bank of Montreal management, information that is derived from unaudited financial information, including information as at and for the interim periods, includes all
adjustments necessary for a fair presentation of such information. All such adjustments are of a normal and recurring nature. Financial ratios for interim periods are stated on an annualized
basis, where appropriate, and the ratios, as well as interim operating results, are not necessarily indicative of actual results for the full fiscal year.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
BMO Financial Group 198th Annual Report 2015 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Condition Review
Summary Balance Sheet
(Canadian $ in millions)
As at October 31
Assets
Cash and interest bearing deposits with banks
Securities
Securities borrowed or purchased under resale agreements
Net loans and acceptances
Other assets
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Total assets
Liabilities and Shareholders’ Equity
Deposits
Other liabilities
Subordinated debt
Capital trust securities
Shareholders’ equity
Non-controlling interest in subsidiaries
Total liabilities and shareholders’ equity
2015
2014
2013
2012
2011
47,677
130,918
68,066
334,024
61,196
34,496
143,319
53,555
303,038
54,251
32,607
135,800
39,799
279,294
49,544
26,256
129,441
47,011
253,846
68,130
25,656
122,115
37,970
238,885
75,949
641,881
588,659
537,044
524,684
500,575
438,169
159,383
4,416
–
39,422
491
393,088
155,254
4,913
–
34,313
1,091
368,369
133,500
3,996
–
30,107
1,072
325,235
165,813
4,093
–
28,108
1,435
302,373
164,197
5,348
821
26,353
1,483
641,881
588,659
537,044
524,684
500,575
Overview
Total assets increased $53.2 billion from the prior year to $641.9 billion, including a $35.8 billion increase due to the stronger U.S. dollar, excluding
the impact on derivative financial assets. Total liabilities increased $48.7 billion from October 31, 2014, including a $35.7 billion increase due to the
stronger U.S. dollar, excluding the impact on derivative financial liabilities. Derivative financial assets increased $5.6 billion and derivative financial
liabilities increased $9.0 billion, primarily due to the increase in the fair value of interest rate and foreign exchange contracts resulting from the
decline in interest rates and the strengthening U.S. dollar, respectively. Total equity increased $4.5 billion from October 31, 2014.
Cash and Interest Bearing Deposits with Banks
Cash and interest bearing deposits with banks increased $13.2 billion, primarily reflecting a $6.3 billion increase due to the stronger U.S. dollar and
balances held with central banks.
Securities
(Canadian $ in millions)
As at October 31
Trading
Available-for-sale
Held-to-maturity
Other
Total securities
2015
2014
2013
2012
2011
72,460
48,006
9,432
1,020
85,022
46,966
10,344
987
75,159
53,710
6,032
899
70,109
57,340
875
1,117
69,925
51,426
–
764
130,918
143,319
135,800
129,441
122,115
Securities decreased $12.4 billion, primarily reflecting decreases in trading securities related to client-driven activities in BMO Capital Markets.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements increased $14.5 billion, driven by client activities in BMO Capital Markets.
Loans and Acceptances
(Canadian $ in millions)
As at October 31
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Customers’ liability under acceptances
Gross loans and acceptances
Allowance for credit losses
Net loans and acceptances
2015
2014
2013
2012
2011
105,918
65,598
7,980
145,076
11,307
101,013
64,143
7,972
120,766
10,878
96,392
63,640
7,870
104,585
8,472
84,211
61,436
7,814
94,072
8,019
81,075
59,445
8,038
84,883
7,227
335,879
(1,855)
304,772
(1,734)
280,959
(1,665)
255,552
(1,706)
240,668
(1,783)
334,024
303,038
279,294
253,846
238,885
Net loans and acceptances increased $31 billion, including a $16.1 billion increase due to the stronger U.S. dollar. The remaining increase was
primarily due to a $12.1 billion increase in loans to businesses and governments across most operating groups and a $3.7 billion increase in
residential mortgages primarily in Canadian P&C.
Table 7 on page 124 provides a comparative summary of loans by geographic location and product. Table 9 on page 125 provides a comparative
summary of net loans in Canada by province and industry. Loan quality is discussed on pages 96 and 97 and further details on loans are provided in
Notes 4, 6 and 26 on pages 148, 153 and 192 of the financial statements.
68 BMO Financial Group 198th Annual Report 2015
Other Assets
Other assets excluding derivative assets increased $1.4 billion or decreased $0.6 billion excluding the stronger U.S. dollar impact. Other assets
includes premises and equipment, goodwill and intangible assets, current and deferred tax assets, accounts receivable and prepaid expenses.
The increase in derivative financial assets is discussed above and is detailed in Note 8 on page 156 of the financial statements.
Deposits
(Canadian $ in millions)
As at October 31
Banks
Businesses and governments
Individuals
Total deposits
2015
2014
2013
2012
2011
27,135
263,618
147,416
18,243
239,139
135,706
20,591
222,346
125,432
18,102
188,103
119,030
20,877
159,209
122,287
438,169
393,088
368,369
325,235
302,373
Deposits increased $45.1 billion, including an increase of $30.5 billion due to the stronger U.S. dollar. The balance of the increase was largely driven
by a $6.9 billion increase in deposits by banks, a $4.8 billion increase in deposits by individuals and a $2.9 billion increase in deposits by businesses
and governments, reflecting higher levels of wholesale and customer deposits. Further details on the composition of deposits are provided in Note 13
on page 166 of the financial statements and in the Liquidity and Funding Risk section on page 105.
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Other Liabilities
Other liabilities excluding derivative financial liabilities decreased $4.9 billion, or decreased $10.0 billion excluding the stronger U.S. dollar impact,
primarily driven by a decrease of $6.8 billion in securities sold but not yet purchased and a $3.4 billion decrease in securities lent or sold under
repurchase agreements related to client activities in BMO Capital Markets. The increase in derivative financial liabilities is discussed above.
Further details on the composition of other liabilities are provided in Note 14 on page 167 of the financial statements.
Subordinated Debt
Subordinated debt decreased $0.5 billion. Further details on the composition of subordinated debt are provided in Note 15 on page 168 of the
financial statements.
Equity
(Canadian $ in millions)
As at October 31
Share capital
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Non-controlling interest in subsidiaries
Total equity
2015
2014
2013
2012
2011
3,240
12,313
299
18,930
4,640
39,422
491
39,913
3,040
12,357
304
17,237
1,375
34,313
1,091
35,404
2,265
12,003
315
15,087
437
30,107
1,072
31,179
2,465
11,957
213
13,456
17
28,108
1,435
29,543
2,861
11,332
113
11,381
666
26,353
1,483
27,836
Total equity increased $4.5 billion. Total shareholders’ equity increased $5.1 billion, partly offset by a decrease in non-controlling interest in
subsidiaries of $0.6 billion due to the redemption of BMO BoaTS – Series D. Total shareholders’ equity increased due to an increase of $2.7 billion
in accumulated other comprehensive income on translation of net foreign operations as a result of the strengthening U.S. dollar net of hedging
impacts and increased retained earnings of $1.7 billion.
The increase in share capital is driven by the issuance of preferred shares, as well as the issuance of common shares under the Shareholder
Dividend Reinvestment and Share Purchase Plan (DRIP) and Stock Option Plan, net of the impact of share repurchases. BMO’s DRIP is described in
the Enterprise-Wide Capital Management section that follows. Our Consolidated Statement of Changes in Equity on page 138 provides a summary
of items that increase or reduce shareholders’ equity, while Note 17 on page 170 of the financial statements provides details on the components
of and changes in share capital. Details of our enterprise-wide capital management practices and strategies can be found on the following page.
2011 data has not been restated to reflect the new IFRS standards adopted in 2014.
BMO Financial Group 198th Annual Report 2015 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Capital Management
BMO’s Common Equity Tier 1 Ratio of 10.7% is strong and exceeds regulatory requirements.
Objective
BMO is committed to a disciplined approach to capital management that balances the interests and requirements of shareholders, regulators,
depositors and rating agencies. Our objective is to maintain a strong capital position in a cost-effective structure that:
‰
‰
‰ underpins our operating groups’ business strategies; and
‰ supports depositor, investor and regulator confidence, while building long-term shareholder value.
is appropriate given our target regulatory capital ratios and internal assessment of required Economic Capital;
is consistent with our target credit ratings;
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Capital Management Framework
The principles and key elements of BMO’s capital management framework are outlined in our Capital Management Corporate Policy and in our annual
capital plan, which includes the results of our Internal Capital Adequacy Assessment Process (ICAAP).
ICAAP is an integrated process that evaluates capital adequacy on both a regulatory and an economic capital basis, and is used to establish
capital targets and capital strategies that take into consideration the strategic direction and risk appetite of the enterprise. The capital plan is
developed considering the results of our ICAAP and in conjunction with our annual business plan, promoting alignment between our business and risk
strategies, regulatory and economic capital requirements and the availability of capital. Enterprise-wide stress testing and scenario analysis are also
used to assess the impact of various stress conditions on BMO’s risk profile and capital requirements. The framework seeks to ensure that we are
adequately capitalized given the risks we take, and supports the determination of limits, goals and performance measures that are used to manage
balance sheet positions, risk levels and capital requirements at both the consolidated entity and line of business levels. Assessments of actual and
forecast capital adequacy are compared to the capital plan throughout the year, and the capital plan is updated as required, based on changes in our
business activities, risk profile or operating environment.
BMO uses a combination of regulatory and economic capital to evaluate business performance and considers capital implications in its strategic,
tactical and transactional decision-making. By allocating our capital to operating groups and measuring their performance in relation to the capital
necessary to support the risks in their business, we seek to optimize our risk-adjusted return to shareholders, while maintaining a well-capitalized
position. This approach aims to protect our stakeholders from the risks inherent in our various businesses, while still allowing the flexibility to deploy
resources to support the strategic growth activities of our operating groups. We increased the capital allocated to the operating groups in fiscal 2015
given higher capital expectations for the bank. Capital in excess of what is required to support our line of business activities is held in Corporate Services.
Capital Demand
Capital required to support
the risks underlying our
business activities
Capital adequacy
assessment of capital
demand and supply
Capital Supply
Capital available to
support risks
Management
Actions
For further discussion of the risks underlying our business activities, refer to the Enterprise-Wide Risk Management section on page 86.
Governance
The Board of Directors, either directly or in conjunction with its Risk Review Committee, provides ultimate oversight and approval of capital
management, including our Capital Management Corporate Policy framework, capital plan and capital adequacy assessments. The Board regularly
reviews BMO’s capital position and key capital management activities, and the Risk Review Committee reviews the ICAAP-determined capital
adequacy assessment results. The Balance Sheet and Capital Management Committee provides senior management oversight, including the review
and discussion of significant capital management policies, issues and activities and, along with the Risk Management Committee, the capital required
to support the execution of our enterprise-wide strategy. Finance and Risk Management are responsible for the design and implementation of the
corporate policies and framework related to capital and risk management and the ICAAP.
Regulatory Capital
Common equity is the most permanent form of capital. Common Equity Tier 1 (CET1) capital is comprised of common shareholders’ equity less
deductions for goodwill, intangible assets, defined benefit pension assets, certain deferred tax assets and certain other items. Additional Tier 1 capital
primarily consists of preferred shares and innovative hybrid instruments, less certain regulatory deductions. Tier 1 capital is comprised of CET1 capital
and Additional Tier 1 capital. Tier 2 capital is primarily comprised of subordinated debentures and a portion of the collective and individual allowances
for credit losses, less certain regulatory deductions. Total capital includes Tier 1 and Tier 2 capital.
Regulatory capital requirements for BMO are determined on a Basel III basis. The minimum Basel III capital ratios proposed by the Basel
Committee on Banking Supervision (BCBS) were a 4.5% CET1 Ratio, 6% Tier 1 Capital Ratio and 8% Total Capital Ratio. These ratios are calculated
using a five-year transitional phase-in of regulatory adjustments and a nine-year transitional phase-out of non-qualifying capital instruments.
However, guidance issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) required Canadian deposit-taking institutions to
meet the 2019 Basel III capital requirements in 2013, other than the phase-out of non-qualifying capital instruments, and OSFI has expected banks to
70 BMO Financial Group 198th Annual Report 2015
attain a target Basel III CET1 Ratio of at least 7% (4.5% minimum plus 2.5% Capital Conservation Buffer) since January 31, 2013 (also referred to as
the “all-in” requirements).
In addition, OSFI issued guidance designating the six largest Canadian banks as domestic systemically important banks (D-SIBs), increasing
minimum capital ratio requirements by 1% commencing on January 1, 2016. No Canadian banks are currently considered to be globally systemically
important. Our practice is to hold capital in addition to these requirements for a number of reasons, including regulatory considerations, market
expectations and to provide flexibility for growth.
The fully implemented Basel III requirements and the OSFI “all-in” Basel III requirements are summarized in the following table.
Regulatory Capital Requirements (% of Risk-Weighted Assets)
Basel III – Stated 2019 minimum requirements
Plus: Capital Conservation Buffer (2) (effective January 1, 2013)
Plus: D-SIB Common Equity Surcharge (effective January 1, 2016)
OSFI Basel III effective requirements (4)
Common Equity
Tier 1 Ratio (1)
Tier 1
Capital Ratio
Total
Capital Ratio
Leverage
Ratio (3)
4.5
2.5
1.0
8.0
6.0
2.5
1.0
9.5
8.0
2.5
1.0
11.5
3.0
na
na
3.0
(1) The minimum 4.5% CET1 Ratio requirement is augmented by the 2.5% Capital Conservation Buffer that can absorb losses during periods of stress. The Capital Conservation Buffer for BMO will be
augmented in 2016 with the addition of the 1% Common Equity Surcharge for D-SIBs. If a bank’s capital ratios fall within the range of this combined buffer, restrictions on discretionary distributions
of earnings (such as dividends, equity repurchases and discretionary compensation) would ensue, with the degree of such restrictions varying according to the position of the bank’s ratios within the
buffer range.
(2) The Capital Conservation Buffer does not include the counter-cyclical capital buffer of up to 2.5% of CET1, which may be required on a national basis by supervisors if they perceive credit growth
resulting in systemic risk. If imposed, this additional buffer would be effectively combined with the Capital Conservation Buffer.
(3) A 3% minimum Leverage Ratio has been established by the BCBS. It will be subject to monitoring and analysis during a four-year parallel run test period, which began on January 1, 2013. Depending
upon the results of the parallel run testing, there could be subsequent adjustments, which are targeted to be finalized in 2017, with the final Leverage Ratio requirement effective January 1, 2018.
OSFI established a 3% minimum Basel III Leverage Ratio requirement in October 2014.
(4) OSFI’s Basel III “effective requirements” are the capital requirements systemically important Canadian banks must meet in 2016 to avoid being subject to restrictions on discretionary distributions
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na – not applicable
OSFI’s Basel III capital rules also require the implementation of BCBS guidance on non-viability contingent capital (NVCC). NVCC provisions require the
conversion of the capital instrument into a variable number of common shares in the event that OSFI announces that the bank is, or is about to
become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital
injection, or equivalent support, to avoid non-viability.
Under OSFI’s Basel III rules, non-common share capital instruments that do not meet Basel III requirements, including NVCC requirements, are
to be grandfathered and phased out over a nine-year period that began on January 1, 2013. OSFI’s guidance also outlines the requirements for
redemption of these regulatory capital instruments due to a regulatory capital event.
BMO primarily uses the Advanced Internal Ratings Based (AIRB) Approach to determine credit risk-weighted assets (RWA) in our portfolio.
Credit RWA arising from certain U.S. portfolios are determined using the Standardized Approach. The AIRB Approach utilizes sophisticated techniques
to measure RWA at the exposure level based on sound risk management principles, including consideration of estimates of the probability of default,
the likely loss given default and exposure at default, term to maturity and the type of Basel Asset Class exposure. These risk parameters are
determined using historical portfolio data supplemented by benchmarking, and are updated periodically. Validation procedures related to these
parameters are in place and are enhanced periodically in order to appropriately quantify and differentiate risks so they reflect changes in economic
and credit conditions.
BMO’s market risk RWA are primarily determined using the Internal Models Approach, but the Standardized Approach is used for some exposures.
BMO uses the Advanced Measurement Approach (AMA), a risk-sensitive capital model, along with the Standardized Approach under OSFI rules, to
determine capital requirements for operational risk.
OSFI advised banks that it would begin phasing in the Credit Valuation Adjustment (CVA) risk capital charge for Canadian banks in the first quarter
of 2014. In 2015, the CVA risk capital charge applicable to CET1 was 64% of the fully implemented charge, and will remain at 64% in 2016.
In addition, starting in the first quarter of fiscal 2015, Canadian banks were expected to maintain a 3% minimum Basel III Leverage Ratio
requirement, replacing the Assets-to-Capital Multiple which was discontinued.
In an effort to increase the comparability of capital requirements and to ensure minimum levels of capital across the banking system, BCBS is
considering a standardized approach for credit, market and operational risk-weighted assets, including new capital floors based on revised
standardized approaches. The current expectation is that the approaches will be settled on during 2016. BCBS is also completing a fundamental
review of the trading book risk-weighted assets and released a consultative paper in June 2015 that discussed the appropriate capital to be held for
interest rate risk in the banking book. Such changes, if implemented, along with the new impairment model based on expected credit losses under
IFRS 9, could have the effect of increasing the capital that we are required to hold.
A number of other potential regulatory changes are still under discussion with regulators. OSFI may implement a stand-alone or “solo” capital
framework that would assess a bank’s stand-alone capital adequacy by reducing such bank’s capital by the portion of its investments in subsidiaries
that are not considered available to protect the parent bank depositors and senior creditors under exceptional circumstances. These changes could
affect the amount of capital that we hold or are required to hold, or the attractiveness of certain investments in subsidiaries.
In August 2014, Canada’s Department of Finance issued a consultation paper on a Canadian bank resolution framework, including the Canadian
bail-in regime and Higher Loss Absorbency (HLA) requirements that would apply to Canadian D-SIBs. In its budget on April 21, 2015, the Government
of Canada provided details on the Canadian bail-in regime, stating that it would apply to unsecured, tradable, transferable senior debt with an original
term to maturity of greater than or equal to 400 days and that all securities subject to bail-in would be convertible into common shares. The
government did not provide details on the timing planned for implementation of the regime, on the amount, or on the period of time within which
banks must transition to meet the new HLA requirement. In October 2015, the Federal Reserve Board proposed new rules on Total Loss Absorbing
Capacity (TLAC) for U.S. domestic firms identified by the Board as Global Systemically Important Banks (G-SIBs) and for the U.S. operations of G-SIBs.
In November 2015, the Financial Stability Board issued the final standard for TLAC for G-SIBs. Neither of these rules are expected to apply to BMO, as
BMO is not a G-SIB. With respect to capital supply, in November 2015, BCBS issued a consultative document which proposes a Tier 2 deduction
approach for investments in G-SIB TLAC by internationally active banks (both G-SIBs and non G-SIBs).
BMO conducts business through a variety of corporate structures, including subsidiaries and joint ventures. A framework is in place for
subsidiaries to appropriately manage their funding and capital.
BMO Financial Group 198th Annual Report 2015 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
As a bank holding company with total consolidated assets of US$50 billion or more, our subsidiary BMO Financial Corp. (BFC) became subject to
the Federal Reserve Board’s (FRB) annual Comprehensive Capital Analysis and Review (CCAR) and mid-year Dodd-Frank Act stress testing (DFAST)
requirements starting in fiscal 2014. CCAR requires BFC to test its ability to meet applicable regulatory capital requirements and continue to operate
under severe stress. The quantitative and qualitative aspects of BFC’s 2015 CCAR capital plan were subject to supervisory review and the FRB applied
its own quantitative tools to evaluate BFC. The FRB announced its decision not to object to BFC’s capital plan in March 2015 and disclosed the results
of its quantitative analysis. BFC and its bank subsidiary BMO Harris Bank N.A. (BHB) also disclosed their results under the CCAR supervisory severely
adverse scenario. Under DFAST, BFC executes mid-year company-run stress tests. BFC submitted its DFAST stress tests to the FRB and disclosed the
results in July 2015.
The Common Equity Tier 1 Ratio reflects Basel III CET1 capital divided by CET1 capital RWA.
The Tier 1 Capital Ratio reflects Basel III Tier 1 capital divided by Tier 1 capital RWA.
The Total Capital Ratio reflects Basel III Total capital divided by Total capital RWA.
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The Leverage Ratio is defined as Basel III Tier 1 capital divided by the sum of on-balance sheet items and specified off-balance sheet items, net
of specified adjustments.
2015 Regulatory Capital Review
BMO’s capital ratios are strong and exceed OSFI’s requirements for large Canadian banks, including the 1% D-SIB Common Equity Surcharge to be
implemented in 2016. Our CET1 Ratio was 10.7% at October 31, 2015, compared to 10.1% at October 31, 2014. The CET1 Ratio increased by 60 basis
points from the end of fiscal 2014 primarily due to higher capital from accumulated other comprehensive income and retained earnings, partially
offset by an increase in RWA. The RWA increase was attributable to foreign exchange rate movements, which we largely hedge as discussed below,
higher business volumes and higher market risk, partly offset by methodology changes and changes in book quality.
Our Tier 1 Capital and Total Capital Ratios were 12.3% and 14.4%, respectively, at October 31, 2015, compared to 12.0% and 14.3%, respectively,
at October 31, 2014. The Tier 1 and Total Capital Ratios increased by 30 basis points and 10 basis points, respectively, from the end of fiscal 2014 due
mainly to the factors impacting the CET1 Ratio discussed above and the issuances of preferred shares, partially offset by Additional Tier 1 instruments
redemptions. The increase in the Total Capital Ratio was mainly due to the factors impacting the CET1 and the Tier 1 Ratios, partially offset by the
additional 10% phase-out of non-qualifying subordinated debt.
BMO’s Leverage Ratio was 4.2% at October 31, 2015, in excess of the 3% minimum requirement established by OSFI.
On September 10, 2015, we announced the signing of an agreement to acquire GE Capital’s Transportation Finance business. The acquisition is
expected to reduce BMO’s CET1 Ratio by approximately 70 basis points on closing in the first quarter of 2016.
BMO’s investments in foreign operations are primarily denominated in U.S. dollars. The foreign exchange impact of U.S.-dollar-denominated RWA
and U.S.-dollar-denominated capital deductions may result in variability in the bank’s capital ratios. BMO may enter into hedging arrangements to
reduce the impact of foreign exchange movements on its capital ratios and did so during 2015.
Regulatory Capital (All-in basis (1))
(Canadian $ in millions)
As at October 31
Common Equity Tier 1 capital: instruments and reserves
Directly issued qualifying common share capital plus related stock surplus
Retained earnings
Accumulated other comprehensive income (and other reserves)
Goodwill and other intangibles (net of related tax liability)
Other common equity Tier 1 capital deductions
Common Equity Tier 1 capital (CET1)
Additional Tier 1 capital: instruments
Directly issued qualifying Additional Tier 1 instruments plus related stock surplus
Directly issued capital instruments subject to phase-out from Additional Tier 1
Additional Tier 1 instruments (and CET1 instruments not otherwise included) issued by subsidiaries and held by third parties
(amount allowed in group AT1)
of which: instruments issued by subsidiaries subject to phase-out
Total regulatory adjustments applied to Additional Tier 1 capital
Additional Tier 1 capital (AT1)
Tier 1 capital (T1 = CET1 + AT1)
Tier 2 capital: instruments and provisions
Directly issued qualifying Tier 2 instruments plus related stock surplus
Directly issued capital instruments subject to phase-out from Tier 2
Tier 2 instruments (and CET1 and AT1 instruments not included) issued by subsidiaries and held by third parties
(amount allowed in group Tier 2)
of which: instruments issued by subsidiaries subject to phase-out
Collective allowances
Total regulatory adjustments to Tier 2 capital
Tier 2 capital (T2)
Total capital (TC = T1 + T2)
2015
2014
12,612
18,930
4,640
(7,752)
(2,802)
25,628
2,150
1,987
9
9
12,661
17,237
1,375
(6,875)
(1,977)
22,421
1,200
3,332
7
7
(358)
(358)
3,788
29,416
1,034
3,548
46
46
590
(50)
5,168
34,584
4,181
26,602
1,002
4,027
80
80
266
(50)
5,325
31,927
(1) “All-in” regulatory capital assumes that all Basel III regulatory adjustments are applied effective January 1, 2013, and that the capital value of instruments that no longer qualify as regulatory capital
under Basel III rules is being phased out at a rate of 10% per year from January 1, 2013 to January 1, 2022.
72 BMO Financial Group 198th Annual Report 2015
Our CET1 capital and Tier 1 capital were $25.6 billion and $29.4 billion, respectively, at October 31, 2015, up from $22.4 billion and $26.6 billion,
respectively, at October 31, 2014. CET1 capital increased due to higher accumulated other comprehensive income, primarily driven by foreign
exchange movement due to our investment in foreign operations, retained earnings growth, the issuance of common shares through the Shareholder
Dividend Reinvestment and Share Purchase Plan (DRIP) and the exercise of stock options, partially offset by higher deductions and share repurchases.
The increase in Tier 1 capital since October 31, 2014 was attributable to the growth in CET1 capital and issuance of preferred shares, partially offset
by the Additional Tier 1 instruments redemptions, as outlined below in the Capital Management Activities section.
Total capital was $34.6 billion at October 31, 2015, up from $31.9 billion at October 31, 2014, attributable to the growth in Tier 1 capital
mentioned above, partially offset by the additional 10% phase-out of non-qualifying subordinated debt, as mentioned above.
Risk-Weighted Assets
(Canadian $ in millions)
As at October 31
Credit Risk
Wholesale
Corporate, including specialized lending
Corporate small and medium-sized enterprises
Sovereign
Bank
Retail
Residential mortgages, excluding home equity line of credit
Home equity line of credit
Qualifying revolving retail
Other retail, excluding small and medium-sized enterprises
Retail small and medium-sized enterprises
Equity
Trading book
Securitization
Other credit risk assets – non-counterparty managed assets
Scaling factor for credit risk assets under AIRB Approach (1)
Total Credit Risk
Market Risk
Operational Risk
CET1 Capital Risk-Weighted Assets
Additional CVA adjustment, prescribed by OSFI, for Tier 1 Capital
Tier 1 Capital Risk-Weighted Assets
Additional CVA adjustment, prescribed by OSFI, for Total Capital
Total Capital Risk-Weighted Assets
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2015
2014
91,489
31,954
1,765
3,902
8,427
7,889
4,569
11,053
1,968
1,369
8,415
2,456
16,255
8,874
200,385
10,262
28,538
239,185
286
239,471
245
239,716
81,340
33,644
1,612
4,186
7,618
6,541
4,000
9,826
1,604
1,362
7,359
3,098
14,946
8,251
185,387
9,002
27,703
222,092
336
222,428
503
222,931
(1) The scaling factor is applied to the risk-weighted assets amounts for credit risk under the AIRB Approach.
Credit Risk RWA (CET1 basis) were $200.4 billion at October 31, 2015, up from $185.4 billion at October 31, 2014. The increase was largely due to
foreign exchange movement and business growth, partially offset by changes in methodology and higher book quality. Market Risk RWA were
$10.3 billion at October 31, 2015, up from $9.0 billion at October 31, 2014, attributable to an increase in client facilitation positions and market
variables, partially offset by methodology and policy changes. Operational Risk RWA were $28.5 billion at October 31, 2015, up from $27.7 billion at
October 31, 2014, largely due to growth in the bank’s average gross income.
Risk Capital Review
Economic capital is a measure of our internal assessment of the risks underlying BMO’s business activities. It represents management’s estimation of
the likely magnitude of economic losses that could occur should severely adverse situations arise, and allows returns to be measured on a basis that
considers the risks undertaken. Economic capital is calculated for various types of risk – credit, market (trading and non-trading), operational and
business – based on a one-year time horizon using a defined confidence level.
Risk-weighted assets (RWA) is a measure of the bank’s exposures weighted by risk and is calculated in accordance with the Regulatory Capital
rules using a combination of Advanced approach models and Standardized approaches. RWA is calculated for credit, market (trading) and operational
risk categories based on OSFI’s prescribed rules.
BMO Financial Group 198th Annual Report 2015 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Capital and RWA by Operating Group and Risk Type
(As at October 31, 2015)
BMO Financial Group
Operating Groups
Personal and
Commercial
Banking
Wealth
Management
BMO Capital
Markets
Corporate
Services
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Economic Capital by Risk Type (%)
Credit
Market
Operational/Other
RWA by Risk Type
(Canadian $ in millions)
Credit
Market
Operational
72%
11%
17%
133,419
15,523
22%
39%
39%
10,291
98
5,231
60%
20%
20%
47,361
10,165
7,785
67%
6%
27%
9,312
Capital Management Activities
On December 2, 2014, we announced our intention, and subsequently obtained the approval of OSFI and the Toronto Stock Exchange (TSX), to initiate
a normal course issuer bid (NCIB) to purchase up to 15 million of BMO’s common shares on the TSX for the purpose of cancellation. During fiscal 2015,
we purchased 8 million shares under our NCIB share repurchase program. The current NCIB is set to expire on January 31, 2016.
On December 1, 2015, we announced our intention, subject to the approval of OSFI and the TSX, to initiate a new NCIB for up to 15 million of
BMO’s common shares, commencing on or about February 1, 2016, after the expiry of the current NCIB. Once approvals are obtained, the share
repurchase program will permit BMO to purchase its common shares on the TSX for the purpose of cancellation. Maintaining an NCIB is part of BMO’s
capital management strategy. The timing and amount of any purchases under the program are subject to regulatory approvals and to management
discretion based on factors such as market conditions and capital adequacy.
During 2015, BMO issued 1.5 million common shares through the DRIP and the exercise of stock options.
On December 31, 2014, we redeemed all of our $600 million BMO Capital Trust Securities – Series D (BMO BOaTS – Series D). On February 25,
2015, we redeemed all of our $400 million Non-cumulative 5-Year Rate Reset Class B Preferred Shares, Series 23. On April 22, 2015, we redeemed all
of our $500 million Subordinated Debentures, Series C Medium-Term Notes, Second Tranche. On May 25, 2015, we redeemed all of our $350 million
Non-cumulative Perpetual Class B Preferred Shares, Series 13.
On June 5, 2015, we completed our offering of Non-cumulative 5-Year Rate Reset Class B Preferred Shares Series 33. We issued 8 million shares
for aggregate proceeds of $200 million.
On July 29, 2015, we completed our offering of Non-cumulative Perpetual Class B Preferred Shares Series 35. We issued 6 million shares for
aggregate proceeds of $150 million.
On October 16, 2015, we completed our offering of Non-cumulative Perpetual Class B Preferred Shares Series 36. We issued 600,000 shares for
aggregate proceeds of $600 million.
On November 27, 2015, BMO announced its intention to redeem the $450 million of outstanding BMO Capital Trust Securities – Series E (BMO
BOaTS – Series E) on December 31, 2015.
If an NVCC trigger event were to occur, our NVCC capital instruments, Non-cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27,
Series 29, Series 31, Series 33 and Series 36, Non-cumulative Perpetual Class B Preferred Shares, Series 35, and Series H Medium-Term Notes,
Tranche 1, would be converted into BMO common shares pursuant to automatic conversion formulas with a conversion price based on the greater of:
(i) a floor price of $5.00, and (ii) the current market price of our common shares at the time of the trigger event (10-day weighted average). Based
on a floor price of $5.00, these NVCC capital instruments would convert into 730 million BMO common shares, assuming no accrued interest and no
declared and unpaid dividends.
Further details are provided in Notes 15, 16 and 17 on pages 168, 169 and 170 of the financial statements.
74 BMO Financial Group 198th Annual Report 2015
Outstanding Shares and Securities Convertible into Common Shares
As at November 25, 2015
Common shares
Class B Preferred shares
Series 5 (1)
Series 13 (2)
Series 14
Series 15
Series 16 (3)
Series 17 (3)
Series 18 (4)
Series 21 (5)
Series 23 (6)
Series 25
Series 27
Series 29
Series 31
Series 33
Series 35
Series 36
Medium-Term Notes
Series H (7)
Stock options
– vested
– non-vested
Number of shares
or dollar amount
(in millions)
643
–
–
$ 250
$ 250
$ 157
$ 143
–
–
–
$ 290
$ 500
$ 400
$ 300
$ 200
$ 150
$ 600
$1,000
6.9
5.1
Dividends declared per share
2015
$3.24
–
$0.56
$1.31
$1.45
$0.85
$0.60
–
–
$0.34
$0.98
$1.00
$0.98
$0.95
$0.45
$0.41
–
2014
$3.08
–
$1.13
$1.31
$1.45
$0.85
$0.64
$0.41
$0.81
$1.35
$0.98
$0.59
$0.46
$0.31
–
–
–
2013
$2.94
$0.33
$1.13
$1.31
$1.45
$1.19
$0.17
$1.63
$1.63
$1.35
$0.98
–
–
–
–
–
–
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na
na
na
(1) Redeemed in February 2013.
(2) Redeemed in May 2015.
(3) In August 2013, approximately 5.7 million Series 16 Preferred Shares were converted into Series 17 Preferred Shares on a one-for-one basis.
(4) Redeemed in February 2014.
(5) Redeemed in May 2014.
(6) Redeemed in February 2015.
(7) Note 15 on page 168 of the financial statements includes details on the Series H Medium-Term Notes, Tranche 1.
na – not applicable
Note 17 on page 170 of the financial statements includes details on share capital.
Dividends
Dividends declared per common share in fiscal 2015 totalled $3.24. Annual dividends declared represented 51.1% of reported net income and 48.0%
of adjusted net income available to common shareholders on a last twelve months basis.
Our target dividend payout range (common share dividends as a percentage of net income available to shareholders, less preferred share
dividends, based on adjusted earnings over the last twelve months) is 40% to 50%, which is consistent with our objective of maintaining flexibility to
execute on our growth strategies, and takes into consideration the higher capital expectations resulting from the Basel III rules. BMO’s target dividend
payout range seeks to provide shareholders with stable income, while ensuring sufficient earnings are retained to support anticipated business
growth, fund strategic investments and provide for a sound capital level.
At year end, BMO’s common shares provided a 4.3% annual dividend yield based on the year-end closing share price and dividends declared in
the last four quarters. On December 1, 2015, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of
$0.84 per share, up $0.02 per share or 2% from the prior quarter and up $0.04 per share or 5.0% from a year ago. The dividend is payable on
February 26, 2016 to shareholders of record on February 1, 2016.
Common shareholders may elect to have their cash dividends reinvested in common shares of BMO in accordance with the DRIP. In the first
quarter of 2015, common shares to supply the DRIP were issued from treasury without discount. Starting in the second quarter of 2015, common
shares for the DRIP were purchased on the open market.
Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation, BMO designates all dividends paid or deemed to
be paid on both its common and preferred shares as “eligible dividends”, unless indicated otherwise.
Caution
This Enterprise-Wide Capital Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
BMO Financial Group 198th Annual Report 2015 75
MANAGEMENT’S DISCUSSION AND ANALYSIS
Select Financial Instruments
The Financial Stability Board (FSB) issued a report in 2012 encouraging enhanced disclosure related to financial instruments that market participants
had come to regard as carrying higher risk. An index of the disclosures recommended by the Enhanced Disclosure Task Force of the FSB and where
these disclosures appear in our Annual Report or Supplementary Financial Information is provided on page 84.
Caution
Given continued uncertainty in the capital markets environment, our capital markets instruments could experience valuation gains and losses due to
changes in market value. This section, Select Financial Instruments, contains forward-looking statements. Please see the Caution Regarding Forward-
Looking Statements on page 30.
Consumer Loans
In Canada, our Consumer Lending portfolio is comprised of three main asset classes: Real Estate Secured Lending (including residential mortgages and
home equity products), instalment/other personal loans (including indirect automobile loans) and credit card loans. We do not have any subprime or
Alt-A mortgage or home equity loan programs, nor do we purchase subprime or Alt-A loans from third-party lenders.
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In the United States, the Consumer Lending portfolio is primarily comprised of three asset classes: residential first mortgages, home equity
products and indirect automobile loans. We have a small portfolio of first mortgage and home equity loans outstanding that had subprime or Alt-A
characteristics at the date of authorization (e.g., low credit score or limited documentation). These programs have been discontinued. Balances
outstanding and amounts in arrears 90 days or more at year end were not significant.
In both Canada and the United States, consumer lending products are underwritten to prudent standards relative to credit scores, loan-to-value
ratios, and capacity assessment, and are generally based upon documented and verifiable income.
Leveraged Finance
Leveraged finance loans are defined by BMO as loans to private equity businesses and mezzanine financings where our assessment indicates a
higher level of credit risk. BMO has exposure to leveraged finance loans, which represent 1.6% of our total assets, with $10.4 billion outstanding at
October 31, 2015, up approximately $1.9 billion from a year ago. Of this amount, $351 million or 3.4% of leveraged finance loans were classified as
impaired ($179 million or 2.1% in 2014).
BMO-Sponsored Securitization Vehicles
BMO sponsors various vehicles that fund assets originated by either BMO (through a bank securitization vehicle) or its customers (several Canadian
customer securitization vehicles and one U.S. customer securitization vehicle). We earn fees for providing services related to the customer
securitization vehicles, including liquidity, distribution and financial arrangement fees for supporting the ongoing operations of the vehicles.
These fees totalled approximately $89 million in 2015 and $66 million in 2014.
Canadian Customer Securitization Vehicles
The customer securitization vehicles we sponsor in Canada provide our customers with access to financing either directly from BMO or in the
asset-backed commercial paper (ABCP) markets. Customers sell their assets into these vehicles, which then issue ABCP to either investors or BMO
to fund the purchases. In all cases, the sellers remain responsible for the servicing of the transferred assets and are first to absorb any losses realized
on the assets.
Our exposure to potential losses relates to our investment in ABCP issued by the vehicles, derivative contracts we have entered into with the
vehicles and the liquidity support we provide to ABCP purchased by investors. We use our credit adjudication process in deciding whether to enter
into these arrangements just as we do when extending credit in the form of a loan.
Two of these customer securitization vehicles are funded in the market, while a third is funded directly by BMO. BMO does not control these
entities and therefore they are not consolidated. Further information on the consolidation of customer securitization vehicles is provided in Note 7 on
page 154 of the financial statements. There were no material mortgage loans with subprime or Alt-A characteristics held in any of the customer
securitization vehicles at year end. No losses have been recorded on any of BMO’s exposures to these vehicles.
BMO’s investment in the ABCP of the market-funded vehicles totalled $21 million at October 31, 2015 ($10 million in 2014).
BMO provided liquidity support facilities to the market-funded vehicles totalling $5.0 billion at October 31, 2015 ($4.6 billion in 2014).
This amount comprised part of our commitments outlined in Note 26 on page 192 of the financial statements. All of these facilities remain undrawn.
The assets of each of these market-funded customer securitization vehicles consist primarily of diversified pools of Canadian automobile-related
receivables and Canadian insured residential mortgages. These two asset classes represent 86% (85% in 2014) of the aggregate assets of these
vehicles.
U.S. Customer Securitization Vehicle
We sponsor a U.S. ABCP multi-seller vehicle that we consolidate under IFRS. This customer securitization vehicle assists our customers with the
securitization of their assets to provide them with alternative sources of funding. The vehicle provides funding to diversified pools of portfolios
through 28 (30 in 2014) individual securitization transactions with an average facility size of US$174 million (US$136 million in 2014). The size of the
pools ranged from US$1 million to US$700 million at October 31, 2015. There were no residential mortgages classified as subprime or Alt-A held in
this ABCP multi-seller vehicle.
The vehicle holds exposures secured by a variety of asset classes, including mid-market corporate loans, student loans and automobile loans.
The vehicle had US$4.1 billion of commercial paper outstanding at October 31, 2015 (US$2.6 billion in 2014). The ABCP of the vehicle is rated A1
by S&P and P1 by Moody’s. BMO has not invested in the vehicle’s ABCP. BMO provides committed liquidity support facilities to the vehicle, with the
undrawn amount totalling US$5.4 billion at October 31, 2015 (US$4.6 billion in 2014).
76 BMO Financial Group 198th Annual Report 2015
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Sectors of Interest: Oil and Gas, Mining
Our risks related to the Oil and Gas sector are further outlined in the Top and Emerging Risks That May Affect Future Results section on page 87.
As at October 31, 2015, BMO’s Oil and Gas outstanding loans were $6.7 billion or 2.0% of total loans and up approximately $0.7 billion from a year
ago. Of this amount, $102 million of oil and gas sector loans were classified as impaired ($1 million in 2014). The majority of oil and gas lending is
to Exploration and Development companies at 66%, followed by Pipelines at 18%, Services at 14% and Manufacturing and Refining at 2%, with
approximately half of these loans having an internal rating that maps to investment grade.
As at October 31, 2015, BMO’s loans in respect to the mining sectors were $1.3 billion or 0.4% of total loans and up approximately $0.2 billion
from a year ago. Of this amount, $4 million of mining sector loans were classified as impaired ($12 million in 2014). Quarrying represents 12% of the
total and of the remaining Metal/Non-Metal Mining, approximately half have an internal rating that maps to investment grade.
Off-Balance Sheet Arrangements
BMO enters into a number of off-balance sheet arrangements in the normal course of operations.
Credit Instruments
In order to meet the financial needs of our clients, we use a variety of off-balance sheet credit instruments. These include guarantees and standby
letters of credit, which represent our obligation to make payments to third parties on behalf of a customer if the customer is unable to make the
required payments or meet other contractual requirements. We also write documentary and commercial letters of credit, which represent our
agreement to honour drafts presented by a third party upon completion of specified activities. Commitments to extend credit are off-balance sheet
arrangements that represent our commitment to customers to grant them credit in the form of loans or other financings for specific amounts and
maturities, subject to meeting certain conditions.
There are a large number of credit instruments outstanding at any time. Our customers are broadly diversified and we do not anticipate events
or conditions that would cause a significant number of our customers to fail to perform in accordance with the terms of their contracts with us.
We use our credit adjudication process in deciding whether to enter into these arrangements, just as we do when extending credit in the form of
a loan. We monitor off-balance sheet instruments to avoid undue concentrations in any geographic region or industry.
The maximum amount payable by BMO in relation to these credit instruments was approximately $124 billion at October 31, 2015 ($99 billion in
2014). However, this amount is not representative of our likely credit exposure or liquidity requirements for these instruments, as it does not take
into account customer behaviour, which suggests that only a portion of our customers will utilize the facilities related to these instruments. It also
does not take into account any amounts that could be recovered under recourse and collateral provisions. Further information on these instruments
can be found in Note 26 on page 192 of the financial statements.
For the credit commitments outlined in the preceding paragraphs, in the absence of an event that triggers a default, early termination by BMO
may result in a breach of contract.
Structured Entities (SEs)
Our interests in SEs are discussed primarily on page 76 in the BMO-Sponsored Securitization Vehicles section and in Note 7 on page 154 of the
financial statements. Under IFRS, we consolidate our bank securitization vehicles, U.S. customer securitization vehicle, credit protection vehicle, and
certain capital and funding vehicles. We do not consolidate our Canadian customer securitization vehicles, structured finance vehicles, certain capital
and funding vehicles, and various BMO managed and non-BMO managed investment funds.
Guarantees
Guarantees include contracts under which we may be required to make payments to a counterparty based on changes in the value of an asset,
liability or equity security that the counterparty holds. Contracts under which we may be required to make payments if a third party does not perform
according to the terms of a contract and contracts under which we provide indirect guarantees of indebtedness are also considered guarantees. In the
normal course of business, we enter into a variety of guarantees, including standby letters of credit, backstop and other liquidity facilities and
derivatives contracts or instruments (including, but not limited to, credit default swaps), as well as indemnification agreements.
The maximum amount payable by BMO in relation to these guarantees was $30 billion at October 31, 2015 ($31 billion in 2014). However, this
amount is not representative of our likely exposure, as it does not take into account customer behaviour, which suggests that only a portion of the
guarantees will require us to make any payments. It also does not take into account any amounts that could be recovered through recourse and
collateral provisions.
For a more detailed discussion of these agreements, please see Note 26 on page 192 of the financial statements.
Caution
This Off-Balance Sheet Arrangements section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
BMO Financial Group 198th Annual Report 2015 77
MANAGEMENT’S DISCUSSION AND ANALYSIS
Critical Accounting Estimates
The most significant assets and liabilities for which we must make estimates include: allowance for credit losses; financial instruments measured at
fair value; pension and other employee future benefits; impairment of securities; income taxes and deferred tax assets; goodwill and intangible
assets; purchased loans; insurance-related liabilities; and contingent liabilities. We make judgments in assessing whether substantially all risks and
rewards have been transferred in respect of transfers of financial assets and whether we control SEs. These judgments are discussed in Notes 6 and 7,
respectively, on pages 153 and 154 of the financial statements. Note 18 on page 172 of the financial statements discusses the judgments made in
determining the fair value of financial instruments. If actual results differ from the estimates we make, the impact would be recorded in future
periods. We have established detailed policies and control procedures that are intended to ensure the judgments we make in determining the
estimates are well controlled, independently reviewed and consistently applied from period to period. We believe that our estimates of the value of
BMO’s assets and liabilities are appropriate.
For a more detailed discussion of the use of estimates, please see Note 1 on page 140 of the financial statements.
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Allowance for Credit Losses
One of our key performance measures is the provision for credit losses as a percentage of average net loans and acceptances. Over the 10 years prior
to 2015, our average annual ratio has ranged from a high of 0.88% in 2009 to a low of 0.09% in 2006. This ratio varies with changes in the economy
and credit conditions. If we were to apply these high and low ratios to average net loans and acceptances in 2015, our provision for credit losses
would range from $288 million to $2,818 million and our allowance for credit losses would range from $1,728 million to $4,258 million. Our provision
for credit losses in 2015 was $612 million and our allowance for credit losses as at October 31, 2015 was $2,052 million. Additional information on
the process and methodology for determining the allowance for credit losses can be found in the discussion of Credit and Counterparty Risk on
page 94 as well as in Note 4 on page 148 of the financial statements.
Financial Instruments Measured at Fair Value
BMO records certain securities and derivatives at their fair value, and certain liabilities are designated at fair value. Fair value represents our estimate
of the amount we would receive, or would be required to pay in the case of a liability, in a current transaction between willing parties. We employ a
fair value hierarchy to categorize the inputs we use in valuation techniques to measure fair value. The extent of our use of quoted market prices
(Level 1), internal models using observable market information (Level 2) and internal models without observable market information (Level 3) in the
valuation of securities, derivative assets and derivative liabilities as at October 31, 2015, as well as a sensitivity analysis of our Level 3 financial
instruments, is disclosed in Note 18 on page 172 of the financial statements.
Our valuation models use general assumptions and market data, and therefore do not reflect the specific risks and other factors that could affect
a particular instrument’s fair value. Valuation Product Control (VPC), a group independent of the trading lines of business, verifies the fair values at
which financial instruments are recorded. For instruments that are valued using models, VPC identifies situations where valuation adjustments must
be made to the model estimates to arrive at fair value. As a result, we incorporate certain adjustments when using internal models to establish fair
values. These fair value adjustments take into account the estimated impact of credit risk, liquidity risk and other items, including closeout costs.
For example, the credit risk adjustment for derivative financial instruments incorporates credit risk into our determination of fair values by taking into
account factors such as the counterparty’s credit rating, the duration of the instrument and changes in credit spreads. We also incorporate an estimate
of the implicit funding costs borne by BMO for over-the-counter derivative positions (the funding valuation adjustment).
The methodologies used for calculating these adjustments are reviewed on an ongoing basis to ensure that they remain appropriate. Significant
changes in methodologies are made only when we believe that the change will result in better estimates of fair value.
Valuation Adjustments
(Canadian $ in millions)
As at October 31
Credit risk
Funding risk
Liquidity risk
Other
Total
2015
100
60
57
–
217
2014
53
39
59
2
153
Valuation adjustments increased in 2015, primarily driven by the widening of credit spreads, lower interest rates, and the appreciation of the
U.S. dollar.
Pension and Other Employee Future Benefits
Our pension and other employee future benefits expense is calculated by our independent actuaries using assumptions determined by management.
If actual experience differs from the assumptions used, the difference is recognized in other comprehensive income.
Pension and other employee future benefits expense and the related obligations are sensitive to changes in discount rates. We determine
discount rates at each year end for all our plans using high-quality corporate bonds with terms matching the plans’ specific cash flows.
Additional information regarding our accounting for pension and other employee future benefits, including a sensitivity analysis for key
assumptions, is included in Note 23 on page 184 of the financial statements.
78 BMO Financial Group 198th Annual Report 2015
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Impairment of Securities
We have investments in securities issued or guaranteed by Canadian, U.S. and other governments, corporate debt and equity securities,
mortgage-backed securities and collateralized mortgage obligations, which are classified as either available-for-sale securities, held-to-maturity
securities or other securities. We review held-to-maturity, available-for-sale and other securities at each quarter-end reporting period to identify
and evaluate investments that show indications of possible impairment. An investment is considered impaired if there is objective evidence that
the estimated future cash flows will be reduced and the impact can be reliably measured. We consider evidence such as delinquency or default,
bankruptcy, restructuring or other evidence of deterioration in the creditworthiness of the issuer, or the absence of an active market. The decision
to record a write-down, its amount and the period in which it is recorded could change if management’s assessment of those factors were to differ.
We do not record impairment write-downs on debt securities when impairment is due to changes in market rates, if future contractual cash flows
associated with the debt security are still expected to be recovered.
At the end of 2015, there were total unrealized losses of $152 million related to available-for-sale securities for which cost exceeded fair value
and an impairment write-down had not been recorded. Of this amount, $5 million related to available-for-sale securities for which cost had exceeded
fair value for 12 months or more. These unrealized losses resulted from changes in market interest rates and not from deterioration in the
creditworthiness of the issuer.
Additional information regarding our accounting for available-for-sale securities, held-to-maturity securities and other securities and the
determination of fair value is included in Note 3 on page 144 and Note 18 on page 172 of the financial statements.
Income Taxes and Deferred Tax Assets
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our Consolidated Statements of Income
or Changes in Equity. In determining the provision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions
about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations differ from those of tax authorities or if the
timing of reversals is not as expected, our provision for income taxes could increase or decrease in future periods. The amount of any such increase
or decrease cannot be reasonably estimated.
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which
deductible temporary differences may be utilized. We are required to assess whether it is probable that our deferred income tax asset will be realized
prior to its expiration and, based on all the available evidence, determine if any portion of our deferred income tax asset should not be recognized.
The factors used to assess the probability of realization are our past experience of income and capital gains, our forecast of future net income before
taxes, available tax planning strategies that could be implemented to realize the deferred income tax asset, and the remaining expiration period of
tax loss carryforwards. Changes in our assessment of these factors could increase or decrease our provision for income taxes in future periods.
If income tax rates increase or decrease in future periods in a jurisdiction, our provision for income taxes for future periods will increase or
decrease accordingly. Furthermore, our deferred tax assets and liabilities will increase or decrease as income tax rates decrease or increase,
respectively, and will result in either an income tax charge or a recovery. A 1% decrease in the U.S. federal tax rate from 35% to 34% would reduce
our deferred tax asset by about $58 million and would result in a corresponding income tax charge.
Additional information regarding our accounting for income taxes is included in Note 24 on page 189 of the financial statements.
Goodwill and Intangible Assets
Goodwill is assessed for impairment at least annually. This assessment includes a comparison of the carrying value and the recoverable amount of
each business unit to verify that the recoverable amount of the business unit is greater than its carrying value. If the carrying value were to exceed
the recoverable amount of the business unit, an impairment calculation would be performed. The recoverable amount of an asset is the higher of its
fair value less costs to sell and its value in use.
Fair value less costs to sell was used to perform the impairment test in all periods. In determining fair value less costs to sell, we employ a
discounted cash flow model, consistent with that used when we acquire businesses. This model is dependent on assumptions related to revenue
growth, discount rates, synergies achieved on acquisition and the availability of comparable acquisition data. Changes in any of these assumptions
would affect the determination of fair value for each of the business units in a different manner. Management must exercise judgment and make
assumptions in determining fair value, and differences in judgments and assumptions could affect the determination of fair value and any resulting
impairment write-down. At October 31, 2015, the estimated fair value of each of our business units was greater than its carrying value.
Definite-lived intangible assets are amortized to income on either a straight-line or an accelerated basis over a period not exceeding 15 years,
depending on the nature of the asset. We test definite-lived intangible assets for impairment when circumstances indicate the carrying value may not
be recoverable. During the year ended October 31, 2015, we recorded $1 million in impairment of definite-lived intangibles ($nil for 2014). Indefinite
life intangible assets are tested annually for impairment. If any intangible assets are determined to be impaired, we write them down to their
recoverable amount, the higher of value in use and fair value less costs to sell, when this is less than the carrying value. No such impairment was
identified for the years ended October 31, 2015 and 2014. Additional information regarding the composition of goodwill and intangible assets is
included in Note 11 on page 164 of the financial statements.
Purchased Loans
Significant judgment and assumptions were applied to determine the fair value of the Marshall & Ilsley Corporation (M&I) loan portfolio. Loans were
identified as either purchased performing loans or purchased credit impaired loans (PCI loans), both of which were recorded at fair value at the time
of acquisition. The determination of fair value involved estimating the expected cash flows to be received and determining the discount rate to be
applied to the cash flows from the loan portfolio. In determining the discount rate, we considered various factors, including our cost to raise funds in
the current market, the risk premium associated with the loans and the cost to service the portfolios. PCI loans are those where the timely collection
of principal and interest was no longer reasonably assured as at the date of acquisition. We regularly evaluate what we expect to collect on PCI loans.
Changes in expected cash flows could result in the recognition of impairment or a recovery through the provision for credit losses. Estimating the
timing and amount of cash flows requires significant management judgment regarding key assumptions, including the probability of default, severity
of loss, timing of payment receipts and valuation of collateral. All of these factors are inherently subjective and can result in significant changes in
cash flow estimates over the term of a loan.
BMO Financial Group 198th Annual Report 2015 79
MANAGEMENT’S DISCUSSION AND ANALYSIS
The purchased performing loans are subject to the same credit review processes we apply to loans we originate. Additional information
regarding purchased loans is provided in Note 4 on page 148 of the financial statements.
Insurance-Related Liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance
contracts are determined using the Canadian Asset Liability Method, which incorporates best-estimate assumptions for mortality, morbidity, policy
lapses, surrenders, future investment yields, policy dividends, administration costs and margins for adverse deviation. These assumptions are
reviewed at least annually and updated to reflect actual experience and market conditions. The most significant impact on the valuation of a liability
would be the result of a change in the assumption for future investment yields. If the assumed yield were to increase by one percentage point, net
income would increase by approximately $66 million. A reduction of one percentage point would lower net income by approximately $65 million.
See the Insurance Risk section on page 114 for further discussion of the impact of changing rates on insurance earnings.
Provisions
BMO and its subsidiaries are involved in various legal actions in the ordinary course of business.
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Provisions are recorded at the best estimate of the amount required to settle any obligation related to these legal actions as at the balance
sheet date, taking into account the risks and uncertainties surrounding the obligation. Factors included in making the assessment include a case-by-
case assessment of specific facts and circumstances, our past experience and opinions of legal experts. Management and internal and external
experts are involved in estimating any amounts that may be required. The actual costs of resolving these claims may be substantially higher or lower
than the amount of the provisions.
Additional information regarding provisions is provided in Note 26 on page 192 of the financial statements.
Transfers of Financial Assets and Consolidation of Structured Entities
We sell Canadian mortgage loans to third-party Canadian securitization programs, including the Canadian Mortgage Bond program, and directly to
third-party investors under the National Housing Act Mortgage-Backed Securities program. We assess whether substantially all of the risk and rewards
of the loans have been transferred to determine if they qualify for derecognition. Since we continue to be exposed to substantially all of the
prepayment, interest rate and/or credit risk associated with the securitized loans, they do not qualify for derecognition. We continue to recognize the
loans and recognize the related cash proceeds as secured financing in our Consolidated Balance Sheet. Additional information concerning the transfer
of financial assets is included on page 76, as well as in Note 6 on page 153 of the financial statements.
In the normal course of business, BMO enters into arrangements with SEs. We are required to consolidate SEs if we determine that we control
the SEs. We control an SE when we have power over the entity, exposure or rights to variable returns from our investment and the ability to exercise
power to affect the amount of our returns. Additional information concerning BMO’s interests in SEs is included on pages 76 and 77, as well as in
Note 7 on page 154 of the financial statements.
Caution
This Critical Accounting Estimates section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Changes in Accounting Policies in 2015
BMO adopted the following new or amended standards in 2015: IAS 36 Impairment of Assets; IAS 32 Financial Instruments: Presentation; IFRIC 21
Levies; and early adopted the own credit provisions of IFRS 9 Financial Instruments. The adoption of the own credit provisions of IFRS 9, which were
adopted prospectively, resulted in a $120 million gain, net of taxes being recorded in other comprehensive income instead of net income related to
the change in fair value of deposit and annuity liabilities due to changes in our credit spread. The adoption of the other new or amended standards
did not have a significant impact on our financial statements. The impact of these accounting policy changes is discussed in Note 1 on page 140 of
the financial statements.
Future Changes in Accounting Policies
BMO monitors the potential changes to IFRS proposed by the International Accounting Standards Board (IASB) and analyzes the effect that any such
changes to the standards may have on BMO’s financial reporting and accounting policies. New standards and amendments to existing standards that
will be effective for BMO in the future are described in Note 1 on page 140 of the financial statements.
Adoption of IFRS 9 Financial Instruments
As a result of an announcement from our regulator OSFI, we will be adopting IFRS 9 Financial Instruments effective November 1, 2017. IFRS 9
addresses the classification, measurement and impairment of financial instruments. The impairment requirements of IFRS 9 are expected to have the
largest impact on the bank and will result in the earlier recognition in the credit cycle of provisions for credit losses and a higher initial collective loan
loss allowance when the standard is implemented as an adjustment to retained earnings. We do not expect significant changes to the accounting for
the specific loan loss allowance or the specific provision for credit losses.
IFRS 9 utilizes an expected credit loss model which will result in lifetime credit losses being recognized in the collective allowance if there is a
significant deterioration in lifetime credit quality, regardless of whether there has been a credit event. The expected credit loss model requires the
recognition of credit losses based on a 12-month time horizon for performing loans and requires the recognition of lifetime expected credit losses for
loans that experience a significant deterioration in credit risk since inception. The expected loss calculations are required to incorporate forward-
looking macroeconomic information in determining the final provision.
80 BMO Financial Group 198th Annual Report 2015
The classification requirements will result in unrealized gains and losses on equity securities currently classified as available-for-sale being
recognized in profit or loss going forward, as opposed to being recognized in other comprehensive income. Additionally, based on the results of the
business model and cash flow characteristics test, certain investments in debt securities may be reclassified from the current amortized cost or
available-for-sale categories to fair value through profit or loss or from available-for-sale into amortized cost.
In order to meet the requirement to adopt IFRS 9, we have established an enterprise-wide project. We are currently evaluating the impact of
adoption on our financial results.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our key management personnel and their affiliated entities, joint ventures and
equity-accounted investees on the same terms that we offer to our customers for those services. Key management personnel are defined as those
persons having authority and responsibility for planning, directing and/or controlling the activities of an entity, being the directors and most senior
executives of the bank.
Details of our investments in joint arrangements and associates and the compensation of key management personnel are disclosed in Note 29
on page 197 of the financial statements. We also offer employees a subsidy on annual credit card fees.
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BMO Financial Group 198th Annual Report 2015 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Annual Report on Disclosure Controls and Procedures and
Internal Control over Financial Reporting
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior
management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis so that appropriate decisions can be
made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was conducted as at October 31, 2015,
by Bank of Montreal’s management under the supervision of the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that,
as at October 31, 2015, our disclosure controls and procedures, as defined in Canada by National Instrument 52-109, Certification of Disclosure in
Issuers’ Annual and Interim Filings, and in the United States by Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), are
effective.
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Internal Control over Financial Reporting
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with IFRS and the requirements of the Securities and Exchange Commission (SEC) in the United States, as
applicable. Management is responsible for establishing and maintaining adequate internal control over financial reporting for Bank of Montreal.
Bank of Montreal’s internal control over financial reporting includes policies and procedures designed to provide assurance that records are
maintained in reasonable detail to accurately and fairly reflect the transactions and dispositions of the assets of Bank of Montreal; and to provide
reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with IFRS and the
requirements of the SEC in the United States, as applicable, that receipts and expenditures of Bank of Montreal are being made only in accordance
with authorizations by management and directors of Bank of Montreal, and that any unauthorized acquisition, use or disposition of Bank of Montreal’s
assets which could have a material effect on the financial statements is prevented or detected in a timely manner.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or
detect misstatements. Furthermore, 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 related policies or procedures may deteriorate.
Bank of Montreal’s management, under the supervision of the CEO and the CFO, has evaluated the effectiveness of 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 in May 2013 (2013 COSO Framework). Based on this evaluation, management has concluded that internal
control over financial reporting was effective as at October 31, 2015.
At the request of Bank of Montreal’s Audit and Conduct Review Committee, KPMG LLP (Shareholders’ Auditors), an independent registered public
accounting firm, has conducted an audit of the effectiveness of our internal control over financial reporting based on the 2013 COSO Framework.
The audit report concludes that, in KPMG’s opinion, Bank of Montreal maintained, in all material respects, effective internal control over financial
reporting as at October 31, 2015, in accordance with the criteria established in the 2013 COSO Framework. This audit report appears on page 134.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting in fiscal 2015 that have materially affected, or are reasonably likely to
materially affect, the adequacy and effectiveness of our internal control over financial reporting.
82 BMO Financial Group 198th Annual Report 2015
Shareholders’ Auditors’ Services and Fees
Review of Shareholders’ Auditors
The Audit and Conduct Review Committee (ACRC) is responsible for the appointment, compensation and oversight of the shareholders’ auditors and
conducts an annual assessment of the shareholders’ auditors’ performance and effectiveness considering factors such as: (i) the quality of services
provided by the shareholders’ auditors’ engagement team during the audit period; (ii) the relevant qualifications, experience and geographical reach
to serve BMO; (iii) the quality of communications received from the shareholders’ auditors; and (iv) the shareholders’ auditors’ independence,
objectivity and professional skepticism.
The Board believes that it has robust review processes in place to monitor audit quality and oversee the work of the shareholders’ auditors,
including the lead partner, which include:
‰ annually reviewing the shareholders’ auditors’ audit plan, including a consideration of the impact of business risks on the audit plan and an
assessment of the reasonableness of the audit fee;
‰ monitoring the execution of the audit plan, with emphasis on the more complex and risky areas of the audit;
‰
‰ evaluating audit quality and performance, including recent Canadian Public Accountability Board and Public Company Accounting Oversight Board
reviewing and evaluating the audit findings, including in camera sessions;
inspection reports on the shareholders’ auditors and their peer firms;
reviewing qualifications of their senior engagement team members with the shareholders’ auditors;
‰
‰ soliciting the opinion of the bank’s management and internal auditors on the performance of the engagement team; and
‰ at a minimum, holding quarterly meetings with the ACRC Chair and the lead audit partner to discuss audit issues independently of management.
In 2015, we completed our periodic comprehensive review of the shareholders’ auditors. The comprehensive review was based on the
recommendations of the Chartered Professional Accountants of Canada and the Canadian Public Accountability Board. The review focused on (1) the
shareholders’ auditors’ independence, objectivity and professional skepticism; (2) quality of the engagement team; and (3) quality of communications
and interactions with the shareholders’ auditors. As a result of this review the ACRC was satisfied with the performance of the shareholders’ auditors.
Independence of the shareholders’ auditors is overseen by the ACRC in accordance with the bank’s Auditor Independence Policy, as outlined
below. The ACRC also ensures that the lead audit partner rotates out of that role after five consecutive years and does not return to that role for a
further five years.
Pre-Approval Policies and Procedures
As part of BMO Financial Group’s corporate governance practices, the ACRC oversees the application of BMO’s Corporate Policy limiting the services
provided by the shareholders’ auditors that are not related to their role as auditors. The ACRC pre-approves the types of services (“permitted
services”) that can be provided by the shareholders’ auditors, as well as the annual audit plan, which includes fees for specific types of services.
For permitted services that are not included in the pre-approved annual audit plan, confirmation to proceed with the engagement is obtained and the
services to be provided are presented to the ACRC for ratification at its next meeting. All services must comply with our Auditor Independence Policy,
as well as professional standards and securities regulations governing auditor independence.
Shareholders’ Auditors’ Fees
Aggregate fees paid to the Shareholders’ Auditors during the fiscal years ended October 31, 2015 and 2014 were as follows:
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Fees ($ millions) (1)
Audit fees
Audit-related fees (2)
Tax fees
All other fees (3)
Total
2015
17.1
2.2
0.1
2.3
21.7
2014
17.3
1.9
–
1.2
20.4
(1) The classification of fees is based on applicable Canadian securities laws and U.S. Securities and
Exchange Commission definitions.
(2) Audit-related fees for 2015 and 2014 relate to fees paid for accounting advice, specified procedures
on our Proxy Circular and other specified procedures.
(3) All other fees for 2015 and 2014 relate primarily to fees paid for reviews of compliance with
regulatory requirements for financial information and reports on internal controls over services
provided by various BMO Financial Group businesses. They also include costs of translation services.
BMO Financial Group 198th Annual Report 2015 83
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enhanced Disclosure Task Force
On October 29, 2012, the Enhanced Disclosure Task Force (EDTF) of the Financial Stability Board published its first report, Enhancing
the Risk Disclosures of Banks. We support the recommendations issued by the EDTF for the provision of high-quality, transparent risk
disclosures.
Disclosures related to the EDTF recommendations are detailed below.
General
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2
3
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Present all risk-related information in the Annual Report, Supplementary Financial Information and Supplementary Regulatory
Capital Disclosure, and provide an index for easy navigation.
Annual Report: Risk-related information is presented in the Enterprise-Wide Risk Management section on pages 86 to 117.
An index for the MD&A is provided on page 26. An index for the notes to the financial statements is provided on page 140.
Supplementary Financial Information: An index is provided in our Supplementary Financial Information.
Define the bank’s risk terminology and risk measures and present key parameters used.
Annual Report: Specific risk definitions and key parameters underpinning BMO’s risk reporting are provided on pages 94 to 117.
A glossary of financial terms (including risk terminology) can be found on pages 202 to 203.
Discuss top and emerging risks for the bank.
Annual Report: BMO’s top and emerging risks are discussed on pages 87 to 89.
Outline plans to meet new key regulatory ratios once the applicable rules are finalized.
Annual Report: We outline BMO’s plans to meet new regulatory ratios on pages 71 to 73 and 110.
Risk Governance
5
6
7
8
Summarize the bank’s risk management organization, processes, and key functions.
Annual Report: BMO’s risk management organization, processes and key functions are summarized on pages 89 to 93.
Describe the bank’s risk culture.
Annual Report: BMO’s risk culture is described on page 90.
Describe key risks that arise from the bank’s business model and activities.
Annual Report: A diagram of BMO’s risk exposure by operating segment is provided on page 74.
Describe the use of stress testing within the bank’s risk governance and capital frameworks.
Annual Report: BMO’s stress testing process is described on page 93.
Capital Adequacy and Risk-Weighted Assets (RWA)
9
Provide minimum Pillar 1 capital requirements.
Annual Report: Basel III Pillar 1 capital requirements are described on pages 70 to 72.
Supplementary Financial Information: Basel III regulatory capital is disclosed on page 34.
10 Summarize information contained in the composition of capital templates adopted by the Basel Committee.
Annual Report: An abridged version of the Basel III regulatory capital template is provided on page 72.
Supplementary Financial Information: Basel III Pillar 3 disclosure is provided on pages 34 to 36 and 38. A Main Features template can be found on BMO’s
website at www.bmo.com under Investor Relations and Regulatory Filings.
11 Present a flow statement of movements in regulatory capital, including changes in Common Equity Tier 1, Additional Tier 1,
and Tier 2 capital.
Supplementary Financial Information: Regulatory capital flow statement is provided on page 39.
12 Discuss capital planning within a more general discussion of management’s strategic planning.
Annual Report: BMO’s capital planning process is discussed under Capital Management Framework on page 70.
13 Provide granular information to explain how RWA relate to business activities.
Annual Report: A diagram of BMO’s risk exposure, including RWA by operating group, is provided on page 74.
14 Present a table showing the capital requirements for each method used for calculating RWA.
Annual Report: Regulatory capital requirement, as a percentage of RWA, is outlined on page 71.
Information about significant models used to determine RWA is provided on pages 95 to 96.
Supplementary Financial Information: A table showing RWA by model approach and by risk type is provided on page 38.
15 Tabulate credit risk in the banking book for Basel asset classes.
Supplementary Financial Information: Wholesale and retail credit exposures by internal rating grades are provided on page 46.
16 Present a flow statement that reconciles movements in RWA by credit risk and market risk.
Supplementary Financial Information: RWA flow statements are provided on page 40, with a reconciliation on page 37.
17 Describe the bank’s Basel validation and back-testing process.
Annual Report: BMO’s Basel validation and back-testing process for credit and market risk is described on page 113.
Supplementary Financial Information: A table showing Exposure at Default and RWA by model approach and asset class is provided on page 38. A table
showing estimated and actual loss parameters is provided on page 48.
84 BMO Financial Group 198th Annual Report 2015
Liquidity
18 Describe how the bank manages its potential liquidity needs and the liquidity reserve held to meet those needs.
Annual Report: BMO’s potential liquidity needs and the liquidity reserve held to meet those needs are described on pages 105 to 106.
Funding
19 Summarize encumbered and unencumbered assets in a table by balance sheet category.
Annual Report: An Asset Encumbrance table is provided on page 107.
Additional collateral requirements in the event of downgrades by rating agencies are disclosed in Note 8 on pages 158 to 159 of the financial statements.
Supplementary Financial Information: The Asset Encumbrance table by currency is provided on page 33.
20 Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity.
Annual Report: A Contractual Maturity table is presented in Note 30 on pages 198 to 201 of the financial statements.
21 Discuss the bank’s sources of funding and describe the bank’s funding strategy.
Annual Report: BMO’s sources of funding and funding strategy are described on pages 108 to 109.
A table showing the composition and maturity of wholesale funding is provided on page 109.
Market Risk
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22 Provide a breakdown of balance sheet positions into trading and non-trading market risk measures.
Annual Report: A table linking balance sheet items to market risk measures is provided on page 103.
23 Provide qualitative and quantitative breakdowns of significant trading and non-trading market risk measures.
Annual Report: Trading market risk exposures are described and quantified on pages 100 to 102.
Structural (non-trading) market risk exposures are described and quantified on pages 103 to 104.
24 Describe significant market risk measurement model validation procedures and back-testing and how these are used to
enhance the parameters of the model.
Annual Report: Market risk measurement model validation procedures and back-testing for trading market risk and structural (non-trading) market risk are
described on page 113.
25 Describe the primary risk management techniques employed by the bank to measure and assess the risk of loss beyond
reported risk measures.
Annual Report: The use of stress testing, scenario analysis and stressed VaR for market risk management is described on pages 100 to 101.
Credit Risk
26 Provide information about the bank’s credit risk profile.
Annual Report: Information about BMO’s credit risk profile is provided on pages 96 to 97 and in Notes 4 and 5 on pages 148 to 153 of the financial
statements, respectively.
Supplementary Financial Information: Tables detailing credit risk information are provided on pages 20 to 29 and 42 to 49.
27 Describe the bank’s policies related to impaired loans and renegotiated loans.
Annual Report: Impaired and renegotiated loan policies are described in Note 4 on pages 148 and 150, respectively, of the financial statements.
28 Provide reconciliations of impaired loans and the allowance for credit losses.
Annual Report: Continuity schedules for gross impaired loans and allowance for credit losses are provided on page 97 and in Note 4 on pages 149 to 150 of
the financial statements.
29 Provide a quantitative and qualitative analysis of the bank’s counterparty credit risk that arises from its derivative transactions.
Annual Report: Quantitative disclosures on collateralization agreements for over-the-counter (OTC) derivatives are provided on page 99 and qualitative
disclosures are provided on page 94.
Supplementary Financial Information: Quantitative disclosures for OTC derivatives are provided on page 32.
30 Provide a discussion of credit risk mitigation.
Annual Report: A discussion of BMO’s credit and counterparty risk management is provided on pages 94 to 95. Collateral management discussions are
provided on page 94 and in Notes 8 and 26 on pages 161 and 193, respectively, of the financial statements.
Supplementary Financial Information: The Exposures Covered by Credit Risk Mitigation table is provided on page 42.
Other Risks
31 Describe other risks and discuss how each is identified, governed, measured and managed.
Annual Report: A diagram illustrating the risk governance process that supports BMO’s risk culture is provided on page 89.
Other risks are discussed on pages 111 to 117.
32 Discuss publicly known risk events related to other risks, where material or potentially material loss events have occurred.
Annual Report: Other risks are discussed on pages 111 to 117.
BMO Financial Group 198th Annual Report 2015 85
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Risk Management
As a diversified financial services company actively providing banking,
wealth management, capital market and insurance services, we are
exposed to a variety of risks that are inherent in carrying out our
business activities. A disciplined and integrated approach to managing
risk is therefore fundamental to the success of our operations. Our risk
management framework provides independent risk oversight across the
enterprise and is essential to building competitive advantage.
Surjit Rajpal
Chief Risk Officer
BMO Financial Group
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Strengths and Value Drivers
‰ Disciplined approach to risk-taking.
‰ Comprehensive and consistent risk frameworks that address all risk types.
‰ Risk appetite and metrics that are clearly articulated and integrated into strategic planning and the ongoing management of businesses and risk.
‰ Sustained mindset of continuous improvement that drives consistency and efficiency in the management of risk.
Challenges
‰ The heightened pace, volume and complexity of regulatory requirements.
‰ Balancing risk and return in an uncertain economic and geopolitical environment.
‰ The evolving technology improvements required to meet customer expectations and the need to anticipate and respond to cyber threats.
Priorities
‰ Address increased complexity by streamlining risk management activities and by simplifying processes and ensuring consistent practices across
different business lines.
‰ Support greater integration of risk in the business, while managing the high rate of change with more dynamic assessment and monitoring of the
risks that are being taken.
‰ Continue to enhance our risk management infrastructure through greater integration of our systems, data and models to ensure ongoing alignment
of these critical elements.
2015 Accomplishments
‰ Leveraged our capital processes to enhance our risk appetite and limit framework through further alignment with our businesses’ capacity to bear risk.
‰ Developed and embedded our stress testing capabilities in business management processes and provided additional risk insights.
‰ Continued to improve our risk culture as evidenced by internal and external surveys.
‰ Fulfilled rising regulatory expectations, evidenced by improvements in stress testing, market risk measurement and anti-money laundering.
‰ Continued to develop the next generation of our risk infrastructure by integrating, automating and upgrading foundational capabilities.
Gross Impaired
Loan Formations ($ millions)
Gross Impaired
Loan Balances* ($ millions)
Provision for
Credit Losses ($ millions)
Total Allowance for
Credit Losses* ($ millions)
3,101
2,449
2,142
1,921
2,976
2,544
2,048
1,959
2012
2013
2014
2015
2012
2013
2014
2015
761
470
597
561 561
612 612
357
3
2012
(10)
2013
2014
2015
Collective provision
Specific provisions
Adjusted specific provisions
1,259
1,221
1,360
1,498
447
444
374
2012
2013
2014
357
2015
Collective allowance
Specific allowances
Level of new impaired loan
formations was 10% lower year
over year, reflecting decreases in
formations in both Canada and
the United States.
Gross impaired loans were 4%
lower year over year; excluding
the impact of stronger U.S. dollar
GIL were 13% lower.
* Excludes purchased credit impaired loans.
The total provision for credit
losses was 9% higher year over
year, reflecting lower recoveries
in Corporate Services and higher
provisions in Capital Markets
partially offset by reduced
provisions in the P&C business.
The total allowance for credit
losses increased 7% year over
year primarily due to the
stronger U.S. dollar, and remains
adequate.
* Excludes allowances related to Other
Credit Instruments.
Text and tables presented in a blue-tinted font in the Enterprise-Wide Risk Management section of the MD&A form an integral part of the 2015 annual consolidated
financial statements. They present required disclosures as set out by the International Accounting Standards Board in IFRS 7, Financial Instruments – Disclosures, which
permits cross-referencing between the notes to the financial statements and the MD&A. See Note 1 on page 140 and Note 5 on page 151 of the financial statements.
Adjusted results in this Enterprise-Wide Risk Management section are non-GAAP and are discussed in the Non-GAAP Measures section on page 33.
86 BMO Financial Group 198th Annual Report 2015
Overview
At BMO, we believe that risk management is every employee’s responsibility. We are guided by five core principles that inform our approach to
managing risk across the enterprise.
Our Approach to Risk Management
‰ Understand and manage.
‰ Protect our reputation.
‰ Diversify. Limit tail risk.
‰ Maintain strong capital and liquidity.
‰ Optimize risk return.
Our integrated and disciplined approach to risk management is fundamental to the success of our operations. All elements of our risk management
framework work together in support of prudent and measured risk-taking, while striking an appropriate balance between risk and return.
Our Enterprise Risk and Portfolio Management (ERPM) group develops our risk appetite, risk policies and limits, and provides independent review
and oversight across the enterprise on risk-related issues to achieve prudent and measured risk-taking that is integrated with our business strategy.
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Risks That May Affect Future Results
Top and Emerging Risks That May Affect Future Results
We are exposed to a variety of continually changing risks that have the potential to affect our business and financial condition. An essential mandate
of our risk management process is to proactively identify, assess, monitor and manage a broad spectrum of top and emerging risks. Our top and
emerging risk identification process consists of several forums for discussion with the Board, senior management and business thought leaders,
combining both bottom-up and top-down approaches to considering risk. Our assessment of top and emerging risks is used to develop action plans
and stress tests of our exposure to certain events.
In 2015, particular attention was given to the following top and emerging risks:
Slow Global Economic Growth
Concerns about global growth outside of North America could be triggered by a variety of disparate possible causes, ranging from disruption in
China or other emerging markets to conflicts in the Middle East, North Africa and Europe. These could result in market volatility spikes, lower
commodity prices, currency devaluations, rapid changes in capital flows, regional credit crises and disruption of the social fabric, and higher levels of
uncertainty that reduce growth, employment, trade and business investment. In the short run, market shocks can impact our Capital Markets business,
while over a longer period of time the broader impact could be felt through reduced North American economic growth and weaker credit quality in our
internationally exposed customers.
BMO benefits from an integrated North American strategy in diverse industries, with limited direct lending exposure outside the region and
with a footprint that partially acts as a natural hedge to commodity price and foreign exchange movements, wherein price declines/rises often
have offsetting impacts across different North American regions. We actively monitor sources of global growth and continually assess our portfolio
and business strategies against developments. We stress test our business plans and capital adequacy against severely adverse scenarios arising
outside North America and develop contingency plans and mitigation strategies to react to and offset such possible adverse political and/or
economic developments.
Further information on our direct and indirect European exposures is provided in the Select Geographic Exposures section on page 98.
Information and Cyber Security Risk
Information security is integral to BMO’s business activities, brand and reputation. Given our pervasive use of the internet and reliance on advanced
digital technologies, particularly the mobile and online banking platforms that serve our customers, BMO faces heightened information security risks,
including the threat of 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. BMO proactively invests in defences and procedures to prevent, detect, respond to and manage cyber
security threats. These include regular benchmarking and review of best practices, evaluation of the effectiveness of our key controls and
development of new controls, as needed, and ongoing investments in both technology and human resources to protect BMO, third parties that we
interact with, and our customers against these attacks. BMO also works with critical cyber security and software suppliers to bolster our internal
resources and technology capabilities in order to ensure BMO remains resilient in the face of any such attacks in a rapidly evolving threat landscape.
Protracted Low Oil Prices
The significant decline in oil and gas prices has challenged many companies in the sector and has resulted in wide-ranging actions by affected
companies to increase efficiency, reduce costs, limit capital outflows, sell assets and raise equity. Should oil and gas prices stay at a low level for a
prolonged period of time there will be greater challenges for the industry, with a deterioration of borrower repayment capacity and of borrower
ratings. The oil industry’s response to low prices has indirect negative impacts on commercial businesses and consumers in the oil-producing regions,
particularly in Alberta.
Low oil prices have resulted in quite different outcomes for other sectors and regions within the BMO footprint as lower oil prices have led to a
lower Canadian dollar and lower input costs for many consumers and businesses. Benefits of the lower oil price have shown through in the upturn of
Canadian manufacturing output and non-oil exports and we expect those positive trends to strengthen into 2016. Overall, lower oil prices are a net
positive for global and U.S. demand, and for Canadian non-energy exports.
BMO Financial Group 198th Annual Report 2015 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
Business Disruptors
The financial services industry is undergoing rapid change as technology enables non-traditional new entrants to compete in certain segments of the
banking market, in some cases with reduced regulation. New entrants may use new technologies, advanced data and analytic tools, lower cost to
serve, reduced regulatory burden and/or faster processes to challenge traditional banks. For example, new business models have been observed in
retail payments, consumer and commercial lending, foreign exchange and low cost investment advisory services. While we closely monitor business
disruptors, we also continue to adapt by making investments, including improving our mobile banking capabilities, building new branch formats, and
refining our credit decisioning tools. We further mitigate this risk by providing our customers with access to banking services across different
channels, focusing on improving customer loyalty and trust, using our own advanced data and analytical tools and leveraging current and future
partnerships. However, matching the pace of innovation exhibited by new and differently-situated competitors may require us and policy-makers to
adapt with greater pace.
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Other Factors That May Affect Future Results
General Economic and Market Conditions in the Countries in which We Conduct Business
We conduct business in Canada, the United States and a number of other countries. Factors such as the general health of capital and/or credit
markets, including liquidity, level of business activity, volatility and stability, could have a material impact on our business. As well, interest rates,
foreign exchange rates, consumer saving and spending, housing prices, consumer borrowing and repayment, business investment, government
spending and the rate of inflation affect the business and economic environments in which we operate. Therefore, the amount of business we
conduct in a specific geographic region and its local economic and business conditions may have an effect on our overall revenue and earnings.
For example, elevated consumer debt and housing price appreciation in some Canadian regions could create a vulnerability to higher credit losses for
the bank in the event of a general economic downturn or other negative catalyst.
Regulatory Requirements
The financial services industry is highly regulated, and we have experienced further changes in regulatory requirements as governments and
regulators around the world continue major reforms intended to strengthen the stability of the financial system. As a result, there is the potential for
higher capital requirements and increased regulatory costs which could lower our returns. We monitor developments to ensure BMO is well-
positioned to respond to and implement any required changes. Failure to comply with applicable regulatory and legal requirements may result in
litigation, financial losses, regulatory sanctions, enforcement actions, an inability to execute our business strategies, a decline in investor confidence
and harm to our reputation. Refer to the Legal and Regulatory Risk and Enterprise-Wide Capital Management sections on pages 114 and 70 for a more
complete discussion of our legal and regulatory risk.
Fiscal, Tax, Monetary and Interest Rate Policies
Our earnings are affected by fiscal, tax, monetary, regulatory and other economic policies in Canada, the United States and other jurisdictions.
Such policies may have the effect of increasing or reducing competition and uncertainty in the markets. Such policies may also adversely affect our
customers and counterparties in the countries in which we operate, contributing to a greater risk of default by these customers and counterparties.
As well, expectations in the bond and money markets related to inflation and central bank monetary policy have an effect on the level of interest
rates. Changes in market expectations and monetary policy are difficult to anticipate and predict. Fluctuations in interest rates that result from these
changes can have an impact on our earnings. Refer to the Market Risk section on page 100 for a more complete discussion of our interest rate risk
exposures. Changes in tax rates and tax policy can also have an impact on our earnings and, as discussed in the Critical Accounting Estimates section,
a reduction in income tax rates could lower the value of our deferred tax asset.
Acquisitions and Strategic Plans
We conduct thorough due diligence before completing an acquisition. However, it is possible that we could make an acquisition that subsequently
does not perform in line with our financial or strategic objectives. Our ability to successfully complete an acquisition may be subject to regulatory and
shareholder approvals and we may not be able to determine when, if or on what terms, the necessary approvals will be granted. Changes in the
competitive and economic environment, as well as other factors, may result in lower revenue, while higher than anticipated integration costs and
failure to realize expected cost savings after an acquisition could also adversely affect our earnings. Integration costs may increase as a result of
higher regulatory costs related to an acquisition, unanticipated costs that were not identified in the due diligence process or demands on
management time that are more significant than anticipated, as well as unexpected delays in implementing certain plans that in turn lead to delays
in achieving full integration. Our post-acquisition performance is also contingent on retaining the clients and key employees of acquired companies,
and there can be no assurance that we will always succeed in doing so.
Our financial performance is influenced by our ability to execute strategic plans developed by management. If these strategic plans do not meet
with success or if there is a change in these strategic plans, our earnings could grow at a slower pace or decline. In addition, our ability to execute our
strategic plans is dependent to a large extent on our ability to attract, develop and retain key executives, and there is no assurance we will continue
to be able to do so.
Level of Competition
The level of competition among financial services companies is high. Furthermore, non-financial companies have increasingly been offering products
and services traditionally provided by banks. Customer loyalty and retention can be influenced by a number of factors, including service levels, prices
for products and services, our reputation and the actions of our competitors. Also, laws and regulations enacted by regulatory authorities in the United
States and other jurisdictions in which we operate may provide advantages to our international competitors that could affect our ability to compete.
Changes in these factors or any subsequent loss of market share could adversely affect our earnings.
Currency Rates
The Canadian dollar equivalents of our revenues, expenses, assets and liabilities denominated in currencies other than the Canadian dollar are subject
to fluctuations in the value of the Canadian dollar relative to those currencies. Changes in the value of the Canadian dollar relative to the U.S. dollar
could affect the earnings of our small business, corporate and commercial clients in Canada. A strengthening of the U.S. dollar could increase the
value of our risk-weighted assets, lowering our capital ratios. Refer to the Foreign Exchange section on page 37, the Enterprise-Wide Capital
Management section on page 70 and the Market Risk section on page 100 for a more complete discussion of our foreign exchange risk exposures.
88 BMO Financial Group 198th Annual Report 2015
Changes to Our Credit Ratings, Capital and Funding Markets
Credit ratings are important to our ability to raise both capital and funding in order to support our business operations. Maintaining strong credit
ratings allows us to access capital markets at competitive pricing. Should our credit ratings experience a material downgrade, our costs of funding
would likely increase significantly and our access to funding and capital through capital markets could be reduced. In part, given changes in the
regulatory environment, capital and funding markets have been less liquid than previously. Reduced market liquidity could impact the valuation of
bank securities and the availability and pricing of bank funding. A material downgrade of our ratings could also have other consequences, including
those set out in Note 8 on page 156 of the financial statements.
Operational and Infrastructure Risks
As a large enterprise conducting business in multiple jurisdictions, we are exposed to many operational risks that can have a significant impact.
Such risks include the risk of fraud by employees or others, unauthorized transactions by employees and operational or human error. Given the
large volume of transactions we process on a daily basis, certain errors may be repeated or compounded before they are discovered and rectified.
Shortcomings or failures of our internal processes, employees or systems, or of services and products provided by third parties, including any of our
financial, accounting or other data processing systems, could lead to financial loss and damage our reputation. In addition, despite the contingency
plans we have in place, our ability to conduct business may be adversely affected by a disruption to the infrastructure that supports both our
operations and the communities in which we do business, including but not limited to disruption caused by public health emergencies or terrorist acts.
Legal Proceedings
We are subject to litigation arising in the ordinary course of business. The unfavourable resolution of any such litigation could have a material adverse
effect on our financial results. Damage to our reputation could also result, harming our future business prospects. Information about certain legal and
regulatory proceedings we currently face is provided in Note 26 on page 192 of the financial statements.
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Critical Accounting Estimates and Accounting Standards
We prepare our financial statements in accordance with International Financial Reporting Standards (IFRS). Changes that the International Accounting
Standards Board makes from time to time to these standards, which govern the preparation of our financial statements, can be difficult to anticipate
and may materially affect how we record and report our financial results. Significant accounting policies and future changes in accounting policies are
discussed in Note 1 on page 140 of the financial statements.
The application of IFRS requires management to make significant judgments and estimates that can affect the dates on which certain assets,
liabilities, revenues and expenses are recorded in our financial statements, as well as their recorded values. In making these judgments and
estimates, we rely on the best information available at the time. However, it is possible that circumstances may change or new information may
become available.
Our financial results could be affected for the period during which any such new information or change in circumstances became apparent, and
the extent of the impact could be significant. More information is included in the discussion of Critical Accounting Estimates on page 78.
Accuracy and Completeness of Customer and Counterparty Information
When deciding whether to extend credit or enter into other transactions with customers or counterparties, we may rely on information provided by
or on behalf of those customers and counterparties, including audited financial statements and other financial information. We may also rely on
representations made by customers and counterparties that the information they provide is accurate and complete. Our financial results could be
adversely affected if the financial statements or other financial information provided by customers or counterparties are materially misleading.
Caution
This Risks That May Affect Future Results section and the remainder of this Enterprise-Wide Risk Management section contain forward-looking statements.
Other factors beyond our control that may affect our future results are noted in the Caution Regarding Forward-Looking Statements on page 30.
We caution that the preceding discussion of risks that may affect future results is not exhaustive.
Framework and Risks
Enterprise-Wide Risk Management Framework
Our enterprise-wide risk management framework operates at all levels of the bank and consists of our three-lines-of-defence operating model and
our risk appetite framework, underpinned by our risk governance structure, and our strong risk culture.
3 Lines of
Defence
Operating
Model
Risk Appetite
Framework
Enterprise-Wide
Risk Management
Framework
Risk
Culture
Risk
Governance
BMO Financial Group 198th Annual Report 2015 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Types
The framework provides for management of each individual risk type: credit and counterparty, market, liquidity and funding, operational, model,
insurance, legal and regulatory, business, strategic, reputation, and environmental and social. We have identified risk types with a potentially material
impact on our business and we consider those based upon their materiality and our ability to manage and mitigate those risks.
Credit and
Counterparty
Market
Liquidity
and Funding
Operational
Model
Insurance
Legal and
Regulatory
Business
Strategic
Reputation
Environmental
and Social
Risk Principles
Within the framework, risk-taking and risk management activities across the enterprise are guided by our Risk Principles:
‰ management of risk is a responsibility at all levels of the organization;
‰ material risks to which the enterprise is exposed are identified, measured, managed, monitored and reported;
‰
risk identification and measurement will include both qualitative and quantitative elements, including views of risk relative to the external
operating environment and stress testing and scenario analysis;
‰ decision-making is based on a clear understanding of risk, accompanied by robust metrics and analysis; and
‰ an Economic Capital methodology is employed to measure and aggregate risk across all risk types and business activities in order to facilitate the
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incorporation of risk into business returns.
Three Lines of Defence
Our framework is anchored in the three-lines-of-defence approach to managing risk, which is fundamental to our operating model, as described below:
Three Lines of Defence
First Line:
‰ Operating groups, which own
the risks in their operations
Second Line:
‰ Enterprise Risk and Portfolio
Management (ERPM) group
‰ Corporate Support Areas (CSAs)
Third Line:
‰ Corporate Audit Division
Responsibilities
‰ Own, measure and manage all risks in their lines of business.
‰
Identify, monitor, quantify and report risks arising from their operating activities and initiatives.
‰ Establish appropriate internal control structures in accordance with our risk management framework.
‰ Pursue suitable business opportunities within their established risk appetite.
‰ Act within their delegated risk-taking authority as set out in established corporate policies.
‰ Provide independent oversight, effective challenge and independent assessment of risks and risk
management practices.
‰ Set enterprise risk management policies and establish infrastructure, processes and practices that
identify, assess, manage and monitor all significant risks across the enterprise.
Independently assess, quantify, monitor, manage, mitigate and report all significant risks.
‰
‰ Provide an independent assessment of the effectiveness of internal control within the enterprise,
including risk management and governance processes that support the enterprise, its objectives
and the Board of Directors’ discharge of its responsibilities.
Risk Culture
At BMO, we believe that risk management is the responsibility of every employee within the organization. This key tenet shapes and influences our
risk culture and is evident in the actions and behaviours of our employees and leaders as they identify, interpret and discuss risks, and make choices
and decisions that balance risks and opportunities and seek to optimize risk-adjusted returns. Our risk culture is deeply rooted within our policies,
business processes, risk management frameworks, risk appetite, limits and tolerances, capital management and compensation practices, and is
evident in every aspect of how we operate across the enterprise.
Our risk culture is grounded in a “Being BMO” risk management approach that encourages openness, constructive challenge and personal
accountability. Timely and transparent information sharing is key to how we engage stakeholders in key decisions and strategy discussions, thereby
bringing rigour and discipline to decision-making. This not only leads to the timely identification, escalation and resolution of issues, but also
encourages open communication, independent challenge and a clear understanding of the key risks faced by our organization, so that our employees
are equipped and empowered to make decisions and take action in a coordinated and consistent manner, supported by a strong monitoring and
control framework. Our governance and leadership forums, committee structures and learning curriculums also reinforce and foster our risk culture.
Certain elements of our risk culture that are embedded throughout the enterprise include:
‰ Risk appetite – promotes a clear understanding of the most prevalent risks that our businesses face and facilitates alignment of business strategies
within our risk appetite, leading to sound business decision-making and execution, supported by a strong monitoring framework.
‰ Communication and escalation channels – encourages information sharing and engagement between ERPM and the operating groups, leading to
greater transparency and open and effective communication. We also foster and encourage a culture in which concerns about potential or emerging
risks are escalated to senior management so that they can be evaluated and appropriately addressed.
‰ Compensation philosophy – pay is aligned with prudent risk-taking to ensure that compensation rewards the appropriate use of capital and does
not encourage excessive risk-taking.
‰ Training and education – our programs are designed to foster a deep understanding of BMO’s capital and risk management frameworks across the
enterprise, providing employees and management with the tools and awareness they need to fulfill their responsibilities for independent oversight
regardless of their position in the organization. Our education strategy has been developed in partnership with BMO’s Institute for Learning, our risk
management professionals, external risk experts and teaching professionals.
‰ Rotation programs – two-way rotation allows employees to transfer between ERPM and the operating groups, thereby effectively embedding our
strong risk culture across the enterprise.
90 BMO Financial Group 198th Annual Report 2015
Risk Governance
Our enterprise-wide risk management framework is founded on a governance approach that includes a robust committee structure and a
comprehensive set of corporate policies and limits, each of which is approved by the Board of Directors or its committees, as well as specific
corporate standards and operating procedures. Our corporate policies outline frameworks and objectives for every significant risk type, in order to
ensure that risks to which the enterprise is exposed are appropriately identified, managed, measured, monitored and reported in accordance with our
risk appetite. Specific policies govern key risks such as credit, market, liquidity and funding, model, and operational risks. This enterprise-wide risk
management framework is governed at all levels through a hierarchy of committees and individual responsibilities as outlined in the diagram below.
Our risk management framework is reviewed on a regular basis by the Risk Review Committee of the Board of Directors in order to provide
guidance for the governance of our risk-taking activities. In each of our operating groups, management monitors governance activities, controls, and
management processes and procedures. Management also oversees their effective implementation within our overall risk management framework.
Individual governance committees establish and monitor further risk management limits, consistent with and subordinate to the Board-approved limits.
Risk Governance Framework
Board of Directors
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Risk Review
Committee
Risk Management Committee
Chief Executive Officer
Audit and Conduct Review
Committee
Balance Sheet
and Capital
Management
Reputation
Risk
Management
Operational
Risk
Management
Model
Risk
Management
First Line of Defence
Second Line of Defence
Third Line of Defence
Operating Groups
Enterprise Risk and
Portfolio Management
Corporate Support
Areas/Groups
Corporate Audit Group
Appropriate risk governance frameworks, including our three lines of defence, are in place in all our material businesses and entities:
Board of Directors is responsible for supervising the management of
the business and affairs of BMO. The Board, either directly or through its
committees, is responsible for oversight in the following areas: strategic
planning, defining risk appetite, the identification and management of
risk, capital management, fostering a culture of integrity, internal
controls, succession planning and evaluation of senior management,
communication, public disclosure and corporate governance.
Risk Review Committee of the Board of Directors (RRC) assists
the Board in fulfilling its oversight responsibilities in relation to
BMO’s identification and management of risk, adherence to risk
management corporate policies and procedures, compliance with
risk-related regulatory requirements and the evaluation of the Chief
Risk Officer. Our risk management framework is reviewed on a regular
basis by the RRC in order to provide guidance for the governance of
our risk-taking activities.
Audit and Conduct Review Committee of the Board of Directors
assists the Board in fulfilling its oversight responsibilities for the
integrity of BMO’s financial reporting, the effectiveness of BMO’s
internal controls and the performance of its internal and external
audit functions.
Chief Executive Officer (CEO) is directly accountable to the Board for
all of BMO’s risk-taking activities. The CEO is supported by the Risk
Management Committee and its sub-committees, as well as ERPM.
Chief Risk Officer (CRO) reports directly to the CEO and is head of
ERPM. The CRO is responsible for providing independent review and
oversight of enterprise-wide risks and leadership on risk issues,
developing and maintaining a risk management framework and
fostering a strong risk culture across the enterprise.
Risk Management Committee (RMC) is BMO’s senior risk committee.
RMC reviews and discusses significant risk issues and action plans that
arise in executing the enterprise-wide strategy. RMC provides risk
oversight and governance at the highest levels of management. This
committee is chaired by the CRO and its members include the heads
of our operating groups, CEO and CFO.
RMC Sub-Committees have oversight responsibility for the risk
implications and balance sheet impacts of management strategies,
governance practices, risk measurement, model risk management and
contingency planning. RMC and its sub-committees provide oversight
of the processes whereby the risks assumed across the enterprise are
identified, measured, managed, monitored and reported in accordance
with policy guidelines, and are held within limits and risk tolerances.
Enterprise Risk and Portfolio Management (ERPM) as the risk
management second line of defence, provides comprehensive risk
management oversight. It promotes consistency in risk management
practices and standards across the enterprise. ERPM supports a
disciplined approach to risk-taking in fulfilling its responsibilities for
independent transactional approval and portfolio management, policy
formulation, risk reporting, stress testing, modelling, vetting and risk
education. This approach seeks to meet enterprise objectives and to
ensure that risks assumed are consistent with BMO’s risk appetite.
Operating Groups are responsible for identifying, measuring, managing,
monitoring and reporting risk within their respective lines of business.
They exercise business judgment and seek to ensure that effective
policies, processes and internal controls are in place and that significant
risk issues are reviewed with ERPM. Individual governance committees
and ERPM establish and monitor further risk management limits that are
consistent with and subordinate to the Board-approved limits.
BMO Financial Group 198th Annual Report 2015 91
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Appetite Framework
Our Risk Appetite Framework consists of our Risk Appetite Statement, key risk metrics and corporate policies, standards and guidelines, including the
related limits, concentration levels and controls defined therein. Our risk appetite defines the amount of risk that BMO is willing to assume given our
guiding principles and capital capacity, and thus supports sound business initiatives, appropriate returns and targeted growth. Our risk appetite is
integrated into our strategic and capital planning processes and performance management system. On an annual basis, senior management
recommends our Risk Appetite Statement and key risk metrics to the RMC and the Board of Directors for approval. Our Risk Appetite Statement is
articulated and applied consistently across the enterprise, with key enterprise businesses and entities articulating their own risk appetite statements
within this framework. Among other things, our risk appetite requires:
‰
‰
‰ maintaining strong capital, liquidity and funding positions that meet or exceed regulatory requirements and the expectations of the market;
‰ new products and initiatives are subject to rigorous review and approval and new acquisitions must provide a good strategic, financial and cultural
that everything we do is guided by principles of honesty, integrity and respect, as well as high ethical standards;
taking only those risks that are transparent, understood, measured, monitored and managed;
fit, and have a high likelihood of creating value for our shareholders;
‰ setting capital limits based on our risk appetite and strategy and having our lines of business optimize risk-adjusted returns within those limits;
‰ maintaining a robust recovery framework that enables an effective and efficient response in a severe crisis;
‰ using Economic Capital, regulatory capital and stress testing methodologies to understand our risks and guide our risk-return assessments;
‰
‰
‰
targeting an investment grade credit rating at a level that allows competitive access to funding;
limiting exposure to low-frequency, high-severity events that could jeopardize BMO’s credit ratings, capital position or reputation;
incorporating risk measures and risk-adjusted returns into our performance management system and including an assessment of performance
against our risk appetite and return objectives in compensation decisions;
‰ maintaining effective policies, procedures, guidelines, compliance standards and controls, training and management that guide the business
practices and risk-taking activities of all employees so that they help optimize risk-adjusted returns and adhere to all legal and regulatory
obligations and thus protect BMO’s reputation; and
‰ protecting the assets of BMO and BMO’s clients by maintaining a system of effective limits and strong operational risk controls.
Risk Limits
Our risk limits are shaped by our risk principles, reflect our risk appetite, and inform our business strategies and decisions. In particular, we consider
risk diversification, exposure to loss and risk-adjusted returns when setting limits. These limits are reviewed and approved by the Board of Directors
and/or management committees and include:
‰ Credit and Counterparty Risk – limits on group and single-name exposures and material country, industry, and portfolio/product segments;
‰ Market Risk – limits on economic value and earnings exposures to stress scenarios;
‰ Liquidity and Funding Risk – limits on minimum levels of liquid assets and maximum levels of asset pledging and wholesale funding, as well as
guidelines approved by senior management related to liability diversification, financial condition, and credit and liquidity exposure appetite;
Insurance Risk – limits on policy exposure and reinsurance arrangements; and
‰
‰ Model Risk – limits on potential capital erosion due to model mis-estimation, data shortcomings, or the use of unvalidated models.
The Board of Directors, after considering recommendations from the RRC and the RMC, annually reviews and approves key risk limits and in turn
delegates them to the CEO. The CEO then delegates more specific authorities to the senior executives of the operating groups (first line of defence),
who are responsible for the management of risk in their respective areas, and the CRO (second line of defence). These delegated authorities allow
the officers to set risk tolerances, approve geographic and industry sector exposure limits within defined parameters, and establish underwriting and
inventory limits for trading and investment banking activities. The criteria whereby these authorities may be further delegated throughout the
organization, as well as the requirements relating to documentation, communication and monitoring of delegated authorities, are set out in corporate
policies and standards.
Risk Identification, Review and Approval
Risk identification is an essential step in recognizing key inherent risks that we face, understanding the potential for loss and then acting to mitigate
these risks. A Risk Register is maintained to comprehensively identify and manage key risks, supporting the implementation of the bank’s Risk
Appetite Framework and assisting in identifying the primary risk categories for which Economic Capital is reported and stress capital consumption is
estimated. Our enterprise and ad-hoc stress testing processes have been developed to assist in identifying and evaluating these risks. Risk review
and approval processes are established based on the nature, size and complexity of the risks involved. Generally, this involves a formal review and
approval by either an individual or a committee, independent of the originator. Delegated authorities and approvals by category are outlined below.
Portfolio transactions – transactions are approved through risk assessment processes for all types of transactions at all levels of the enterprise,
which include operating group recommendations and ERPM approval of credit risk, and transactional and position limits for market risk.
Structured transactions – new structured products and transactions with significant legal, regulatory, accounting, tax or reputation risk are reviewed
by the Reputation Risk Management Committee or the Trading Products Risk Committee, as appropriate.
Investment initiatives – documentation of risk assessments is formalized through our investment spending approval process, which is reviewed and
approved by Corporate Support areas.
New products and services – policies and procedures for the approval of new or modified products and services offered to our customers are
reviewed and approved by Corporate Support areas, as well as by other senior management committees, including the Operational Risk Committee
and Reputation Risk Management Committee, as appropriate.
92 BMO Financial Group 198th Annual Report 2015
Risk Monitoring
Enterprise-level risk transparency and monitoring and associated reporting are critical process components of our risk management framework and
corporate culture, that allow senior management, committees and the Board of Directors to effectively exercise their business management, risk
management and oversight responsibilities at enterprise, operating group and key legal entity levels. Internal reporting includes a synthesis of the
key risks and associated metrics that the enterprise currently faces. Our reporting highlights our most significant risks, including assessments of our
top and emerging risks, to provide the Board of Directors, its committees and any other appropriate executive and senior management committees
with timely, actionable and forward-looking risk reporting. This reporting includes supporting metrics and material to facilitate assessment of these
risks relative to our risk appetite and the relevant limits established within our Risk Appetite Framework.
On a regular basis, reporting on risk issues is also provided to stakeholders, including regulators, external rating agencies and our shareholders,
as well as to others in the investment community.
Risk-Based Capital Assessment
Two measures of risk-based capital are used by BMO: Economic Capital and Regulatory Capital. Both are aggregate measures of the risk that we take on
in pursuit of our financial targets and enable us to evaluate risk-adjusted returns. Our operating model provides for the direct management of each type
of risk, as well as the management of all risks on an integrated basis. Measuring the economic profitability of transactions or portfolios incorporates a
combination of both expected and unexpected losses to assess the extent and correlation of risk before authorizing new exposures. Both expected and
unexpected loss measures for a transaction or a portfolio reflect current market conditions, the inherent risk in the position and, as appropriate, credit
quality. Risk-based capital methods and model inputs are reviewed and/or recalibrated on an annual basis, as applicable. Our risk-based capital models
provide a forward-looking estimate of the difference between our maximum potential loss in economic (or market) value and our expected loss,
measured over a specified time interval and using a defined confidence level.
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Stress Testing
Stress testing is a key element of our risk and capital management frameworks. It informs our strategy, business planning and decision-making
processes.
Governance of the stress testing framework resides with senior management, including the Enterprise Stress Testing Steering Committee.
This committee is comprised of business, risk and finance executives and is accountable for the oversight of BMO’s stress testing framework and for
reviewing and challenging enterprise stress test results. Stress testing and enterprise-wide scenarios associated with the Internal Capital Adequacy
Assessment Process (ICAAP), including recommended actions that the organization would likely take to manage the impact of the stress event, are
presented to senior management and the RRC. Stress testing associated with the Comprehensive Capital Analysis and Review (CCAR) and the mid-year
Dodd-Frank Capital Stress Test (DFAST) – which are U.S. regulatory requirements for BMO Financial Corp. – and other regulatory stress tests are similarly
governed within the applicable entities. Stress testing specific risks, businesses or exposures, so called “ad hoc stress testing”, is also conducted
in conjunction with business decision processes, including strategy development, in risk assessments and is reviewed by the RMC and/or RRC as
appropriate.
Enterprise Stress Testing
Enterprise stress testing supports our internal capital adequacy assessment and target-setting through analysis of the potential effects of low-
frequency, high-severity events on our balance sheet, earnings, liquidity and capital positions. Scenario selection is a multi-step process that considers
the enterprise’s material and idiosyncratic risks and the potential impact of new or emerging risks, as well as the macroeconomic environment, on
our risk profile. Scenarios may be defined by senior management, the Board of Directors or regulators, and are developed in conjunction with the
Economics group. To the extent not prescribed by a regulator, the Economics group translates the scenarios into macroeconomic and market variables
that include but are not limited to GDP growth, yield curve estimates, unemployment, housing starts, real estate prices, stock index growth and
changes in corporate profits. The scenarios are then used by our operating, risk and finance groups to estimate future losses and financial
performance.
Quantitative models and qualitative approaches are utilized to assess the impact of changes in the macroeconomic environment on our
income statement and balance sheet and the resilience of our capital over a forecast horizon. Stress test results, including mitigating actions,
are benchmarked and challenged by relevant business units and senior management, including the Enterprise Stress Testing Steering Committee
and RMC.
Ad Hoc Stress Testing
Through our stress testing framework, we embed stress testing in our strategy, business planning and decision-making at various levels of our
organization. Ad hoc stress testing is conducted regularly by our operating and risk groups to support risk identification, business analysis and
strategic decision-making. Such stress testing is used as a tool to assess the potential longer term impacts of risks arising in a changing environment,
such as a material and sustained period of low oil prices.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit and Counterparty Risk
Credit and counterparty risk is the potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or
honour another predetermined financial obligation.
Credit and counterparty risk underlies every lending activity that BMO enters into, and also arises in the transacting of trading and other capital
markets products, the holding of investment securities and the activities related to securitization. Credit risk is the most significant measurable risk
BMO faces. Proper management of credit risk is essential to our success, since the failure to effectively manage credit risk could have an immediate
and significant impact on our earnings, financial condition and reputation.
Credit and Counterparty Risk Governance
The objective of our credit risk management framework is to ensure all material credit risks to which the enterprise is exposed are identified,
measured, managed, monitored and reported. The RRC has oversight of the management of all risks faced by the enterprise, including the credit risk
management framework. BMO’s credit risk management framework incorporates governing principles which are defined in a series of corporate
policies and standards, and which flow through to more specific guidelines and procedures. These are reviewed on a regular basis and modified
when necessary to keep them current and consistent with BMO’s risk appetite. The structure, limits, collateral requirements, monitoring, reporting
and ongoing management of our credit exposures are all governed by these credit risk management principles.
Lending officers in the operating groups are accountable for recommending credit decisions based on the completion of appropriate due
diligence, and they assume ownership of the risks. Credit officers in ERPM approve these credit decisions and are accountable for providing an
objective assessment of the lending recommendations and independent oversight of the risks assumed by the lending officers. All of these
experienced and skilled individuals are subject to a rigorous lending qualification process and operate in a disciplined environment with clear
delegation of decision-making authority, including individually delegated lending limits, which are reviewed annually. Credit decision-making is
conducted at the management level appropriate to the size and risk of each transaction in accordance with comprehensive corporate policies,
standards and procedures governing the conduct of credit risk activities. Corporate Audit Division reviews and tests management processes and
controls and samples credit transactions in order to assess adherence to credit terms and conditions, as well as to governing policies, standards and
procedures.
All credit risk exposures are subject to regular monitoring. Performing accounts are reviewed on a regular basis, with most commercial and
corporate accounts reviewed at least annually. The frequency of review increases in accordance with the likelihood and size of potential credit
losses, with deteriorating higher-risk situations referred to specialized account management groups for closer attention, when appropriate. In addition,
regular portfolio and sector reviews are carried out, including stress testing and scenario analysis based on current, emerging or prospective risks.
Reporting is provided at least quarterly to the Board and senior management committees in order to keep them informed of developments in our
credit risk portfolios, including changes in credit risk concentrations and significant emerging credit risk issues, and to allow appropriate actions to be
taken where necessary.
Credit and Counterparty Risk Management
Collateral Management
Collateral is used for credit and/or counterparty risk mitigation purposes to minimize losses that would otherwise be incurred upon the occurrence
of a default. Depending on the type of borrower, the assets available and the structure and term of the credit obligations, collateral can take
various forms. For corporate and commercial borrowers, collateral can take the form of pledges of the assets of a business, such as accounts
receivable, inventory, machinery and real estate, or personal assets pledged in support of guarantees. On a periodic basis, collateral is subject to
regular revaluation specific to asset type.
For loans, the value of collateral is initially established at the time of origination, and the frequency of revaluation is dependent on the type of
collateral. Credit officers in ERPM provide independent oversight of collateral documentation and valuation. For collateral in the form of investor-
owned commercial real estate, a full external appraisal of the property is obtained at the time of loan origination, except where the loan is below a
specified threshold amount, in which case an internal evaluation and a site inspection are conducted. Internal evaluation methods may consider tax
assessments, purchase price, real estate listing or realtor opinion. The case for an updated appraisal is reviewed annually, with consideration given to
the borrower risk rating, existing tenants and lease contracts, as well as current market conditions. In the event a loan is classified as impaired,
depending on its size, a current external appraisal, evaluation or restricted use appraisal is obtained and updated every 12 months while the loan is
classified as impaired. For residential real estate that has a loan-to-value (LTV) ratio of less than 80%, an external property appraisal is routinely
obtained at the time of loan origination. In certain low LTV ratio cases, BMO may use an external service provided by Canada Mortgage and Housing
Corporation to assist in determining whether a full property appraisal is necessary. For high LTV ratio (greater than 80%) insured mortgages, BMO
obtains the value of the property through available means and the default insurer confirms the value.
Collateral for our trading products is primarily comprised of cash and high-quality liquid securities (U.S. and Canadian treasury securities, U.S.
agency securities and Canadian provincial government securities) that are monitored and margined on a daily basis. Collateral is obtained under the
contractual terms of standardized industry documentation. With limited exceptions, we utilize the International Swaps and Derivatives Association Inc.
(ISDA) Master Agreement with a Credit Support Annex (CSA) to document our collateralized trading relationships with our counterparties for non-
centrally cleared over-the-counter (OTC) derivatives. CSAs entitle a party to demand collateral (or other credit support) when its OTC derivatives
exposure to the other party exceeds an agreed amount (threshold). Collateral transferred can include an independent amount (initial margin) and/or
variation margin. CSAs contain, among other things, provisions setting out acceptable collateral types and how they are to be valued (discounts are
often applied to the market values), as well as thresholds, whether or not the collateral can be re-pledged by the recipient and how interest is to be
calculated.
To document our contractual trading relationships with our counterparties for repurchase transactions, we utilize master repurchase agreements
and for securities lending transactions, we utilize master securities lending agreements.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
94 BMO Financial Group 198th Annual Report 2015
Portfolio Management
BMO’s credit risk governance policies set an acceptable level of diversification. Limits may be used for several portfolio dimensions, including industry,
specialty segments (e.g., hedge funds and leveraged lending), country, product and single-name concentrations. At year end, our credit assets
consisted of a well-diversified portfolio comprised of millions of clients, the majority of them consumers and small to medium-sized businesses. The
diversification of our credit exposure may be supplemented by the purchase or sale of insurance through guarantees or credit default swaps.
Wrong-way Risk
Wrong-way risk occurs when exposure to a counterparty is highly correlated with the credit quality of collateral or another intended mitigant of the
risk from that counterparty. There is specific wrong-way risk, which arises when the counterparty and the market risk factors affecting that mitigant
display a high correlation, and general wrong-way risk, which arises when the credit quality of the counterparty, for non-specific reasons, is highly
correlated with macroeconomic or other factors that affect the value of the mitigant. Our procedures require that specific wrong-way risk be identified
in transactions and accounted for in the calculation of risk. Stress testing of wrong-way risk is conducted monthly and can be used to identify
existing/emerging concentrations of general wrong-way risk in our portfolios.
Credit and Counterparty Risk Measurement
We quantify credit risk at both the individual borrower or counterparty and the portfolio level. In order to limit earnings volatility, manage expected
credit losses and minimize unexpected losses, credit risk is assessed and measured using the following risk-based parameters:
M
D
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A
Exposure at Default (EAD) represents an estimate of the outstanding amount of a credit exposure at the time a default may occur. For off-balance
sheet amounts and undrawn amounts, EAD includes an estimate of any further amounts that may be drawn at the time of default.
Loss Given Default (LGD) is the amount that may not be recovered in the event of a default, presented as a proportion of the exposure at default.
Probability of Default (PD) represents the likelihood that a borrower or counterparty will go into default over a one-year time horizon, estimated at
a high confidence level.
Expected Loss (EL) is a measure representing the loss that is expected to occur in the normal course of business in a given period of time. EL is
calculated as a function of EAD, LGD and PD.
Under OSFI rules, there are three approaches available for the measurement of credit risk: Standardized, Foundation Internal Ratings Based and
Advanced Internal Ratings Based (AIRB). Subject to a transitional floor based on the Standardized Approach, we apply the AIRB Approach for
calculations of credit risk in our portfolios, including portfolios of our subsidiary BMO Financial Corp. The Standardized Approach is currently being used
for measurements related to the acquired M&I portfolio, while we continue to execute our plan to transition this portfolio to the AIRB Approach.
Risk Rating Systems
BMO’s risk rating systems are designed to assess and measure the risk of any exposure. The rating systems differ for retail (consumer and small
business) and wholesale (corporate and commercial) portfolios.
Credit risk measures are validated and back-tested regularly – quarterly in the case of retail models and annually in the case of wholesale models.
Please refer to pages 112 and 113 for a discussion of our model risk mitigation processes.
Retail (Consumer and Small Business)
The retail portfolios are made up of a diversified group of individual customer accounts and include residential mortgages, personal loans, credit
cards and small business loans. These loans are managed in pools of homogeneous risk exposures. For these pools, decision support systems are
developed using established statistical techniques and expert systems for underwriting and monitoring purposes. Adjudication models, behavioural
scorecards, decision trees and expert knowledge are combined to produce optimal credit decisions in a centralized and automated environment.
The retail risk rating system assesses the borrower’s risk based on a narrow range of likely expected conditions, primarily more recent in nature,
including delinquency, loan-to-value ratio and loan utilization rate. Product lines within each of the retail risk areas are separately modelled so the
risk-based parameters capture the distinct nature of each product. A final segmentation then sorts each exposure within a product line into
homogeneous pools of retail risk that reflect common risk-based parameters. Each pool is assigned a unique combination of PD, LGD and EAD
parameters that captures its segment-specific credit risk.
The retail risk rating system is designed to generate estimates of the value of credit risk parameters as accurately as possible but is subject to
uncertainty. During the calibration process, adjustments are made at the parameter level for each segment to account for this uncertainty. The retail
parameters are tested quarterly and calibrated on an annual basis to incorporate additional data points in the parameter estimation process, ensuring
that the most recent experience is incorporated.
Retail Credit Probability of Default Bands by Risk Rating
Risk profile
Exceptionally low
Very low
Low
Medium
High
Default
Probability of default band
≤ 0.05%
> 0.05% to 0.20%
> 0.20% to 0.75%
> 0.75% to 7.00%
> 7.00% to 99.99%
100%
Wholesale (Corporate, Commercial and Sovereign)
Within wholesale portfolios, we utilize an enterprise-wide risk rating framework that is applied to all of our sovereign, bank, corporate and
commercial counterparties. One key element of this framework is the assignment of appropriate borrower or counterparty risk ratings (BRRs). A suite
of general and sector-specific risk rating models have been developed within each asset class to capture the key quantitative and qualitative risk
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
factors associated with borrowers in different industries and portfolios. Risk ratings are assigned using the appropriate internal model. BRRs are
assessed and assigned at the time of loan origination and reviewed at least annually. More frequent reviews are conducted for borrowers with higher
risk ratings, borrowers that trigger a review through a rating change or that experience covenant breaches, and borrowers requiring or requesting
changes to credit facilities. The assigned ratings are mapped to a PD over a one-year time horizon. As a borrower migrates between risk ratings, the
PD associated with the borrower changes.
BMO employs a master scale with 14 BRRs above default, and PDs are assigned to each grade within an asset class to reflect the long-run
average of one-year default rates. PD estimates are updated periodically based on internal default experience over a period of more than five years
that covers at least one full economic cycle, supplemented by external benchmarking, as applicable.
BMO also assigns an LGD estimate to each separate facility provided to a borrower at the time of origination. LGD estimates are a measure of the
potential economic loss that would be incurred for a facility if the borrower were to default during a period of economic distress. The LGD estimate
provides an inverse measure of the protection against loss afforded by the assigned collateral, as applicable, and considers the supporting structural
elements of the facility, including seniority, margin arrangements, and product and sectoral characteristics. LGD models have been developed for each
asset class using internal data that covers a period of more than seven years, capturing a full economic cycle, and are supplemented by external data,
when necessary.
As demonstrated in the table below, our internal risk rating system corresponds in a logical manner to those of external rating agencies.
Wholesale Borrower Risk Rating Scale
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Description of risk
Moody’s Investors Service
implied equivalent
Standard & Poor’s
implied equivalent
BMO rating
Acceptable
I-1 to I-3
I-4 to I-5
I-6 to I-7
S-1 to S-2
S-3 to S-4
Problem
P-1
P-2 to P-3
Undoubted to minimal
Modest
Average
Acceptable
Marginal
Aaa to Aa3
A1 to Baa1
Baa2 to Baa3
Ba1 to Ba2
Ba3 to B1
Deteriorating
Watchlist
B2
B3 to Ca
Default and impaired
T1, D-1 to D-4
Default/default and
impaired
C
Credit Quality Information
AAA to AA-
A+ to BBB+
BBB to BBB-
BB+ to BB
BB- to B+
B
B- to CC
D
Portfolio Review
Total enterprise-wide outstanding credit exposures were $623 billion at October 31, 2015, comprised of $358 billion in Canada, $236 billion in the
United States and $29 billion in other jurisdictions. This represents an increase of $76 billion or 14% from the prior year.
BMO’s loan book continues to be well-diversified by industry and geographic region and, consistent with the prior year, the consumer portfolio
represented the majority of loans. Gross loans and acceptances increased by $31 billion or 10% from the prior year (5% excluding the impact of the
stronger U.S. dollar) to $336 billion at October 31, 2015. Excluding the impact of the stronger U.S. dollar, the geographic mix of our Canadian and U.S.
portfolios was relatively consistent with the prior year, and represented 66.6% and 30.1% of total loans, respectively, compared with 70.0% and
26.3% in 2014. The consumer loan portfolio represented 53.4% of the total portfolio, a modest decrease from 56.8% in 2014. Approximately 88% of
the Canadian consumer portfolio and 97% of the U.S. consumer portfolio is secured. Business and government loans represented 46.6% of the total
portfolio, up from 43.2% in 2014, primarily due to the stronger U.S. dollar. Our loan portfolio is well-diversified by industry and we continue to
proactively monitor industry sectors that we consider warrant closer attention, including Canadian consumer loans and U.S. and Canadian direct and
indirect oil and gas exposures.
Further details on our loan book, including detailed breakdowns by industry and geographic region, can be found in Tables 7 to 15 on pages 124
to 130 and in Note 5 on page 151 of the financial statements. Details related to our credit exposures are discussed in Note 4 on page 148 of the
financial statements.
Real Estate Secured Lending
Residential mortgage and home equity line of credit (HELOC) exposures continue to be of interest in the current environment. BMO regularly performs
stress testing on its residential mortgage and HELOC portfolios to evaluate the potential effects of high-impact events. These stress tests incorporate
scenarios ranging from moderately to severely adverse. The credit losses forecast in these tests vary with the severity of the scenario and are
considered to be manageable.
Provision for Credit Losses (PCL)
Total PCL was $612 million in the current year, up 9% from $561 million in 2014. Detailed discussion of our PCL, including historical trends in PCL,
is provided on page 42, in Table 15 on page 130 and in Note 4 on page 148 of the financial statements.
Gross Impaired Loans (GIL)
Total GIL decreased by $89 million or 4% from 2014 to $1,959 million in 2015, with the decrease being attributed to Canada. Excluding the impact of
the stronger U.S. dollar, GIL were 13% lower. GIL as a percentage of gross loans and acceptances also decreased over the prior year from 0.67% in
2014 to 0.58% in 2015.
Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the year decreased from
$2,142 million in 2014 to $1,921 million in 2015. On a geographic basis, the United States accounted for the majority of impaired loan formations,
comprising 55.6% of total formations in 2015, compared with 56.8% in 2014. Further details on the breakdown of impaired loans by geographic
region and industry can be found in Table 11 on page 126 and in Note 4 on page 148 of the financial statements.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
96 BMO Financial Group 198th Annual Report 2015
Changes in Gross Impaired Loans and Acceptances (1)
(Canadian $ in millions, except as noted)
For the year ended October 31
GIL, beginning of year
Classified as impaired during the year
Transferred to not impaired during the year
Net repayments
Amounts written off
Recoveries of loans and advances previously written off
Disposals of loans
Foreign exchange and other movements
GIL, end of year
GIL as a % of gross loans and acceptances
(1) GIL excludes purchased credit impaired loans.
2015
2014
2013
2,048
1,921
(556)
(700)
(704)
–
(252)
202
1,959
0.58
2,544
2,142
(669)
(1,059)
(801)
–
(220)
111
2,048
0.67
2,976
2,449
(728)
(1,058)
(939)
–
(343)
187
2,544
0.91
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Allowance for Credit Losses (ACL)
Across all loan portfolios, BMO employs a disciplined approach to provisioning and loan loss evaluation, with the prompt identification of problem
loans being a key risk management objective. BMO maintains both specific and collective allowances for credit losses. Specific allowances reduce the
aggregate carrying value of credit assets for which there is evidence of deterioration in credit quality. We also maintain a collective allowance in order
to cover any impairment in the existing loan portfolio that cannot yet be associated with individually identified impaired loans. Our approach to
establishing and maintaining the collective allowance is based on the requirements of IFRS, in conjunction with guidelines issued by our regulator,
OSFI. Our collective allowance methodology groups loans on the basis of similar credit risk characteristics, and applies quantitative and qualitative
factors to determine the appropriate level for the collective allowance. The quantitative component of the methodology measures long-run expected
losses based on the PD, LGD and EAD risk parameters used to estimate risk-based capital. For commercial and corporate loans, key determinants of
incurred but not identified losses include the underlying risk rating of the borrower, industry sector, credit product and amount and quality of
collateral held. For consumer and small business loans, exposures are pooled based on similar risk characteristics and the levels of incurred but not
identified losses are determined from the long-run default and historical loss experience of each pool. The qualitative component of the methodology
reflects management’s judgment with respect to current and near-term macroeconomic and business conditions, portfolio-specific considerations,
credit quality trends, changes in lending practices and model factors. We review the collective allowance on a quarterly basis.
BMO maintains the allowance for credit losses at a level that we consider adequate to absorb credit-related losses. As at October 31, 2015, our
ACL was $2,052 million, comprised of specific allowances of $392 million and collective allowance of $1,660 million. This includes specific allowance
of $35 million and collective allowance of $162 million related to undrawn commitments and letters of credit that are considered other credit
instruments and recorded in other liabilities. Total ACL increased slightly year over year by $86 million, primarily due to the impact of the stronger
U.S. dollar. Our coverage ratios are trending positively, with ACL as a percentage of GIL increasing year over year.
The collective allowance increased by $118 million from 2014 to $1,660 million in 2015 due to the impact of the stronger U.S. dollar.
The collective allowance remains adequate and at year end represented 0.83% of credit risk-weighted assets, consistent with the prior year.
Factors contributing to the change in ACL are outlined in the table below. Further details on changes in ACL by country and portfolio can be found
in Tables 12 and 13 on page 128 and in Note 4 on page 148 of the financial statements.
Changes in Allowance for Credit Losses (1)
(Canadian $ in millions, except as noted)
For the year ended October 31
Specific ACL, beginning of year
Specific PCL (charge to income statement)
Recoveries of amounts written off in previous years
Write-offs
Foreign exchange and other movements
Specific ACL, end of year
Collective ACL, beginning of year
Collective PCL (charge to income statement)
Foreign exchange and other movements
Collective ACL, end of year
Total ACL
Comprised of:
Loans
Specific allowance for other credit instruments
Collective allowance for other credit instruments
ACL as a % of GIL (2)
(1) Includes allowances related to other credit instruments that are included in other liabilities.
(2) Ratio excludes specific allowances for other credit instruments that are included in other liabilities.
2015
2014
2013
424
612
456
(1,065)
(35)
392
1,542
–
118
1,660
2,052
1,855
35
162
103.0
485
561
624
(1,149)
(97)
424
1,485
–
57
1,542
1,966
1,734
50
182
93.6
476
597
772
(1,297)
(63)
485
1,460
(10)
35
1,485
1,970
1,665
41
264
75.8
BMO Financial Group 198th Annual Report 2015 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
Select Geographic Exposures
BMO’s geographic exposures are subject to a country risk management framework that incorporates economic and political assessments and
management of exposure within limits based on product, entity and the country of ultimate risk. We closely monitor our European exposure, and our
risk management processes incorporate stress tests as appropriate to assess our potential risk. Our exposure to European countries, as at October 31,
2015, including Greece, Ireland, Italy, Portugal and Spain (GIIPS), is set out in the tables that follow.
The table below outlines total net portfolio exposures for funded lending, securities (inclusive of credit default swap (CDS) activity), repo-style
transactions and derivatives. Funded lending is detailed by counterparty type, as well as by total commitments compared to the funded amount, in
the table on page 99. There has been a reduction in our exposures since October 31, 2014.
European Exposure by Country and Counterparty (1)
(Canadian $ in millions)
As at October 31, 2015
Funded
lending (2)
Securities (3)(4)
Repo-style transactions and derivatives (5)(6)
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M
Country
GIIPS
Greece
Ireland (7)
Italy
Portugal
Spain
Total – GIIPS
Eurozone (excluding GIIPS)
Germany
Netherlands
Finland
Other (8)
Total – Eurozone (excluding GIIPS)
Rest of Europe
Denmark
Norway
United Kingdom
Other (8)
Total – Rest of Europe
Total – All of Europe (9)
As at October 31, 2014
Country
Total – GIIPS
Total – Eurozone (excluding GIIPS)
Total – Rest of Europe
Total – All of Europe (9)
Total
Bank
Corporate
Sovereign
Total
Bank
Corporate
Sovereign
Total
–
8
2
–
63
73
72
245
1
322
640
6
26
387
104
–
–
–
–
–
–
15
520
–
–
535
248
897
70
2
523
1,217
1,236
1,752
–
–
–
–
–
–
1
13
–
–
14
–
–
49
–
49
63
–
–
–
–
–
–
–
–
–
–
–
–
1,158
131
324
188
1,174
664
324
188
1,801 2,350
453
–
324
169
701
897
443
171
946 2,212
2,747 4,562
–
2
2
–
4
8
13
9
5
66
93
4
–
713
19
736
837
–
19
5
–
–
24
–
15
–
21
36
–
–
8
8
16
76
–
–
–
–
–
–
–
–
–
8
8
–
–
1
–
1
9
–
21
7
–
4
32
13
24
5
95
137
4
–
722
27
753
922
Funded
lending (2)
Total
129
551
1,162
1,842
Securities (3)
Repo-style transactions and derivatives (5)(6)
Bank
Corporate
Sovereign
Total
Bank
Corporate
Sovereign
–
711
2,254
2,965
–
53
44
97
–
–
1,872
2,636
537
2,835
55
379
714
2,409
5,471
1,148
7
49
14
70
–
7
2
9
Total
62
435
730
1,227
Total net
exposure
–
29
9
–
67
105
1,259
933
330
605
3,127
711
923
1,552
302
3,488
6,720
Total net
exposure
191
3,622
4,727
8,540
(1) BMO has the following indirect exposures to Europe as at October 31, 2015:
– Collateral of €958 million to support trading activity in securities (€108 million from GIIPS) and €82 million of cash collateral held.
– Guarantees of $1.3 billion ($17 million to GIIPS).
(2) Funded lending includes loans (primarily trade finance).
(3) Securities include cash products, insurance investments and traded credit.
(4) BMO’s total net notional CDS exposure (embedded as part of the securities exposure in this table) to Europe was $153 million, with no net single-name* CDS exposure to GIIPS countries as at
October 31, 2015 (*includes a net position of $119 million (bought protection) on a CDS Index, of which 20% is comprised of GIIPS domiciled entities).
(5) Repo-style transactions are primarily with bank counterparties for which BMO holds collateral ($16 billion for Europe as at October 31, 2015).
(6) Derivatives amounts are marked-to-market, incorporating transaction netting where master netting agreements with counterparties have been entered into, and collateral offsets for counterparties
where a Credit Support Annex is in effect.
(7) Does not include Irish subsidiary reserves we are required to maintain with the Irish Central Bank of $76 million as at October 31, 2015.
(8) Includes countries with less than $300 million net exposure, with $25 million exposure to the Russian Federation as at October 31, 2015.
(9) Of our total net direct exposure to Europe, approximately 93% was to counterparties in countries with a rating of Aaa/AAA from at least one of Moody’s and S&P.
98 BMO Financial Group 198th Annual Report 2015
European Lending Exposure by Country and Counterparty (9)
(Canadian $ in millions)
Country
GIIPS
Greece
Ireland (7)
Italy
Portugal
Spain
Total – GIIPS
Eurozone (excluding GIIPS)
Germany
Netherlands
Finland
Other (8)
Total – Eurozone (excluding GIIPS)
Rest of Europe
Denmark
Norway
United Kingdom
Other (8)
Total – Rest of Europe
Total – All of Europe (9)
Refer to footnotes in the table on page 98.
Funded lending as at October 31, 2015
As at October 31, 2015
As at October 31, 2014
Bank
Corporate
Sovereign
Commitments
Funded
Commitments
Funded
Lending (2)
–
–
2
–
53
55
17
30
1
182
230
6
26
30
31
93
378
–
8
–
–
10
18
54
215
–
140
409
–
–
357
73
430
857
–
–
–
–
–
–
1
–
–
–
1
–
–
–
–
–
1
–
27
2
–
75
104
79
346
1
622
1,048
6
26
459
287
778
–
8
2
–
63
73
72
245
1
322
640
6
26
387
104
523
1,930
1,236
–
103
69
–
62
234
99
559
–
517
1,175
12
15
701
1,044
1,772
3,181
–
8
69
–
52
129
85
239
–
227
551
12
15
497
638
1,162
1,842
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Derivative Transactions
The following table represents the notional amounts of our over-the-counter (OTC) derivative contracts, comprised of those which are centrally
cleared and settled through a designated clearing house and those which are non-centrally cleared. The notional amounts of our derivatives represent
the amount to which a rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts
do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet. The fair values of OTC derivative contracts are
recorded in our Consolidated Balance Sheet.
Over-the-Counter Derivatives (1) (Notional amounts)
(Canadian $ in millions)
As at October 31
Interest Rate Contracts
Swaps
Forward rate agreements
Purchased options
Written options
Total interest rate contracts
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Written options
Total commodity contracts
Equity Contracts
Credit Default Swaps
Purchased
Written
Total credit default swaps
Total
(1) Certain comparative figures have been reclassified to conform with the current year’s presentation.
Non-centrally cleared
Centrally cleared
Total
2015
2014
2015
2014
2015
2014
690,375
2,563
21,344
24,154
814,178
34,713
19,267
22,955
2,269,412
430,181
–
–
1,861,499
326,771
–
–
2,959,787
432,744
21,344
24,154
2,675,677
361,484
19,267
22,955
738,436
891,113
2,699,593
2,188,270
3,438,029
3,079,383
76,083
339,467
393,098
28,297
28,960
51,616
279,119
299,480
37,245
36,913
865,905
704,373
11,929
6,172
4,103
22,204
47,114
5,611
9,385
14,996
13,559
8,526
4,166
26,251
48,702
6,507
10,232
16,739
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,054
–
1,054
2,294
1,751
4,045
76,083
339,467
393,098
28,297
28,960
51,616
279,119
299,480
37,245
36,913
865,905
704,373
11,929
6,172
4,103
22,204
47,114
6,665
9,385
16,050
13,559
8,526
4,166
26,251
48,702
8,801
11,983
20,784
1,688,655
1,687,178
2,700,647
2,192,315
4,389,302
3,879,493
BMO Financial Group 198th Annual Report 2015 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
Market Risk
Market risk is the potential for adverse changes in the value of BMO’s assets and liabilities resulting from changes in market variables such as
interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, and credit spreads, and includes the risk of credit
migration and default in our trading book.
BMO incurs market risk in its trading and underwriting activities and structural banking activities. The magnitude and importance of these activities
to the enterprise, along with the relative uncertainty of daily changes to market variables, require a strong and balanced market risk structure that
incorporates appropriate and defensible governance, management and measurement.
Trading and Underwriting Market Risk Governance
As part of our enterprise-wide risk management framework, we apply comprehensive governance and management processes to our market risk-
taking activities. The RRC has oversight of the management of market risk and approves the Market Risk Corporate Policy, along with limits governing
market risk exposures. The RMC, which recommends the Market Risk Corporate Policy for approval, regularly reviews and discusses significant market
risk issues and positions, and provides senior management oversight. These committees are informed of specific exposures or other factors that
expose BMO to unusual, unexpected, inappropriate or otherwise not fully identified or quantified risks associated with market or traded credit
exposures, as well as other relevant market risk issues. In addition, all individuals authorized to conduct trading and underwriting activities on behalf
of BMO are appropriately notified of BMO’s risk-taking governance, authority structure, procedures and processes, are given access to and guidance
on the relevant corporate policies and standards, and are expected to adhere to those standards.
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Trading and Underwriting Market Risk Management
We have strong, independent risk oversight within a policy framework that mandates comprehensive controls for the management of market risk.
We monitor an extensive range of risk metrics, including Value at Risk (VaR), Stressed Value at Risk (SVaR), stress and scenario tests, risk sensitivities
and operational metrics. We apply a comprehensive set of limits to these metrics, with appropriate monitoring, reporting and escalation of limit
breaches. Risk profiles of our trading and underwriting activities are maintained within our risk appetite, and are monitored and reported to traders,
management, senior executives and Board committees. Further key controls include the independent valuation of financial assets and liabilities, as
well as compliance with a model risk management framework to mitigate model risk.
BMO’s Market Risk group also provides oversight of structural market risk, which is managed by BMO’s Corporate Treasury group and described
on page 103.
Valuation Product Control
Within the Market Risk group, the Valuation Product Control (VPC) group is responsible for the independent valuation of all trading and available-for-
sale (AFS) portfolios within Capital Markets Trading Products and Corporate Treasury, to confirm that they are materially accurate by:
‰ developing and maintaining valuation adjustment policies and procedures in accordance with regulatory requirements and IFRS;
‰ establishing official rate sources for valuation of all portfolios; and
‰ providing an independent review of portfolios where prices supplied by traders are used for valuation.
Trader valuations are reviewed to determine whether they align with an independent assessment of the market value of the related portfolio. If the
valuation difference exceeds the prescribed tolerance threshold, a valuation adjustment is recorded in accordance with our accounting policy and
regulatory requirements. Prior to the final month-end general ledger close, the Valuation Operating Committee, comprised of key stakeholders from
the lines of business, Market Risk, Capital Markets Finance, Treasury and the Chief Accountant’s Group, reviews all valuation adjustments that are
proposed by the VPC group.
The Valuation Steering Committee is BMO’s senior management valuation committee. It meets at least monthly to address the more challenging
material valuation issues related to BMO’s portfolios, approves valuation methodology changes and acts as a key forum for discussing positions
categorized as Level 3 for financial reporting purposes and their inherent uncertainty.
At a minimum, the following are considered when determining appropriate valuation adjustments: credit valuation adjustments, closeout costs,
uncertainty, funding valuation adjustments, and liquidity and model risk. Also, a fair value hierarchy is used to categorize the inputs used in the
valuation of securities, liabilities, derivative assets and derivative liabilities. Level 1 inputs consist of quoted market prices, Level 2 inputs consist of
results from models that use observable market information and Level 3 inputs consist of results from models for which observable market
information is not available. Details of Level 1, Level 2 and Level 3 fair value measurements can be found in Note 18 on page 172 of the financial
statements.
Trading and Underwriting Market Risk Measurement
To capture the multi-dimensional aspects of market risk effectively, a number of metrics are used, including VaR, SVaR, stress testing, sensitivities,
position concentrations, market and notional values and revenue losses.
Value at Risk (VaR) is measured for specific classes of risk in BMO’s trading and underwriting activities related to interest rates, foreign
exchange rates, credit spreads, equity and commodity prices and their implied volatilities. This measure calculates the maximum loss likely to be
experienced in the trading and underwriting portfolios, measured at a 99% confidence level over a specified holding period.
Stressed Value at Risk (SVaR) is measured for specific classes of risk in BMO’s trading and underwriting activities related to interest rates,
foreign exchange rates, credit spreads, equity and commodity prices and their implied volatilities, where model inputs are calibrated to historical
data from a period of significant financial stress. This measure calculates the maximum loss likely to be experienced in the trading and
underwriting portfolios, measured at a 99% confidence level over a specified holding period.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
100 BMO Financial Group 198th Annual Report 2015
Although it is a valuable indicator of risk, VaR should always be viewed in the context of its limitations. Among the limitations of VaR is the
assumption that all positions can be liquidated within the assigned one-day holding period (ten-day holding period for regulatory calculations), which
may not be the case in illiquid market conditions, and that historical data can be used as a proxy to predict future market events. Generally, market
liquidity horizons are reviewed for suitability and updated where appropriate for relevant risk metrics. Scenario analysis and probabilistic stress
testing are performed daily to determine the potential impact of unusual and/or unexpected market changes on our portfolios. As well, historical and
event stresses are tested on a weekly basis, including tests of scenarios such as the stock market crash of 1987 and the collapse of Lehman Brothers
in 2008. Ad hoc analyses are run to examine our sensitivity to low-frequency, high-severity hypothetical scenarios. Scenarios are amended, added or
removed to better reflect changes in underlying market conditions. The results are reported to the lines of business, the RMC and the RRC on a regular
basis. Stress testing is limited by the fact that not all downside scenarios can be predicted and effectively modelled. Neither VaR nor stress testing
should be viewed as a definitive predictor of the maximum amount of losses that could occur in any one day, because these measures are based on
models and estimates (such as confidence levels) and their results could be exceeded in highly volatile market conditions. On a daily basis, exposures
are aggregated by lines of business and risk type and monitored against delegated limit levels, and the results are reported to the appropriate
stakeholders. BMO has a robust governance process in place to ensure adherence to delegated market risk limits. Amounts exceeding those limits
are reported to senior management on a timely basis for resolution and appropriate action.
In addition, we measure the market risk for trading and underwriting portfolios that meet regulatory criteria for trading book capital treatment
using the Internal Models Approach. For trading and underwriting portfolios covered by the Internal Models Approach, VaR is computed using BMO’s
Trading Book VaR model. This is a Monte Carlo scenario simulation model, and its results are used for market risk management and reporting of
exposures. The model computes one-day VaR results using a 99% confidence level, and those results reflect the historic correlations between the
different classes of market risk factors.
We use a variety of methods to verify the integrity of our risk models, including the application of back-testing against hypothetical losses.
This process assumes there are no changes in the previous day’s closing positions and then isolates the effects of each day’s price movements
against those closing positions. Models are validated by assessing how often the calculated hypothetical losses exceed the VaR measure over a
defined period. This testing result is in line with defined regulatory expectations, and its results confirm the reliability of our models. The volatility
data and correlations that underpin our models are updated monthly, so that VaR measures reflect current conditions.
Our models are used to determine market risk Economic Capital for each of our lines of business and to determine regulatory capital. For capital
calculation purposes, the longer holding periods and/or higher confidence levels that are used are not the same as those employed in day-to-day risk
management. Under the Model Risk Corporate Policy, models are subject to review by our Model Validation group prior to use. The Model Risk
Corporate Policy outlines minimum requirements for the identification, assessment, monitoring and management of models and model risk across the
enterprise, and is described on page 112.
Total Trading VaR increased year over year from client facilitation activities, the recent impact of more volatile historical data used for VaR
calculation and changes in market rates. Average Trading VaR is up moderately year over year. Beginning in the fourth quarter, market risk associated
with changes in the fair value of non-derivative liabilities attributable to fluctuations in our credit risk is no longer reflected in our VaR calculation to
better reflect our associated net risk position, resulting in a drop in Credit VaR and SVaR. Total Trading SVaR reduced moderately year over year, with
reductions in Credit SVaR offset by reduced diversification.
Total Trading Value at Risk (VaR) Summary (1)
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As at or for the year ended October 31
(pre-tax Canadian $ equivalent in millions)
Commodity VaR
Equity VaR
Foreign exchange VaR
Interest rate VaR
Credit VaR
Diversification
Total Trading VaR
Total Trading Stressed Value at Risk (SVaR) Summary (1)(2)
As at or for the year ended October 31
(pre-tax Canadian $ equivalent in millions)
Commodity SVaR
Equity SVaR
Foreign exchange SVaR
Interest rate SVaR
Credit SVaR
Diversification
Total Trading SVaR
2015
2014
Year-end
Average
High
Low
Year-end
(1.4)
(15.8)
(4.8)
(11.6)
(8.2)
nm
(17.7)
(0.3)
(3.3)
(0.4)
(3.3)
(1.8)
nm
(6.9)
(0.4)
(6.9)
(2.6)
(10.5)
(2.7)
9.8
(13.3)
(0.5)
(6.3)
(1.6)
(6.6)
(5.7)
9.7
(11.0)
2015
(0.5)
(3.2)
(0.5)
(5.8)
(5.5)
7.4
(8.1)
2014
Year-end
Average
High
Low
Year-end
(0.7)
(17.6)
(2.2)
(10.4)
(5.2)
15.0
(21.1)
(1.0)
(12.4)
(3.0)
(10.9)
(16.0)
21.0
(22.3)
(1.8)
(22.4)
(8.4)
(15.7)
(24.5)
nm
(29.3)
(0.5)
(7.2)
(0.8)
(7.9)
(4.7)
nm
(17.4)
(3.2)
(14.0)
(0.7)
(11.2)
(13.6)
20.6
(22.1)
(1) One-day measure using a 99% confidence interval. Losses are in brackets and benefits are presented as positive numbers.
(2) Stressed VaR is produced weekly.
nm – not meaningful
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 101
MANAGEMENT’S DISCUSSION AND ANALYSIS
Trading Net Revenue
The charts below present daily net revenue plotted against total trading VaR, along with a representation of daily net revenue distribution. During the
current year, the largest loss occurred on June 30, and was the result of normal trading activity and valuation adjustments. The largest gain occurred
on February 27, and was primarily due to normal trading and underwriting activity.
Frequency Distribution of Daily Net Revenues
November 1, 2014 to October 31, 2015 ($ millions)
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s
y
a
d
f
o
r
e
b
m
u
n
n
i
y
c
n
e
u
q
e
r
F
25
20
15
10
5
0
(2) (1) 0
1
2
3
4
5
6
7
8
9
10 11
12
13
14
15 16 17 18 19 20 21 22
23 24 25 31 32 34 35 37
Daily net revenues (pre-tax)
Trading Net Revenues versus Value at Risk
November 1, 2014 to October 31, 2015 ($ millions)
40
30
20
10
0
(10)
(20)
3
0
v
o
N
5
1
c
e
D
9
2
n
a
J
3
1
r
a
M
7
2
r
p
A
9
0
n
u
J
2
2
l
u
J
3
0
p
e
S
9
1
t
c
O
Daily Revenues
Total Trading VaR
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
102 BMO Financial Group 198th Annual Report 2015
Linkages between Balance Sheet Items and Market Risk Disclosures
The table below presents items reported in our Consolidated Balance Sheet that are subject to market risk, comprised of balances that are subject to
either traded risk or non-traded risk measurement techniques.
As at October 31, 2015
Subject to market risk
As at October 31, 2014
Subject to market risk
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
Consolidated
Balance Sheet
Traded
risk (1)
Non-traded
risk (2)
Not subject to
market risk
(Canadian $ in millions)
Assets Subject to Market Risk
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Trading
40,295
7,382
–
1,212
40,295
6,170
72,460
65,066
7,394
Available-for-sale
Held-to-maturity
Other
Securities borrowed or purchased
under resale agreements
Loans and acceptances (net of
allowance for credit losses)
48,006
9,432
1,020
68,066
334,024
–
–
–
–
–
48,006
9,432
1,020
68,066
334,024
Derivative instruments
38,238
35,924
2,314
–
–
–
–
–
–
–
–
–
28,386
6,110
–
930
28,386
5,180
85,022
78,997
6,025
46,966
10,344
987
53,555
303,038
–
–
–
–
–
46,966
10,344
987
53,555
303,038
32,655
31,627
1,028
–
–
–
–
–
–
–
–
–
Other assets
Total Assets
22,958
–
8,195
641,881 102,202
524,916
14,763
14,763
21,596
–
7,787
588,659 111,554
463,296
13,809
13,809
Liabilities Subject to Market Risk
Deposits
438,169
9,429
428,740
Derivative instruments
42,639
39,907
2,732
Acceptances
Securities sold but not yet
purchased
Securities lent or sold under
repurchase agreements
Other liabilities
Subordinated debt
Total Liabilities
11,307
–
11,307
21,226
21,226
–
39,891
44,320
4,416
–
–
–
39,891
44,218
4,416
601,968
70,562
531,304
–
–
–
–
–
102
–
102
393,088
7,639
385,449
33,657
32,312
1,345
10,878
–
10,878
27,348
27,348
–
39,695
43,676
4,913
–
–
–
39,695
43,263
4,913
553,255
67,299
485,543
–
–
–
–
–
413
–
413
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Main risk factors
for non-traded risk
balances
Interest rate
Interest rate
Interest rate,
credit spread
Interest rate,
credit spread
Interest rate
Equity
Interest rate
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
(1) Primarily comprised of BMO’s balance sheet items that are subject to the trading and underwriting risk management framework and fair valued through profit or loss.
(2) Primarily comprised of BMO’s balance sheet items that are subject to the structural balance sheet and insurance risk management framework, or are available-for-sale securities.
Certain comparative figures have been reclassified to conform to the current year’s presentation.
Structural (Non-Trading) Market Risk
Structural market risk is comprised of interest rate risk arising from our banking activities (loans and deposits) and foreign exchange risk arising from
our foreign currency operations.
Structural Market Risk Governance
The RRC has oversight of the management of structural market risk, annually approves the structural market risk strategy and limits, and regularly
reviews structural market risk positions. The RMC and Balance Sheet and Capital Management Committee (BSCMC) regularly review structural market
risk positions and provide senior management oversight.
In addition to Board-approved limits on earnings and economic value exposure, more granular management limits are in place to guide
day-to-day management of this risk. BMO’s Corporate Treasury group is responsible for the ongoing management of structural market risk across
the enterprise, with independent oversight provided by the Market Risk group.
Structural Market Risk Measurement
Interest Rate Risk
Structural interest rate risk arises when changes in interest rates affect the cash flows, earnings and values of assets and liabilities from our banking
activities. The objective of structural interest rate risk management is to maintain high-quality earnings and maximize sustainable product spreads.
Structural interest rate risk is primarily comprised of interest rate mismatch risk and product embedded option risk.
Interest rate mismatch risk arises when there are differences in the scheduled maturities, repricing dates or reference rates of assets, liabilities
and derivatives. The net interest rate mismatch, representing residual assets funded by common shareholders’ equity, is managed to a target profile
through interest rate swaps and securities.
Product embedded option risk arises when product features allow customers to alter cash flows, such as scheduled maturity or repricing dates,
usually in response to changes in market conditions. Product embedded options include loan prepayments, deposit redemption privileges and
committed rates on unadvanced mortgages. Product embedded options are generally managed to low risk levels through a dynamic hedging process
or with purchased options.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 103
MANAGEMENT’S DISCUSSION AND ANALYSIS
Structural interest rate risk is measured using simulations, earnings sensitivity and economic value sensitivity analysis, stress testing and gap
analysis, in addition to other traditional risk metrics.
Earnings Sensitivity is a measure of the impact of potential changes in interest rates on the projected 12-month after-tax net income of a
portfolio of assets, liabilities and off-balance sheet positions in response to prescribed parallel interest rate movements.
Economic Value Sensitivity is a measure of the impact of potential changes in interest rates on the market value of a portfolio of assets,
liabilities and off-balance sheet positions in response to prescribed parallel interest rate movements.
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The models used to measure structural interest rate risk project changes in interest rates and predict how customers would likely react to these
changes. For customer loans and deposits with scheduled maturity and repricing dates (such as mortgages and term deposits), our models measure
the extent to which customers are likely to use embedded options to alter those scheduled terms. For customer loans and deposits without scheduled
maturity and repricing dates (such as credit card loans and chequing accounts), we measure our exposure using models that adjust for elasticity in
product pricing and reflect historical and forecasted trends in balances. Structural market risk models by their nature have inherent uncertainty as they
reflect potential anticipated pricing and customer behaviours which may differ from actual experience. The models have been developed using
statistical analysis and are validated and periodically updated through regular model vetting, back-testing processes and ongoing dialogue with the
lines of business. Models developed to predict customer behaviour are also used in support of product pricing.
Structural interest rate earnings and economic value sensitivity to an immediate parallel increase or decrease of 100 and 200 basis points in the
yield curve are disclosed in the following table. The interest rate gap position is disclosed in Note 20 on page 180 of the financial statements.
During the year, we updated our approach to quantify the potential impact of changing interest rates on structural earnings and value
sensitivities. The new approach reflects a more refined estimate of expected deposit pricing as interest rates change. There were no other significant
changes in our structural market risk management framework during the year.
Structural economic value sensitivity to rising rates primarily reflects a lower market value for fixed-rate loans. Structural economic value
sensitivity to falling rates primarily reflects the reduced ability to price deposits lower in the low-rate environment. Structural earnings exposure to
falling interest rates primarily reflects the risk of fixed and floating rate loans repricing at lower rates and the more limited ability to reduce deposit
pricing as rates fall. The asset-liability profile at the end of the year resulted in a structural earnings benefit from interest rate increases and structural
earnings exposure to interest rate decreases. The realized earnings impact may differ from that shown depending on a number of factors, including
customer and competitor actions and the pace at which interest rates change.
Structural Balance Sheet Interest Rate Sensitivity (1) (2) (3) (4) (5)
(Canadian $ in millions)
100 basis point increase
100 basis point decrease
200 basis point increase
200 basis point decrease
As at October 31, 2015
As at October 31, 2014
Economic value
sensitivity
(Pre-tax)
Earnings sensitivity
over the next
12 months
(After tax)
Economic value
sensitivity
(Pre-tax)
Earnings sensitivity
over the next
12 months
(After tax)
(647.6)
107.3
(1,722.3)
(288.5)
143.5
(62.0)
185.4
(87.8)
(715.1)
405.2
(1,579.4)
320.5
64.7
(62.6)
85.8
(68.1)
(1) We enhanced our approach to quantify the potential impact of changing interest rates on structural earnings and value sensitivities in 2015. Positions as at October 31, 2014 have not been restated to
the new approach.
(2) Earnings and value sensitivities to falling interest rates assume Canadian and U.S. central banks do not decrease overnight interest rates below nil. The scenarios with decreasing interest rates therefore
limit the decrease in Canadian and U.S. short-term interest rates to 50 basis points (100 basis points in 2014) and 25 basis points, respectively, for shorter terms in 2015 and 2014. Longer-term interest
rates do not decrease below the assumed level of short-term interest rates.
(3) Certain non-trading AFS holdings are managed under the bank’s trading risk framework.
(4) Losses are in brackets and benefits are presented as positive numbers.
(5) For BMO’s Insurance businesses, a 100 basis point increase in interest rates at October 31, 2015, results in an increase in earnings after tax of $66 million and an increase in economic value before
tax of $511 million ($71 million and $385 million, respectively, at October 31, 2014). A 100 basis point decrease in interest rates at October 31, 2015, results in a decrease in earnings after tax of
$63 million and a decrease in economic value before tax of $414 million ($63 million and $414 million, respectively, at October 31, 2014). These impacts are not reflected in the table above.
Foreign Exchange Risk
Structural foreign exchange risk arises primarily from translation risk related to the net investment in our U.S. operations and from transaction risk
associated with our U.S.-dollar-denominated net income.
Translation risk represents the impact that changes in foreign exchange rates can have on BMO’s reported shareholders’ equity and capital
ratios. When the Canadian dollar appreciates relative to the U.S. dollar, unrealized translation losses on our net investment in foreign operations,
net of related book value hedging activities, are reported in other comprehensive income in shareholders’ equity. In addition, the Canadian dollar
equivalent of U.S.-dollar-denominated risk-weighted assets and regulatory capital deductions decreases. The reverse is true when the Canadian dollar
depreciates relative to the U.S. dollar. Consequently, we may adjust the hedge of our net investment in foreign operations such that translation risk is
not expected to materially impact our capital ratios.
Transaction risk represents the impact that fluctuations in the Canadian/U.S. dollar exchange rate may have on the Canadian dollar equivalent of
BMO’s U.S.-dollar-denominated results. Exchange rate fluctuations will affect future results measured in Canadian dollars and the impact on those
results is a function of the periods during which revenues, expenses and provisions for credit losses arise. Hedging positions may be taken to partially
offset the pre-tax effects of Canadian/U.S. dollar exchange rate fluctuations. If future results are consistent with results in 2015, each one cent
increase (decrease) in the Canadian/U.S. dollar exchange rate would be expected to increase (decrease) adjusted net income before income taxes for
the year by $10 million, in the absence of hedging transactions. Refer to the Foreign Exchange section on page 37 for a more complete discussion of
the effects of changes in exchange rates on the bank’s results.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
104 BMO Financial Group 198th Annual Report 2015
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if BMO is unable to meet financial commitments in a timely manner at reasonable prices as
they fall due. Financial commitments include liabilities to depositors and suppliers, and lending, investment and pledging commitments.
Managing liquidity and funding risk is essential to maintaining the safety and soundness of the enterprise, depositor confidence and earnings
stability. It is BMO’s policy to ensure that sufficient liquid assets and funding capacity are available to meet financial commitments, even in times
of stress.
Liquidity and Funding Risk Governance
The RRC has oversight of the management of liquidity and funding risk, annually approves applicable policies, limits and the contingency plan,
and regularly reviews liquidity and funding positions. BMO’s Corporate Treasury group recommends the Liquidity and Funding Risk Management
Framework and the related risk appetite, limits and guidelines, monitors compliance with policy requirements and assesses the impact of market
events on liquidity requirements on an ongoing basis. The RMC and BSCMC provide senior management oversight and also review and discuss
significant liquidity and funding policies, issues and action items that arise in the pursuit of our strategic priorities.
The Corporate Treasury group and the operating groups are responsible for the ongoing management of liquidity and funding risk across the
enterprise. Enterprise Market Risk Management provides oversight, independent risk assessment and effective challenge of liquidity and funding
management across the organization.
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Liquidity and Funding Risk Management
BMO’s Liquidity and Funding Risk Management Framework is defined and authorized under Board-approved corporate policies and management-
approved standards. These policies and standards outline key management principles, liquidity and funding metrics and related limits and guidelines,
as well as roles and responsibilities for the management of liquidity and funding risk across the enterprise.
BMO has robust limits and guidelines in place in order to manage liquidity and funding risk. Limits establish the enterprise-level risk appetite for
our key Net Liquidity Position (NLP) measure, secured and unsecured funding appetite, for both trading and structural activities, and risk appetite for
enterprise pledging activity. Guidelines establish the tolerance for concentrations of maturities, requirements for diversifying counterparty liabilities
and limits for business pledging activity. Guidelines have also been established for the size and type of uncommitted and committed credit and
liquidity facilities that may be outstanding in order to ensure liquidity and funding risk is appropriately managed. An enterprise-wide contingency plan
that will facilitate effective management in the event of a disruption is also in place. Early warning indicators identified in the contingency plan are
regularly monitored to identify early signs of growing liquidity risk in the market or risks specific to BMO.
BMO subsidiaries include regulated and foreign legal entities and branches, and as a result, movements of funds between companies in the
corporate group are subject to, among other things, the liquidity, funding and capital adequacy requirements of the subsidiaries. As such, liquidity and
funding positions are managed on both a consolidated and key legal entity basis. Liquidity and funding risk management policies and limits are in
place for key legal entities which are informed by the legal and regulatory requirements that apply to each entity, and positions are regularly
reviewed at the legal entity level to ensure compliance with applicable requirements.
BMO employs fund transfer pricing and liquidity transfer pricing practices in order to ensure the appropriate economic signals for the pricing of
products for customers are provided to the lines of business and to assess the performance of each business. These practices capture both the cost of
funding assets and the value of deposits under normal operating conditions, as well as the cost of supplemental liquid assets held to support
contingent liquidity requirements.
Liquidity and Funding Risk Measurement
A key component of liquidity risk management is the measurement of liquidity risk under stress. BMO uses the NLP as a key measure of liquidity risk.
The NLP represents the amount by which liquid assets exceed potential funding needs under a severe combined enterprise-specific and systemic
stress scenario. Potential funding needs may arise from obligations to repay retail, commercial and wholesale deposits that are withdrawn or not
renewed, fund drawdowns on available credit and liquidity lines, or the requirement to pledge collateral due to ratings downgrades or as a result of
market volatility, as well as the continuing need to fund assets and strategic investments. Potential funding needs are quantified by applying factors
to various business activities based on management’s view of the relative liquidity risk of each activity. These factors vary by depositor classification
(e.g., retail, small business, non-financial corporate or wholesale counterparties) and deposit type (e.g., insured, uninsured, operational or non-
operational deposits), as well as by commitment type (e.g., uncommitted or committed credit or liquidity facilities by counterparty type). The stress
scenario also considers the time horizon over which liquid assets can be monetized and the related haircuts that may occur as a result of market
stress. These funding needs are assessed under severe systemic and enterprise-specific stress scenarios and a combination thereof. BMO focuses on
maintaining a Net Liquidity Position sufficient to withstand each scenario.
Stress testing results are compared against BMO’s stated risk tolerance and are considered in management decisions on setting limits or
guidelines and internal liquidity transfer pricing, and they also help to shape the design of business plans and contingency plans. The Liquidity and
Funding Risk Management Framework is also integrated with enterprise-wide stress testing.
In addition to the NLP, we regularly monitor positions against the limits and guidelines noted in the Liquidity and Funding Risk Management
section above. This includes required regulatory metrics such as the Liquidity Coverage Ratio (LCR) and Net Cumulative Cash Flow (NCCF).
Unencumbered Liquid Assets
Unencumbered liquid assets include high-quality assets that are marketable, can be pledged as security for borrowings, and can be converted to
cash in a time frame that meets our liquidity and funding requirements. Liquid assets are primarily held in our trading businesses, as well as in
supplemental liquidity pools that are maintained for contingent liquidity risk management purposes. The amounts of liquidity recognized for different
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 105
MANAGEMENT’S DISCUSSION AND ANALYSIS
asset classes under our management framework are subject to haircuts reflecting management’s view of the liquidity value of those assets in a stress
scenario. Liquid assets in the trading businesses include cash on deposit with central banks and short-term deposits with other financial institutions,
highly-rated debt and equity securities and short-term reverse repurchase agreements. Supplemental liquidity pool assets are predominantly
comprised of cash on deposit with central banks and securities and short-term reverse repurchase agreements of highly-rated Canadian federal and
provincial and U.S. federal government and agency debt. Substantially all supplemental liquidity pool assets meet the definition of liquid assets under
Basel III. Approximately 75% of the supplemental liquidity pool is held at the parent bank level in Canadian- and U.S.-dollar-denominated assets, with
the majority of the remaining supplemental liquidity pool held at BMO Harris Bank in U.S.-dollar-denominated assets. The size of the supplemental
liquidity pool is highly integrated with our measurement of liquidity risk, as its size is calibrated to meet the potential funding needs, outside of our
trading businesses, in the parent bank and BMO Harris Bank and to meet BMO’s target NLP for each entity. To meet local regulatory requirements,
certain of our legal entities maintain their own minimum liquidity positions. There may be legal and regulatory restrictions on our ability to use liquid
assets held in one legal entity to support the liquidity requirements of another legal entity.
In the ordinary course of business, BMO may encumber a portion of cash and securities holdings as collateral in support of trading activities and
our participation in clearing and payment systems in Canada and abroad. In addition, BMO may receive liquid assets as collateral and may re-pledge
these assets in exchange for cash or as collateral for trading activities. Net unencumbered liquid assets, defined as on-balance sheet assets such as
BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other off-balance sheet eligible collateral
received, less collateral encumbered, totalled $188.5 billion at October 31, 2015, compared with $171.0 billion at October 31, 2014. The increase in
unencumbered liquid assets was primarily due to the impact of the stronger U.S. dollar. Net unencumbered liquid assets are primarily held at the
parent bank level, at our U.S. legal entity BMO Harris Bank, and in our Canadian and international broker/dealer operations. In addition to liquid
assets, BMO has access to the Bank of Canada’s lending assistance programs, the Federal Reserve Bank discount window in the United States and
European Central Bank standby liquidity facilities. We do not consider central bank facilities to be a source of available liquidity when assessing BMO’s
liquidity position.
In addition to cash and securities holdings, BMO may also pledge other assets, including mortgages and loans, to raise long-term secured
funding. As part of the Liquidity and Funding Risk Management Framework, a Pledging of Assets Corporate Policy is in place that sets out the
framework and pledging limits for financial and non-financial assets.
BMO’s total encumbered assets and unencumbered liquid assets are summarized in the table below. See Note 26 on page 192 of the financial
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statements for further information on pledged assets.
Liquid Assets
(Canadian $ in millions)
Cash and cash equivalents
Deposits with other banks
Securities and securities borrowed or purchased under resale
agreements
Sovereigns / Central banks / Multilateral development
As at October 31, 2015
As at October 31,
2014
Carrying
value/on-
balance sheet
assets (1)
40,295
7,382
Other cash and
securities received
Total gross
assets (2)
Encumbered
assets
Net unencumbered
assets (3)
Net unencumbered
assets (3)
–
–
40,295
7,382
2,232
–
38,063
7,382
26,749
6,110
banks
103,793
15,742
119,535
70,962
Mortgage-backed securities and collateralized mortgage
obligations
Corporate debt
Corporate equity
19,371
17,584
58,236
1,179
6,332
17,897
20,550
23,916
76,133
2,194
1,472
40,733
48,573
18,356
22,444
35,400
41,770
16,046
24,026
41,600
Total securities and securities borrowed or purchased under
resale agreements
198,984
41,150
240,134
115,361
124,773
123,442
NHA mortgage-backed securities (reported as loans at
amortized cost) (4)
Total liquid assets
Other eligible assets at central banks (not included above) (5)
Undrawn credit lines granted by central banks
Total liquid assets and other sources
21,834
268,495
110,703
–
379,198
–
21,834
3,589
41,150
309,645
121,182
–
–
110,703
–
764
–
41,150
420,348
121,946
18,245
188,463
109,939
–
298,402
14,680
170,981
108,804
–
279,785
(1) The carrying values outlined in this table are consistent with the carrying values in BMO’s balance sheet as at October 31, 2015.
(2) Gross assets include on-balance sheet and off-balance sheet assets.
(3) Net unencumbered liquid assets are defined as on-balance sheet assets, such as BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other
off-balance sheet eligible collateral received, less encumbered assets.
(4) Under IFRS, NHA mortgage-backed securities that include mortgages owned by BMO as the underlying collateral are classified as loans. Unencumbered NHA mortgage-backed securities have liquidity
value and are included as liquid assets under BMO’s liquidity and funding management framework. This amount is shown as a separate line item, NHA mortgage-backed securities.
(5) Represents loans currently lodged at central banks that could potentially be used to access central bank funding. Loans available for pledging as collateral do not include other sources of additional
liquidity that may be realized from the loan portfolio, including incremental securitization, covered bond issuances and Federal Home Loan Bank (FHLB) advances.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
106 BMO Financial Group 198th Annual Report 2015
Asset Encumbrance
(Canadian $ in millions)
As at October 31, 2015
Cash and deposits with other banks
Securities (5)
Loans and acceptances
Other assets
Derivative instruments
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax assets
Other assets
Total other assets
Total assets
As at October 31, 2014
Cash and deposits with other banks
Securities (5)
Loans and acceptances
Other assets
Derivative instruments
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax assets
Other assets
Total other assets
Total assets
Encumbered (2)
Net unencumbered
Total gross
assets (1)
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
47,677
261,968
312,190
–
94,367
43,928
2,232
24,583
1,594
397
8,302
156,729
45,048
134,716
109,939
38,238
2,285
6,069
2,208
561
3,162
8,673
61,196
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38,238
2,285
6,069
2,208
561
3,162
8,673
61,196
–
–
–
–
–
–
–
–
683,031
138,295
28,409
226,624
289,703
Encumbered (2)
Net unencumbered
Total gross
assets (1)
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
34,496
253,961
285,186
–
85,374
37,060
1,637
30,465
2,722
417
7,939
136,600
32,442
130,183
108,804
32,655
2,276
5,353
2,052
665
3,019
8,231
54,251
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
32,655
2,276
5,353
2,052
665
3,019
8,231
54,251
–
–
–
–
–
–
–
–
627,894
122,434
34,824
199,207
271,429
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(1) Gross assets include on-balance sheet and off-balance sheet assets.
(2) Pledged as collateral refers to the portion of on-balance sheet assets and other cash and securities received that is pledged through repurchase agreements, securities lent, derivative contracts,
minimum required deposits at central banks and requirements associated with participation in clearing houses and payment systems. Other encumbered assets include assets which are restricted
from use for legal or other reasons, such as restricted cash and short sales.
(3) Other unencumbered assets include select liquid asset holdings that management believes are not readily available to support BMO’s liquidity requirements. These include cash and securities of
$8.7 billion as at October 31, 2015, which include securities held in BMO’s insurance subsidiary and credit protection vehicle, significant equity investments, and certain investments held in our
merchant banking business. Other unencumbered assets also include mortgages and loans that may be securitized to access secured funding.
(4) Loans included as available as collateral represent loans currently lodged at central banks that could potentially be used to access central bank funding. Loans available for pledging as collateral do
not include other sources of additional liquidity that may be realized from the loan portfolio, including incremental securitization, covered bond issuances and FHLB advances.
(5) Includes securities, securities borrowed or purchased under resale agreements and NHA mortgage-backed securities (reported as loans at amortized cost).
BMO’s LCR is summarized in the table on the following page. The average month-end LCR for the quarter ended October 31, 2015 of 130% is
calculated as the ratio of the stock of High-Quality Liquid Assets (HQLA) to total net stressed cash outflows over the next 30 calendar days. The
average LCR ratio is up from 128% from last quarter mainly due to the increase in HQLA. While banks are required to maintain an LCR greater than
100% in normal conditions, banks are also expected to be able to utilize their HQLA in a period of stress, which may result in an LCR below 100%
during that period. BMO’s HQLA are primarily comprised of cash, highly-rated debt issued or backed by governments, highly-rated covered bonds and
non-financial corporate debt and non-financial equities that are part of a major stock index. Net cash flows include outflows from deposits, secured
and unsecured wholesale funding, commitments and potential collateral requirements offset by permitted inflows from loans, securities lending
activities and other non-HQLA debt maturing over a 30-day horizon. OSFI prescribed weights are applied to cash flows and HQLA to arrive at the
weighted values and the LCR. The LCR is only one measure of a bank’s liquidity position and does not fully capture all of the bank’s liquid assets or
the funding alternatives that may be pursued in a period of stress. BMO’s total liquid assets are shown in the Liquid Assets table on page 106.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity Coverage Ratio
(Canadian $ in billions, except as noted)
High-Quality Liquid Assets
Total high-quality liquid assets (HQLA)
Cash Outflows
Retail deposits and deposits from small business customers, of which:
Stable deposits
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative
banks
Non-operational deposits (all counterparties)
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
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Outflows related to derivatives exposures and other collateral requirements
Outflows related to loss of funding on debt products
Credit and liquidity facilities
Other contractual funding obligations
Other contingent funding obligations
Total cash outflows
Cash Inflows
Secured lending (e.g. reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
For the quarter ended October 31, 2015
For the quarter ended
July 31, 2015
Total unweighted value
(average) (1) (2)
Total weighted value
(average) (2) (3)
Total weighted value
(average) (2) (3)
*
142.2
85.7
56.5
138.0
59.9
48.1
30.0
*
118.5
16.7
3.1
98.7
0.9
253.1
*
93.1
7.7
4.0
104.8
134.6
125.8
8.3
2.6
5.7
78.0
14.9
33.1
30.0
9.5
23.9
5.8
3.1
15.0
–
5.4
125.1
11.9
5.6
4.0
21.5
8.0
2.5
5.5
79.3
14.2
32.7
32.4
8.7
22.0
5.1
3.1
13.8
–
5.1
123.1
12.5
7.4
4.8
24.7
Total adjusted value (4)
Total adjusted value (4)
134.6
103.6
130
125.8
98.4
128
* Disclosure is not required under the LCR disclosure standard.
(1) Unweighted values are calculated at market value (for HQLA) or as outstanding balances maturing or callable within 30 days (for inflows and outflows).
(2) Average calculated based on month-end values during the quarter.
(3) Weighted values are calculated after the application of the weights prescribed under the OSFI Liquidity Adequacy Requirements (LAR) Guideline for HQLA and cash inflows and outflows.
(4) Adjusted values are calculated based on total weighted values after applicable caps as defined by the LAR Guideline.
Funding Strategy
Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets must be longer term
(typically maturing in two to ten years) to better match the term to maturity of these assets. Wholesale secured and unsecured funding for liquid
trading assets is generally shorter term (maturing in one year or less), is aligned with the liquidity of the assets being funded, and is subject to
limits on aggregate maturities that are permitted across different time periods. Supplemental liquidity pools are funded with a mix of wholesale
term funding.
BMO maintains a large and stable base of customer deposits that, in combination with our strong capital base, is a source of strength. It supports
the maintenance of a sound liquidity position and reduces our reliance on wholesale funding. Customer deposits totalled $261.9 billion at the end of
the year, up from $238.7 billion in 2014, primarily due to the impact of the stronger U.S. dollar and deposit growth. BMO also receives deposits to
facilitate certain trading activities, receives non-marketable deposits from corporate and institutional customers and issues structured notes primarily
to retail investors. These deposits and notes totalled $45.6 billion as at October 31, 2015.
Total wholesale funding outstanding, largely consisting of negotiable marketable securities, was $159.5 billion at October 31, 2015, with
$42.4 billion sourced as secured funding and $117.1 billion sourced as unsecured funding. Wholesale funding outstanding increased from
$143.8 billion at October 31, 2014, primarily due to the impact of the stronger U.S. dollar. The mix and maturities of BMO’s wholesale term funding
are outlined in the table below. Additional information on deposit maturities can be found in Note 30 on page 198 of the financial statements.
BMO maintains a sizeable portfolio of unencumbered liquid assets, totalling $188.5 billion as at October 31, 2015, that can be monetized to meet
potential funding requirements, as described in the Unencumbered Liquid Assets section above.
Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. BMO’s wholesale funding
activities are well-diversified by jurisdiction, currency, investor segment, instrument and maturity profile. BMO maintains ready access to long-term
wholesale funding through various borrowing programs, including a European Note Issuance Program, Canadian and U.S. Medium-Term Note Programs,
Canadian and U.S. mortgage securitizations, Canadian credit card securitizations, covered bonds and Canadian and U.S. senior (unsecured) deposits.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
108 BMO Financial Group 198th Annual Report 2015
BMO’s wholesale funding plan ensures sufficient funding capacity is available to execute business strategies. The funding plan considers
expected maturities, as well as asset and liability growth projected for our businesses in our forecasting and planning process, and assesses funding
needs against available potential funding sources. The funding plan is reviewed annually by the RRC and is regularly updated during the year to
incorporate actual results and updated forecast information.
Customer Deposits-and-
Capital-to-Customer-Loans
Ratio (%)
98.6
94.6
94.5
94.7
Customer Deposits
($ billions)
262
239
221
204
2012
2013
2014
2015
2012
2013
2014
2015
Our large customer base and
strong capital position reduce our
reliance on wholesale funding.
Customer deposits provide a
strong funding base.
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Wholesale Funding Maturities (1)
(Canadian $ in millions)
As at October 31, 2015
Deposits from banks
Certificates of deposit and commercial paper
Bearer deposit notes
Asset-backed commercial paper (ABCP)
Senior unsecured medium-term notes
Senior unsecured structured notes (2)
Covered bonds and securitizations
Mortgage securitizations
Covered bonds
Credit card securitizations
Subordinated debt (3)
Other (4)
Total
Of which:
Secured
Unsecured
Total (5)
Less than
1 month
415
5,753
249
1,406
1,308
17
–
–
–
–
–
1 to 3
months
576
29,143
1,637
1,829
2,131
476
789
1,961
–
–
–
3 to 6
months
917
17,349
901
2,131
1,212
30
–
–
437
–
–
6 to 12
months
819
5,547
115
–
8,195
199
1,321
–
1,538
–
–
Subtotal
less than
1 year
2,727
57,792
2,902
5,366
12,846
722
2,110
1,961
1,975
–
–
1 to 2
years
975
360
–
–
10,636
153
2,781
2,615
1,135
602
1,308
Over
2 years
–
–
–
–
20,210
2,115
12,197
8,038
1,101
5,050
1,798
Total
3,702
58,152
2,902
5,366
43,692
2,990
17,088
12,614
4,211
5,652
3,106
9,148
38,542
22,977
17,734
88,401
20,565
50,509
159,475
1,406
7,742
9,148
4,579
33,963
2,568
20,409
2,859
14,875
11,412
76,989
7,839
12,726
23,134
27,375
42,385
117,090
38,542
22,977
17,734
88,401
20,565
50,509
159,475
(1) Wholesale unsecured funding refers to funding through the issuance of marketable, negotiable instruments. Wholesale funding excludes repo transactions and bankers’ acceptances, which are
disclosed in the contractual maturity table in Note 30 on page 198 of the financial statements, and excludes ABCP issued by certain ABCP conduits that are not consolidated for financial reporting
purposes.
(2) Primarily issued to institutional investors.
(3) Includes certain subordinated debt instruments reported as deposits or other liabilities for accounting purposes. Subordinated debt is reported in this table in accordance with recommended Enhanced
Disclosure Task Force disclosures.
(4) Refers to Federal Home Loan Banks advances.
(5) Total wholesale funding consists of Canadian-dollar-denominated funding of $47.5 billion and U.S.-dollar and other foreign-denominated funding of $112 billion as at October 31, 2015.
Material presented in a blue-tinted font above is an integral part of the 2015 annual consolidated financial statements (see page 86).
BMO Financial Group 198th Annual Report 2015 109
MANAGEMENT’S DISCUSSION AND ANALYSIS
Regulatory Developments
OSFI’s Liquidity Adequacy Requirements Guideline outlines the approach and methodology for a number of liquidity metrics and tools used to monitor
and assess the adequacy of Canadian banks’ liquidity, including the LCR, NCCF and others. The LCR and NCCF were implemented in January 2015.
The Net Stable Funding Ratio (NSFR) was finalized by the Basel Committee on Banking Supervision in 2015 and is expected to come into force on
January 1, 2018.
As mentioned on page 71 in the Enterprise-Wide Capital Management section, in August 2014, Canada’s Department of Finance issued a
consultation paper on a Canadian bank resolution framework, including bail-in and Higher Loss Absorbency requirements. The Enterprise-Wide Capital
Management section also discusses the recently released new rules proposed by the Federal Reserve Board for Total Loss Absorbing Capacity (TLAC)
and the Financial Stability Board final standard for TLAC for Global Systemically Important Banks.
Credit Ratings
The credit ratings assigned to BMO’s short-term and senior long-term debt securities by external rating agencies are important in the raising of both
capital and funding to support our business operations. Maintaining strong credit ratings allows us to access capital markets at competitive pricing
levels. Should our credit ratings experience a material downgrade, our costs of funding would likely increase significantly and our access to funding
and capital through capital markets could be limited. A material downgrade of our ratings could have additional consequences, including those set out
in Note 8 on page 156 of the financial statements.
The credit ratings assigned to BMO’s senior debt by rating agencies are indicative of high-grade, high-quality issues. Moody’s, Standard & Poor’s
(S&P) and DBRS have a negative outlook on the ratings of BMO and other Canadian banks in response to the federal government’s proposed bail-in
regime for senior unsecured debt, while Fitch has a stable outlook on BMO’s long-term credit ratings.
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As at October 31, 2015
Rating agency
Moody’s
S&P
Fitch
DBRS
(1) As at October 31, 2015, NVCC subordinated debt is rated Baa1 by Moody’s, BBB by S&P and A(low) by DBRS.
Short-term debt
Senior long-
term debt
Subordinated
debt (1)
P-1
A-1
F1+
R-1 (high)
Aa3
A+
AA-
AA
A3
BBB+
A+
AA (low)
Outlook
Negative
Negative
Stable
Negative
110 BMO Financial Group 198th Annual Report 2015
Operational Risk
Operational risk is the potential for loss resulting from inadequate or failed internal processes or systems, human interactions or external
events, but excludes business risk.
BMO is exposed to potential losses arising from a variety of operational risks, including process failure, theft and fraud, regulatory non-compliance,
business disruption, information security breaches and exposure related to outsourcing, as well as damage to physical assets. Operational risk is
inherent in all our business activities, including the processes and controls used to manage all of the risks we face. While operational risk can never
be fully eliminated, it can be managed to reduce exposure to financial loss, reputational harm or regulatory sanctions.
Operational Risk Governance
Operational risk management is governed by a robust committee structure supported by a comprehensive set of policies, standards and operating
guidelines. The Operational Risk Committee (ORC), a sub-committee of the RMC, is the main decision-making committee for all operational risk
management matters and has responsibility for the oversight of operational risk strategy, management and governance. The ORC provides advice and
guidance to the lines of business on operational risk assessments, measurement and mitigation, and related monitoring of change initiatives. The ORC
also oversees the development of policies, standards and operating guidelines that give effect to the governing principles of the Operational Risk
Management Framework (ORMF). These governance documents incorporate industry leading practices and are reviewed on a regular basis to ensure
they are current and consistent with our risk appetite.
Regular analysis and reporting of our enterprise operational risk profile to the various committees (ORC, RMC and RRC) are important elements of
our ORMF. Enterprise reporting provides an integrated view of top and emerging risks, trends in loss data, capital consumption, key risk indicators and
operating group portfolio profiles. We continue to invest in our reporting platforms to support timely and comprehensive reporting capabilities that
enhance risk transparency and facilitate the proactive management of operational risk exposures.
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Operational Risk Management
The ORMF defines the processes we use to identify, measure, manage, mitigate, monitor and report key operational risk exposures. A primary
objective of the ORMF is to ensure that our operational risk profile is consistent with our risk appetite and supported by adequate capital. Executing
our ORMF strategy also involves continuing to embed our risk culture by promoting greater awareness and understanding of operational risk within
our first line of defence through training and communication. In addition, we continue to invest in resources to further strengthen our second line of
defence capabilities.
Consistent with the management of risk across the organization, we employ the three lines of defence approach to operational risk.
The operating groups, as the first line of defence, are responsible for the day-to-day management of operational risk in a manner consistent with
our enterprise-wide principles. Independent risk management oversight is provided by the Operational Risk Management function, Corporate Support
areas and Operational Risk Officers (OROs). OROs independently assess group operational risk profiles, identify material exposures and potential
weaknesses in controls, and recommend appropriate mitigation strategies and actions as the second line of defence. The Corporate Audit Division
verifies our adherence to policies and procedures and highlights opportunities to strengthen our process as the third line of defence. Corporate
Support areas develop tools and processes for the management of specific operational risks across the enterprise. Corporate Operational Risk
Management establishes the ORMF and the necessary governance framework, with the operating group CROs providing governance and oversight
for their respective business units.
The key programs, methodologies and processes we have developed to support the framework are highlighted below:
‰ Risk Control Assessment (RCA) is an established process used by our operating groups to identify the key risks associated with their businesses and
the controls required for risk mitigation. The RCA process provides a forward-looking view of the impact of the business environment and internal
controls on operating group risk profiles, enabling the proactive prevention, mitigation and management of risk. On an aggregate basis, RCA results
also provide an enterprise-level view of operational risks relative to risk appetite, so that key risks can be appropriately managed and mitigated.
‰ Process Risk Assessment (PRA) provides a deeper insight in identifying key risks and controls in our business processes and can span multiple
business units. The PRA process enables a greater understanding of our key processes, which facilitates more effective oversight and ensures risks
are appropriately mitigated.
‰ BMO’s initiative assessment and approval process is used to assess, document and approve qualifying initiatives when new business, services and
products are developed or existing services and products are enhanced. The process ensures that due diligence, approval, monitoring and reporting
requirements are appropriately addressed at all levels of the organization.
‰ Key Risk Indicators (KRIs) provide an early indication of any adverse changes in risk exposure. Operating groups and Corporate Support areas
‰
identify metrics related to their material operational risks. These KRIs are used in monitoring operational risk profiles and their overall relation to
our risk appetite, and are linked to thresholds that trigger management action.
Internal loss data serves as an important means of assessing our operational risk exposure and identifying opportunities for future risk prevention
measures. Under this process, internal loss data is analyzed and benchmarked against external data. Material trends are regularly reported to the
ORC, RMC and RRC to ensure preventative and corrective action can be taken where appropriate. BMO is a member of the Operational Risk Data
Exchange Association, the American Bankers Association and other international and national associations of banks that share loss data information
anonymously to assist in risk identification, assessment and modelling.
‰ BMO’s operational risk management training programs ensure employees are qualified and equipped to execute the ORMF strategy consistently,
effectively and efficiently.
‰ Effective business continuity management ensures that we have the capability to sustain, manage and recover critical operations and processes
in the event of a business disruption, thereby minimizing any adverse effects on our customers and other stakeholders.
‰ BMO’s Corporate Risk & Insurance team provides a second level of mitigation for certain operational risk exposures. We purchase insurance in
amounts that are expected to provide adequate protection against unexpected material loss and where insurance is required by law, regulation
or contractual agreement.
BMO Financial Group 198th Annual Report 2015 111
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO uses the Advanced Measurement Approach (AMA), a risk-sensitive capital model, along with the Standardized Approach under OSFI rules, to
determine capital requirements for managing operational risk. The AMA Capital Model uses a loss distribution approach along with the four elements
required to support the measurement of our operational risk exposure. Internal loss data and external loss data are used as inputs to our AMA Capital
Model, and are grouped based on attributes into cells which include operating group, business activity or event type. Minimum enterprise operational
risk capital is determined at a specific upper confidence limit of the enterprise total loss distribution (99.9% quantile for regulatory capital and 99.95%
quantile for Economic Capital). Business Environment and Internal Control Factors are used for post-modelling adjustments, and these are subject to
regular review in order to identify and understand risk drivers and to ensure consistency in application across the organization. Scenarios are used
to verify the distributions and correlations used to model capital and to provide management with a better understanding of low-frequency,
high-severity events and to assess enterprise preparedness for events that could create risks that exceed our risk appetite. We also use scenario
analysis as part of our stress testing program, which measures the potential impact of plausible operational events on our operations and capital,
and allows us to manage tail risk exposure to low-frequency, high-severity events and to validate operational risk capital adequacy.
Model Risk
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Model risk is the potential for adverse consequences following decisions based on incorrect or misused model outputs. These adverse
consequences can include financial loss, poor business decision-making or damage to reputation.
Models are quantitative tools that apply statistical, economic and other quantitative techniques and assumptions to process input data into
quantitative estimates. BMO uses models that range from very simple models for straightforward estimates to highly sophisticated models that value
complex transactions or provide a broad range of forward-looking estimates.
The outputs from these models are used to inform business, risk and capital management decision-making and to assist in making daily lending,
trading, underwriting, funding, investment and operational decisions. For example, BMO uses models as a core risk management tool, to measure
exposure to specific risks through stress testing, to value and price transactions, to evaluate credit, market and operational risk regulatory capital
requirements and to measure risks on an integrated basis using Economic Capital.
Quantitative tools provide important insights and are beneficial when used within a framework to control and mitigate model risk. In addition to
applying judgment to evaluate the reliability of model outputs, BMO mitigates model risk by maintaining strong controls over the development,
validation, implementation and use of models across all model categories.
Model Risk Management
Risk is inherent in models because model outputs are estimates that rely on statistical techniques and data to simulate reality. Model risk also arises
from potential misuse. Model risk is governed at BMO by the enterprise-wide Model Risk Management Framework, which operates throughout the
model life cycle.
Model Use &
Monitoring
Model Development & Validation
1
Model Identification
and Design
8
Outcomes
Analysis
2
Data
Management
7
Ongoing
Monitoring
Model
Life Cycle
3
Model
Development
6
Model Use
4
Model
Validation
5
Implementation
Model Governance
This framework sets out end-to-end model risk governance throughout the model life cycle and helps to ensure that model risk remains
consistent with BMO’s enterprise-wide risk appetite. The framework includes BMO’s Model Risk Corporate Policy, Model Risk Corporate Standard and
Model Risk Guidelines, which outline explicit principles for managing model risk, detail model risk processes and clearly define the roles and
responsibilities of all stakeholders throughout the model life cycle. Model owners, developers and users are the first line of defence, model validators
and the Model Governance group are the second line of defence, and Corporate Audit Division is the third line of defence.
The Model Governance group is responsible for the administration of the Model Risk Management Framework, the effectiveness of our model
processes and the overall management of model risk. The Model Risk Management Committee, a cross-functional group representing all key
stakeholders across the enterprise (model owners, users, developers and validators and the Model Governance group), meets regularly to help direct
the bank’s use of models, to oversee the development, implementation and maintenance of the Model Risk Management Framework and to discuss
requirements governing the enterprise’s models.
112 BMO Financial Group 198th Annual Report 2015
Model Development and Validation
Models are developed, implemented and used to meet specific business objectives, including applicable regulatory requirements. Model owners, in
consultation with model developers and other stakeholders, determine the design, objectives, intended use and desired functionality of models, and
have overall responsibility for ensuring models comply with bank policies and approved terms of use. Model developers assist the model owners by
proposing model solutions, identifying data availability and limitations and developing and implementing models for their intended purposes.
They do so by engaging model owners and other key stakeholders in the development and implementation processes, and by evaluating and
documenting alternatives and model characteristics, outputs, strengths and weaknesses. Our independent Model Validation group reviews model
development outputs to evaluate whether a proposed model is conceptually and statistically sound, achieves its objectives and is fit for its intended
use without creating material model risk. Observations are made to guide model owners, users and developers, remediation of material deficiencies
may be required and unless an exception is obtained in accordance with bank policy, approval from our Model Validation group is required before a
model is used.
Model Use and Monitoring
Model owners and other model users are accountable for using the models appropriately for business decision-making and for the proper care and
maintenance of models throughout the model life cycle. The development and validation processes provide guidance to ensure that models can be
used effectively within an appropriate range of use, that model limitations are known and that model risk mitigants are implemented. When in use,
models are subject to ongoing monitoring, including outcomes analysis and periodic reviews. Ongoing monitoring and outcomes analysis are part of
evaluation processes to confirm the continuing validity and adequate performance of each model over time. These techniques and other controls are
used to mitigate potential issues and to help ensure continuing acceptable model performance. All models in use are subject to periodic scheduled
reviews, with the frequency based on a model’s risk rating, and to earlier reviews if business judgment, triggers or other ongoing monitoring tools
indicate that model performance may be inadequate. Scheduled reviews require the model owner and developers to assess a model’s continuing
suitability for use and such assessment is subject to independent review by our Model Validation group.
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Model Validation, Outcome Analysis and Back-Testing
Once the models are validated, approved and in use, they are subject to ongoing validation, which includes ongoing monitoring and outcomes
analysis. As a key component of the outcomes analysis, back-testing measures model outputs against actual observed outcomes. This analysis is used
to confirm the validity and performance of each model over time, and helps to ensure that appropriate controls are in place to address identified
issues and enhance a model’s overall performance.
Credit Risk – The Credit Risk Model Validation Guidelines are an important subset of BMO’s Model Risk Corporate Policy. These guidelines include clear
and detailed requirements for the back-testing of all credit risk rating models.
The process for back-testing the Probability of Default (PD) model computation includes comparing PD estimates generated by credit risk models
against the actual or realized default rates across all obligor ratings. This process also includes testing for statistical evidence that default rates
accurately capture sampling variability over time.
The comprehensive validation of a risk rating system involves various prescribed tests and analyses that measure discriminatory power,
calibration and dynamic properties, with support from migration analysis. Additional tests or analyses are used to validate borrower risk rating grades
and probability of default.
As with any analysis, judgment is applied in determining various factors, such as data limitations, which may affect the overall relevance of a
given validation approach or interpretation of statistical analysis. Similar back-testing is applied to the Loss Given Default (LGD) and Exposure at
Default (EAD) model computations.
Annual validations of all material models in use are conducted to ensure they perform as intended and to confirm they continue to be fit for use.
An annual review includes a qualitative assessment conducted by model developers and a quantitative validation conducted by the Model Validation
group, with all conclusions reported to senior management.
Trading and Underwriting Market Risk – All internal models used to calculate regulatory capital and Economic Capital for trading and underwriting
market risk have their Value at Risk (VaR) results back-tested regularly. The bank’s internal VaR model is back-tested daily, and the one-day 99%
confidence level VaR at the local and consolidated BMO levels is compared against the realized theoretical Profit & Loss (P&L) calculation, which is the
daily change in portfolio value that would occur if the portfolio composition remained unchanged. If the theoretical P&L is negative and its absolute
value is greater than the previous day’s VaR, a back-testing exception occurs. Each exception is investigated, explained and documented, and the
back-testing results are reviewed by the Board and our regulators. This process monitors the quality and accuracy of the internal VaR model results
and assists in refining overall risk measurement procedures.
Structural Market Risk – Back-testing of our structural market risk models is performed monthly and reported quarterly. For products with a
scheduled term, such as mortgages and term deposits, the model-predicted prepayments or redemptions are compared against the actual outcomes
observed. For products without a scheduled term, such as credit card loans and chequing accounts, the modelled balance run-off profiles are
compared against actual balance trends.
The variances between model predictions and the actual outcomes experienced are measured against pre-defined risk materiality thresholds.
To ensure variances are within the tolerance range, actions such as model review and parameter recalibration are taken. Performance is assessed
by analyzing model overrides and tests conducted during model development, such as back-testing and sensitivity testing.
BMO Financial Group 198th Annual Report 2015 113
MANAGEMENT’S DISCUSSION AND ANALYSIS
Insurance Risk
Insurance risk is the potential for risk of loss due to actual experience being different from that assumed when an insurance product was
designed and priced. It generally entails inherent unpredictability that can arise from assuming long-term policy liabilities or from the uncertainty
of future events. Insurance risk is inherent in all our insurance products, including annuities and life, accident and sickness, and creditor
insurance, as well as in our reinsurance business.
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Insurance risk consists of:
‰ Claims risk – the risk that the actual magnitude or frequency of claims will differ from those assumed in the pricing or underwriting process,
including mortality risk, morbidity risk, longevity risk and catastrophe risk;
‰ Policyholder behaviour risk – the risk that the behaviour of policyholders related to premium payments, withdrawals or loans, policy lapse and
surrenders, and other voluntary terminations will differ from the behaviour assumed in the pricing calculations; and
‰ Expense risk – the risk that actual expenses associated with acquiring and administering policies and processing claims will exceed the expenses
assumed in the pricing calculations.
BMO’s risk governance practices ensure effective independent oversight and control of risk within the insurance business. BMO’s Insurance Risk
Management Framework comprises the identification, assessment, management and reporting of risks. The framework includes: the risk appetite
statement and key risk metrics; insurance risk policies and processes, including limits; capital requirements; stress testing; risk reports; and the Own
Risk and Solvency Assessment. All of these are overseen by internal risk committees and the insurance companies’ Boards of Directors. The Insurance
Risk Management Committee for BMO Insurance oversees and reports on risk management activities on a quarterly basis to the insurance companies’
Boards of Directors. Senior management within the various lines of business is responsible for managing insurance risk, with oversight provided by
the CRO, BMO Insurance, who reports to the CRO, Wealth Management.
A robust product approval process is a cornerstone of the framework for identifying, assessing and mitigating risks associated with new
insurance products or changes to existing products. This process, combined with guidelines and practices for underwriting and claims management,
promotes the effective identification, measurement and management of insurance risk. Reinsurance, which involves transactions that transfer
insurance risk to independent reinsurance companies, is also used to manage our exposure to insurance risk by diversifying risk and limiting claims.
Legal and Regulatory Risk
Legal and regulatory risk is the potential for loss or harm that arises from legislation, contracts, non-contractual rights and obligations, and
disputes. This includes the risks of failing to: comply with the law (in letter or in spirit) or maintain standards of care; implement legislative or
regulatory requirements; enforce or comply with contractual terms; assert non-contractual rights; effectively manage disputes; and act in a
manner so as to maintain our reputation.
BMO’s success relies in part on our ability to prudently manage our exposure to legal and regulatory risk. The financial services industry is highly
regulated, and we anticipate more intense scrutiny from our supervisors in the oversight process and strict enforcement of regulatory requirements
as governments and regulators around the world continue major reforms intended to strengthen the stability of the financial system. The current
environment is one in which banks globally have recently been subject to fines of unprecedented levels in relation to a number of regulatory and
market conduct issues. As rulemaking and supervisory expectations evolve, we are monitoring developments to enable BMO to respond to and
implement any required changes.
Under the direction of the General Counsel, the Legal and Compliance Group (LCG) maintains enterprise-wide frameworks that serve to identify,
measure, manage, monitor and report on legal and regulatory risk. LCG also works with operating groups and Corporate Support areas to identify
legal and regulatory requirements, trends and potential risks, recommend mitigation strategies and actions, and oversee litigation involving BMO.
Another area of focus for legal and compliance risk management and operating groups is the oversight of fiduciary risk related to BMO’s businesses
that provide products or services giving rise to fiduciary duties to clients. Of particular importance are the policies and practices that address the
responsibilities of a business to a client, including service requirements and expectations, client suitability determinations, and disclosure obligations
and communications.
Physical protection and protecting our employees, customers, information and assets from criminal risk, including acts by employees against
BMO, external parties acting against BMO and acts by external parties using BMO to engage in unlawful conduct such as fraud, theft, violence,
cyber-crime, bribery, and corruption, is a top priority. The management of criminal risk at BMO has been transformed through the implementation of
a robust Criminal Risk Management Framework, which prevents, detects, responds to and reports on criminal risk using a three-lines-of-defence
approach and through enhanced centralized management and oversight.
As governments around the world seek to curb corruption to counter its negative effects on political stability, sustainable economic development,
international trade and investment and in other areas, BMO’s Anti-Corruption Office, through its global program and framework, has articulated the
key principles and activities required to oversee compliance with anti-corruption legislation in jurisdictions where BMO operates, including providing
guidance so that corrupt practices can be identified and avoided and ensuring that allegations of corrupt activity are rigorously investigated.
Under the direction of the Chief Anti-Money Laundering Officer, the Anti-Money Laundering Office is responsible for the governance, oversight
and assessment of the principles and procedures established by the enterprise to ensure compliance with regulatory requirements and risk
parameters related to anti-money laundering, anti-terrorist financing and sanctions measures. International regulators continue to focus on
anti-money laundering and other related measures, to heighten their expectations concerning the quality and efficacy of anti-money laundering
and related programs and to penalize institutions that fail to meet these expectations.
All of these frameworks reflect the three-lines-of-defence operating model described previously. The operating groups and Corporate Support
areas manage day-to-day risks in compliance with corporate policies and standards, while LCG teams specifically aligned with each of the operating
groups provide advice and independent legal and regulatory risk management oversight.
114 BMO Financial Group 198th Annual Report 2015
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Heightened regulatory and supervisory scrutiny has had a significant impact on how we conduct business. Working with the operating groups
and other Corporate Support areas, LCG continues to diligently assess and analyze the implications of regulatory changes, and devotes substantial
resources to implementing the systems and processes required to comply with new regulations while also helping the operating groups meet BMO
customers’ needs and demands.
We continue to respond to other global regulatory developments, including capital and liquidity requirements under the Basel Committee on
Banking Supervision (BCBS) global standards (Basel III), over-the-counter (OTC) derivatives reform, consumer protection measures and specific
financial reforms, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). For additional discussion on regulatory
developments relating to capital management and liquidity and funding risk, please refer to the Enterprise-Wide Capital Management section starting
on page 70 and the Liquidity and Funding Risk section starting on page 105.
Cross-Border Resolution and Bail-in – As mentioned on page 71 in the Enterprise-Wide Capital Management section, in August 2014, Canada’s
Department of Finance issued a consultation paper on a Canadian bank resolution framework, including bail-in and Higher Loss Absorbency
requirements. The Enterprise-Wide Capital Management section also discusses the recently released new rules proposed by the Federal Reserve Board
for Total Loss Absorbing Capacity (TLAC) and the Financial Stability Board final standard for TLAC for Global Systemically Important Banks.
Dodd-Frank – Dodd-Frank reforms include heightened consumer protection, revised regulation of the OTC derivatives markets, restrictions on
proprietary trading and the ownership and sponsorship of private investment funds by banks and their affiliates (referred to as the Volcker Rule),
imposition of heightened prudential standards and broader application of leverage and risk-based capital requirements. Dodd-Frank rulemaking will
continue over the next several years. The conformance date for the Volcker Rule, which prohibits banking entities active in the United States and their
affiliates from certain proprietary trading and specified relationships with private investment funds, was July 21, 2015. U.S. regulators previously
extended until July 21, 2016, the time that banking entities have to conform their investments in and relationships with private investment funds in
place before December 31, 2013. They also indicated that during the course of 2015 they would issue a further such conformance extension to
July 21, 2017. BMO completed a significant review of our operations and developed policies and procedures to meet the July 21, 2015 deadline.
We now have systems in place to assess, monitor, and report on Volcker Rule compliance across the enterprise. In addition, under Dodd-Frank, most
OTC derivatives are now subject to a comprehensive regulatory regime. Certain derivatives are now required to be centrally cleared and traded on an
exchange and are subject to reporting and business conduct requirements. In Canada, OTC derivative transactions must now be reported to
designated trade repositories. Capital and margin requirements relating to derivatives are currently being considered by international regulators, and
margin requirements for non-centrally cleared derivatives have been adopted by U.S. regulators. The U.S. Securities and Exchange Commission (SEC)
has adopted rules for security-based swap dealers and other participants in the security-based swap market, including registration requirements. The
date or dates for registration, which depend on additional SEC rulemaking, have not been set. BMO is preparing for the impact of such requirements.
Indirect Auto Lenders – The Consumer Financial Protection Bureau, which enforces certain U.S. federal consumer finance laws, is closely scrutinizing
indirect auto lenders to focus on compliance, including with fair lending laws.
Regulatory Capital Rule Changes – In an effort to increase the comparability of capital requirements and to ensure minimum levels of capital across
the banking system, BCBS is considering a standardized approach for credit, market and operational risk-weighted assets, including new capital floors
based on revised standardized approaches. The current expectation is that the approaches will be settled on during 2016. BCBS is also completing a
fundamental review of the trading book risk-weighted assets and released a consultative paper in June 2015 that discussed the appropriate capital to
be held for interest rate risk in the banking book. Such changes, if implemented, along with the new impairment model based on expected credit
losses under IFRS 9, could have the effect of increasing the capital that we are required to hold.
FBO Rule – In February 2014, the Federal Reserve Board approved a final rule for strengthening supervision and regulation of foreign banking
organizations (FBO Rule) that implements Dodd-Frank’s enhanced prudential standards and early remediation requirements for the U.S. operations of
non-U.S. banks, such as BMO. The FBO Rule establishes new requirements relating to risk-based capital, leverage limits, liquidity standards, risk
management frameworks, concentration and credit exposure limits, resolution planning and credit exposure reporting. On December 29, 2014, we
submitted to the Federal Reserve Board an outline of our implementation plan for meeting these requirements by the effective date (July 1, 2016).
BMO is preparing for the impact of the FBO Rule on its operations.
Federal Budget Proposal – The 2015 Federal budget and the July 31, 2015 technical release proposed tax rules for synthetic equity arrangements
(the 2015 Proposals). Assuming the new Federal government reintroduces the 2015 Proposals, these proposals would, in certain circumstances, deny
any deduction for dividends that are paid or become payable after October 2015, unless the arrangement is grandfathered, in which case the
proposed tax rules would apply to dividends paid or that become payable after April 2017. BMO is currently assessing the impact of this proposal,
which has the potential to increase our effective tax rate.
Risk Governance Framework – In September 2014, the Office of the Comptroller of Currency issued guidelines that establish heightened standards
for large national banks with average total consolidated assets of US$50 billion or more, including BMO Harris Bank N.A. The guidelines set forth
minimum standards for the design and implementation of a bank’s risk governance framework and minimum standards for oversight of that
framework by a bank’s board of directors. The framework must ensure the bank’s risk profile is easily distinguished and separate from the parent for
risk management purposes. A bank’s board of directors is responsible for informed oversight of, and providing credible challenge to, management’s
risk management recommendations and decisions. BMO is required to comply by April 2016, and is implementing a plan to prepare to comply with
this guidance.
BMO Financial Group 198th Annual Report 2015 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
The General Counsel and the Chief Compliance Officer (CCO) regularly report to the ACRC of the Board and senior management on the effectiveness of
our Enterprise Compliance Program (ECP) which, using a risk-based approach, identifies, assesses and manages compliance with applicable legal and
regulatory requirements. The ECP directs operating groups and Corporate Support areas to maintain compliance policies, procedures and controls to
meet these requirements. Under the direction of the CCO, LCG identifies and reports on gaps and deficiencies, and tracks remedial action plans. The
Chief Anti-Money Laundering Officer also regularly reports to the ACRC.
All BMO employees are required to annually complete legal and regulatory training on topics such as anti-corruption, anti-money laundering and
privacy. This is done in conjunction with our Code of Conduct training, which tests employees’ knowledge and understanding of how they are required
to behave as employees of BMO.
Business Risk
Business risk arises from the specific business activities of a company and the effects these could have on its earnings.
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Business risk encompasses the potential causes of earnings volatility that are distinct from credit, market or operational risk factors. The management
of business risk identifies and addresses factors related to the risk that volumes will decrease or margins will shrink without the company having the
ability to compensate for this decline by cutting costs.
BMO faces many risks that are similar to those faced by non-financial firms, principally that our profitability, and hence value, may be eroded by
changes in the business environment or by failures of strategy or execution. Sources of these risks include, but are not limited to, changing client
expectations, adverse business developments and relatively ineffective responses to industry changes.
Within BMO, each operating group is responsible for controlling its respective business risk by assessing, managing and mitigating the risks
arising from changes in business volumes and cost structures, among other factors.
Strategic Risk
Strategic risk is the potential for loss due to fluctuations in the external business environment and/or failure to properly respond to these
fluctuations as a result of inaction, ineffective strategies or poor implementation of strategies.
Strategic risk arises from external risks inherent in the business environment within which BMO operates, as well as the risk of potential loss if BMO
is unable to address those external risks effectively. While external strategic risks – including economic, geo-political, regulatory, technological, social
and competitive risks – cannot be controlled, the likelihood and magnitude of their impact can be mitigated through an effective strategic risk
management framework and certain of these risks, including economic, geo-political and regulatory risks, can be assessed through stress testing.
BMO’s Office of Strategic Management (OSM) oversees our strategic planning processes and works with the lines of business, along with Risk,
Finance and other Corporate Support areas, to identify, monitor and mitigate strategic risk across the enterprise. Our rigorous strategic risk
management framework encourages a consistent approach to the development of strategies and incorporates financial information linked to financial
commitments.
The OSM works with the lines of business and key corporate stakeholders during the strategy development process to promote consistency and
adherence to strategic management standards, including considering the results from stress testing as an input into strategic decision-making, as
appropriate. The potential impacts of changes in the business environment, such as broad industry trends and the actions of competitors, are
considered as part of this process and inform strategic decisions within each of our lines of business. Enterprise and group strategies are reviewed
with the Executive Committee and the Board of Directors annually in interactive sessions that challenge assumptions and strategies in the context of
current and potential future business environments.
Performance objectives established through the strategic management process are monitored regularly and reported upon quarterly, using both
leading and lagging indicators of performance, so that strategies can be reviewed and adjusted where necessary. Regular strategic and financial
updates are also monitored closely to identify any significant emerging risk issues.
Reputation Risk
Reputation risk is the potential for a negative impact on BMO that results from the deterioration of BMO’s reputation. Potential negative impacts
include revenue loss, a decline in customer loyalty, litigation, regulatory sanction or additional oversight, and a decline in BMO’s share price.
BMO’s reputation is one of its most valuable assets. By protecting and maintaining our reputation, we can increase shareholder value, reduce our cost
of capital and improve employee engagement and customer loyalty.
Our reputation is built on our commitment to high standards of business conduct and ethics.
Rooted in our values, BMO’s Code of Conduct provides our employees and directors with guidance on expected behaviour and is the foundation
for an ethical culture.
We believe that active, ongoing and effective management of reputation risk is best achieved by considering reputation risk issues in the
course of strategy development, strategic and operational implementation, and transactional or initiative decision-making, as well as in day-to-day
decision-making. Reputation risk is also managed through our corporate governance practices and enterprise risk management framework.
The Reputation Risk Management Committee reviews instances of significant or heightened reputation risk to BMO.
116 BMO Financial Group 198th Annual Report 2015
Environmental and Social Risk
Environmental and social risk is the potential for loss or damage to BMO’s reputation resulting from environmental or social concerns related to
BMO or its customers. Environmental and social risk is often associated with credit, operational and reputation risk.
In order to manage our business responsibly, we consider factors that can give rise to environmental or social risk. This consideration is embedded
in our Board-approved Code of Conduct. BMO’s Supplier Code of Conduct outlines the principles we expect our suppliers to uphold – our standards
for integrity, fair dealing and sustainability. Environmental and social risk management activities are overseen by the Environmental, Social and
Governance (ESG) group and the Environmental Sustainability (ES) group, with support from our lines of business and other Corporate Support areas.
BMO’s Sustainability Council, which is comprised of executives representing various areas of the organization, provides insight and guidance for our
environmental and social initiatives.
Environmental and social risk covers a broad spectrum of issues, such as climate change, biodiversity and ecosystem health, pollution, waste and
the unsustainable use of water and other resources, as well as risks to the livelihoods, health, rights and cultural heritage of communities. We work
with external stakeholders to understand the impact of our operations and financing decisions in the context of these issues, and we use this
understanding to determine the consequences for our businesses. As part of our enterprise risk management framework, we evaluate the
environmental and social impact of our clients’ operations, as well as the impact of their industry sectors. Environmental and social risks associated
with credit transactions are managed within BMO’s credit and counterparty risk management framework. BMO has also developed and implemented
specific financing guidelines on environmental and social risk for specific lines of business. Enhanced due diligence is applied to transactions with
clients operating in environmentally sensitive industry sectors.
BMO applies the Equator Principles, a voluntary credit risk management framework for determining, assessing and managing environmental and
social risk in project finance transactions. These principles have been integrated into our credit risk management framework. We are also a signatory
to and participate in the Carbon Disclosure Project, which provides corporate disclosure on greenhouse gas emissions and climate change
management.
BMO implemented ESG training for BMO Capital Markets employees as part of a program to instill a consistent understanding of environmental
and social risk across the enterprise. The training includes identification of emerging issues, an overview of BMO’s due diligence procedures and tools
to assist employees in identifying and managing environmental, social and governance risks. We review our environmental and social risk policies
and procedures on a periodic basis.
BMO is a signatory to the UN Principles for Responsible Investment, a framework designed to encourage sustainable investing through the
integration of ESG issues into investment, decision-making and ownership practices.
The ESG group is responsible for coordinating the development and maintenance of an enterprise-wide strategy to meet BMO’s overarching
environmental and social responsibilities. The ES group is responsible for establishing and maintaining an environmental management system that is
aligned to ISO 14001, and for setting objectives and targets related to the bank’s own operations. BMO’s operating groups, Procurement and Strategic
Sourcing, and Corporate Real Estate are responsible for putting appropriate operating procedures in place. To ensure that we are informed of
emerging issues, we participate in global forums with our peers, maintain an open dialogue with our internal and external stakeholders, and
continuously monitor and evaluate policy and legislative changes in the jurisdictions where we operate. We publicly report our environmental and
social performance and targets in our annual Environmental, Social and Governance (ESG) Report and Public Accountability Statement (PAS), and on
our Corporate Responsibility website. Selected environmental and social indicators in the ESG Report and PAS are assured by a third party.
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BMO Financial Group 198th Annual Report 2015 117
SUPPLEMENTAL INFORMATION
Supplemental Information
Certain comparative figures have been reclassified to conform to the current period’s presentation and for changes in accounting policies. Refer to
Note 1 of the consolidated financial statements. In addition, on November 1, 2011, BMO’s financial statements have been reported in accordance with
IFRS. Results for years prior to 2011 have not been restated and are presented in accordance with Canadian GAAP as defined at that time (CGAAP).
As a result of these changes, certain growth rates and compound annual growth rates (CAGR) may not be meaningful.
Adjusted results in this section are non-GAAP measures. Refer to the Non-GAAP Measures section on page 33.
Table 1: Shareholder Value and Other Statistical Information
As at or for the year ended October 31
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
Market Price per Common Share ($)
High
Low
Close
Common Share Dividends
Dividends declared per share ($)
Dividend payout ratio (%)
Dividend yield (%)
Dividends declared ($ millions)
Total Shareholder Return (%)
Five-year average annual return
Three-year average annual return
One-year return
Common Share Information
Number outstanding (in thousands)
End of year
Average basic
Average diluted
Number of shareholder accounts
Book value per share ($)
Total market value of shares ($ billions)
Price-to-earnings multiple
Price-to-adjusted earnings multiple
Market-to-book value multiple
Balances
As at assets
Average daily assets
Average daily net loans and acceptances
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
84.39
64.01
76.04
3.24
49.2
4.3
2,087
9.5
13.5
(3.0)
85.71
67.04
81.73
3.08
47.8
3.8
1,991
15.5
16.7
17.1
73.90
56.74
72.62
2.94
47.5
4.0
1,904
17.0
11.5
28.8
61.29
53.15
59.02
2.82
46.0
4.8
1,820
4.2
10.8
5.2
63.94
55.02
58.89
2.80
57.1
4.8
1,690
1.9
17.4
2.4
65.71
49.78
60.23
2.80
58.6
4.6
1,571
5.9
4.5
26.4
54.75
24.05
50.06
2.80
90.6
5.6
1,530
63.44
35.65
43.02
2.80
73.9
6.5
1,409
72.75
60.21
63.00
2.71
64.8
4.3
1,354
70.24
56.86
69.45
2.26
43.0
3.3
1,133
1.8
(5.3)
25.1
0.9
(5.6)
(27.9)
14.2
6.6
(5.8)
19.1
15.6
24.1
642,583
644,916
647,162
53,481
56.31
48.9
11.6
10.9
1.35
649,050
645,860
648,475
55,610
48.18
53.0
12.8
12.4
1.70
644,130
648,476
649,806
56,241
43.22
46.8
11.8
11.7
1.66
650,730
644,407
648,615
59,238
39.41
38.4
9.7
9.9
1.47
639,000
591,403
607,068
58,769
36.76
37.6
12.2
11.5
1.49
566,468
559,822
563,125
36,612
34.09
34.1
12.7
12.5
1.77
551,716
540,294
542,313
37,061
31.95
27.6
16.3
12.5
1.57
504,575
502,062
506,697
37,250
32.02
21.7
11.4
9.2
1.34
498,563 500,726
499,950 501,257
508,614 511,173
38,360
28.89
34.8
13.5
13.4
2.40
37,165
28.29
31.4
15.3
11.6
2.23
641,881
664,391
320,081
588,659
593,928
292,098
537,044
555,431
266,107
524,684
543,931
246,129
500,575
469,934
215,414
411,640
398,474
171,554
388,458
438,548
182,097
416,050
397,609
175,079
366,524 319,978
360,575 309,131
165,783 153,282
Return on Equity and Assets
Return on equity (%)
Adjusted return on equity (%)
Return on average assets (%)
Adjusted return on average assets (%)
Return on average risk-weighted assets (%) (1)
Adjusted return on average risk-weighted assets (%) (1)
Average equity to average total assets (%)
12.5
13.3
0.66
0.70
1.84
1.96
0.05
14.0
14.4
0.72
0.74
1.85
1.91
0.05
14.9
15.0
0.74
0.75
1.93
1.94
0.05
15.9
15.5
0.75
0.73
1.96
1.92
0.05
15.1
16.0
0.65
0.68
1.70
1.79
0.04
14.9
15.0
0.71
0.71
1.74
1.76
0.05
9.9
12.9
0.41
0.52
0.97
1.25
0.04
13.0
16.2
0.50
0.61
1.07
1.32
0.04
14.4
19.0
0.59
0.78
1.20
1.58
0.04
19.2
19.3
0.86
0.87
1.71
1.71
0.04
Other Statistical Information
Employees (2)
Canada
United States
Other
Total
Bank branches
Canada
United States
Other
Total
Automated banking machines
Canada
United States
Total
2010 and prior based on CGAAP.
30,669
14,316
1,368
30,587
14,845
1,346
30,303
14,694
634
30,797
14,963
512
31,351
15,184
440
29,821
7,445
363
29,118
6,732
323
29,529
7,256
288
28,944
6,595
288
27,922
6,785
234
46,353
46,778
45,631
46,272
46,975
37,629
36,173
37,073
35,827
34,941
939
592
4
934
615
4
933
626
4
930
638
3
920
688
3
910
321
3
900
290
5
983
292
5
977
243
4
963
215
4
1,535
1,553
1,563
1,571
1,611
1,234
1,195
1,280
1,224
1,182
3,442
1,319
4,761
3,016
1,322
4,338
2,900
1,325
4,225
2,596
1,375
3,971
2,235
1,366
3,601
2,076
905
2,981
2,030
636
2,666
2,026
640
2,666
1,978
583
1,936
547
2,561
2,483
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Beginning in 2008, return on average risk-weighted assets has been calculated under the Basel II guidelines; for all prior periods, return on average risk-weighted assets has been calculated using the
Basel I methodology.
(2) Reflects full-time equivalent number of employees, comprising full-time and part-time employees and adjustments for overtime hours.
118 BMO Financial Group 198th Annual Report 2015
Table 2: Summary Income Statement and Growth Statistics
($ millions, except as noted)
For the year ended October 31
Income Statement – Reported Results
Net interest income
Non-interest revenue
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Attributable to bank shareholders
Attributable to non-controlling interest in subsidiaries
Net income
Income Statement – Adjusted Results
Net interest income
Non-interest revenue
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) (1)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Adjusted net income
Attributable to bank shareholders
Attributable to non-controlling interest in subsidiaries
Adjusted net income
Earnings per Share (EPS) ($)
Basic
Diluted
Adjusted diluted
Year-over-Year Growth-Based Statistical Information (%)
Net income growth
Adjusted net income growth
Diluted EPS growth
Adjusted diluted EPS growth
2015
2014
2013
2012
2011
5-year
CAGR
10-year
CAGR
8,970
10,419
19,389
1,254
18,135
612
12,182
5,341
936
4,405
4,370
35
4,405
8,971
10,420
19,391
1,254
18,137
612
11,819
5,706
1,025
4,681
4,646
35
4,681
6.59
6.57
7.00
1.7
5.1
2.5
6.2
8,461
9,762
18,223
1,505
16,718
561
10,921
5,236
903
4,333
4,277
56
4,333
8,461
9,762
18,223
1,505
16,718
561
10,761
5,396
943
4,453
4,397
56
4,453
6.44
6.41
6.59
3.3
5.4
3.9
6.1
8,677
8,153
16,830
767
16,063
587
10,226
5,250
1,055
4,195
4,130
65
4,195
8,020
8,119
16,139
767
15,372
357
9,755
5,260
1,037
4,223
4,158
65
4,223
6.19
6.17
6.21
0.9
4.1
1.1
4.4
8,937
8,166
17,103
1,174
15,929
764
10,135
5,030
874
4,156
4,082
74
4,156
8,158
7,882
16,040
1,174
14,866
470
9,410
4,986
927
4,059
3,985
74
4,059
6.13
6.10
5.95
33.5
23.9
26.0
16.7
7,474
7,587
15,061
1,118
13,943
1,212
8,741
3,990
876
3,114
3,041
73
3,114
7,248
7,612
14,860
1,118
13,742
1,108
8,453
4,181
906
3,275
3,202
73
3,275
4.90
4.84
5.10
8.0
12.3
1.9
6.0
7.5
8.2
7.9
4.1
8.2
nm
9.8
8.4
nm
8.8
9.2
nm
8.8
7.5
8.2
7.9
4.1
8.2
nm
9.3
9.6
8.2
9.9
9.8
nm
9.9
6.6
6.7
7.8
na
na
na
na
6.5
7.1
6.8
22.0
6.3
nm
6.8
4.8
0.7
6.3
6.2
nm
6.3
6.5
7.1
6.8
22.0
6.3
nm
6.6
5.2
(0.1)
7.0
6.9
nm
7.0
3.4
3.6
4.5
na
na
na
na
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
Five-year and ten-year CAGR based on CGAAP in 2010 and 2005, respectively, and on IFRS in 2015. 2011 growth rates based on CGAAP in 2010 and IFRS in 2011.
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Beginning in 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance revenue in
non-interest revenue. Prior period amounts and ratios have been reclassified.
nm – not meaningful
na – not applicable
BMO Financial Group 198th Annual Report 2015 119
SUPPLEMENTAL INFORMATION
Table 3: Revenue and Revenue Growth
($ millions, except as noted)
For the year ended October 31
Net Interest Income
Year-over-year growth (%)
Adjusted Net Interest Income
Year-over-year growth (%)
Net Interest Margin (1)
Average earning assets
Net interest margin (%)
Adjusted net interest margin (%)
Canadian dollar net interest margin (%)
U.S. dollar and other currencies net interest margin (%)
Non-Interest Revenue
Securities commissions and fees
Deposit and payment service charges
Trading revenues
Lending fees
Card fees
Investment management and custodial fees
Mutual fund revenues
Underwriting and advisory fees
Securities gains, other than trading
Foreign exchange, other than trading
Insurance income (2)
Other revenues
Total Non-Interest Revenue
Year-over-year growth (%)
Non-interest revenue as a % of total revenue
Adjusted Non-Interest Revenue
Year-over-year adjusted non-interest revenue growth (%)
Adjusted non-interest revenue as a % of total adjusted revenue
Total Revenue
Year-over-year total revenue growth (%)
Total Revenue, net of CCPB (2)
Year-over-year total revenue growth, net of CCPB (%)
Total Adjusted Revenue
Year-over-year total adjusted revenue growth (%)
Total Adjusted Revenue, net of CCPB (2)
Year-over-year total adjusted revenue growth, net of CCPB (%)
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
2015
8,970
6.0
8,971
6.0
2014
2013
8,461
(2.5)
8,461
5.5
8,677
(2.9)
8,020
(1.7)
2012
8,937
19.6
8,158
12.6
2011
7,474
19.9
7,248
16.2
579,471
1.55
1.55
1.68
1.38
528,786
1.60
1.60
1.74
1.41
485,191
1.79
1.65
1.82
1.74
461,018
1.94
1.77
1.89
2.01
404,195
1.85
1.79
1.99
1.61
953
1,077
987
737
460
1,500
1,385
706
171
172
1,762
509
10,419
6.7
53.7
10,420
6.8
53.7
19,389
6.4
18,135
8.5
19,391
6.4
18,137
8.5
934
1,002
949
680
462
1,246
1,073
744
162
179
2,008
323
9,762
19.7
53.6
9,762
20.2
53.6
18,223
8.3
16,718
4.1
18,223
12.9
16,718
8.7
846
916
849
603
461
971
832
659
285
172
1,212
347
8,153
(0.2)
48.4
8,119
3.0
50.3
16,830
(1.6)
16,063
0.8
16,139
0.6
15,372
3.4
825
929
1,025
544
441
967
665
600
152
153
1,509
356
8,166
7.6
47.7
7,882
3.6
49.1
17,103
13.6
15,929
14.2
16,040
7.9
14,866
8.2
1,215
834
549
593
689
496
633
512
189
130
1,401
346
7,587
7.9
50.4
7,612
8.3
51.2
15,061
13.5
13,943
13.9
14,860
12.0
13,742
12.3
5-year
CAGR
10-year
CAGR
7.5
na
7.5
na
11.8
na
na
na
na
(2.4)
6.1
14.4
5.2
14.6
33.4
20.3
9.7
nm
13.0
5.5
17.8
8.2
na
na
8.2
na
na
7.9
na
8.2
na
7.9
na
8.2
na
6.5
na
6.5
na
9.1
na
na
na
na
(1.4)
3.9
7.1
8.9
3.3
17.3
12.2
7.1
nm
5.9
20.0
1.6
7.1
na
na
7.1
na
na
6.8
na
6.3
na
6.8
na
6.3
na
Five-year and ten-year CAGR based on CGAAP in 2010 and 2005, respectively, and on IFRS in 2015. 2011 growth rates based on CGAAP in 2010 and IFRS in 2011.
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Net interest margin is calculated based on average earning assets.
(2) Beginning in 2015, insurance claims, commissions and changes in policy benefit liabilities (CCPB) are reported separately. They were previously reported as a reduction in insurance revenue in
non-interest revenue. Prior period amounts and ratios have been reclassified.
na – not applicable
nm – not meaningful
120 BMO Financial Group 198th Annual Report 2015
Table 4: Non-Interest Expense and Expense-to-Revenue Ratio
($ millions, except as noted)
For the year ended October 31
Non-Interest Expense
Employee compensation
Salaries
Performance-based compensation
Employee benefits
Total employee compensation
Premises and equipment
Rental of real estate
Premises, furniture and fixtures
Property taxes
Computers and equipment (1)
Total premises and equipment (1)
Other expenses
Amortization of intangible assets (1)
Communications
Business and capital taxes
Professional fees
Travel and business development
Other
Total other expenses
Total Non-Interest Expense
Year-over-year total non-interest expense growth (%)
Total Adjusted Non-Interest Expense
Year-over-year total adjusted non-interest expense growth (%)
Non-interest expense-to-revenue ratio (Efficiency ratio) (%)
Adjusted non-interest expense-to-revenue ratio (Efficiency ratio) (%)
Efficiency ratio, net of CCPB (2)
Adjusted efficiency ratio, net of CCPB (2)
Government Levies and Taxes (3)
Government levies other than income taxes
Payroll levies
Property taxes
Provincial capital taxes
Business taxes
Harmonized sales tax, GST and other sales taxes
Sundry taxes
Total government levies other than income taxes
Provision for income taxes
Total Government Levies and Taxes
Total government levies and taxes as a % of income available to pay
government levies and taxes
Effective income tax rate (%)
Adjusted effective income tax rate (%)
2015
2014
2013
2012
2011
5-year
CAGR
10-year
CAGR
2,646
1,560
621
4,827
360
310
30
878
1,578
231
259
51
624
382
789
2,336
8,741
14.7
8,453
11.5
58.0
56.9
62.7
61.5
203
30
44
7
235
1
520
876
3,910
2,102
1,069
7,081
462
287
39
1,349
2,137
411
314
45
595
605
994
3,388
1,946
908
6,242
415
261
39
1,193
1,908
382
289
39
622
542
897
3,259
1,686
897
5,842
416
377
37
1,003
1,833
346
291
39
527
514
834
3,148
1,657
808
5,613
400
368
36
1,071
1,875
331
301
46
593
491
885
2,964
2,771
2,551
2,647
10,135
15.9
9,410
11.3
59.3
58.7
63.6
63.3
250
36
37
9
249
2
583
874
12,182
11.5
11,819
9.8
62.8
60.9
67.2
65.2
10,921
6.8
10,761
10.3
59.9
59.1
65.3
64.4
312
39
33
10
319
2
715
936
252
39
27
9
273
2
602
903
1,651
1,505
23.1
17.5
18.0
25.0
17.2
17.5
10,226
0.9
9,755
3.7
60.8
60.4
63.7
63.5
249
37
30
7
262
1
586
1,055
1,641
28.7
20.1
19.7
1,457
1,396
26.6
17.4
18.6
31.0
22.0
21.7
11.3
7.6
11.4
10.2
7.7
1.3
6.5
13.2
9.7
15.2
6.5
(3.1)
8.2
12.1
7.8
9.2
9.8
na
9.3
na
na
na
na
na
12.3
6.5
(6.1)
7.4
16.9
nm
12.2
nm
8.7
na
na
na
7.5
5.1
6.5
6.6
8.9
1.2
(1.5)
5.8
nm
nm
10.0
(8.4)
9.4
9.4
7.0
8.4
6.8
na
6.6
na
na
na
na
na
7.5
(1.5)
(10.5)
3.3
9.7
nm
5.2
0.7
2.4
na
na
na
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
Five-year and ten-year CAGR based on CGAAP in 2010 and 2005, respectively, and on IFRS in 2015. 2011 growth rates based on CGAAP in 2010 and IFRS in 2011.
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) In 2009, we adopted new accounting requirements for intangible assets and reclassified certain computer equipment from premises and equipment to intangible assets. Computer and equipment
expense and the amortization of intangible assets were restated, but not for years prior to 2007. As such, ten-year growth rates for these expense categories are not meaningful. Together, computer
and equipment expense and the amortization of intangible assets increased at a compound annual growth rate of 6.5% over ten years. Together, total premises and equipment expense and the
amortization of intangible assets increased at a compound annual growth rate of 7.4% over ten years.
(2) This ratio is calculated excluding insurance claims, commissions and changes in policy benefit liabilities (CCPB).
(3) Government levies are included in various non-interest expense categories.
na – not applicable
nm – not meaningful
BMO Financial Group 198th Annual Report 2015 121
SUPPLEMENTAL INFORMATION
Table 5: Average Assets, Liabilities and Interest Rates
($ millions, except as noted)
For the year ended October 31
Assets
Canadian Dollar
Deposits with other banks
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Businesses and governments
Total loans
Total Canadian dollar
U.S. Dollar and Other Currencies
Deposits with other banks
Securities
Securities borrowed or purchased under resale agreements
Loans
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
Residential mortgages
Non-residential mortgages
Personal and credit cards
Businesses and governments
Total loans
Total U.S. dollar and other currencies
Other non-interest bearing assets
Total All Currencies
Total assets and interest income
Liabilities
Canadian Dollar
Deposits
Banks
Businesses and governments
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold (1)
Subordinated debt and other interest bearing liabilities
Total Canadian dollar
U.S. Dollar and Other Currencies
Deposits
Banks
Businesses and governments
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold (1)
Subordinated debt and other interest bearing liabilities
Total U.S. dollar and other currencies
Other non-interest bearing liabilities
Total All Currencies
Total liabilities and interest expense
Shareholders’ equity
Average
balances
Average
interest
rate (%)
Average
balances
Average
interest
rate (%)
2013
Interest
income/
expense
Average
balances
Average
interest
rate (%)
1,984
90,322
29,617
94,119
6,176
55,219
43,427
198,941
320,864
48,031
54,733
44,010
8,631
4,619
17,071
79,678
109,999
256,773
86,754
1.04
1.39
0.90
2.83
3.71
4.89
3.94
3.67
2.76
0.53
1.20
0.14
3.39
2.51
3.19
3.26
3.23
1.76
2015
Interest
income/
expense
21
1,257
266
2,663
229
2,699
1,710
1,632
94,234
23,027
90,134
6,276
55,719
40,250
7,301
192,379
8,845
311,272
253
655
60
293
116
545
2,598
38,815
53,921
32,629
7,753
4,860
15,812
61,402
3,552
89,827
4,520
215,192
67,464
2014
Interest
income/
expense
25
1,244
238
2,779
256
2,860
1,726
2,461
83,605
22,309
81,693
6,285
54,845
37,380
7,621
180,203
9,128
288,578
245
601
38
261
121
524
2,123
35,093
48,488
32,578
8,897
5,558
14,862
47,821
3,029
77,138
3,913
193,297
73,556
1.52
1.32
1.03
3.08
4.08
5.13
4.29
3.96
2.93
0.63
1.11
0.12
3.37
2.48
3.32
3.46
3.37
1.82
664,391
2.01
13,365
593,928
2.20
13,041
555,431
2.39
13,265
7,883
96,713
94,031
198,627
40,637
25,713
264,977
19,377
169,793
47,671
236,841
41,792
5,749
284,382
78,130
627,489
36,902
0.43
1.16
0.88
1.00
1.63
2.96
1.29
0.27
0.32
0.20
0.29
0.20
3.61
0.35
34
1,121
832
1,987
661
760
5,416
98,090
89,007
192,513
40,713
24,712
3,408
257,938
53
546
95
694
85
208
19,048
145,355
41,675
206,078
33,650
4,901
987
244,629
0.39
1.38
0.97
1.16
1.74
3.11
1.44
0.23
0.34
0.22
0.30
0.21
3.34
0.35
0.70
4,395
59,139
561,706
32,222
0.82
4,580
21
1,353
863
2,237
710
769
5,921
88,603
82,248
176,772
36,077
28,004
3,716
240,853
44
494
90
628
72
164
864
17,135
123,129
40,694
180,958
33,486
4,325
218,769
66,523
526,145
29,286
1.28
1.78
1.19
3.15
4.29
4.97
4.62
4.05
3.15
0.61
1.32
0.17
4.31
3.01
3.59
4.57
4.24
2.16
32
1,492
265
2,576
269
2,728
1,725
7,298
9,087
213
640
57
383
167
533
2,185
3,268
4,178
0.34
1.53
0.96
1.22
1.96
3.25
1.57
0.33
0.32
0.29
0.31
0.30
3.32
0.37
20
1,352
788
2,160
708
911
3,779
56
392
119
567
99
143
809
0.87
4,588
Total Liabilities, Interest Expense and Shareholders’ Equity
664,391
0.66
4,395
593,928
0.77
4,580
555,431
0.83
4,588
Net interest margin
– based on earning assets
– based on total assets
Net interest income based on total assets
Adjusted net interest margin
– based on earning assets
– based on total assets
8,970
1.55
1.35
1.55
1.35
8,461
1.60
1.42
1.60
1.42
8,677
1.79
1.56
1.65
1.44
Adjusted net interest income based on total assets
8,971
8,461
8,020
(1) For the years ended October 31, 2015, 2014 and 2013, the maximum amount of securities lent or sold under repurchase agreements at any month end amounted to $57,385 million, $50,138 million
and $53,898 million, respectively.
122 BMO Financial Group 198th Annual Report 2015
Table 6: Volume/Rate Analysis of Changes in Net Interest Income
($ millions)
For the year ended October 31
Assets
Canadian Dollar
Deposits with other banks
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Businesses and governments
Total loans
Change in Canadian dollar interest income
U.S. Dollar and Other Currencies
Deposits with other banks
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Businesses and governments
Total loans
Change in U.S. dollar and other currencies interest income
Total All Currencies
Change in total interest income (a)
Liabilities
Canadian Dollar
Deposits
Banks
Businesses and governments
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
Subordinated debt and other interest bearing liabilities
Change in Canadian dollar interest expense
U.S. Dollar and Other Currencies
Deposits
Banks
Businesses and governments
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
Subordinated debt and other interest bearing liabilities
Change in U.S. dollar and other currencies interest expense
Total All Currencies
Change in total interest expense (b)
Change in total net interest income (a - b)
2015/2014
2014/2013
Increase (decrease) due to change in
Increase (decrease) due to change in
Average
balance
Average
rate
5
(52)
68
123
(4)
(26)
136
229
250
58
9
13
30
(6)
42
632
698
778
(9)
66
(41)
(238)
(23)
(135)
(153)
(549)
(533)
(51)
45
9
2
1
(21)
(156)
(174)
(171)
Total
(4)
14
27
(115)
(27)
(161)
(17)
(320)
(283)
7
54
22
32
(5)
21
476
524
607
Average
balance
Average
rate
(11)
190
8
266
–
44
132
442
629
23
72
–
(49)
(21)
34
620
584
679
4
(438)
(35)
(63)
(13)
88
(131)
(119)
(588)
10
(111)
(19)
(73)
(26)
(43)
(682)
(824)
(944)
Total
(7)
(248)
(27)
203
(13)
132
1
323
41
33
(39)
(19)
(122)
(47)
(9)
(62)
(240)
(265)
1,028
(704)
324
1,308
(1,532)
(224)
9
(19)
49
39
(1)
31
69
1
83
13
97
17
28
142
211
817
3
(213)
(80)
(290)
(47)
(40)
(377)
9
(31)
(8)
(30)
(4)
15
(19)
12
(232)
(31)
(251)
(48)
(9)
(308)
10
52
5
67
13
43
123
(2)
145
65
208
91
(107)
192
6
71
3
80
–
19
99
3
(143)
10
(130)
(89)
(34)
(253)
(18)
31
(32)
(19)
(28)
1
(46)
(396)
(308)
(185)
509
291
(299)
1,017
(1,233)
1
2
75
78
2
(141)
(61)
(12)
102
(29)
61
(28)
20
53
(8)
(216)
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BMO Financial Group 198th Annual Report 2015 123
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o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
As at October 31
Consumer
Residential mortgages
Consumer instalment and
other personal loans
Total consumer
Businesses and governments
Total impaired loans and
acceptances, net of specific
allowances
Collective allowance
Total net impaired loans and
SUPPLEMENTAL INFORMATION
Table 7: Net Loans and Acceptances –
Segmented Information (1) (5) (6)
($ millions)
As at October 31
Consumer
Residential mortgages
Credit cards
Consumer instalment and
other personal loans
Total consumer
Total businesses and
governments
Total loans and acceptances, net
of specific allowances
Collective allowance
Canada
United States
Other countries
Total
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
96,975
7,427
92,972 88,677
7,413
7,476
76,729
7,381
68,190
7,564
8,905
553
7,980
496
7,646
457
7,416
433
7,945
474
49,181
48,955 49,195
47,955
45,584 16,098 15,088 14,364 13,419 13,802
153,583 149,403 145,285 132,065 121,338 25,556 23,564 22,467 21,268 22,221
–
–
206
206
–
–
1
1
–
–
–
–
–
–
–
–
–
–
–
–
105,880 100,952
7,972
7,980
96,323
7,870
84,145
7,814
76,135
8,038
65,485
64,044
63,559
61,374
59,386
179,345 172,968 167,752 153,333 143,559
69,772
63,896 57,967
53,069
50,737 75,430 56,389 45,842 42,955 41,209 10,975
11,145 8,954 5,748 4,649
156,177 131,430 112,763 101,772
96,595
223,355 213,299 203,252 185,134 172,075 100,986 79,953 68,309 64,223 63,430 11,181
–
(857)
(803)
(795)
(791)
(694)
(765)
(755)
(747)
(705)
(687)
11,146 8,954 5,748 4,649
–
–
–
–
335,522 304,398 280,515 255,105 240,154
(1,452)
(1,660)
(1,485)
(1,542)
(1,460)
Total net loans and acceptances 222,498 212,504 202,461 184,429 171,388 100,183 79,206 67,615 63,468 62,665 11,181
11,146 8,954 5,748 4,649
333,862 302,856 279,030 253,645 238,702
Table 8: Net Impaired Loans and Acceptances –
Segmented Information (6)
($ millions, except as noted)
Canada
United States
Other countries
Total
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
159
117
276
220
168
157
136
304
247
100
257
253
182
64
246
377
178
173
303
369
335
221
101
279
433
316
489
613
309
612
507
274
643
944
275
128
610
1,271
349
1,108
496
(857)
551
(795)
510
(791)
623
(705)
712
(687)
1,102
(803)
1,119
(747)
1,587
(694)
1,881
(755)
1,457
(765)
–
–
–
4
4
–
4
–
–
–
4
4
–
4
–
–
–
3
3
–
3
–
–
–
25
25
–
25
–
–
–
2
2
–
2
332
433
765
837
471
445
916
758
526
374
517
399
339
229
900
1,200
856
1,673
628
1,543
1,602
1,674
2,100
2,529
2,171
(1,660)
(1,542)
(1,485)
(1,460)
(1,452)
(58)
132
615
1,069
719
acceptances (NIL)
(361)
(244)
(281)
(82)
25
299
372
893
1,126
692
Condition Ratios (1)
NIL as a % of net loans and
acceptances (2) (3)
(0.16)
(0.12)
(0.14)
(0.04)
0.01
0.30
0.48
1.34
1.81
1.15
0.04
0.04
0.03
0.43
0.04
(0.02)
0.04
0.22
0.42
0.30
NIL as a % of net loans and
acceptances (2) (3) (4)
Consumer
Businesses and governments
0.18
0.32
0.20
0.39
0.18
0.43
0.19
0.66
0.23
0.85
1.92
0.82
2.60
0.90
2.87
2.08
2.87
2.99
1.57
2.69
–
0.04
–
0.04
–
0.03
–
0.43
–
0.04
0.43
0.54
0.53
0.58
0.54
1.07
0.56
1.67
0.44
1.63
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Certain balances and ratios (coverage, condition and performance) for fiscal 2012 were restated in 2013 to conform to the current period’s presentation.
(2) Aggregate balances are net of specific and collective allowances; the consumer and businesses and governments categories are stated net of specific allowances only. Includes collective allowances
related to off-balance sheet instruments and undrawn commitments, which are reported in Other Liabilities. Excludes specific allowances for Other Credit Instruments, which are included in Other
Liabilities.
(3) Ratio is presented including purchased portfolios and prior periods have been restated.
(4) Certain condition and performance ratios for 2013 and 2012 were restated in 2014 to conform to the current period’s presentation.
(5) Fiscal 2013, 2012 and 2011 balances were reclassified in 2014 to conform to the current period’s presentation.
(6) Certain balances for fiscal 2014 and 2013 were restated in 2015 to conform to the current period’s presentation.
124 BMO Financial Group 198th Annual Report 2015
Table 9: Net Loans and Acceptances –
Segmented Information (1) (2) (3) (4)
($ millions)
As at October 31
Net Loans and Acceptances by Province
Atlantic provinces
Quebec
Ontario
Prairie provinces
British Columbia and territories
2015
2014
2013
2012
2011
13,361
36,486
89,460
43,612
39,579
13,065
35,647
84,498
42,043
37,251
11,244
33,746
80,726
38,825
37,920
11,801
35,650
69,014
34,431
33,533
10,638
28,489
68,556
32,162
31,543
Total net loans and acceptances in Canada
222,498
212,504
202,461
184,429
171,388
Net Businesses and Governments Loans by Industry
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial institutions
Government
Other
20,597
3,544
14,096
10,243
9,891
815
16,187
1,309
6,667
3,735
1,984
859
28,384
31,220
1,874
4,772
17,636
3,101
12,580
8,281
9,155
831
13,612
1,085
5,943
2,532
1,670
587
22,114
24,096
2,076
6,131
17,606
2,934
10,229
7,345
8,380
729
11,250
959
3,908
2,152
1,309
631
18,321
19,019
1,719
6,272
18,720
2,539
9,084
6,821
7,312
513
9,870
662
3,466
2,109
1,170
592
14,992
15,113
1,295
7,514
20,468
2,460
7,829
5,854
6,653
564
9,368
683
3,477
2,009
842
529
13,872
14,709
810
6,468
156,177
131,430
112,763
101,772
96,595
Table 10: Net Impaired Loans and Acceptances –
Segmented Information (2) (4)
($ millions)
As at October 31
Net Impaired Businesses and Governments Loans
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial institutions
Government
Other
2015
2014
2013
2012
2011
87
83
55
47
129
13
102
3
100
30
14
9
107
48
–
10
837
159
84
38
35
103
59
100
2
1
7
–
13
145
9
2
1
758
379
32
74
64
118
–
74
5
30
23
–
19
246
–
61
75
803
51
68
58
131
5
126
5
1
41
6
24
263
–
68
23
637
45
98
32
135
7
87
3
2
42
2
36
169
181
1
66
1,200
1,673
1,543
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our
results prospectively.
(1) Certain balances and ratios (coverage, condition and performance) for fiscal 2012 were restated in 2013 to conform to the current period’s
presentation.
(2) Fiscal 2013, 2012 and 2011 balances were reclassified in 2014 to conform to the current period’s presentation.
(3) Fiscal 2014 Canadian regional balances were reclassified in 2015 to conform to the current period’s presentation.
(4) Excludes specific allowances for Other Credit Instruments, which are included in Other Liabilities.
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BMO Financial Group 198th Annual Report 2015 125
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Gross impaired loans and acceptances,
end of year
Consumer
Businesses and governments
Total GIL, end of year
Condition Ratios
GIL as a % of Gross Loans (2)
Consumer
Businesses and governments
SUPPLEMENTAL INFORMATION
Table 11: Changes in Gross Impaired Loans –
Segmented Information (6)
($ millions)
As at October 31
Gross impaired loans and acceptances (GIL),
beginning of year
Consumer
Businesses and governments
Total GIL, beginning of year
Additions to impaired loans and acceptances
Consumer
Businesses and governments
Total additions
Reductions to impaired loans and
acceptances (1)
Consumer
Businesses and governments
Total reductions due to net repayments
and other
Write-offs
Canada
United States
Other countries
Total
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
398
344
742
617
231
848
348
406
754
643
285
928
338
548
886
584
294
878
371
586
957
533
352
885
412
540
678
623
702
1,081
646
1,401
388
1,326
309
1,551
952
1,301
1,783
2,047
1,714
1,860
573
424
526
542
529
685
637
931
764
1,416
997
1,068
1,214
1,568
2,180
333
661
994
–
5
5
–
5
5
–
7
7
–
–
–
–
43
43
–
3
3
–
14
14
–
36
36
–
82
82
–
1
1
1,076
972
1,050
1,494
984
1,992
759
1,926
721
2,173
2,048
2,544
2,976
2,685
2,894
1,143
778
1,172
970
1,221
1,228
1,297
1,804
906
1,086
1,921
2,142
2,449
3,101
1,992
(479)
(151)
(431)
(224)
(416)
(274)
(386)
(314)
(413)
(242)
(432)
(239)
(321)
(859)
(243)
(973)
(45)
(880)
7
(597)
–
(5)
–
(2)
–
(36)
–
(6)
–
(40)
(911)
(659)
(752)
(395) (1,085) (1,283)
(431)
(1,200)
(406)
(879)
(630)
(655)
(690)
(700)
(655)
(671)
(1,180)
(1,216)
(925)
(590)
(5)
(2)
(36)
(6)
(40)
(1,306) (1,837)
(1,942) (1,631)
(1,285)
Consumer
Businesses and governments
(177)
(142)
(162)
(123)
(158)
(162)
(180)
(76)
(201)
(136)
(215)
(169)
(232)
(284)
(338)
(278)
(461)
(461)
(261)
(289)
Total write-offs
(319)
(285)
(320)
(256)
(337)
(384)
(516)
(616)
(922)
(550)
359
282
641
398
344
742
348
406
754
338
548
886
371
586
557
757
678
623
702
1,081
646
1,401
388
1,326
957
1,314
1,301
1,783
2,047
1,714
–
(1)
(1)
–
4
4
–
–
–
–
5
5
–
(3)
(3)
–
7
7
–
(1)
(1)
–
(29)
(29)
(392)
(312)
(394)
(407)
(496)
(443)
(641)
(538)
(462)
(454)
(704)
(801)
(939) (1,179)
(916)
–
43
43
–
14
14
916
1,043
1,076
972
1,050
1,494
984
1,992
759
1,926
1,959
2,048
2,544
2,976
2,685
Total Loans and Acceptances
0.29
0.35
0.37
0.47
0.56
0.23
0.40
0.27
0.54
0.24
0.68
0.26
1.00
0.31
1.15
2.18
1.01
1.30
2.87
1.10
1.62
3.12
2.34
2.60
3.03
3.28
3.20
1.74
3.20
–
0.04
–
0.04
–
0.10
–
0.91
–
0.30
2.69
0.04
0.04
0.10
0.91
0.30
0.51
0.67
0.58
0.62
0.74
0.67
0.63
1.32
0.91
0.64
1.95
1.17
0.53
1.99
1.12
GIL as a % of equity and allowance for
credit losses (3) (4) (5)
un
un
un
un
un
un
un
un
un
un
un
un
un
un
un
4.67
5.49
7.68
9.46
8.98
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Includes amounts returning to performing status, sales, repayments, the impact of foreign exchange, and offsets for consumer write-offs that are not recognized as formations.
(2) Certain balances and ratios (coverage, condition and performance) for fiscal 2012 were restated in 2013 to conform to the current period’s presentation.
(3) Ratio is presented including purchased portfolios and prior periods have been restated.
(4) Effective in 2011, total equity includes non-controlling interest in subsidiaries. In addition, geographic allocations are not available, as equity is not allocated on a country of risk basis.
(5) Certain condition and performance ratios for 2013 and 2012 were restated in 2014 to conform to the current period’s presentation.
(6) GIL excludes Purchased Credit Impaired Loans.
un – unavailable
126 BMO Financial Group 198th Annual Report 2015
127
SUPPLEMENTAL INFORMATION
Table 12: Changes in Allowance for Credit Losses –
Segmented Information (3)
($ millions, except as noted)
Canada
United States
Other countries
Total
As at October 31
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
Allowance for credit losses (ACL),
beginning of year
Consumer
Businesses and governments
Total ACL, beginning of year
Provision for credit losses
Consumer
Businesses and governments
Total provision for credit losses
Recoveries
Consumer
Businesses and governments
Total recoveries
Write-offs
615
371
986
412
149
561
111
13
124
602
433
1,035
436
97
533
99
15
114
518
450
968
521
133
654
81
(1)
80
464
468
932
543
90
633
91
4
95
454
473
927
527
152
679
80
1
81
333
646
979
278
653
931
291
659
950
270
797
145
859
1,067
1,004
122
(70)
202
(172)
262
(327)
401
(267)
52
30
(65)
134
151
181
332
102
408
510
95
597
692
125
626
751
350
184
534
61
99
160
Consumer
Businesses and governments
(521)
(143)
(500)
(122)
(507)
(160)
(563)
(76)
(587)
(136)
(232)
(168)
(242)
(285)
(347)
(280)
(492)
(461)
(289)
(289)
Total write-offs
(664)
(622)
(667)
(639)
(723)
(400)
(527)
(627)
(953)
(578)
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f
n
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Other, including foreign exchange rate
changes
Consumer
Businesses and governments
Total Other, including foreign
exchange rate changes
ACL, end of year
Consumer
Businesses and governments
Total ACL, end of year
Allocation of Write-offs by Market
Consumer
Businesses and governments
Allocation of Recoveries by Market
Consumer
Businesses and governments
Net write-offs as a % of average loans
and acceptances (1) (2)
(3)
(2)
(22)
(52)
(11)
11
(17)
(36)
(10)
(22)
(5)
(74)
–
(53)
(32)
19
68
87
(7)
42
(23)
4
(13)
(36)
3
(56)
35
(19)
(49)
(53)
614
388
1,002
615
371
986
602
433
1,035
518
450
968
464
468
932
393
657
1,050
333
646
979
278
653
931
291
659
950
270
797
1,067
(521)
(143)
(500)
(122)
(507)
(160)
(563)
(76)
(587)
(136)
(232)
(168)
(242)
(285)
(347)
(280)
(492)
(461)
(289)
(289)
81
(1)
91
4
80
1
151
181
102
408
95
597
125
626
61
99
111
13
un
99
15
un
–
1
1
–
(1)
(1)
–
–
–
–
(1)
(1)
–
1
1
–
–
–
–
(1)
–
–
–
4
4
–
(2)
(2)
–
–
–
–
–
–
–
(1)
–
18
18
–
(2)
(2)
–
–
–
–
(3)
(3)
–
(9)
–
12
12
–
(3)
(3)
–
–
–
–
(1)
(1)
–
10
(1)
(9)
10
–
18
18
–
1
1
–
–
–
–
–
4
4
–
(3)
–
–
–
42
42
–
(1)
(1)
–
–
–
–
(29)
(29)
–
–
–
–
12
12
948
1,018
880
1,090
809
1,127
734
1,277
599
1,374
1,966
1,970
1,936
2,011
1,973
534
78
612
262
194
456
638
(77)
561
201
423
624
783
(196)
944
(180)
877
335
587
764
1,212
176
596
772
216
630
846
141
100
241
(753)
(312)
(742)
(407)
(854) (1,055)
(538)
(443)
(876)
(454)
(1,065) (1,149) (1,297) (1,593) (1,330)
16
67
83
(29)
(11)
(34)
6
(30)
(62)
(7)
(78)
(40)
(28)
(92)
(85)
1,007
1,045
948
1,018
880
1,090
809
1,127
734
1,277
2,052
1,966
1,970
1,936
2,011
–
(1)
–
(29)
(753)
(312)
(742)
(407)
(854) (1,055)
(538)
(443)
(876)
(454)
–
–
–
–
262
194
201
423
176
596
216
630
141
100
un
un
un
un
un
un
un
un
un
un
un
un
un
0.19
0.18
0.20
0.30
0.51
Table 13: Allocation of Allowance for Credit Losses –
Segmented Information (4)
($ millions, except as noted)
Canada
United States
Other countries
Total
As at October 31
Consumer
Residential mortgages
Consumer instalment and other
personal loans
Total consumer
Businesses and governments
Off-balance sheet
Total specific allowances
Collective allowance
Allowance for credit losses
Coverage Ratios
Allowance for credit losses as a %
of gross impaired loans and
acceptances (GIL) (1)
Total
Consumer
Businesses and governments
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
2015
2014
2013
2012
2011
17
66
83
62
–
145
857
1,002
20
74
94
97
–
191
795
986
27
64
91
153
–
244
791
1,035
36
55
91
172
–
263
705
968
38
54
92
153
–
245
687
932
21
47
68
144
35
247
803
1,050
41
25
66
116
50
232
747
979
42
17
59
137
41
237
694
931
30
7
37
129
29
195
755
950
34
5
39
218
45
302
765
1,067
156.3
23.1
22.0
132.9
23.6
28.2
137.3
26.2
37.7
109.3
27.0
31.3
97.4
24.8
26.1
77.2
12.2
19.0
71.4
9.9
18.5
49.9
8.4
12.7
45.0
5.7
9.2
59.6
10.1
16.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
1
–
1
–
–
–
4
–
4
–
4
–
–
–
18
–
18
–
18
–
–
–
12
–
12
–
12
38
113
151
206
35
61
99
160
214
50
69
81
150
294
41
66
62
128
319
29
72
59
131
383
45
392
1,660
424
1,542
485
1,485
476
1,460
559
1,452
2,052
1,966
1,970
1,936
2,011
20.0
–
20.0
57.1
–
57.1
41.9
–
41.9
85.7
–
85.7
103.0
16.5
19.8
93.6
14.9
22.0
75.8
14.3
19.7
64.1
13.1
16.0
73.2
17.3
19.9
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Ratio is presented including purchased portfolios and prior periods have been restated.
(2) Certain balances and ratios (coverage, condition and performance) for fiscal 2012 were restated in 2013 to conform to the current period’s presentation.
(3) Fiscal 2013, 2012 and 2011 balances were reclassified in 2014 to conform to the current period’s presentation.
(4) Certain balances for fiscal 2014 and 2013 were restated in 2015 to conform to the current period’s presentation.
un – unavailable
128 BMO Financial Group 198th Annual Report 2015
129
SUPPLEMENTAL INFORMATION
Table 14: Specific Allowances for Credit Losses –
Segmented Information (2)
($ millions)
As at October 31
Businesses and Governments Specific
Allowances by Industry
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial institutions
Government
Other
2015
2014
2013
2012
2011
17
8
23
19
6
9
38
1
2
5
–
2
33
3
–
40
13
16
8
10
8
–
33
10
–
2
–
9
100
2
–
3
214
46
26
13
25
9
–
36
3
1
4
–
11
59
29
1
31
79
22
17
6
11
1
67
–
2
2
1
15
75
8
1
12
294
319
136
19
15
8
8
–
37
–
3
9
–
14
51
63
2
18
383
Total specific allowances for credit losses on businesses and governments loans (1)
206
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Table 15: Provision for Credit Losses –
Segmented Information (2)
($ millions)
For the year ended October 31
Consumer
Residential mortgages
Cards
Consumer instalment and other personal loans
Total consumer
Businesses and Governments
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial institutions
Government
Other
Total businesses and governments
Total specific provisions
Collective provision for credit losses
Total provision for credit losses
Performance Ratios (%)
PCL-to-average net loans and acceptances (3) (4)
PCL-to-segmented average net loans and acceptances (4)
Consumer
Businesses and governments
Specific PCL-to-average net loans and acceptances
2015
2014
2013
2012
2011
11
272
225
508
(37)
–
8
19
3
13
67
2
25
(4)
–
–
(29)
8
(2)
31
104
612
–
612
0.19
0.30
0.05
0.19
77
268
251
596
(141)
7
1
29
15
–
44
7
–
10
–
(1)
80
(34)
(3)
(49)
(35)
561
–
561
129
305
313
747
(185)
36
(4)
10
8
(6)
2
2
–
(9)
–
3
(37)
(15)
(6)
51
(150)
597
(10)
587
132
355
387
874
(108)
(14)
–
(16)
4
(5)
25
(1)
–
5
–
7
23
(29)
–
(4)
(113)
761
3
764
0.19
0.22
0.31
0.37
(0.06)
0.19
0.49
(0.18)
0.23
0.62
(0.15)
0.31
109
376
291
776
132
21
7
(1)
7
(9)
47
–
1
8
–
4
76
45
–
12
350
1,126
86
1,212
0.56
0.57
0.45
0.52
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 only impacted our results prospectively.
(1) Amounts for 2015 exclude specific allowances of $4 million related to Other Credit Instruments (2014 – $23 million, 2013 – $21 million, 2012 – $19 million, 2011 – $43 million) included in
Other Liabilities.
(2) Fiscal 2013, 2012 and 2011 balances were reclassified in 2014 to conform to the current period’s presentation.
(3) Ratio is presented including purchased portfolios and prior periods have been restated.
(4) Certain balances and ratios (coverage, condition and performance) for fiscal 2012 were restated in 2013 to conform to the current period’s presentation.
130 BMO Financial Group 198th Annual Report 2015
Table 16: Risk-Weighted Assets
($ millions)
As at October 31
Credit Risk
Wholesale
Corporate, including specialized
lending
Corporate small and
medium-sized enterprises
Sovereign
Bank
Retail
Residential mortgages,
excluding home equity line
of credit
Home equity line of credit
Qualifying revolving retail
Other retail, excluding small
and medium-sized
enterprises
Retail small and medium-sized
enterprises
Equity
Trading book
Securitization
Other credit risk assets – non-
counterparty managed assets
Scaling factor for credit risk assets
under AIRB Approach (1)
Total Credit Risk
Market Risk
Operational Risk
Common Equity Tier 1 (CET 1) Capital
Exposure at Default
Risk-weighted assets
Exposure at Default
Risk-weighted assets
Standardized
Approach
Advanced
Approach
2015
Total
Standardized
Approach
Advanced
Approach (2)
2015
Total
Standardized
Approach
Advanced
Approach
2014
Total
Standardized
Approach
Advanced
Approach (2)
2014
Total
Basel III
19,583 218,409 237,992
19,260
72,229
91,489
16,890 179,737 196,627
16,942
64,398
81,340
–
172
344
64,525
75,324
34,964
64,525
75,496
35,308
–
94
341
31,954
1,671
3,561
31,954
1,765
3,902
–
124
326
59,821
67,616
33,187
59,821
67,740
33,513
–
63
328
33,644
1,549
3,858
33,644
1,612
4,186
3,425 104,031 107,456
43,257
42,665
32,109
32,109
592
–
1,740
416
–
6,687
7,473
4,569
8,427
7,889
4,569
3,298
1,095
–
90,303
41,337
28,895
93,601
42,432
28,895
1,736
809
–
5,882
5,732
4,000
7,618
6,541
4,000
2,557
20,638
23,195
1,624
9,429
11,053
2,199
17,824
20,023
1,519
8,307
9,826
277
–
2,890
3,167
1,965
1,965
165 150,876 151,041
29,178
29,178
–
–
–
20,329
20,329
–
–
27,115 797,903 825,018
–
–
–
–
–
–
210
–
165
–
–
–
1,758
1,369
8,250
2,456
1,968
1,369
8,415
2,456
16,255
16,255
8,874
8,874
23,850
1,142
4,033
176,535 200,385
10,262
28,538
9,120
24,505
292
–
3,262
3,554
1,924
1,924
122 133,942 134,064
28,115
28,115
–
–
–
30,746
30,746
–
–
24,346 716,709 741,055
–
–
–
–
–
–
231
–
122
–
–
–
1,373
1,362
7,237
3,098
1,604
1,362
7,359
3,098
14,946
14,946
8,251
8,251
21,750
1,719
3,791
163,637 185,387
9,002
27,703
7,283
23,912
Risk-Weighted Assets
27,115 797,903 825,018
29,025
210,160 239,185
24,346 716,709 741,055
27,260
194,832 222,092
Additional Credit Valuation
Adjustment (CVA), prescribed by
OSFI, for Tier 1 Capital
Tier 1 Capital Risk-Weighted Assets
Additional CVA, prescribed by OSFI,
for Total Capital
Total Capital Risk-Weighted Assets
–
–
–
–
–
–
–
286
286
29,025
210,446 239,471
–
245
245
29,025
210,691 239,716
–
–
–
–
–
–
–
336
336
27,260
195,168 222,428
–
503
503
27,260
195,671 222,931
(1) The scaling factor is applied to the risk-weighted assets amounts for credit risk under the AIRB Approach.
(2) In calculating the AIRB credit risk RWA for certain portfolios in BMO Financial Corp., a transitional floor based on the Standardized Approach was applied until Q3 2015.
Table 17: Average Deposits
($ millions, except as noted)
Deposits Booked in Canada
Demand deposits – interest bearing
Demand deposits – non-interest bearing
Payable after notice
Payable on a fixed date
Total deposits booked in Canada
Deposits Booked in the United States and Other Countries
Banks located in the United States and other countries
Governments and institutions in the United States and other countries
Other demand deposits
Other deposits payable after notice or on a fixed date
Total deposits booked in the United States and other countries
Total average deposits
2015
2014
2013
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
18,910
31,762
76,458
120,764
247,894
11,183
13,902
16,109
146,380
187,574
435,468
0.36
–
0.57
1.35
16,469
26,702
76,903
118,094
0.45
–
0.70
1.44
16,050
24,400
71,820
100,118
0.86
238,168
0.97
212,388
0.28
0.39
0.01
0.31
8,195
12,095
12,744
127,389
0.28
0.36
0.02
0.38
9,308
9,283
9,305
117,446
0.29
160,423
0.35
145,342
0.62
398,591
0.72
357,730
0.47
–
0.67
1.63
1.03
0.35
0.42
0.03
0.39
0.36
0.76
As at October 31, 2015, 2014 and 2013: deposits by foreign depositors in our Canadian bank offices amounted to $37,477 million, $30,622 million and $19,248 million, respectively; total deposits payable
after notice included $29,104 million, $33,109 million and $33,014 million, respectively, of chequing accounts that would have been classified as demand deposits under U.S. reporting requirements; and
total deposits payable on a fixed date included $25,956 million, $17,738 million and $19,044 million, respectively, of federal funds purchased, commercial paper issued and other deposit liabilities. These
amounts would have been classified as short-term borrowings for U.S. reporting purposes.
BMO Financial Group 198th Annual Report 2015 131
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Statement of Management’s Responsibility
for Financial Information
Management of Bank of Montreal (the “bank”) is responsible for the preparation and presentation of the annual consolidated financial statements,
Management’s Discussion and Analysis (“MD&A”) and all other information in the Annual Report.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board and meet the applicable requirements of the Canadian Securities Administrators (“CSA”) and the
Securities and Exchange Commission (“SEC”) in the United States. The financial statements also comply with the provisions of the Bank Act (Canada)
and related regulations, including interpretations of IFRS by our regulator, the Office of the Superintendent of Financial Institutions Canada.
The MD&A has been prepared in accordance with the requirements of securities regulators, including National Instrument 51-102, Continuous
Disclosure Obligations of the CSA, as well as Item 303, Management’s Discussion and Analysis of Financial Condition and Results of Operations of
Regulation S-K under the United States Securities Act of 1933 and the Securities Exchange Act of 1934, and their related published requirements.
The consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates
of the expected effects of current events and transactions with appropriate consideration to materiality. In addition, in preparing the financial
information we must interpret the requirements described above, make determinations as to the relevancy of information to be included, and make
estimates and assumptions that affect reported information. The MD&A also includes information regarding the impact of current transactions and
events, sources of liquidity and capital resources, operating trends, and risks and uncertainties. Actual results in the future may differ materially from
our present assessment of this information because events and circumstances in the future may not occur as expected.
The financial information presented in the bank’s Annual Report is consistent with that in the consolidated financial statements.
In meeting our responsibility for the reliability and timeliness of financial information, we maintain and rely on a comprehensive system of
internal controls, including organizational and procedural controls, disclosure controls and procedures, and internal control over financial reporting.
Our system of internal controls includes written communication of our policies and procedures governing corporate conduct and risk management;
comprehensive business planning; effective segregation of duties; delegation of authority and personal accountability; escalation of relevant
information for decisions regarding public disclosure; careful selection and training of personnel; and accounting policies that we regularly update.
Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are
maintained, and that we are in compliance with all regulatory requirements. The system of internal controls is further supported by a compliance
function, which is designed to ensure that we and our employees comply with securities legislation and conflict of interest rules, and by an internal
audit staff, who conduct periodic audits of all aspects of our operations.
As of October 31, 2015, we, as the bank’s Chief Executive Officer and Chief Financial Officer, have determined that the bank’s internal control
over financial reporting is effective. We have certified Bank of Montreal’s annual filings with the CSA and with the SEC pursuant to National
Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings and the Securities Exchange Act of 1934.
In order to provide their audit opinions on our consolidated financial statements and on the bank’s internal control over financial reporting, the
Shareholders’ Auditors audit our system of internal controls over financial reporting and conduct work to the extent that they consider appropriate.
Their audit opinion on the bank’s internal control over financial reporting as of October 31, 2015 is set forth on page 134.
The Board of Directors, based on recommendations from its Audit and Conduct Review Committee, reviews and approves the financial
information contained in the Annual Report, including the MD&A. The Board of Directors and its relevant committees oversee management’s
responsibilities for the preparation and presentation of financial information, maintenance of appropriate internal controls, compliance with legal
and regulatory requirements, management and control of major risk areas, and assessment of significant and related party transactions.
The Audit and Conduct Review Committee, which is comprised entirely of independent directors, is also responsible for selecting the
Shareholders’ Auditors and for reviewing the qualifications, independence and performance of both the Shareholders’ Auditors and internal audit.
The Shareholders’ Auditors and the bank’s Chief Auditor have full and free access to the Board of Directors, its Audit and Conduct Review Committee
and other relevant committees to discuss audit, financial reporting and related matters.
The Office of the Superintendent of Financial Institutions Canada conducts examinations and inquiries into the affairs of the bank as are deemed
necessary to ensure that the provisions of the Bank Act, with respect to the safety of the depositors, are being duly observed and that the bank is in
sound financial condition.
William A. Downe
Chief Executive Officer
Thomas E. Flynn
Chief Financial Officer
Toronto, Canada
December 1, 2015
132 BMO Financial Group 198th Annual Report 2015
Independent Auditors’ Report of Registered Public
Accounting Firm
To the Shareholders and Board of Directors of Bank of Montreal
We have audited the accompanying consolidated financial statements of Bank of Montreal (the “Bank”), which comprise the consolidated balance
sheets as at October 31, 2015 and October 31, 2014, the consolidated statements of income, comprehensive income, changes in equity and cash
flows for each of the years in the three-year period ended October 31, 2015, and notes, comprising a summary of significant accounting policies and
other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as at
October 31, 2015 and October 31, 2014, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-
year period ended October 31, 2015 in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board.
Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bank’s internal control
over financial reporting as of October 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 1, 2015 expressed an unmodified
(unqualified) opinion on the effectiveness of the Bank’s internal control over financial reporting.
Chartered Professional Accountants, Licensed Public Accountants
December 1, 2015
Toronto, Canada
BMO Financial Group 198th Annual Report 2015 133
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Bank of Montreal
We have audited Bank of Montreal’s (the “Bank”) internal control over financial reporting as of October 31, 2015, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bank’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included under the heading “Management’s Annual Report on Disclosure Controls and Procedures and Internal Control
over Financial Reporting” in the accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Bank’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2015, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Bank as at October 31, 2015 and 2014, the consolidated statements of
income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended October 31, 2015, and notes,
comprising a summary of significant accounting policies and other explanatory information, and our report dated December 1, 2015 expressed an
unmodified (unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
December 1, 2015
Toronto, Canada
134 BMO Financial Group 198th Annual Report 2015
Consolidated Statement of Income
For the Year Ended October 31 (Canadian $ in millions, except as noted)
2015
2014
2013
Interest, Dividend and Fee Income
Loans
Securities (Note 3)
Deposits with banks
Interest Expense
Deposits
Subordinated debt
Other liabilities
Net Interest Income
Non-Interest Revenue
Securities commissions and fees
Deposit and payment service charges
Trading revenues
Lending fees
Card fees
Investment management and custodial fees
Mutual fund revenues
Underwriting and advisory fees
Securities gains, other than trading (Note 3)
Foreign exchange, other than trading
Insurance revenue
Other
Total Revenue
Provision for Credit Losses (Note 4)
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities (Note 14)
Non-Interest Expense
Employee compensation (Notes 22 and 23)
Premises and equipment (Note 9)
Amortization of intangible assets (Note 11)
Travel and business development
Communications
Business and capital taxes
Professional fees
Other
Income Before Provision for Income Taxes
Provision for income taxes (Note 24)
Net Income
Attributable to:
Bank shareholders
Non-controlling interest in subsidiaries (Notes 16 and 17)
Net Income
Earnings Per Share (Canadian $) (Note 25)
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
$
11,263
1,912
190
13,365
$
$
10,997
1,862
182
13,041
10,951
2,132
182
13,265
2,681
171
1,543
4,395
8,970
953
1,077
987
737
460
1,500
1,385
706
171
172
1,762
509
10,419
19,389
612
1,254
7,081
2,137
411
605
314
45
595
994
12,182
5,341
936
$
4,405
$
4,370
35
4,405
6.59
6.57
$
$
$
$
2,865
150
1,565
4,580
8,461
934
1,002
949
680
462
1,246
1,073
744
162
179
2,008
323
9,762
18,223
561
1,505
6,242
1,908
382
542
289
39
622
897
10,921
5,236
903
4,333
4,277
56
4,333
6.44
6.41
$
$
$
2,727
145
1,716
4,588
8,677
846
916
849
603
461
971
832
659
285
172
1,212
347
8,153
16,830
587
767
5,842
1,833
346
514
291
39
527
834
10,226
5,250
1,055
4,195
4,130
65
4,195
6.19
6.17
C
o
n
s
o
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i
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a
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F
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William A. Downe
Chief Executive Officer
Philip S. Orsino
Chairman, Audit and Conduct Review Committee
BMO Financial Group 198th Annual Report 2015 135
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the Year Ended October 31 (Canadian $ in millions)
Net Income
Other Comprehensive Income (Loss)
Items that may subsequently be reclassified to net income
Net change in unrealized gains (losses) on available-for-sale securities
Unrealized gains (losses) on available-for-sale securities arising during the year (1)
Reclassification to earnings of (gains) in the year (2)
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on cash flow hedges arising during the year (3)
Reclassification to earnings of (gains) on cash flow hedges (4)
Net gain on translation of net foreign operations
Unrealized gains on translation of net foreign operations
Unrealized (losses) on hedges of net foreign operations (5)
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)
Gains on remeasurement of own credit risk on financial liabilities designated at fair value (Note 1) (7)
Other Comprehensive Income
Total Comprehensive Income
Attributable to:
Bank shareholders
Non-controlling interest in subsidiaries (Notes 16 and 17)
Total Comprehensive Income
(1) Net of income tax (provision) recovery of $63 million, $(22) million and $9 million for the year ended, respectively.
(2) Net of income tax provision of $24 million, $37 million and $22 million for the year ended, respectively.
(3) Net of income tax (provision) recovery of $(188) million, $(79) million and $12 million for the year ended, respectively.
(4) Net of income tax provision of $14 million, $28 million and $45 million for the year ended, respectively.
(5) Net of income tax recovery of $167 million, $144 million and $146 million for the year ended, respectively.
(6) Net of income tax (provision) recovery of $(51) million, $63 million and $(126) million for the year ended, respectively.
(7) Net of income tax provision of $43 million for the year ended October 31, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
2015
2014
2013
$
4,405
$
4,333
$
4,195
(166)
(65)
(231)
528
(57)
471
3,187
(482)
2,705
200
120
320
3,265
28
(77)
(49)
247
(98)
149
1,378
(415)
963
(125)
–
(125)
938
(10)
(50)
(60)
(25)
(125)
(150)
741
(409)
332
298
–
298
420
$
7,670
$
5,271
$
4,615
7,635
35
5,215
56
$
7,670
$
5,271
$
4,550
65
4,615
s
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136 BMO Financial Group 198th Annual Report 2015
Consolidated Balance Sheet
As at October 31 (Canadian $ in millions)
Assets
Cash and Cash Equivalents (Note 2)
Interest Bearing Deposits with Banks (Note 2)
Securities (Note 3)
Trading
Available-for-sale
Held-to-maturity
Other
Securities Borrowed or Purchased Under Resale Agreements (Note 4)
Loans (Notes 4 and 6)
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Customers‘ liability under acceptances
Allowance for credit losses (Note 4)
Other Assets
Derivative instruments (Note 8)
Premises and equipment (Note 9)
Goodwill (Note 11)
Intangible assets (Note 11)
Current tax assets
Deferred tax assets (Note 24)
Other (Note 12)
Total Assets
Liabilities and Equity
Deposits (Note 13)
Banks
Businesses and governments
Individuals
Other Liabilities
Derivative instruments (Note 8)
Acceptances (Note 14)
Securities sold but not yet purchased (Note 14)
Securities lent or sold under repurchase agreements (Note 14)
Current tax liabilities
Deferred tax liabilities (Note 24)
Other (Note 14)
Subordinated Debt (Note 15)
Equity
Share capital (Note 17)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders‘ equity
Non-controlling interest in subsidiaries (Notes 16 and 17)
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
2015
2014
$
40,295
$
28,386
7,382
6,110
72,460
48,006
9,432
1,020
130,918
68,066
105,918
65,598
7,980
145,076
324,572
11,307
(1,855)
334,024
38,238
2,285
6,069
2,208
561
3,162
8,673
61,196
641,881
27,135
263,618
147,416
438,169
42,639
11,307
21,226
39,891
102
265
43,953
159,383
4,416
15,553
299
18,930
4,640
39,422
491
39,913
$
$
85,022
46,966
10,344
987
143,319
53,555
101,013
64,143
7,972
120,766
293,894
10,878
(1,734)
303,038
32,655
2,276
5,353
2,052
665
3,019
8,231
54,251
588,659
18,243
239,139
135,706
393,088
33,657
10,878
27,348
39,695
235
178
43,263
155,254
4,913
15,397
304
17,237
1,375
34,313
1,091
35,404
$
$
C
o
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s
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d
F
i
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a
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c
i
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S
t
a
t
e
m
e
n
t
s
$
641,881
$
588,659
BMO Financial Group 198th Annual Report 2015 137
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Changes in Equity
For the Year Ended October 31 (Canadian $ in millions)
2015
2014
2013
Preferred Shares (Note 17)
Balance at beginning of year
Issued during the year
Redeemed during the year
Balance at End of Year
Common Shares (Note 17)
Balance at beginning of year
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan (Note 17)
Issued under the Stock Option Plan (Note 22)
Repurchased for cancellation (Note 17)
Balance at End of Year
Contributed Surplus
Balance at beginning of year
Stock option expense/exercised (Note 22)
Foreign exchange on redemption of preferred shares
Other
Balance at End of Year
Retained Earnings
Balance at beginning of year
Net income attributable to bank shareholders
Dividends – Preferred shares (Note 17)
– Common shares (Note 17)
Preferred shares redeemed during the year (Note 17)
Common shares repurchased for cancellation (Note 17)
Share issue expense
Balance at End of Year
Accumulated Other Comprehensive Income on Available-for-Sale Securities
Balance at beginning of year
Unrealized gains (losses) on available-for-sale securities arising during the year (1)
Reclassification to earnings of (gains) in the year (2)
Balance at End of Year
Accumulated Other Comprehensive Income on Cash Flow Hedges
Balance at beginning of year
Gains (losses) on cash flow hedges arising during the year (3)
Reclassification to earnings of (gains) in the year (4)
Balance at End of Year
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations
Balance at beginning of year
Unrealized gains on translation of net foreign operations
Unrealized (losses) on hedges of net foreign operations (5)
Balance at End of Year
Accumulated Other Comprehensive Income on Pension and Other Post-Employment Plans
Balance at beginning of year
Gains (losses) on remeasurement of pension and other employee future benefit plans (6)
Balance at End of Year
Accumulated Other Comprehensive Income on Own Credit Risk on Financial Liabilities
Designated at Fair Value
Balance at beginning of year
Gains on remeasurement of own credit risk on financial liabilities designated at fair value (Note 1) (7)
Balance at End of Year
Total Accumulated Other Comprehensive Income
Total Shareholders‘ Equity
Non-controlling Interest in Subsidiaries
Balance at beginning of year
Net income attributable to non-controlling interest
Dividends to non-controlling interest
Redemption of securities of a subsidiary (Note 17)
Redemption of capital trust securities (Note 16)
Acquisitions (Note 10)
Other
Balance at End of Year
Total Equity
(1) Net of income tax (provision) recovery of $63 million, $(22) million and $9 million for the year ended, respectively.
(2) Net of income tax provision of $24 million, $37 million and $22 million for the year ended, respectively.
(3) Net of income tax (provision) recovery of $(188) million, $(79) million and $12 million for the year ended, respectively.
(4) Net of income tax provision of $14 million, $28 million and $45 million for the year ended, respectively.
(5) Net of income tax recovery of $167 million, $144 million and $146 million for the year ended, respectively.
(6) Net of income tax (provision) recovery of $(51) million, $63 million and $(126) million for the year ended, respectively.
(7) Net of income tax provision of $43 million for the year ended October 31, 2015.
The accompanying notes are an integral part of these consolidated financial statements.
138 BMO Financial Group 198th Annual Report 2015
s
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$
$
3,040
950
(750)
3,240
$
2,265
1,200
(425)
3,040
12,357
58
51
(153)
12,313
304
–
–
(5)
299
17,237
4,370
(117)
(2,087)
(3)
(465)
(5)
18,930
156
(166)
(65)
(75)
141
528
(57)
612
1,368
3,187
(482)
4,073
(290)
200
(90)
–
120
120
12,003
223
131
–
12,357
315
(7)
–
(4)
304
15,087
4,277
(120)
(1,991)
–
–
(16)
17,237
205
28
(77)
156
(8)
247
(98)
141
405
1,378
(415)
1,368
(165)
(125)
(290)
–
–
–
2,465
–
(200)
2,265
11,957
130
116
(200)
12,003
213
(5)
107
–
315
13,456
4,130
(120)
(1,904)
–
(475)
–
15,087
265
(10)
(50)
205
142
(25)
(125)
(8)
73
741
(409)
405
(463)
298
(165)
–
–
–
4,640
1,375
437
$ 39,422
$
34,313
$
30,107
1,091
35
(37)
–
(600)
–
2
491
1,072
56
(52)
–
–
22
(7)
1,091
1,435
65
(73)
(359)
–
–
4
1,072
$ 39,913
$
35,404
$
31,179
Consolidated Statement of Cash Flows
For the Year Ended October 31 (Canadian $ in millions)
2015
2014
2013
Cash Flows from Operating Activities
Net Income
Adjustments to determine net cash flows provided by (used in) operating activities
Impairment write-down of securities, other than trading (Note 3)
Net (gain) on securities, other than trading (Note 3)
Net (increase) decrease in trading securities
Provision for credit losses (Note 4)
Change in derivative instruments – (Increase) decrease in derivative asset
– Increase (decrease) in derivative liability
Amortization of premises and equipment (Note 9)
Amortization of intangible assets (Note 11)
Net decrease in deferred income tax asset
Net increase (decrease) in deferred income tax liability
Net decrease in current income tax asset
Net increase (decrease) in current income tax liability
Change in accrued interest – (Increase) decrease in interest receivable
– Increase (decrease) in interest payable
Changes in other items and accruals, net
Net increase in deposits
Net (increase) in loans
Net increase (decrease) in securities sold but not yet purchased
Net increase (decrease) in securities lent or sold under repurchase agreements
Net (increase) decrease in securities borrowed or purchased under resale agreements
Net Cash Provided by (Used in) Operating Activities
Cash Flows from Financing Activities
Net (decrease) in liabilities of subsidiaries
Proceeds from issuance (maturities) of Covered Bonds (Note 13)
Proceeds from issuance (repayment) of subordinated debt (Note 15)
Proceeds from issuance of preferred shares (Note 17)
Redemption of preferred shares (Note 17)
Redemption of securities of a subsidiary (Note 17)
Redemption of capital trust securities (Note 16)
Share issue expense
Proceeds from issuance of common shares (Note 17)
Common shares repurchased for cancellation (Note 17)
Cash dividends paid
Cash dividends paid to non-controlling interest
Net Cash Provided by (Used in) Financing Activities
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks
Purchases of securities, other than trading
Maturities of securities, other than trading
Proceeds from sales of securities, other than trading
Premises and equipment – net (purchases)
Purchased and developed software – net (purchases)
Acquisitions (Note 10)
Net Cash Provided by (Used in) Investing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Net increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Represented by:
Cash and deposits with banks (Note 2)
Cheques and other items in transit, net (Note 2)
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Amount of interest paid in the year
Amount of income taxes paid in the year
Amount of interest and dividend income received in the year
The accompanying notes are an integral part of these consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
$
4,405
$
4,333
$
4,195
12
(183)
15,613
612
(6,178)
9,320
378
411
226
76
298
(141)
53
(113)
4,791
7,967
(15,600)
(7,049)
(4,625)
(7,940)
2,333
(390)
4,103
(500)
950
(753)
–
(600)
(5)
51
(618)
(2,135)
(37)
66
(461)
(16,996)
5,267
16,740
(179)
(345)
–
4,026
5,484
11,909
28,386
40,295
38,818
1,477
40,295
4,476
641
13,306
$
$
$
$
$
$
8
(170)
(8,470)
561
(2,822)
1,402
365
382
241
(42)
546
(226)
(36)
160
4,094
9,814
(15,207)
4,429
9,073
(11,362)
(2,927)
(48)
(406)
1,000
1,200
(425)
–
–
(16)
133
–
(1,851)
(52)
(465)
519
(24,674)
11,698
17,184
(355)
(382)
(956)
3,034
2,396
2,038
26,348
28,386
27,056
1,330
28,386
4,407
264
12,849
17
(302)
(4,392)
587
20,240
(19,195)
348
346
203
(65)
389
21
122
(129)
(364)
35,739
(21,665)
(1,221)
(12,090)
8,660
11,444
(397)
(1,354)
–
–
(200)
(359)
–
–
122
(675)
(1,896)
(73)
(4,832)
302
(32,007)
13,233
17,288
(361)
(254)
140
(1,659)
1,480
6,433
19,915
26,348
24,938
1,410
26,348
4,708
577
13,283
$
$
$
$
$
$
$
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BMO Financial Group 198th Annual Report 2015 139
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Bank of Montreal (“the bank”) is a chartered bank under the Bank Act (Canada) and is a public company incorporated in Canada. We are a highly
diversified financial services company and provide a broad range of personal and commercial banking, wealth management and investment banking
products and services. The bank’s head office is at 129 rue Saint Jacques, Montreal, Quebec. Its executive offices are at 100 King Street West, 1 First
Canadian Place, Toronto, Ontario. Our common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange.
We have prepared these consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”). We also comply with interpretations of IFRS by our regulator, the Office of the Superintendent
of Financial Institutions Canada (“OSFI”).
Our consolidated financial statements have been prepared on a historic cost basis, except the revaluation of the following items: assets and
liabilities held for trading; available-for-sale financial assets; financial instruments designated at fair value through profit or loss; financial assets and
financial liabilities designated as hedged items in qualifying fair value hedge relationships; cash-settled share-based payment liabilities; defined
benefit pension and other employee future benefit liabilities; and insurance-related liabilities.
These consolidated financial statements were authorized for issue by the Board of Directors on December 1, 2015.
Basis of Consolidation
These consolidated financial statements are inclusive of the financial statements of our subsidiaries as at October 31, 2015. We conduct business
through a variety of corporate structures, including subsidiaries, joint ventures, structured entities (“SEs”) and associates. Subsidiaries are those
entities where we exercise control through our ownership of the majority of the voting shares. Joint ventures are those entities where we exercise
joint control through an agreement with other shareholders. We also hold interests in SEs, which we consolidate where we control the SE. These are
more fully described in Note 7. All of the assets, liabilities, revenues and expenses of our subsidiaries and consolidated SEs are included in our
consolidated financial statements. All intercompany transactions and balances are eliminated on consolidation.
We hold investments in associates, where we exert significant influence over operating, investing and financing decisions (generally companies
in which we own between 20% and 50% of the voting shares). These are accounted for using the equity method. The equity method is also applied
to our investments in joint ventures. Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is
increased or decreased to recognize our share of investee net income or loss, including other comprehensive income or loss. The investment is
recorded as securities, other, in our Consolidated Balance Sheet and our share of the net income or loss is recorded in interest, dividend and fee
income, securities, in our Consolidated Statement of Income. Any other comprehensive income amounts are reflected in the relevant section of our
Statement of Comprehensive Income.
Non-controlling interest in subsidiaries is presented in our Consolidated Balance Sheet as a separate component of equity that is distinct from our
shareholders’ equity. The net income attributable to non-controlling interest in subsidiaries is presented separately in our Consolidated Statement of
Income.
Specific Accounting Policies
To facilitate a better understanding of our consolidated financial statements, we have disclosed our significant accounting policies throughout the
following notes with the related financial disclosures by major caption:
Note Topic
1
2
3
4
Basis of Presentation
Cash and Interest Bearing Deposits with Banks
Securities
Loans, Customers’ Liability under Acceptances and
Allowance for Credit Losses
Risk Management
Transfer of Assets
Structured Entities
Derivative Instruments
Premises and Equipment
Acquisitions
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Subordinated Debt
Capital Trust Securities
5
6
7
8
9
10
11
12
13
14
15
16
Page
140
144
144
148
151
153
154
156
163
163
164
166
166
167
168
169
Note Topic
Equity
17
Fair Value of Financial Instruments
18
Offsetting of Financial Assets and Financial Liabilities
19
Interest Rate Risk
20
Capital Management
21
Employee Compensation – Share-Based Compensation
22
Employee Compensation – Pension and Other Employee
23
24
25
26
27
28
29
30
Future Benefits
Income Taxes
Earnings Per Share
Commitments, Guarantees, Pledged Assets, Provisions and
Contingent Liabilities
Operating and Geographic Segmentation
Significant Subsidiaries
Related Party Transactions
Contractual Maturities of Assets and Liabilities and
Off-Balance Sheet Commitments
Page
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172
180
180
181
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184
189
191
192
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Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and present our consolidated financial statements in Canadian dollars, which is our functional
currency. Monetary assets and liabilities, as well as non-monetary assets and liabilities measured at fair value that are denominated in foreign
currencies, are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities not
measured at fair value are translated into Canadian dollars at historical rates. Revenues and expenses denominated in foreign currencies are
translated using the average exchange rate for the year.
Unrealized gains and losses arising from translating our net investment in foreign operations into Canadian dollars, net of related hedging
activities and applicable income taxes, are included in our Consolidated Statement of Comprehensive Income within net gain (loss) on translation of
net foreign operations. When we dispose of a foreign operation such that control, significant influence or joint control is lost, the cumulative amount
of the translation gain (loss) and any applicable hedging activities and related income taxes are reclassified to our Consolidated Statement of Income
140 BMO Financial Group 198th Annual Report 2015
as part of the gain or loss on disposition. All other foreign currency translation gains and losses are included in foreign exchange, other than trading,
in our Consolidated Statement of Income as they arise.
Foreign currency translation gains and losses on available-for-sale debt securities that are denominated in foreign currencies are included in
foreign exchange, other than trading, in our Consolidated Statement of Income. Foreign currency translation gains and losses on available-for-sale
equity securities that are denominated in foreign currencies are included in accumulated other comprehensive income on available-for-sale securities
in our Consolidated Statement of Changes in Equity.
From time to time, we enter into foreign exchange hedge contracts to reduce our exposure to changes in the value of foreign currencies.
Realized and unrealized gains and losses that arise on the mark-to-market of foreign exchange contracts related to economic hedges are included in
non-interest revenue in our Consolidated Statement of Income. Changes in the fair value of forward contracts that qualify as accounting hedges are
recorded in our Consolidated Statement of Comprehensive Income within net change in unrealized gains (losses) on cash flow hedges, with the spot/
forward differential (the difference between the foreign currency exchange rate at the inception of the contract and the rate at the end of the
contract) recorded in interest income (expense) over the term of the hedge.
Dividend and Fee Income
Dividend Income
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities.
Fee Income
Fee income (including commissions) is recognized based on the services or products for which the fee is paid. See Note 4 for the accounting
treatment for lending fees.
Investment management and custodial fees are based primarily on the balance of assets under management and assets under administration as
at the period end, respectively, for services provided.
Securities commissions and fees and underwriting and advisory fees are recorded as revenue when the related services are completed. Deposit
and payment service charges and insurance fees are recognized over the period in which the related services are provided. Card fees primarily include
interchange income, late fees, cash advance fees and annual fees. Card fees are recorded as billed, except for annual fees, which are recorded evenly
throughout the year.
Use of Estimates and Judgments
The preparation of the consolidated financial statements requires management to use estimates and assumptions that affect the carrying amounts of
certain assets and liabilities, certain amounts reported in net income and other related disclosures.
The most significant assets and liabilities for which we must make estimates include allowance for credit losses; financial instruments measured
at fair value; pension and other employee future benefits; impairment of securities; income taxes and deferred taxes, purchased loans; goodwill;
insurance-related liabilities; provisions and transfers of financial assets and consolidation of structured entities. We make judgments in assessing
whether substantially all risks and rewards have been transferred in respect of transfers of financial assets and whether we control SEs. These
judgments are discussed in Notes 6 and 7, respectively. If actual results were to differ from the estimates, the impact would be recorded in future
periods.
We have established detailed policies and control procedures that are intended to ensure these judgments are well controlled, independently
reviewed and consistently applied from period to period. We believe that our estimates of the value of our assets and liabilities are appropriate.
Allowance for Credit Losses
The allowance for credit losses adjusts the value of loans to reflect their estimated realizable value. In assessing their estimated realizable value, we
must rely on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These include economic factors,
developments affecting companies in particular industries, and specific issues with respect to single borrowers. Changes in circumstances may cause
future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for
credit losses.
Additional information regarding the allowance for credit losses is included in Note 4.
Financial Instruments Measured at Fair Value
Fair value measurement techniques are used to value various financial assets and financial liabilities and are used in performing impairment testing
on certain non-financial assets. A detailed discussion of our fair value measurement techniques is included in Note 3 and Note 18.
Pension and Other Employee Future Benefits
Our pension and other employee future benefits expense is calculated by our independent actuaries using assumptions determined by management.
If actual experience were to differ from the assumptions used, we would recognize this difference in other comprehensive income.
Pension and other employee future benefits expense, plan assets and defined benefit obligations are also sensitive to changes in discount rates.
We determine discount rates at each year end for all of our plans using high-quality Aa rated corporate bonds with terms matching the plans’ specific
cash flows.
Additional information regarding our accounting for pension and other employee future benefits is included in Note 23.
Impairment of Securities
We have investments in securities issued or guaranteed by Canadian, U.S. and other governments, corporate debt and equity securities, mortgage-
backed securities and collateralized obligations, which are classified as either available-for-sale securities, held-to-maturity securities or other
securities. We review held-to-maturity, available-for-sale and other securities at each quarter-end reporting period to identify and evaluate
investments that show indications of possible impairment.
For held-to-maturity, available-for-sale and other securities, impairment losses are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows from the security and the impact can be reliably estimated. Objective evidence of
impairment includes default or delinquency by a debtor, restructuring of an amount due to us on terms that we would not otherwise consider,
indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for equity securities, a
significant or prolonged decline in the fair value of a security below its cost is objective evidence of impairment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The decision to record a write-down, the amount and the period in which it is recorded could change if management’s assessment of these
factors changes. We do not record impairment write-downs on debt securities when impairment is due to changes in market interest rates if future
contractual cash flows associated with the debt security are still expected to be recovered.
Additional information regarding our accounting for held-to-maturity, available-for-sale and other securities, and the determination of fair value
is included in Note 3 and Note 18.
Income Taxes and Deferred Tax Assets
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our Consolidated Statements of Income
or Changes in Equity. In determining the provision for income taxes, we interpret tax legislation in a variety of jurisdictions and make assumptions
about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations differ from those of tax authorities or if the
timing of reversals is not as expected, our provision for income taxes could increase or decrease in future periods. The amount of any such increase or
decrease cannot be reasonably estimated.
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which
deductible temporary differences may be utilized. We are required to assess whether it is probable that our deferred income tax assets will be
realized prior to expiration and, based on all the available evidence, determine if any portion of our deferred income tax assets should not be
recognized. The factors used to assess the probability of realization are our past experience of income and capital gains, forecast of future net income
before taxes, available tax planning strategies that could be implemented to realize the deferred income tax asset, and the remaining expiration
period of tax loss carryforwards. Changes in our assessment of these factors could increase or decrease our provision for income taxes in future
periods.
Additional information regarding our accounting for income taxes is included in Note 24.
Goodwill and Intangible Assets
For the purpose of impairment testing, goodwill is allocated to our groups of cash-generating units (“CGUs”), which represent the lowest level within
the bank at which goodwill is monitored for internal management purposes. Impairment testing is performed at least annually, by comparing the
carrying values and the recoverable amounts of the CGUs to which goodwill has been allocated to determine whether the recoverable amount of
each group is greater than its carrying value. If the carrying value of the group were to exceed its recoverable amount, an impairment calculation
would be performed. The recoverable amount of a CGU is the higher of its fair value less costs to sell and the value in use.
Fair value less costs to sell is used to perform the impairment test. In determining fair value less costs to sell, we employ a discounted cash flow
model consistent with those used when we acquire businesses. This model is dependent on assumptions related to revenue growth, discount rates,
synergies achieved on acquisition and the availability of comparable acquisition data. Changes in any of these assumptions would affect the
determination of fair value for each of the business units in a different manner. Management must exercise its judgment and make assumptions in
determining fair value less costs to sell, and differences in judgment and assumptions could affect the determination of fair value and any resulting
impairment write-down. As at October 31, 2015, the estimated fair value of each of our business units was greater than its carrying value.
Additional information regarding goodwill and intangible assets is included in Note 11.
Definite life intangible assets are amortized to income on either a straight-line or an accelerated basis over a period not exceeding 15 years,
depending on the nature of the asset. We test definite life intangible assets for impairment when circumstances indicate the carrying value may not
be recoverable. Indefinite life intangible assets are tested annually for impairment. If any intangible assets are determined to be impaired, we write
them down to their recoverable amount, the higher of value in use and fair value less costs to sell, when this is less than the carrying value. No such
impairment was identified for the years ended October 31, 2015 and 2014.
Purchased Loans
Significant judgment and assumptions were applied to determine the fair value of the Marshall & Ilsley Corporation (“M&I”) loan portfolio. Loans were
identified as either purchased performing loans or purchased credit impaired loans (PCI loans), both of which were recorded at fair value at the time
of acquisition. The determination of fair value involved estimating the expected cash flows to be received and determining the discount rate to be
applied to the cash flows from the loan portfolio. In determining the discount rate, we considered various factors, including our cost to raise funds in
the current market, the risk premium associated with the loans and the cost to service the portfolios. PCI loans are those where the timely collection
of principal and interest was no longer reasonably assured as at the date of acquisition. We regularly evaluate what we expect to collect on PCI loans.
Changes in expected cash flows could result in the recognition of impairment or a recovery through the provision for credit losses. Estimating the
timing and amount of cash flows requires significant management judgment regarding key assumptions, including the probability of default, severity
of loss, timing of payment receipts and valuation of collateral. All of these factors are inherently subjective and can result in significant changes in
cash flow estimates over the term of the loan.
Insurance-Related Liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates of future insurance policy benefits. Liabilities for life insurance
contracts are determined using the Canadian Asset Liability Method, which incorporates best-estimate assumptions for mortality, morbidity, policy
lapses, surrenders, future investment yields, policy dividends, administration costs and margins for adverse deviation. These assumptions are
reviewed at least annually and updated to reflect actual experience and market conditions. The most significant impact on the valuation of a liability
would result from a change in the assumption for future investment yields.
Additional information regarding insurance-related liabilities is included in Note 14.
Provisions
The bank and its subsidiaries are involved in various legal actions in the ordinary course of business.
Provisions are recorded at the best estimate of the amounts required to settle any obligations related to these legal actions as at the balance
sheet date, taking into account the risks and uncertainties associated with the obligation. Factors considered in making the assessment include: a
case-by-case assessment of specific facts and circumstances, our past experience and opinions of legal experts. Management and
142 BMO Financial Group 198th Annual Report 2015
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external experts are involved in estimating any provisions. The actual costs of resolving these claims may be substantially higher or lower than the
amounts of the provisions.
Additional information regarding provisions is provided in Note 26.
Transfer of Financial Assets and Consolidation of Structured Entities
We sell Canadian mortgage loans to third-party Canadian securitization programs, including the Canadian Mortgage Bond program, and directly to
third-party investors under the National Housing Act Mortgage-Backed Securities program. We assess whether substantially all of the risks and
rewards of the loans have been transferred to determine if they qualify for derecognition. Since we continue to be exposed to substantially all of the
repayment, interest rate and/or credit risk associated with the securitized loans, they do not qualify for derecognition. We continue to recognize the
loans and the related cash proceeds as secured financing in our Consolidated Balance Sheet. We also use securitization vehicles to securitize our
Canadian credit card loans in order to obtain alternate sources of funding. The structure of these vehicles limits the activities they can undertake and
the types of assets they can hold, and the vehicles have limited decision-making authority. The vehicles issue term asset-backed securities to fund
their activities. We control and consolidate these vehicles, as we have the key decision-making powers necessary to obtain the majority of the
benefits of their activities.
For most of our subsidiaries, control is determined based on holding the majority of the voting rights. For certain investments in limited
partnerships, we exercise judgment in determining if we control an entity. Based on an assessment of our interests and rights, we have determined
that we do not control certain entities, even though we may have an ownership interest greater than 50%. This may be the case when we are not
the general partner in an arrangement and the general partner’s rights most significantly affect the returns of the entity. Additionally, we have
determined that we control certain entities despite having an ownership interest less than 50%. This may be the case when we are the general
partner in an arrangement and the general partner’s rights most significantly affect the returns of the entity.
Structured entities are discussed in greater detail in Note 7 and transferred assets are discussed in greater detail in Note 6.
Changes in Accounting Policies
Effective November 1, 2014, we adopted the following new and amended accounting pronouncements issued by the IASB.
Own Credit
We early adopted the own credit provisions of IFRS 9 Financial Instruments. The provisions require that for financial liabilities designated at fair value
through profit or loss, such as deposits and insurance investment contracts, changes in fair value attributable to our credit risk be presented in other
comprehensive income rather than net income, unless doing so would create or enlarge an accounting mismatch in net income. Changes in fair value
not attributable to our credit risk continue to be recorded in net income. The provisions were adopted prospectively and resulted in a $120 million
gain, net of taxes, being recorded in other comprehensive income rather than net income.
Levies
We adopted the IFRS Interpretations Committee Interpretation 21 Levies (“IFRIC 21”). IFRIC 21 provides guidance on when to recognize a liability to
pay a levy imposed by a government in accordance with legislation. The adoption of IFRIC 21 did not have a significant impact on our consolidated
financial statements.
Impairment of Assets
We adopted the amendments to IAS 36 Impairment of Assets. The amendments address the disclosure of information about the recoverable amount
of impaired assets if that amount is based on fair value less cost of disposal. The adoption of the amendments did not have an impact on disclosure
in our consolidated financial statements.
Offsetting of Financial Assets and Financial Liabilities
We adopted the amendments to IAS 32 Financial Instruments: Presentation. The amendments clarify that an entity has a current legally enforceable
right of offset if that right is not contingent on a future event, and that right is enforceable both in the normal course of business and in the event of
default, insolvency or bankruptcy of the entity and all counterparties. The adoption of the amendments did not have an impact on our consolidated
financial statements.
Future Changes in IFRS
Financial Instruments
In July 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”), which addresses impairment, classification, measurement, and hedge accounting.
IFRS 9 introduces a new single impairment model for financial assets. The new model is based on expected credit losses and will result in credit
losses being recognized regardless of whether a loss event has occurred. The expected credit loss model will apply to most financial instruments not
measured at fair value, with the most significant impact being to loans. The expected credit loss model requires the recognition of credit losses based
on a 12-month time horizon for performing loans, and requires the recognition of lifetime expected credit losses for loans that have experienced a
significant deterioration in credit risk since inception. The expected loss calculations are required to incorporate forward looking macro-economic
information in determining the final provision.
The new standard requires that we classify assets based on our business model for managing the financial assets and the contractual cash flow
characteristics of the financial assets. Financial assets are to be measured at fair value through profit or loss unless certain conditions are met which
permit measurement at amortized cost or fair value through other comprehensive income. As noted above in Changes in Accounting Policies, we
early adopted the requirements for financial liabilities regarding own credit risk.
IFRS 9 also introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge accounting and aligns
hedge accounting more closely with risk management. The new model no longer specifies quantitative measures for effectiveness testing and does
not permit hedge de-designation.
In order to meet the requirement to adopt IFRS 9, we have established an enterprise-wide project. We are currently evaluating the impact of
adoption which is effective November 1, 2017.
Revenue
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), which replaces the existing standards for revenue
recognition. The new standard establishes a framework for the recognition and measurement of revenues generated from contracts with customers,
BMO Financial Group 198th Annual Report 2015 143
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
except for items such as financial instruments, insurance contracts and leases. The standard also requires additional disclosures about the nature,
amount, timing and uncertainty of revenues and cash flows arising from transactions with our customers. The IASB deferred the effective date of
IFRS 15 to November 1, 2018. We are currently assessing the impact of the standard on our future financial reporting.
Note 2: Cash and Interest Bearing Deposits with Banks
(Canadian $ in millions)
Cash and deposits with banks (1)
Cheques and other items in transit, net
Total cash and cash equivalents
2015
2014
38,818
1,477
40,295
27,056
1,330
28,386
(1) Includes deposits with the Bank of Canada, the U.S. Federal Reserve and other central banks.
Cheques and Other Items in Transit, Net
Cheques and other items in transit are recorded at cost and represent the net position of the uncleared cheques and other items in transit between us
and other banks.
Cash Restrictions
Some of our foreign operations are required to maintain reserves or minimum balances with central banks in their respective countries of operation,
amounting to $2,232 million as at October 31, 2015 ($1,638 million in 2014).
Interest Bearing Deposits with Banks
Deposits with banks are recorded at amortized cost and include acceptances we have purchased that were issued by other banks. Interest income
earned on these deposits is recorded on an accrual basis.
Note 3: Securities
Securities are divided into four types, each with a different purpose and accounting treatment. The types of securities we hold are as follows:
Trading securities are securities that we purchase for resale over a short period of time. We report these securities at their fair value and record the
transaction costs and changes in fair value in our Consolidated Statement of Income in trading revenues.
Securities Designated at Fair Value
Securities designated at fair value through profit or loss are financial instruments that are accounted for at fair value, with changes in fair value
recorded in income provided they meet certain criteria. Securities designated at fair value through profit or loss must have reliably measurable fair
values and satisfy one of the following criteria: (1) the designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the gains and losses on a different basis; (2) the securities are part of a group of financial instruments that is
managed and evaluated on a fair value basis; or (3) the securities are hybrid financial instruments with embedded derivatives that would significantly
modify their cash flow. Securities must be designated on initial recognition, and the designation is irrevocable. If these securities were not designated
at fair value, they would be accounted for as available-for-sale securities with unrealized gains and losses recorded in other comprehensive income.
We designate certain securities held by our insurance subsidiaries that support our insurance liabilities at fair value through profit or loss, since
the actuarial calculation of insurance liabilities is based on the fair value of the investments supporting them. This designation aligns the accounting
result with the way the portfolio is managed on a fair value basis. The change in fair value of the securities is recorded in non-interest revenue,
insurance revenue, and the change in fair value of the liabilities is recorded in insurance claims, commissions and changes in policy benefit liabilities.
The fair value of these investments as at October 31, 2015 of $6,961 million ($6,599 million as at October 31, 2014) is recorded in securities, trading,
in our Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was an increase in non-interest
revenue, insurance revenue of $8 million for the year ended October 31, 2015 (increase of $379 million in 2014).
We designate certain investments held in our merchant banking business at fair value through profit or loss, which aligns the accounting result
with the way the portfolio is managed. The fair value of these investments as at October 31, 2015 of $365 million ($467 million in 2014) is recorded
in securities, other, in our Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was a decrease in
non-interest revenue, securities gains, other than trading of $30 million in our Consolidated Statement of Income for the year ended October 31, 2015
(decrease of $36 million in 2014).
Available-for-sale securities consist of debt and equity securities that may be sold in response to or in anticipation of changes in interest rates and
resulting prepayment risk, changes in credit risk, changes in foreign currency risk, changes in funding sources or terms, or to meet liquidity needs.
Available-for-sale securities are initially recorded at fair value plus transaction costs. They are subsequently measured at fair value, with
unrealized gains and losses recorded in unrealized gains (losses) on available-for-sale securities in our Consolidated Statement of Comprehensive
Income until the security is sold. Gains and losses on disposal and impairment losses are recorded in our Consolidated Statement of Income in non-
interest revenue, securities gains, other than trading. Interest income earned and dividends received on available-for-sale securities are recorded in
our Consolidated Statement of Income in interest, dividend and fee income, securities.
Investments held by our insurance operations are classified as available-for-sale securities, except for those investments that support the policy
benefit liabilities on our insurance contracts, which are designated at fair value through profit or loss, as discussed above. Interest and other fee
income on the insurance available-for-sale securities is recognized when earned in our Consolidated Statement of Income in non-interest revenue,
insurance revenue.
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Held-to-maturity securities are debt securities that we have the intention and ability to hold to maturity. These securities are initially recorded at
fair value plus transaction costs and subsequently measured at amortized cost using the effective interest method. Gains and losses on disposal and
impairment losses are recorded in our Consolidated Statement of Income in securities gains (losses), other than trading. Interest income earned
144 BMO Financial Group 198th Annual Report 2015
and amortization of premiums or discounts on the debt securities are recorded in our Consolidated Statement of Income in interest, dividend and fee
income, securities.
Other securities are investments in companies where we exert significant influence over operating, investing and financing decisions (generally
companies in which we own between 20% and 50% of the voting shares) and certain securities held by our merchant banking business.
We account for all of our securities transactions using settlement date accounting in our Consolidated Balance Sheet. Changes in fair value
between the trade date and settlement date are recorded in net income, except for those related to available-for-sale securities, which are recorded
in other comprehensive income.
Impairment Review
For available-for-sale, held-to-maturity and other securities, impairment losses are recognized if there is objective evidence of impairment as a result
of an event that reduces the estimated future cash flows from the security and the impact can be reliably estimated.
For equity securities, a significant or prolonged decline in the fair value of a security below its cost is considered to be objective evidence of
impairment.
The impairment loss on available-for-sale securities is the difference between the security’s amortized cost and its current fair value, less any
previously recognized impairment losses. The impairment loss on held-to-maturity securities is the difference between a security’s carrying amount
and the present value of its estimated future cash flows discounted at the original effective interest rate.
If there is objective evidence of impairment, a write-down is recorded in our Consolidated Statement of Income in securities gains, other than
trading.
For debt securities, a previous impairment loss is reversed through net income if an event occurs after the impairment was recognized that can
be objectively attributed to an increase in fair value, to a maximum of the original impairment charge. Reversals of impairment losses on held-to-
maturity securities are recorded to a maximum of the amortized cost of the investment before the original impairment charge. For equity securities,
previous impairment losses are not reversed through net income, and any subsequent increases in fair value are recorded in other comprehensive
income.
As at October 31, 2015, we had 682 available-for-sale securities (565 in 2014) with unrealized losses totalling $152 million (unrealized losses of
$35 million in 2014). Of these available-for-sale securities, 69 have been in an unrealized loss position continuously for more than one year (203 in
2014), amounting to an unrealized loss position of $5 million (unrealized loss position of $20 million in 2014). Unrealized losses on these
instruments, excluding corporate equities, resulted from changes in interest rates and not from deterioration in the creditworthiness of the issuers.
We expect full recovery of these available-for-sale securities and have determined that there is no significant impairment. The table on page 147
details unrealized gains and losses as at October 31, 2015 and 2014.
We did not own any securities issued by a single non-government entity where the book value, as at October 31, 2015 or 2014, was greater than
10% of our shareholders’ equity.
Fair Value Measurement
For traded securities, quoted market value is considered to be fair value. Quoted market value is based on bid prices. For securities where market
quotes are not available, we use estimation techniques to determine fair value. A discussion of fair value measurement is included in Note 18.
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BMO Financial Group 198th Annual Report 2015 145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions, except as noted)
Trading Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Mortgage-backed securities and collateralized mortgage obligations
Corporate debt
Corporate equity
Total trading securities
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Yield (%)
Canadian provincial and municipal governments
Amortized cost
Fair value
Yield (%)
U.S. federal government
Amortized cost
Fair value
Yield (%)
U.S. states, municipalities and agencies
Amortized cost
Fair value
Yield (%)
Other governments
Amortized cost
Fair value
Yield (%)
Mortgage-backed securities and collateralized mortgage obligations – Canada
Amortized cost
Fair value
Yield (%)
Mortgage-backed securities and collateralized mortgage obligations – U.S.
Amortized cost
Fair value
Yield (%)
Corporate debt
Amortized cost
Fair value
Yield (%)
Corporate equity
Amortized cost
Fair value
Yield (%)
Total cost or amortized cost
Total fair value
Yield (%)
Held-to-Maturity Securities
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Canadian provincial and municipal governments
Amortized cost
Fair value
Mortgage-backed securities and collateralized mortgage obligations (1)
Amortized cost
Fair value
Total cost or amortized cost
Total fair value
Other Securities
Carrying value
Fair value
Total carrying value or amortized cost of securities
Total securities value
Total by Currency (in Canadian $ equivalent)
Canadian dollar
U.S. dollar
Other currencies
Total securities
s
e
t
o
N
Term to maturity
2015
2014
Within
1 year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
Total
Total
10,462
7,196
6,165
711
223
702
11,831
47,732
85,022
10,420
10,501
1.52
4,063
4,104
1.96
1,094
1,093
1.21
5,761
5,815
1.04
6,116
6,132
1.32
3,031
3,054
1.90
6,872
6,895
0.92
7,577
7,666
1.83
1,582
1,706
2.25
46,516
46,966
1.48
2,432
2,442
2,532
2,558
5,380
5,490
10,344
10,490
987
2,306
2,183
1,146
1,300
129
251
272
782
–
6,063
2,318
2,329
1.00
314
317
1.22
332
331
1.03
1,227
1,236
1.05
2,137
2,141
1.26
399
404
1.24
4
4
1.74
2,270
2,280
1.66
–
–
–
797
1,077
781
80
53
68
713
–
3,569
4,685
4,741
1.62
1,636
1,640
1.55
938
945
1.45
1,159
1,168
1.86
748
753
1.33
2,595
2,600
1.62
29
30
1.69
2,412
2,421
2.06
–
–
–
2,451
1,546
394
248
7
41
949
–
1,951
2,282
507
132
2
3
5,428
37,727
13,854
6,751
3,252
687
411
491
9,287
37,727
5,636
48,032
72,460
550
550
1.80
2,861
2,888
2.24
430
426
1.77
1,151
1,180
2.30
138
136
0.37
–
–
–
476
481
1.97
646
670
3.16
–
–
–
138
136
1.99
26
27
3.67
–
–
–
1,255
1,266
1.61
–
–
–
–
–
–
8,652
8,669
1.05
48
47
3.50
1,648
1,713
2.37
7,906
7,970
1.43
4,890
4,925
1.93
1,750
1,754
1.41
6,026
6,085
1.27
5,404
5,412
1.03
2,994
3,004
1.68
9,165
9,188
1.10
7,909
7,955
1.85
1,648
1,713
2.37
9,001
14,202
6,252
11,767
47,692
9,042
14,298
6,331
11,858
48,006
1.29
1.60
2.21
1.32
1.47
6,472
700
270
98
98
107
1,415
–
9,160
215
214
0.56
53
53
0.71
50
52
0.05
1,234
1,235
0.56
2,381
2,382
0.77
–
–
–
4
4
3.42
2,533
2,537
1.45
–
–
–
6,470
6,477
0.98
325
325
485
486
347
349
1,157
1,160
2,005
2,015
1,216
1,219
294
294
3,515
3,528
3
3
7
7
–
–
510
507
354
357
864
864
55
55
–
–
321
347
–
–
321
347
13
13
–
–
–
–
3,575
3,635
3,575
3,635
942
2,651
2,330
2,340
2,532
2,559
4,570
4,635
9,432
9,534
1,020
2,729
16,790
18,586
18,690
12,222
64,316
130,604
142,869
16,797
18,627
18,786
12,301
64,407
130,918
143,319
11,230
3,984
1,583
11,041
6,912
674
12,446
6,269
71
8,885
3,416
–
38,973
25,007
427
82,575
45,588
2,755
94,126
46,580
2,613
16,797
18,627
18,786
12,301
64,407
130,918
143,319
(1) These amounts are supported by insured mortgages or issued by U.S. agencies and government-sponsored enterprises.
Yields in the table above are calculated using the cost of the security and the contractual interest or stated dividend rates associated with each security, adjusted for any amortization of premiums and
discounts. Tax effects are not taken into consideration. The term to maturity included in the table above is based on the contractual maturity date of the security. Actual maturities could differ, as issuers
may have the right to call or prepay obligations. Securities with no maturity date are included in the over 10 years category.
146 BMO Financial Group 198th Annual Report 2015
Unrealized Gains and Losses
(Canadian $ in millions)
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Mortgage-backed securities and collateralized mortgage obligations – Canada (1)
Mortgage-backed securities and collateralized mortgage obligations – U.S.
Corporate debt
Corporate equity
Total
(1) These amounts are supported by insured mortgages.
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
2015
7,906
4,890
1,750
6,026
5,404
2,994
9,165
7,909
1,648
47,692
78
68
9
65
11
22
35
61
117
466
14
33
5
6
3
12
12
15
52
7,970
4,925
1,754
6,085
5,412
3,004
9,188
7,955
1,713
10,420
4,063
1,094
5,761
6,116
3,031
6,872
7,577
1,582
152
48,006
46,516
82
44
2
57
17
24
35
95
129
485
1
3
3
3
1
1
12
6
5
35
Unrealized Losses
(Canadian $ in millions)
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Mortgage-backed securities and collateralized mortgage obligations –
Canada (1)
Mortgage-backed securities and collateralized mortgage obligations –
U.S.
Corporate debt
Corporate equity
Total
Available-for-sale
securities in an unrealized
loss position for
Less than 12 months
12 months
or longer
Gross
unrealized
losses
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
2015
Total
Fair
value
Available-for-sale
securities in an unrealized
loss position for
Less than
12 months
12 months
or longer
Gross
unrealized
losses
Gross
unrealized
losses
Fair
value
14 2,579
33 2,773
759
5
3 1,271
3 1,677
12 1,415
10 2,728
15 2,726
305
52
–
–
–
3
–
–
2
–
–
–
–
–
859
543
14 2,579
33 2,773
759
5
6 2,130
3 2,220
–
12 1,415
622
22
–
12 3,350
15 2,748
305
52
1
–
3
–
–
1
5
1
4
666
280
579
916
158
657
1,969
822
40
–
3
–
3
1
–
7
5
1
147 16,233
5 2,046
152 18,279
15
6,087
20
4,652
Fair
value
–
487
–
732
1,003
–
1,630
773
27
Gross
unrealized
losses
1
3
3
3
1
1
12
6
5
35
2014
Fair
value
10,501
4,104
1,093
5,815
6,132
3,054
6,895
7,666
1,706
46,966
2014
Total
Fair
value
666
767
579
1,648
1,161
657
3,599
1,595
67
10,739
(1) These amounts are supported by insured mortgages.
Income from securities has been included in our consolidated financial statements as follows:
(Canadian $ in millions)
Reported in Consolidated Statement of Income:
Interest, Dividend and Fee Income (1)
Trading securities (2)
Available-for-sale securities
Held-to-maturity securities
Other securities
Non-Interest Revenue
Available-for-sale securities
Gross realized gains
Gross realized losses
Unrealized gain on investment reclassified from equity to available-for-sale
Other securities, net realized and unrealized gains (losses)
Impairment write-downs
Securities gains (losses), other than trading (1)
Trading securities, net realized and unrealized gains (losses) (1) (2)
Total income from securities
2015
2014
2013
1,016
504
167
225
954
570
152
186
1,912
1,862
1,265
610
47
210
2,132
116
(18)
–
85
(12)
171
92
304
(167)
–
33
(8)
162
340
90
(3)
191
24
(17)
285
(1,273)
2,175
2,364
1,144
(1) The following amounts of income related to our insurance operations were included in non-interest revenue, insurance revenue in our Consolidated Statement of Income:
(2) Interest, dividend and fee income of $282 million for the year ended October 31, 2015 ($263 million in 2014 and $263 million in 2013). Securities gains (losses), other than trading of $1 million for
the year ended October 31, 2015 ($5 million in 2014 and $1 million in 2013).
Excluded from the table above are trading securities, net realized and unrealized gains (losses) of $8 million related to our insurance operations for the year ended October 31, 2015 ($379 million in
2014 and $(190) million in 2013).
N
o
t
e
s
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policies.
BMO Financial Group 198th Annual Report 2015 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4: Loans, Customers’ Liability under Acceptances and Allowance for Credit Losses
Loans are initially measured at fair value plus directly attributable costs, and are subsequently measured at amortized cost using the effective interest
method. The effective interest method allocates interest income over the expected term of the loan by applying the effective interest rate to the
carrying amount of the loan. The effective interest rate is defined as the rate that exactly discounts estimated future cash receipts through the
expected term of the loan to the net carrying amount of the loan. Under the effective interest method, the amount recognized in interest, dividend
and fee income, loans, varies over the term of the loan based on the principal outstanding. The treatment of interest income for impaired loans is
described below.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements represent the amounts we will receive as a result of our commitment to resell securities
that we have purchased, back to the original seller, on a specified date at a specified price. We account for these instruments as if they were loans.
Lending Fees
The accounting treatment for lending fees varies depending on the transaction. Some loan origination, restructuring and renegotiation fees are
recorded as interest income over the term of the loan, while other lending fees are taken into income at the time of loan origination. Commitment
fees are recorded as interest income over the term of the loan, unless we believe the loan commitment will not be used. In the latter case,
commitment fees are recorded as lending fees over the commitment period. Loan syndication fees are included in lending fees at the time the
syndication is completed, unless the yield on any loans we retain is less than that of other comparable lenders involved in the financing. In the latter
case, an appropriate portion of the syndication fee is recorded as interest income over the term of the loan.
Customers’ Liability under Acceptances
Acceptances represent a form of negotiable short-term debt that is issued by our customers, which we guarantee for a fee. We have offsetting claims,
equal to the amount of the acceptances, against our customers in the event of a call on these commitments. The amount due under acceptances is
recorded in other liabilities and our corresponding claim is recorded as a loan in our Consolidated Balance Sheet.
Fees earned are recorded in lending fees in our Consolidated Statement of Income over the term of the acceptance.
Impaired Loans
Generally, consumer loans in both Canada and the U.S. are classified as impaired when payment is contractually 90 days past due, or one year past
due for residential mortgages if guaranteed by the Government of Canada. Credit card loans are immediately written off when principal or interest
payments are 180 days past due, and are not reported as impaired. In Canada, consumer instalment loans, other personal loans and some small
business loans are normally written off when they are one year past due. In the U.S., all consumer loans are written off when they are 180 days past
due, except for non-real estate term loans, which are written off at 120 days. For the purpose of measuring the amount to be written off, the
determination of the recoverable amount includes an estimate of future recoveries.
Corporate and commercial loans are classified as impaired when we determine there is no longer reasonable assurance that principal or interest
will be collected in its entirety on a timely basis. Generally, we consider corporate and commercial loans to be impaired when payments are 90 days
past due, or for fully secured loans, when payments are 180 days past due. Corporate and commercial loans are written off following a review on an
individual loan basis that confirms all recovery attempts have been exhausted.
A loan will be reclassified to performing status when we determine that there is reasonable assurance of full and timely repayment of interest
and principal in accordance with the terms and conditions of the loan, and that none of the criteria for classification of the loan as impaired continue
to apply.
Our average gross impaired loans and acceptances were $2,115 million for the year ended October 31, 2015 ($2,261 million in 2014). Our
average impaired loans, net of the specific allowance, were $1,730 million for the year ended October 31, 2015 ($1,783 million in 2014).
Once a loan is identified as impaired, we continue to recognize interest income based on the original effective interest rate of the loan. In the
periods following the recognition of impairment, adjustments to the allowance for these loans reflecting the time value of money are recognized and
presented as interest income. Interest income on impaired loans of $91 million was recognized for the year ended October 31, 2015 ($111 million in
2014).
During the year ended October 31, 2015, we recorded a net gain of $72 million before tax ($12 million in 2014) on the sale of impaired and
written-off loans.
Allowance for Credit Losses (“ACL”)
The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level that we consider adequate to absorb credit-related
losses on our loans, customers’ liability under acceptances and other credit instruments. The portion related to other credit instruments is recorded in
other liabilities in our Consolidated Balance Sheet and amounted to $197 million as at October 31, 2015 ($232 million in 2014).
The allowance is comprised of a specific allowance and a collective allowance.
Specific Allowance
These allowances are recorded for individually identified impaired loans to reduce their carrying value to the expected recoverable amount. We
review our loans and acceptances on an ongoing basis to assess whether any loans should be classified as impaired and whether an allowance or
write-off should be recorded (excluding credit card loans, which are classified as impaired and written off when principal or interest payments are
180 days past due, as discussed under Impaired Loans). The review of individually significant problem loans is conducted at least quarterly by the
account managers, each of whom assesses the ultimate collectability and estimated recoveries for a specific loan based on all events and conditions
that are relevant to the loan. This assessment is then approved by an independent credit officer.
s
e
t
o
N
Individually Significant Impaired Loans
To determine the amount we expect to recover from an individually significant impaired loan, we use the value of the estimated future cash flows
discounted at the loan’s original effective interest rate. The determination of estimated future cash flows of a collateralized impaired loan reflects the
expected realization of the underlying security, net of expected costs and any amounts legally required to be paid to the borrower. Security can vary
by type of loan and may include cash, securities, real properties, accounts receivable, guarantees, inventory or other capital assets.
148 BMO Financial Group 198th Annual Report 2015
Individually Insignificant Impaired Loans
Residential mortgages, consumer instalment and other personal loans are individually insignificant and may be individually assessed or collectively
assessed for losses at the time of impairment, taking into account historical loss experience.
Collective Allowance
We maintain a collective allowance in order to cover any impairment in the existing portfolio for loans that have not yet been individually identified
as impaired. Our approach to establishing and maintaining the collective allowance is based on the requirements of IFRS, considering guidelines
issued by OSFI.
The collective allowance methodology incorporates both quantitative and qualitative factors to determine an appropriate level for the collective
allowance. For the purpose of calculating the collective allowance, we group loans on the basis of similarities in credit risk characteristics. The loss
factors for groups of loans are determined based on a minimum of five years of historical data and a one-year loss emergence period, except for
credit cards, where a seven-month loss emergence period is used. The loss factors are back-tested and calibrated on a regular basis to ensure that
they continue to reflect our best estimate of losses that have been incurred but not yet identified, on an individual basis, within the pools of loans.
Historical loss experience data is also reviewed in the determination of loss factors. Qualitative factors are based on current observable data, such as
current macroeconomic and business conditions, portfolio-specific considerations and model risk factors.
Provision for Credit Losses (“PCL”)
Changes in the value of our loan portfolio due to credit-related losses or recoveries of amounts previously provided for or written off are included in
the provision for credit losses in our Consolidated Statement of Income.
Loans, including customers’ liability under acceptances, and allowance for credit losses by category are as follows:
(Canadian $ in millions)
Residential mortgages (1)
Credit card, consumer
instalment and other
personal loans
Business and
government loans
Customers’ liability
under acceptances
Total
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
2015
2014
2013
Gross loan balances at end of
year (3)
105,918 101,013 96,392 73,578 72,115 71,510 145,076 120,766 104,585 11,307 10,878 8,472 335,879 304,772 280,959
Impairment allowances (specific
ACL), beginning of year
Amounts written off
Recoveries of amounts written
off in previous years
Charge to income statement
(specific PCL)
Foreign exchange and other
88
(83)
89
(87)
76
(104)
99
(670)
81
(655)
62
(750)
237
(312)
315
(407)
338
(443)
72
11
40
77
24
190
161
152
129
497
519
618
194
104
423
596
(35)
(150)
movements
(19)
(31)
(36)
(3)
(7)
99
(1)
81
622
624
(13)
(59)
(26)
210
754
237
756
315
759
Specific ACL, end of year
Collective ACL, beginning of year
Charge to income statement
(collective PCL)
Foreign exchange and
other movements
Collective ACL, end of year
Total ACL
Comprised of: Loans
Other credit
instruments (2)
69
83
19
9
111
180
149
31
88
88
(8)
3
83
171
144
89
47
40
1
88
177
157
113
678
7
29
714
827
827
50
6
678
777
777
27
20
–
–
–
2
622
703
703
80
801
1,011
845
166
48
754
991
786
205
32
756
1,071
786
285
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
424
(1,065)
485
(1,149)
476
(1,297)
456
612
(35)
392
624
561
(97)
424
772
597
(63)
485
27
19
30
1,542
1,485
1,460
7
–
34
34
34
–
8
–
27
27
27
–
–
57
1,542
1,966
(10)
35
1,485
1,970
118
1,660
2,052
1,855
1,734
1,665
197
232
305
–
19
19
19
–
(4)
(33)
(50)
(35)
(11)
–
Net loan balances at end of year 105,769 100,869 96,235 72,751 71,338 70,807 144,231 119,980 103,799 11,273 10,851 8,453 334,024 303,038 279,294
(1) Included in the residential mortgages balance are Canadian government and corporate-insured mortgages of $56,579 million as at October 31, 2015 ($58,511 million in 2014).
(2) The total specific and collective allowances related to other credit instruments are included in other liabilities.
(3) Included in loans as at October 31, 2015 are $117,098 million ($95,269 million in 2014 and $81,069 million in 2013) of loans denominated in U.S. dollars and $1,966 million ($1,039 million in 2014
and $947 million in 2013) of loans denominated in other foreign currencies.
Certain comparative figures have been reclassified to conform with the current year’s presentation and changes in accounting policies.
Loans, including customers’ liability under acceptances, and allowance for credit losses by geographic region are as follows:
(Canadian $ in millions)
Gross amount
Specific allowance (2) Collective allowance (3)
Net amount
By geographic region (1):
Canada
United States
Other countries
Total
2015
2014
2015
2014
2015
2014
2015
2014
223,500
101,198
11,181
213,490
80,135
11,147
335,879
304,772
145
212
–
357
191
182
1
374
816
682
–
766 222,539
594 100,304
11,181
–
212,533
79,359
11,146
1,498
1,360 334,024
303,038
(1) Geographic region is based upon the country of ultimate risk.
(2) Excludes specific allowance of $35 million for other credit instruments ($50 million in 2014), which is included in other liabilities.
(3) Excludes collective allowance of $162 million for other credit instruments ($182 million in 2014), which is included in other liabilities.
N
o
t
e
s
BMO Financial Group 198th Annual Report 2015 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans, including the related allowances, are as follows:
(Canadian $ in millions)
Gross impaired amount
Specific allowance (3)
Net of specific allowance
Residential mortgages
Consumer instalment and other personal loans
Business and government loans
Total (1)
By geographic region (2):
Canada
United States
Other countries
Total
2015
370
546
1,043
1,959
641
1,314
4
1,959
2014
532
544
972
2,048
742
1,301
5
2,048
2015
38
113
206
357
145
212
–
357
2014
61
99
214
374
191
182
1
374
2015
332
433
837
2014
471
445
758
1,602
1,674
496
1,102
4
1,602
551
1,119
4
1,674
(1) Excludes purchased credit impaired loans.
(2) Geographic region is based upon the country of ultimate risk.
(3) Excludes specific allowance of $35 million for other credit instruments ($50 million in 2014), which is included in other liabilities.
Fully secured loans with past due amounts between 90 and 180 days that we have not classified as impaired totalled $83 million and $134 million as at October 31, 2015 and 2014, respectively.
Specific provisions for credit losses by geographic region are as follows:
(Canadian $ in millions)
By geographic region (1):
Canada
United States
Other countries
Total
Residential mortgages
Credit card, consumer
instalment and other
personal loans
Business and
government loans (2)
Total
2015
2014
2015
2014
2015
2014
2015
2014
9
2
–
11
12
65
–
77
393
104
–
497
410
109
–
519
97
8
(1)
104
107
(140)
(2)
(35)
499
114
(1)
612
529
34
(2)
561
(1) Geographic region is based upon the country of ultimate risk.
(2) There were no provisions relating to customers’ liability under acceptances as at October 31, 2015 and 2014.
Foreclosed Assets
Property or other assets that we receive from borrowers to satisfy their loan commitments are classified as either held for use or held for sale
according to management’s intention and are recorded at the lower of carrying amount or fair value less costs to sell. Fair value is determined based
on market prices where available. Otherwise, fair value is determined using methods such as analysis of discounted cash flows or market prices for
similar assets.
During the year ended October 31, 2015, we foreclosed on impaired loans and received $102 million of real estate properties that we classified
as held for sale ($145 million in 2014).
As at October 31, 2015, real estate properties held for sale totalled $109 million ($158 million in 2014). These properties are disposed of when
considered appropriate. During the year ended October 31, 2015, we recorded an impairment loss of $22 million on real estate properties classified as
held for sale ($34 million in 2014).
Renegotiated Loans
From time to time we modify the contractual terms of loans due to the poor financial condition of the borrower. We assess renegotiated loans for
impairment consistent with our existing policies for impairment. When renegotiation leads to significant concessions being granted, and the
concessions are for economic or legal reasons related to the borrower’s financial difficulty that we would not otherwise consider, the loan is classified
as impaired. We consider one or a combination of the following to be significant concessions: (1) a reduction of the stated interest rate, (2) an
extension of the maturity date or dates at a stated interest rate lower than the current market rate for a new loan with similar terms, or
(3) forgiveness of principal or accrued interest.
Renegotiated loans are permitted to remain in performing status if the modifications are not considered to be significant, or are returned to
performing status when none of the criteria for classification as impaired continue to apply.
The carrying value of our renegotiated loans was $730 million as at October 31, 2015 ($728 million in 2014). Renegotiated loans of $361 million
were classified as performing during the year ended October 31, 2015 ($291 million in 2014). Renegotiated loans of $42 million and $25 million were
written off in the years ended October 31, 2015 and 2014, respectively.
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Purchased Loans
We record all loans that we purchase at fair value on the day that we acquire the loans. The fair value of the acquired loan portfolio includes an
estimate of the interest rate premium or discount on the loans, calculated as the difference between the contractual rate of interest on the loans and
prevailing interest rates (the “interest rate mark”). Also included in fair value is an estimate of expected credit losses (the “credit mark”) as of the
acquisition date. The credit mark consists of two components: an estimate of the amount of losses that exist in the acquired loan portfolio on the
acquisition date but that haven’t been specifically identified on that date (the “incurred credit mark”) and an amount that represents future expected
losses (the “future credit mark”). Because we record the loans at fair value, no allowance for credit losses is recorded in our Consolidated Balance
Sheet on the day we acquire the loans. Fair value is determined by estimating the principal and interest cash flows expected to be collected on the
loans and discounting those cash flows at a market rate of interest. We estimate cash flows expected to be collected based on specific loan reviews
for commercial loans. For retail loans, we use models that incorporate management’s best estimate of current key assumptions, such as default rates,
loss severity and the timing of prepayments, as well as collateral.
Acquired loans are classified into the following categories: those for which on the acquisition date we expect to continue to receive timely
principal and interest payments (the “purchased performing loans”) and those for which on the acquisition date the timely collection of interest and
150 BMO Financial Group 198th Annual Report 2015
principal was no longer reasonably assured (the “purchased credit impaired loans” or “PCI loans”). Because PCI loans are recorded at fair value at
acquisition based on the amount expected to be collected, none of the PCI loans are considered to be impaired at acquisition.
Subsequent to the acquisition date, we account for each type of loan as follows:
Purchased Performing Loans
For performing loans with fixed terms, the future credit mark is fully amortized into net interest income over the expected life of the loan using the
effective interest method. The impact on net interest income for the year ended October 31, 2015 was $26 million ($34 million in 2014 and
$48 million in 2013). The incurred credit losses are remeasured at each reporting period, with any increases recorded as an increase in the collective
allowance and the provision for credit losses. Decreases in incurred credit losses are recorded as a decrease in the collective allowance and the
provision for credit losses until the accumulated collective allowance related to these loans is exhausted. Any additional decrease is recorded in net
interest income.
The impact of the remeasurement of incurred credit losses for performing loans with fixed terms for the year ended October 31, 2015 was a
$1 million recovery in the provision for credit losses and $nil in net interest income ($2 million provision and $6 million, respectively, in 2014 and $nil
and $143 million, respectively, in 2013).
For performing loans with revolving terms, the incurred and future credit marks are amortized into net interest income on a straight-line basis
over the contractual terms of the loans. The impact on net interest income of such amortization for the year ended October 31, 2015 was $15 million
($35 million in 2014 and $123 million in 2013).
As performing loans are repaid, the related unamortized credit mark remaining is recorded as net interest income during the period in which the
payments are received. The impact on net interest income of such repayments for the year ended October 31, 2015 was $62 million ($151 million in
2014 and $241 million in 2013).
Actual specific provisions for credit losses related to these performing loans will be recorded as they arise in a manner that is consistent with our
policy for loans we originate. The total specific provision for credit losses for purchased performing loans for the year ended October 31, 2015 was
$5 million ($56 million in 2014 and $240 million in 2013).
As at October 31, 2015, the amount of purchased performing loans remaining on the balance sheet was $4,993 million ($7,755 million in 2014).
As at October 31, 2015, the credit mark remaining on performing term loans, revolving loans and other performing loans was $217 million,
$69 million and $nil, respectively ($279 million, $94 million and $2 million, respectively, in 2014). Of the total credit mark for performing loans of
$286 million, $151 million represents the credit mark that will be amortized over the remaining life of the portfolio. The remaining balance of
$135 million represents the incurred credit mark and will be remeasured each reporting period.
Purchased Credit Impaired Loans
Subsequent to the acquisition date, we regularly re-evaluate the cash flows we expect to collect on the PCI loans. Increases in expected cash flows
will result in a recovery in the specific provision for credit losses and either a reduction in any previously recorded allowance for credit losses or, if no
allowance exists, an increase in the current carrying value of the PCI loans. Decreases in expected cash flows will result in a charge to the specific
provision for credit losses and an increase in the allowance for credit losses. The impact of these evaluations for the year ended October 31, 2015 was
a $86 million recovery in the specific provision for credit losses ($252 million recovery in 2014 and $410 million recovery in 2013).
As at October 31, 2015, the amount of PCI loans remaining on the balance sheet was $383 million ($488 million in 2014). There is no remaining
credit mark on the PCI loans ($nil in 2014).
FDIC Covered Loans
Certain acquired loans are subject to a loss share agreement with the Federal Deposit Insurance Corporation (“FDIC”). Under this agreement, the FDIC
reimburses us for 80% of the net losses we incur on the covered loans.
We recorded net provisions of $36 million for the year ended October 31, 2015 (net recoveries of $8 million in 2014). These amounts are net of
the amounts expected to be reimbursed by the FDIC.
Note 5: Risk Management
We have an enterprise-wide approach to the identification, measurement, monitoring and management of risks faced across our organization. The
key risks related to our financial instruments are classified as credit and counterparty, market, and liquidity and funding risk.
Credit and Counterparty Risk
Credit and counterparty risk is the potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour
another predetermined financial obligation. Credit risk arises predominantly with respect to loans, over-the-counter derivatives and other credit
instruments. This is the most significant measurable risk that we face. Our risk management practices and key measures are disclosed in the text and
tables presented in a blue-tinted font in Management’s Discussion and Analysis on pages 94 to 96 of this report. Additional information on loans and
derivative-related credit risk is disclosed in Notes 4 and 8, respectively.
Concentrations of Credit and Counterparty Risk
Concentrations of credit risk exist if a number of clients are engaged in similar activities, are located in the same geographic region or have similar
economic characteristics such that their ability to meet contractual obligations could be similarly affected by changes in economic, political or other
conditions. Concentrations of credit risk indicate a related sensitivity of our performance to developments affecting a particular counterparty, industry
or geographic location. At year end, our credit assets consisted of a well-diversified portfolio representing millions of clients, the majority of them
consumers and small to medium-sized businesses.
From an industry viewpoint, our most significant exposure as at year end was to individual consumers, captured within the individual sector in
the following table, comprising $178,708 million ($169,039 million in 2014). Additional information on the composition of our loans and derivatives
exposure is disclosed in Notes 4 and 8, respectively.
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BMO Financial Group 198th Annual Report 2015 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basel III Framework
We use the Basel III Framework and our economic capital framework for risk management purposes. For regulatory capital, we use the Advanced
Internal Ratings Based (“AIRB”) approach to determine credit risk-weighted assets in our portfolio, except for acquired loans in our M&I and other
select portfolios, for which we use the Standardized Approach. The framework uses exposure at default to assess credit and counterparty risk.
Exposures are classified as follows:
‰ Drawn loans include loans, acceptances, deposits with regulated financial institutions, and certain securities. Exposure at default (“EAD”) represents
an estimate of the outstanding amount of a credit exposure at the time a default may occur. For off-balance sheet amounts and undrawn amounts,
EAD includes an estimate of any further amounts that may be drawn at the time of default.
‰ Undrawn commitments cover all unutilized authorizations, associated with the drawn loans noted above, including those which are unconditionally
cancellable. EAD for undrawn commitments is model generated based on internal empirical data.
‰ Over-the-counter (“OTC”) derivatives are those in our proprietary accounts that attract credit risk in addition to market risk. EAD for OTC derivatives
is equal to the positive replacement cost; after considering netting, plus any potential credit exposure amount.
‰ Other off-balance sheet exposures include items such as guarantees, standby letters of credit and documentary credits. EAD for other off-balance
sheet items is based on management’s best estimate.
‰ Repo-style transactions include repos, reverse repos and securities lending transactions, which represent both asset and liability exposures. EAD for
repo-style transactions is the total amount drawn, adding back any write-offs.
‰ Adjusted EAD represents exposures that have been redistributed to a more favourable probability of default band or a different Basel asset class as
a result of applying credit risk mitigation.
Total non-trading exposure at default by industry sector, as at October 31, 2015 and 2014, based on the Basel III classifications is as follows:
(Canadian $ in millions)
Drawn
Commitments
(undrawn)
OTC derivatives
Other off-balance
sheet items
Repo-style transactions
Total
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Financial institutions
Governments
Manufacturing
Real estate
Retail trade
Service industries
Wholesale trade
Oil and gas
Individual
Agriculture
Others (1)
Total exposure at
85,854
42,709
16,133
21,100
14,352
28,311
8,453
6,575
139,885
9,860
51,337
69,174
43,035
13,678
18,408
11,973
21,944
8,260
5,969
132,360
9,016
38,090
19,268
2,069
13,039
5,871
4,614
11,881
5,288
7,847
38,674
1,860
14,218
15,164
1,838
9,499
5,602
4,995
8,873
4,253
6,931
36,627
1,905
12,692
default
424,569
371,907
124,629
108,379
(1) Includes industries having a total exposure of less than 2%.
7
–
21
–
–
2
–
–
–
–
1
31
1
–
40
–
–
6
–
–
26
–
1
3,321
794
1,311
809
539
2,936
372
818
149
27
5,329
2,825
1,010
1,189
1,072
537
2,748
461
612
18
36
4,303
50,393
6,478
–
–
–
–
–
–
–
–
–
40,362
10,266
–
–
–
2
–
–
8
–
397
158,843
52,050
30,504
27,780
19,505
43,130
14,113
15,240
178,708
11,747
70,885
127,526
56,149
24,406
25,082
17,505
33,573
12,974
13,512
169,039
10,957
55,483
74
16,405
14,811
56,871
51,035
622,505
546,206
Additional information about our credit risk exposure by geographic region and product category for loans, including customers’ liability under
acceptances, is provided in Note 4.
Credit Quality
We assign risk ratings based on the probability of counterparties defaulting on their financial obligations to us. Our process for assigning risk ratings is
disclosed in the text presented in a blue-tinted font in the Enterprise-Wide Risk Management section of Management’s Discussion and Analysis on
pages 95 to 96 of this report.
The following tables present our business and government gross loans and acceptances and consumer gross loans outstanding by risk rating as
at October 31, 2015 and 2014.
Business and Government Gross Loans and Acceptances by Risk Rating
Business and government loans and acceptances
(Canadian $ in millions)
Acceptable
Investmentgrade
Sub-investment grade
Problem
Default / Impaired
Total
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Consumer Gross Loans by Risk Rating
(Canadian $ in millions)
Exceptionally low (≤ 0.05%)
Very low (> 0.05% to 0.20%)
Low (> 0.20% to 0.75%)
Medium (> 0.75% to 7.00%)
High (> 7.00% to 99.99%)
Standardized performing / Not rated
Default / Impaired
Total
152 BMO Financial Group 198th Annual Report 2015
2015
84,059
67,586
3,530
1,208
156,383
Residential mortgages
Credit card
and other personal loans
Total
2015
2
69,100
17,233
16,513
408
2,246
416
2014
3
65,704
17,200
8,668
6,385
2,253
800
105,918
101,013
2015
16,834
18,795
14,933
16,969
1,600
3,878
569
73,578
2014
2,691
31,243
13,171
18,285
1,707
4,245
773
72,115
2015
16,836
87,895
32,166
33,482
2,008
6,124
985
179,496
173,128
2014
71,282
56,181
2,881
1,300
131,644
2014
2,694
96,947
30,371
26,953
8,092
6,498
1,573
Loans Past Due Not Impaired
Loans that are past due but not classified as impaired are loans where our customers have failed to make payments when contractually due, but for
which we expect the full amount of principal and interest payments to be collected. The following table presents the loans that are past due but not
classified as impaired as at October 31, 2015 and 2014:
(Canadian $ in millions)
1 to 29 days
30 to 89 days
90 days or more
Total
Residential mortgages (1)
Credit card, consumer instalment and other personal loans (2)
Business and government loans
Customers’ liability under acceptances
Total
2015
2014
641
2,474
416
–
3,531
647
1,915
414
20
2,996
2015
459
494
162
–
2014
2015
2014
2015
2014
488
471
126
4
33
90
92
–
37
104
169
–
310
1,133
3,058
670
–
4,861
1,172
2,490
709
24
4,395
1,115
1,089
215
(1) The percentage of loans 90 days or more past due but not impaired that were guaranteed by the Government of Canada is 5% for 2015 and 5% for 2014.
(2) Credit card loans that are past due are not classified as impaired loans and are written off when 180 days past due.
Loan Maturities and Interest Rate Sensitivity
The following table presents gross loans and acceptances by contractual maturity and by country of ultimate risk:
(Canadian $ in millions)
1 year or less
Over 1 year
Over 5 years
Total
2015
2014
2015
2014
2015
2014
2015
2014
Canada
Consumer
Commercial and corporate (excluding real estate)
Commercial real estate
United States
Other countries
Total
50,911
43,329
4,739
30,886
10,136
50,026
41,608
4,506
22,292
10,632
97,482
13,677
6,254
50,647
741
93,486
10,981
5,331
41,084
465
140,001
129,064
168,801
151,347
5,272
461
1,375
19,665
304
27,077
5,984
141
1,427
16,759
50
153,665
57,467
12,368
101,198
11,181
149,496
52,730
11,264
80,135
11,147
24,361
335,879
304,772
The following table presents net loans and acceptances by interest rate sensitivity:
(Canadian $ in millions)
Fixed rate
Floating rate
Non-interest sensitive (1)
Total
2015
2014
160,469
162,248
11,307
150,021
142,139
10,878
334,024
303,038
(1) Non-interest sensitive is comprised of customers’ liability under acceptances.
Market Risk
Market risk is the potential for adverse changes in the value of our assets and liabilities resulting from changes in market variables such as interest
rates, foreign exchange rates, equity and commodity prices and their implied volatilities, and credit spreads, as well as the risk of credit migration and
default. We incur market risk in our trading and underwriting activities and in the management of structural market risk in our banking and insurance
activities.
Our market risk management practices and key measures are disclosed in the text and tables presented in a blue-tinted font in the Enterprise-
Wide Risk Management section of Management’s Discussion and Analysis on pages 100 to 104 of this report.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet financial commitments in a timely manner at reasonable prices as they fall
due. It is our policy to ensure that sufficient liquid assets and funding capacity are available to meet financial commitments, including liabilities to
depositors and suppliers, and lending, investment and pledging commitments, even in times of stress. Managing liquidity and funding risk is essential
to maintaining both depositor confidence and stability in earnings.
Our liquidity and funding risk management practices and key measures are disclosed in the text presented in a blue-tinted font in the Enterprise-
Wide Risk Management section of Management’s Discussion and Analysis on pages 105 to 109 of this report.
Note 6: Transfer of Assets
Loan Securitization
We sell Canadian mortgage loans to third-party Canadian securitization programs, including the Canadian Mortgage Bond program, and directly to
third-party investors under the National Housing Act Mortgage-Backed Securities program. We assess whether substantially all of the risk and rewards
of the loans have been transferred to determine if they qualify for derecognition.
Under these programs, we are entitled to the payment over time of the excess of the sum of interest and fees collected from customers, in
connection with the loans that were sold, over the yield paid to investors in the third-party securitization programs, less credit losses and other costs.
Since we continue to be exposed to substantially all of the prepayment, interest rate and/or credit risk associated with the securitized loans, they do
not qualify for derecognition. We continue to recognize the loans and the related cash proceeds as secured financing in our Consolidated Balance
Sheet. The interest and fees collected, net of the yield paid to investors, is recorded in net interest income using the effective interest method over
the term of the securitization. Credit losses associated with the loans are recorded in the provision for credit losses. During the year ended
October 31, 2015, we sold $6,905 million of loans to third-party securitization programs ($5,564 million in 2014).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying amount and fair value of transferred assets that did not qualify for derecognition and the associated
liabilities:
(Canadian $ in millions)
Residential mortgages
Other related assets (2)
Total
2015 (1)
2014
Carrying amount
of assets
Associated
liabilities
Carrying amount
of assets
Associated
liabilities
7,458
10,181
9,569
8,382
17,639
17,199
17,951
17,546
(1) The fair value of the securitized assets is $17,785 million and the fair value of the associated liabilities is $17,666 million, for a net position of $119 million. Securitized assets are those which we have
transferred to third parties, including other related assets.
(2) Other related assets represent payments received on account of loans pledged under securitization programs that have not yet been applied against the associated liabilities. The payments received
are held on behalf of the investors in the securitization vehicles until principal payments are required to be made on the associated liabilities. In order to compare all assets supporting the associated
liabilities, this amount is added to the carrying value of the securitized assets in the table above.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements represent short-term funding transactions in which we sell securities that we own and
simultaneously commit to repurchase the same securities at a specified price on a specified date in the future. We retain substantially all of the risk
and rewards associated with the securities and we continue to recognize them in our Consolidated Balance Sheet with the obligation to repurchase
these securities recorded as secured borrowing transactions at the amount owing. The interest expense related to these liabilities is recorded on an
accrual basis. For further details, refer to Note 14.
Note 7: Structured Entities
We enter into certain transactions in the ordinary course of business which involve the establishment of structured entities (“SEs”) to facilitate or
secure customer transactions and to obtain alternative sources of funding. We are required to consolidate an SE if we control the entity. We control an
SE when we have power over the SE, exposure to variable returns as a result of our involvement, and the ability to exercise power to affect the
amount of our returns.
In assessing whether we control an SE, we consider the entire arrangement to determine the purpose and design of the SE, the nature of any
rights held through contractual arrangements and whether we are acting as a principal or agent.
We perform a re-assessment of consolidation if facts and circumstances indicate that there have been changes to one or more of the elements of
control over the SE.
Consolidated Structured Entities
Bank Securitization Vehicles
We use securitization vehicles to securitize our Canadian credit card loans in order to obtain alternate sources of funding. The structure of these
vehicles limits the activities they can undertake and the types of assets they can hold, and the vehicles have limited decision-making authority. The
vehicles issue term asset-backed securities to fund their activities. We control and consolidate these vehicles, as we have the key decision-making
powers necessary to obtain the majority of the benefits of their activities.
U.S. Customer Securitization Vehicle
We sponsor a customer securitization vehicle (also referred to as a bank-sponsored multi-seller conduit) that provides our customers with alternate
sources of funding through the securitization of their assets. This vehicle provides clients with access to financing in the asset-backed commercial
paper (“ABCP”) markets by allowing them to sell their assets into the vehicle, which then issues ABCP to investors to fund the purchases. We do not
sell assets to the customer securitization vehicle. We earn fees for providing services related to the securitizations, including liquidity, distribution and
financial arrangement fees for supporting the ongoing operations of the vehicle. We have determined that we control and therefore consolidate this
vehicle, as we are exposed to its variable returns and we have the key decision-making powers necessary to affect the amount of those returns in
our capacity as liquidity provider and servicing agent.
We provide liquidity facilities to this vehicle which may require that we provide additional financing to the vehicle in the event that certain
events occur. The total committed undrawn amount under these facilities at October 31, 2015 was $7,213 million ($5,236 million at October 31,
2014).
Credit Protection Vehicle
We sponsor a credit protection vehicle which provides credit protection to investors on investments in corporate debt portfolios through credit
default swaps. In May 2008, upon the restructuring of the vehicle, we entered into credit default swaps with swap counterparties and offsetting
swaps with the vehicle. In 2015, the vehicle redeemed $nil of its outstanding medium-term notes ($1,049 million in 2014, of which $678 million
were held by us). We continue to hold $256 million of outstanding medium-term notes which mature in September 2016. As at October 31, 2015 and
2014, we have hedged our exposure to our holdings of notes issued by the vehicle. A third party holds its exposure to the vehicle through a total
return swap with us on $108 million of notes. We control and therefore consolidate this vehicle.
Capital and Funding Vehicles
Capital and funding vehicles are created to issue notes or capital trust securities or to guarantee payments due to bondholders on bonds issued by us.
These vehicles may purchase notes issued by us, or we may sell assets to the vehicles in exchange for promissory notes.
For those trusts that purchase assets from us, we have determined that, based on the rights of the arrangements, we have significant exposure
to their variable returns as we are exposed to the variability of their underlying assets, and that we control and therefore consolidate these vehicles.
See Note 1 and Note 16 for further information related to capital trusts.
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154 BMO Financial Group 198th Annual Report 2015
Unconsolidated Structured Entities
The table below presents amounts related to our interests in unconsolidated SEs:
(Canadian $ in millions)
2015
Interests recorded on the balance sheet
Cash and cash equivalents
Trading securities
Available-for-sale securities
Other
Deposits
Derivatives
Other
Exposure to loss (2)
Capital and
funding
vehicles
Canadian
customer
securitization
vehicles (1)
Structured
finance
vehicles
Capital and
funding
vehicles
Canadian
customer
securitization
vehicles (1)
11
2
–
–
13
1,265
–
20
1,285
57
69
21
573
10
673
69
–
–
69
6,175
–
2,266
–
11
2,277
1,296
250
732
2,278
2,278
11
2
–
–
13
1,265
–
21
1,286
57
39
10
652
–
701
39
–
–
39
5,876
2014
Structured
finance
vehicles
–
10,414
–
42
10,456
5,853
1,115
3,447
10,415
10,456
Total assets of the entities
1,285
4,289
2,277
1,286
3,783
10,456
(1) Securities held that are issued by our Canadian customer securitization vehicles are comprised of asset-backed commercial paper and are classified as trading securities and available-for-sale
securities. All assets held by these vehicles relate to assets in Canada.
(2) Exposure to loss represents securities held, drawn and undrawn facilities, and derivative assets.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Capital and Funding Vehicles
Certain of our capital and funding vehicles purchase notes issued by us as their underlying assets. In these situations, we are not exposed to
significant default or credit risk. Our remaining exposure to variable returns is less than that of the note holders, who are exposed to our default and
credit risk. We have determined that we do not consolidate these vehicles. See Note 1 and Note 16 for further information related to capital trusts.
Canadian Customer Securitization Vehicles
We sponsor customer securitization vehicles (also referred to as bank-sponsored multi-seller conduits) that provide our customers with alternate
sources of funding through the securitization of their assets. These vehicles provide clients with access to financing in the ABCP markets by allowing
them to sell their assets into the vehicles, which then issue ABCP to investors to fund the purchases. We do not sell assets to the customer
securitization vehicles. We earn fees for providing services related to the securitizations, including liquidity, distribution and financial arrangement
fees for supporting the ongoing operations of the vehicles. We have determined that we do not have control of these entities as their key relevant
activity, the servicing of program assets, does not reside with us. We provide liquidity facilities to these vehicles which may require that we provide
additional financing to the vehicles in the event that certain events occur. The total committed undrawn amount under these facilities at October 31,
2015 was $5,573 million ($5,214 million at October 31, 2014).
Structured Finance Vehicles
We facilitate development of investment products by third parties, including mutual funds, unit investment trusts and other investment funds that are
sold to retail investors. We enter into derivative contracts with these third parties to provide investors with their desired exposure, and we hedge our
exposure related to these derivative contracts by investing in other funds through SEs. We are not required to consolidate these vehicles.
Compensation Trusts
We sponsor various share ownership arrangements, certain of which are administered through trusts. Generally these arrangements permit
employees to purchase bank common shares.
Employees can direct a portion of their gross salary towards the purchase of our common shares and we match 50% of employees’ contributions
up to 6% of their individual gross salary. Our matching contributions are paid into trusts, which purchase our common shares on the open market for
distribution to employees once those employees are entitled to the shares under the terms of the plan. We are not required to consolidate our
compensation trusts. These trusts are not included in the table above, as we have no interest in the trusts.
Total assets held under our share ownership arrangements amounted to $1,446 million as at October 31, 2015 ($1,532 million in 2014).
BMO Managed Funds
We have established a number of funds that we also manage. We assess whether or not we control these funds based on the economic interest we
have in the funds, including investments in the funds and management fees earned from the funds, and any investors’ rights to remove us as
investment manager. Based on our assessment, we have determined that we do not control these funds. Our total exposure to unconsolidated BMO
managed funds was $589 million at October 31, 2015 ($513 million in 2014), which is included in securities on our Consolidated Balance Sheet.
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Non-BMO Managed Funds
We purchase and hold units of non-BMO managed funds for investment and other purposes. We are considered to have an interest in these funds
through our holding of units, and because we may act as counterparty in certain derivative contracts or other interests. These activities do not
constitute control, and as a result our interests in these funds are not consolidated. Our total exposure to non-BMO managed funds was
$3,735 million at October 31, 2015 ($11,647 million in 2014), which is included in securities on our Consolidated Balance Sheet.
BMO Financial Group 198th Annual Report 2015 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Structured Entities
We may be deemed to be the sponsor of an SE if we are involved in the design, legal set-up or marketing of the SE. We may also be deemed to be
the sponsor of an SE if market participants would reasonably associate the entity with us. We do not have an interest in certain SEs that we have
sponsored. The amounts of revenue earned from such entities are not significant.
Note 8: Derivative Instruments
Derivative instruments are financial contracts that derive their value from underlying changes in interest rates, foreign exchange rates or other
financial or commodity prices or indices.
Derivative instruments are either regulated exchange-traded contracts or negotiated over-the-counter contracts. We use these instruments for
trading purposes, as well as to manage our exposures, mainly to currency and interest rate fluctuations, as part of our asset/liability management
program.
Types of Derivatives
Swaps
Swaps are contractual agreements between two parties to exchange a series of cash flows. The various swap agreements that we enter into are as
follows:
Interest rate swaps – counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.
Cross-currency swaps – fixed rate interest payments and principal amounts are exchanged in different currencies.
Cross-currency interest rate swaps – fixed and/or floating rate interest payments and principal amounts are exchanged in different currencies.
Commodity swaps – counterparties generally exchange fixed and floating rate payments based on a notional value of a single commodity.
Equity swaps – counterparties exchange the return on an equity security or a group of equity securities for the return based on a fixed or floating
interest rate or the return on another equity security or group of equity securities.
Credit default swaps – one counterparty pays the other a fee in exchange for that other counterparty agreeing to make a payment if a credit
event occurs, such as bankruptcy or failure to pay.
Total return swaps – one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a reference asset
or group of assets, including any returns such as interest earned on these assets, in exchange for amounts that are based on prevailing market
funding rates.
The main risks associated with these instruments are related to exposure to movements in interest rates, foreign exchange rates, credit quality,
securities values or commodities prices, as applicable, and the possible inability of counterparties to meet the terms of the contracts.
Forwards and Futures
Forwards and futures are contractual agreements to either buy or sell a specified amount of a currency, commodity, interest-rate-sensitive financial
instrument or security at a specified price and date in the future.
Forwards are customized contracts transacted in the over-the-counter market. Futures are transacted in standardized amounts on regulated
exchanges and are subject to daily cash margining.
The main risks associated with these instruments are related to exposure to movements in interest rates, foreign exchange rates, credit quality,
securities values or commodities prices, as applicable, and the possible inability of counterparties to meet the terms of the contracts.
Options
Options are contractual agreements that convey to the purchaser the right but not the obligation to either buy or sell a specified amount of a
currency, commodity, interest-rate-sensitive financial instrument or security at a fixed future date or at any time within a fixed future period.
For options written by us, we receive a premium from the purchaser for accepting market risk.
For options purchased by us, we pay a premium for the right to exercise the option. Since we have no obligation to exercise the option, our
primary exposure to risk is the potential credit risk if the writer of an over-the-counter contract fails to meet the terms of the contract.
Caps, collars and floors are specialized types of written and purchased options. They are contractual agreements in which the writer agrees to
pay the purchaser, based on a specified notional amount, the difference between the market rate and the prescribed rate of the cap, collar or floor.
The writer receives a premium for selling this instrument.
A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap.
A future option is an option contract in which the underlying instrument is a single futures contract.
The main risks associated with these instruments are related to exposure to movements in interest rates, foreign exchange rates, credit quality,
value of the underlying financial instrument or commodity, as applicable, and the possible inability of counterparties to meet the terms of the
contracts.
Risks Hedged
Interest Rate Risk
We manage interest rate risk through bonds, interest rate futures, interest rate swaps and options, which are linked to and adjust the interest rate
sensitivity of a specific asset, liability, forecasted transaction or firm commitment, or a specific pool of transactions with similar risk characteristics.
Foreign Currency Risk
We manage foreign currency risk through currency futures, foreign currency options, cross-currency swaps and forward contracts. These derivatives
are marked to market, with realized and unrealized gains and losses recorded in non-interest revenue, consistent with the accounting treatment for
gains and losses on the economically hedged item. Changes in fair value on forward contracts that qualify as accounting hedges are recorded in other
comprehensive income, with the spot/forward differential (the difference between the foreign currency exchange rate at the inception of the contract
and the rate at the end of the contract) being recorded in interest expense over the term of the hedge. Foreign currency translation on investments in
foreign operations is managed through deposits. The foreign currency translation on the deposits designated in net investment hedges is recorded in
other comprehensive income.
156 BMO Financial Group 198th Annual Report 2015
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Trading Derivatives
Trading derivatives include derivatives entered into with customers to accommodate their risk management needs, market-making to facilitate
customer-driven demand for derivatives, derivatives transacted on a limited basis to generate trading income from our principal trading positions and
certain derivatives that are executed as part of our risk management strategy that do not qualify as hedges for accounting purposes (“economic
hedges”).
We structure and market derivative products to enable customers to transfer, modify or reduce current or expected risks.
Principal trading activities include market-making and positioning activities. Market-making involves quoting bid and offer prices to other market
participants with the intention of generating revenues based on spread and volume. Positioning activities involve managing market risk positions
with the expectation of profiting from favourable movements in prices, rates or indices.
Trading derivatives are recorded at fair value. Realized and unrealized gains and losses are recorded in trading revenues in our Consolidated
Statement of Income. Unrealized gains on trading derivatives are recorded as derivative instrument assets and unrealized losses are recorded as
derivative instrument liabilities in our Consolidated Balance Sheet.
Hedging Derivatives
In accordance with our risk management strategy, we enter into various derivative contracts to hedge our interest rate and foreign currency
exposures.
We may also economically hedge a portion of our U.S. dollar earnings through forward foreign exchange contracts to minimize fluctuations in our
consolidated net income due to the translation of our U.S. dollar earnings. These contracts are recorded at fair value, with changes in fair value
recorded in non-interest revenue in our Consolidated Statement of Income.
Accounting Hedges
In order for a derivative instrument to qualify as an accounting hedge, the hedging relationship must be designated and formally documented at its
inception, detailing the particular risk management objective and strategy for the hedge and the specific asset, liability or cash flow being hedged, as
well as how its effectiveness is being assessed. Changes in the fair value of the derivative must be highly effective in offsetting changes in the fair
value or changes in the amount of future cash flows of the hedged item.
Hedge effectiveness is evaluated at the inception of the hedging relationship and on an ongoing basis, retrospectively and prospectively,
primarily using quantitative statistical measures of correlation. Any ineffectiveness in the hedging relationship is recognized in non-interest revenue,
other, in our Consolidated Statement of Income as it arises.
Cash Flow Hedges
Cash flow hedges modify exposure to variability in cash flows for variable interest rate bearing instruments, foreign currency denominated assets and
liabilities and certain cash-settled share-based payment grants subject to equity price risk. Variable interest rate bearing instruments include floating
rate loans and deposits. Our cash flow hedges have a maximum remaining term to maturity of 20 years.
We record interest that we pay or receive on these cash flow hedge derivatives as an adjustment to net interest income in our Consolidated
Statement of Income over the life of the hedge.
To the extent that changes in the fair value of the derivative offset changes in the fair value of the hedged item, they are recorded in other
comprehensive income. The excess of the change in fair value of the derivative that does not offset changes in the fair value of the hedged item
(the “ineffectiveness of the hedge”) is recorded directly in non-interest revenue, other, in our Consolidated Statement of Income.
For cash flow hedges that are discontinued before the end of the original hedge term, the cumulative unrealized gain or loss recorded in other
comprehensive income is amortized to our Consolidated Statement of Income in net interest income for interest rate swaps and in employee
compensation for total return swaps as the hedged item is recorded in earnings. If the hedged item is sold or settled, the entire unrealized gain or
loss is recognized immediately in net interest income in our Consolidated Statement of Income.
The amount of unrealized gain that we expect to reclassify to our Consolidated Statement of Income over the next 12 months is $166 million
($122 million after tax). This will adjust the interest income and interest expense recorded on assets and liabilities and employee compensation
expense that were hedged.
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BMO Financial Group 198th Annual Report 2015 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the impact of cash flow hedges on our financial results.
(Canadian $ in millions)
Contract type
2015
Interest rate
Foreign exchange (1)
Share-based payment awards
Total
2014
Interest rate
Foreign exchange (1)
Total
2013
Interest rate
Foreign exchange (1)
Total
Pre-tax gains/(losses) recorded in income
Fair value change recorded in
other comprehensive income
Fair value change recorded in
non-interest revenue – other
Reclassification of gains
on designated hedges
from other comprehensive
income to net interest
income
697
33
(14)
716
224
102
326
(86)
49
(37)
2
1
–
3
3
–
3
–
–
–
119
na
(8)
111
130
na
130
195
na
195
(1) Amortization of the spot/forward differential on foreign exchange contracts of a loss of $40 million for the year ended October 31, 2015 ($4 million loss in 2014 and $25 million loss in 2013) was
transferred from other comprehensive income to interest expense.
na – not applicable
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Fair Value Hedges
Fair value hedges modify exposure to changes in a fixed rate instrument’s fair value caused by changes in interest rates. These hedges convert fixed
rate assets and liabilities to floating rate. Our fair value hedges include hedges of fixed rate securities, deposits and subordinated debt.
We record interest receivable or payable on these derivatives as an adjustment to net interest income in our Consolidated Statement of Income
over the life of the hedge.
For fair value hedges, the hedging derivative is recorded at fair value and any fixed rate assets and liabilities that are part of a hedging
relationship are adjusted for the changes in value of the risk being hedged (“fair value hedge adjustment”). To the extent that the change in the fair
value of the derivative does not offset changes in the fair value of the hedged item (the “ineffectiveness of the hedge”), the net amount is recorded
directly in non-interest revenue, other, in our Consolidated Statement of Income.
For fair value hedges that are discontinued, we cease adjusting the hedged item to fair value. The cumulative fair value adjustment of the
hedged item is then amortized to net interest income over its remaining term to maturity. If the hedged item is sold or settled, the cumulative fair
value adjustment is included in the determination of the gain or loss on sale or settlement.
The following table presents the impact of fair value hedges on our financial results.
(Canadian $ in millions)
Contract type
Interest rate contracts 2015
2014
2013
Amount of gain/(loss) on
hedging derivatives (1)
Fair value
hedge adjustment (2)
Hedge ineffectiveness recorded
in non-interest revenue – other
Pre-tax gains/(losses) recorded in income
225
46
(371)
(219)
(39)
360
6
7
(11)
(1) Unrealized gains (losses) on hedging derivatives are recorded in other assets – derivative instruments or other liabilities – derivative instruments in the Consolidated Balance Sheet.
(2) Unrealized gains (losses) on hedged items are recorded in securities – available-for-sale, subordinated debt, deposits and other liabilities.
Net Investment Hedges
Net investment hedges mitigate our exposure to foreign currency exchange rate fluctuations related to our net investment in foreign operations.
Deposit liabilities denominated in foreign currencies are designated as hedges for a portion of this exposure. The foreign currency translation of our
net investment in foreign operations and the corresponding hedging instrument is recorded in unrealized gains (losses) on translation of net foreign
operations in other comprehensive income. To the extent that the hedging instrument is not effective, amounts are included in the Consolidated
Statement of Income in foreign exchange, other than trading. There was no hedge ineffectiveness associated with net investment hedges for the
years ended October 31, 2015 and 2014. We use foreign currency deposits with a term to maturity of zero to three months as hedging instruments in
net investment hedges, and the fair value of such deposits was $1,485 million as at October 31, 2015 ($2,365 million in 2014).
Embedded Derivatives
From time to time, we purchase or issue financial instruments containing embedded derivatives. The embedded derivative is separated from the host
contract and carried at fair value if the economic characteristics of the derivative are not closely related to those of the host contract, the terms of the
embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value.
To the extent that we cannot reliably identify and measure the embedded derivative, the entire contract is carried at fair value, with changes in fair
value reflected in income. Embedded derivatives in certain of our equity linked notes are accounted for separately from the host instrument.
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Contingent Features
Certain over-the-counter derivative instruments contain provisions that link the amount of collateral we are required to post or pay to our credit
ratings (as determined by the major credit rating agencies). If our credit ratings were to be downgraded, certain counterparties to these derivative
instruments could demand immediate and ongoing collateralization overnight on derivative liability positions or request immediate payment. The
aggregate fair value of all derivative instruments with collateral posting requirements that were in a liability position on October 31, 2015 was
158 BMO Financial Group 198th Annual Report 2015
$11,528 million, for which we have posted collateral of $11,122 million. If our credit rating had been downgraded to A and A- on October 31, 2015
(per Standard & Poor’s Ratings Services), we would have been required to post collateral or meet payment demands of an additional $532 million
and $800 million, respectively.
Fair Value
Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. A discussion
of the fair value measurement of derivatives is included in Note 18. Fair values of our derivative instruments are as follows:
(Canadian $ in millions)
Trading
Interest Rate Contracts
Swaps
Forward rate agreements
Futures
Purchased options
Written options
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Commodity Contracts
Swaps
Purchased options
Written options
Equity Contracts
Credit Default Swaps
Purchased
Written
Total fair value – trading derivatives
Average fair value (1)
Hedging
Interest Rate Contracts
Cash flow hedges – swaps
Fair value hedges – swaps
Total swaps
Foreign Exchange Contracts
Cash flow hedges – forward foreign exchange contracts
Total foreign exchange contracts
Equity Contracts
Cash flow hedges – equity contracts
Total equity contracts
Total fair value – hedging derivatives (2)
Average fair value (1)
Total fair value – trading and hedging derivatives
Less: impact of master netting agreements
Total
Gross
assets
Gross
liabilities
17,382
25
1
637
–
(16,449)
(6)
–
–
(581)
2015
Net
933
19
1
637
(581)
5,128
6,847
3,099
133
–
(4,239)
(12,128)
(1,306)
–
(178)
889
(5,281)
1,793
133
(178)
993
674
–
969
36
–
(1,818)
–
(953)
(2,201)
(825)
674
(953)
(1,232)
–
(48)
36
(48)
Gross
assets
Gross
liabilities
(15,986)
(6)
(21)
–
(616)
(1,182)
(6,682)
(2,856)
–
(465)
(922)
–
(412)
(3,040)
17,020
4
17
697
–
2,153
5,705
3,874
447
–
376
307
–
947
80
–
2014
Net
1,034
(2)
(4)
697
(616)
971
(977)
1,018
447
(465)
(546)
307
(412)
(2,093)
–
(124)
80
(124)
35,924
(39,907)
(3,983)
31,627
(32,312)
(685)
42,027
(44,445)
(2,418)
30,304
(31,092)
(788)
664
544
1,208
(90)
(387)
(477)
574
157
731
1,092
(2,255)
(1,163)
1,092
(2,255)
(1,163)
14
14
–
–
14
14
196
330
526
502
502
–
–
(115)
(272)
(387)
81
58
139
(958)
(456)
(958)
(456)
–
–
–
–
2,314
(2,732)
(418)
1,028
(1,345)
(317)
2,329
(2,404)
(75)
916
(1,089)
(173)
38,238
(42,639)
(4,401)
32,655
(33,657)
(1,002)
(27,415)
27,415
–
(28,885)
28,885
–
10,823
(15,224)
(4,401)
3,770
(4,772)
(1,002)
(1) Average fair value amounts are calculated using a five-quarter rolling average.
(2) The fair values of hedging derivatives wholly or partially offset the changes in fair values of the related on-balance sheet financial instruments or future cash flows.
Assets are shown net of liabilities to customers where we have a legally enforceable right to offset amounts and we intend to settle contracts on a
net basis.
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BMO Financial Group 198th Annual Report 2015 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional Amounts
The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be
exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance
Sheet.
(Canadian $ in millions)
Interest Rate Contracts
Over-the-counter
Swaps
Forward rate agreements
Purchased options
Written options
Exchange-traded
Futures
Purchased options
Written options
Total interest rate contracts
Foreign Exchange Contracts
Over-the-counter
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Exchange-traded
Futures
Purchased options
Written options
Commodity Contracts
Over-the-counter
Swaps
Purchased options
Written options
Exchange-traded
Futures
Purchased options
Written options
Total commodity contracts
Equity Contracts
Over-the-counter
Exchange-traded
Total equity contracts
Credit Default Swaps
Over-the-counter purchased
Over-the-counter written
Total credit default swaps
Total
Hedging
Cash
flow
Fair
value
Trading
2015
Total
Trading
Hedging
Cash
flow
Fair
value
2014
Total
2,853,087
432,744
21,344
24,154
59,021
–
–
–
47,679
–
–
–
2,959,787
432,744
21,344
24,154
2,580,940
361,484
19,267
22,955
45,753
–
–
–
48,984
–
–
–
2,675,677
361,484
19,267
22,955
3,331,329
59,021
47,679
3,438,029
2,984,646
45,753
48,984
3,079,383
137,583
26,598
25,038
189,219
–
–
–
–
–
–
–
–
137,583
26,598
25,038
125,272
21,680
21,342
189,219
168,294
–
–
–
–
–
–
–
–
125,272
21,680
21,342
168,294
3,520,548
59,021
47,679
3,627,248
3,152,940
45,753
48,984
3,247,677
75,890
339,431
362,544
28,297
28,960
193
36
30,554
–
–
835,122
30,783
677
2,562
2,012
5,251
–
–
–
–
11,929
6,172
4,103
22,204
16,803
7,614
9,720
34,137
56,341
46,942
4,371
51,313
6,665
9,385
16,050
–
–
–
–
–
–
–
–
–
172
–
172
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
76,083
339,467
393,098
28,297
28,960
51,374
279,119
283,196
37,245
36,913
242
–
16,284
–
–
865,905
687,847
16,526
677
2,562
2,012
5,251
813
3,110
3,044
6,967
–
–
–
–
871,156
694,814
16,526
11,929
6,172
4,103
22,204
16,803
7,614
9,720
34,137
56,341
47,114
4,371
51,485
6,665
9,385
16,050
13,559
8,526
4,166
26,251
22,586
6,733
8,499
37,818
64,069
48,702
7,314
56,016
8,801
11,983
20,784
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
51,616
279,119
299,480
37,245
36,913
704,373
813
3,110
3,044
6,967
711,340
13,559
8,526
4,166
26,251
22,586
6,733
8,499
37,818
64,069
48,702
7,314
56,016
8,801
11,983
20,784
Total foreign exchange contracts
840,373
30,783
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4,484,625
89,976
47,679
4,622,280
3,988,623
62,279
48,984
4,099,886
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Derivative-Related Market Risk
Derivative instruments are subject to market risk. Market risk arises from the potential for a negative impact on the balance sheet and/or income
statement due to adverse changes in the value of derivative instruments as a result of changes in certain market variables. These variables include
interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and
default. We strive to limit market risk by employing comprehensive governance and management processes for all market risk-taking activities.
160 BMO Financial Group 198th Annual Report 2015
Derivative-Related Credit Risk
Over-the-counter derivative instruments are subject to credit risk arising from the possibility that counterparties may default on their obligations. The
credit risk associated with derivatives is normally a small fraction of the notional amount of the derivative instrument. Derivative contracts generally
expose us to potential credit loss if changes in market rates affect a counterparty’s position unfavourably and the counterparty defaults on payment.
The credit risk is represented by the positive fair value of the derivative instrument. We strive to limit credit risk by dealing with counterparties that
we believe are creditworthy, and we manage our credit risk for derivatives using the same credit risk process that is applied to loans and other credit
assets.
We also pursue opportunities to reduce our exposure to credit losses on derivative instruments, including through collateral and by entering into
master netting agreements with counterparties. The credit risk associated with favourable contracts is eliminated by legally enforceable master
netting agreements to the extent that unfavourable contracts with the same counterparty must be settled concurrently with favourable contracts.
Exchange-traded derivatives have limited potential for credit exposure as they are settled net daily with each exchange.
Terms used in the credit risk table below are as follows:
Replacement cost represents the cost of replacing all contracts that have a positive fair value, determined using current market rates. It represents in
effect the unrealized gains on our derivative instruments. Replacement costs disclosed below represent the net of the asset and liability to a specific
counterparty where we have a legally enforceable right to offset the amount owed to us with the amount owed by us and we intend either to settle
on a net basis or to realize the asset and settle the liability simultaneously.
Credit risk equivalent represents the total replacement cost plus an amount representing the potential future credit exposure, as outlined in OSFI’s
Capital Adequacy Guideline.
Risk-weighted assets represent the credit risk equivalent, weighted on the basis of the creditworthiness of the counterparty, as prescribed by OSFI.
(Canadian $ in millions)
Interest Rate Contracts
Swaps
Forward rate agreements
Purchased options
Total interest rate contracts
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Total commodity contracts
Equity Contracts
Credit Default Swaps
Total derivatives
Replacement
cost
Credit risk
equivalent
2015
Risk-
weighted
assets
Replacement
cost
Credit risk
equivalent
2014
Risk-
weighted
assets
18,590
25
633
22,037
24
651
–
–
–
17,546
4
691
21,371
45
705
–
–
–
19,248
22,712
1,461
18,241
22,121
1,393
5,128
6,847
4,191
115
8,602
13,696
7,838
768
–
–
–
–
2,153
5,705
4,376
415
5,039
11,219
6,477
837
–
–
–
–
16,281
30,904
2,034
12,649
23,572
1,656
993
69
1,062
892
36
2,472
1,043
3,515
3,366
245
–
–
496
214
34
376
30
406
896
80
1,902
1,109
3,011
3,547
271
–
–
472
208
42
37,519
60,742
4,239
32,272
52,522
3,771
Less: impact of master netting agreements
(27,415)
(40,140)
–
(28,885)
(35,585)
–
Total
10,104
20,602
4,239
3,387
16,937
3,771
The total derivatives and the impact of master netting agreements for replacement cost do not include exchange-traded derivatives with a fair value of $719 million as at October 31, 2015 ($383 million
in 2014).
Transactions are conducted with counterparties in various geographic locations and industry sectors. Set out below is the replacement cost of
contracts (before and after the impact of master netting agreements) with customers located in the following countries, based on country of
ultimate risk.
(Canadian $ in millions, except as noted)
Before master netting agreements
After master netting agreements
Canada
United States
United Kingdom
Other countries (1)
Total
(1) No other country represented 15% or more of our replacement cost in 2015 or 2014.
2015
19,492
7,702
3,220
7,105
52
21
9
18
2014
14,395
7,579
3,623
6,675
45
23
11
21
2015
5,832
2,609
398
1,265
2014
1,769
875
232
511
52
26
7
15
58
26
4
12
37,519
100% 32,272
100% 10,104
100% 3,387
100%
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BMO Financial Group 198th Annual Report 2015 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions are conducted with various counterparties. Set out below is the replacement cost of contracts (before the impact of master netting
agreements) with customers in the following industries:
As at October 31, 2015 (Canadian $ in millions)
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Total
Financial institutions
Governments
Natural resources
Energy
Other
Total
13,882
2,940
–
250
2,176
19,248
10,565
3,343
27
693
1,653
16,281
253
85
114
189
421
1,062
708
–
–
–
184
892
35
–
–
–
1
36
25,443
6,368
141
1,132
4,435
37,519
As at October 31, 2014 (Canadian $ in millions)
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Total
Financial institutions
Governments
Natural resources
Energy
Other
Total
13,997
2,262
33
171
1,778
18,241
8,903
2,330
27
255
1,134
12,649
157
11
37
36
165
406
660
–
–
–
236
896
66
–
–
–
14
80
23,783
4,603
97
462
3,327
32,272
Term to Maturity
Our derivative contracts have varying maturity dates. The remaining contractual terms to maturity for the notional amounts of our derivative contracts
are set out below:
(Canadian $ in millions)
Term to maturity
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
2015
2014
Total
notional
amounts
Total
notional
amounts
Interest Rate Contracts
Swaps
Forward rate agreements, futures and options
1,110,622
592,366
573,718
64,574
846,317
6,334
380,048
4,064
49,082
123
2,959,787
667,461
2,675,677
572,000
Total interest rate contracts
1,702,988
638,292
852,651
384,112
49,205
3,627,248
3,247,677
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts, futures and options
19,320
86,626
445,471
16,868
108,857
8,258
22,170
74,121
1,529
15,342
57,722
332
2,383
12,141
16
76,083
339,467
455,606
51,616
279,119
380,605
Total foreign exchange contracts
551,417
133,983
97,820
73,396
14,540
871,156
711,340
Commodity Contracts
Swaps
Futures and options
Total commodity contracts
Equity Contracts
Credit Contracts
Total notional amount
3,604
15,824
6,626
25,688
19,428
32,314
43,296
10,958
5,170
2,966
817
2,353
3,170
1,535
861
502
1,363
21
45
66
68
1,416
713
1,021
392
11,929
44,412
56,341
51,485
16,050
13,559
50,510
64,069
56,016
20,784
2,328,087
812,725
955,889
459,960
65,619
4,622,280
4,099,886
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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162 BMO Financial Group 198th Annual Report 2015
Note 9: Premises and Equipment
We record all premises and equipment at cost less accumulated amortization, except land, which is recorded at cost. Buildings, computer equipment
and operating system software, other equipment and leasehold improvements are amortized on a straight-line basis over their estimated useful lives.
When the major components of a building have different useful lives, they are accounted for separately and amortized over each component’s
useful life. The maximum estimated useful lives we use to amortize our assets are as follows:
Buildings
Computer equipment and operating system software
Other equipment
Leasehold improvements
10 to 40 years
15 years
10 years
Lease term to a maximum of 10 years
Amortization methods, useful lives and the residual values of premises and equipment are reviewed annually for any change in circumstances
and are adjusted if appropriate. At least annually, we review whether there are any indications that premises and equipment need to be tested for
impairment. If there is an indication that an asset may be impaired, we test for impairment by comparing the asset’s carrying value to its recoverable
amount. The recoverable amount is calculated as the higher of the value in use and the fair value less costs to sell. Value in use is the present value
of the future cash flows expected to be derived from the asset. An impairment charge is recorded when the recoverable amount is less than the
carrying value. There were no significant write-downs of premises and equipment due to impairment during the years ended October 31, 2015
and 2014. Gains and losses on disposal are included in non-interest expense, premises and equipment in our Consolidated Statement of Income.
Net rent expense for premises and equipment reported in our Consolidated Statement of Income for the years ended October 31, 2015, 2014 and
2013 was $476 million, $431 million and $434 million, respectively.
(Canadian $ in millions)
2015
Land
Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Total
Land
Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Cost
Balance at beginning of year
Additions
Disposals (1)
Additions from acquisitions (2)
Foreign exchange and other
300
5
(64)
–
39
1,802
48
(102)
–
160
1,571
228
(243)
–
75
Balance at end of year
280
1,908
1,631
Accumulated Depreciation and
Impairment
Balance at beginning of year
Disposals (1)
Amortization
Foreign exchange and other
Balance at end of year
–
–
–
–
–
979
(57)
36
118
1,108
(137)
154
21
1,076
1,146
Net carrying value
280
832
485
(1) Includes fully depreciated assets written off.
(2) Premises and equipment are recorded at their fair values at the date of acquisition.
805
73
(24)
–
47
901
554
(14)
56
55
651
250
Note 10: Acquisitions
1,182 5,660 297
(1)
(16)
–
20
429
(445)
–
361
75
(12)
–
40
1,680
106
(44)
–
60
1,531
189
(188)
3
36
1,285 6,005 300
1,802
1,571
743 3,384
(214)
378
172
(6)
132
(22)
847 3,720
–
–
–
–
–
438 2,285 300
900
(28)
34
73
979
823
1,104
(175)
149
30
1,108
463
770
29
(22)
2
26
805
508
(19)
60
5
554
251
2014
Total
5,323
429
(277)
9
176
1,045
106
(7)
4
34
1,182
5,660
643
(5)
122
(17)
743
439
3,155
(227)
365
91
3,384
2,276
The cost of an acquisition is measured at the fair value of the consideration transferred, including contingent consideration. Acquisition-related costs
are recognized as an expense in the period in which they are incurred. The identifiable assets acquired and liabilities assumed and contingent
consideration are measured at their fair values at the date of acquisition. Goodwill is measured as the excess of the aggregate of the consideration
transferred over the net of the amounts of identifiable assets acquired and liabilities assumed. The results of operations of acquired businesses are
included in our consolidated financial statements beginning on the date of acquisition.
Future Acquisition – GE Capital Corporation Transportation Finance business (“GE Transportation Finance”)
On September 10, 2015, we announced an agreement to purchase the assets of GE Transportation Finance. The aggregate cash purchase price is
approximately US$8.9 billion. The GE Transportation Finance portfolio includes approximately $11.9 billion (US$8.9 billion) in net earning assets,
subject to closing adjustments. The acquisition is consistent with our commercial banking activities in both Canada and the U.S. and will expand our
commercial customer base. We expect the acquisition to close during the first quarter of 2016 and the results of the acquired business will be
included in our U.S. P&C and Canadian P&C reporting segments.
The initial accounting for the business combination is not yet complete and we have not determined the final consideration, fair value of assets
acquired, or amount of goodwill expected to be recognized.
Acquisition – F&C Asset Management plc (“F&C”)
On May 7, 2014, we completed the acquisition of all the issued and outstanding share capital of F&C Asset Management plc, an investment manager
based in the United Kingdom, for cash consideration of £712 million.
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BMO Financial Group 198th Annual Report 2015 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for as a business combination. The results of the acquired business are included in our Wealth Management
reporting segment.
As part of the acquisition, we acquired intangible assets comprised primarily of fund management contracts and customer relationships, including
$178 million of intangible assets that have an indefinite life and $313 million that are being amortized over 2 to 10 years, primarily on a straight-line
basis. This acquisition strengthens our position as a globally significant money manager, enhances our asset management platform capabilities and
provides opportunities to service wealth markets in the United Kingdom and the rest of Europe. Goodwill of $1,268 million related to this acquisition
was recorded and is not deductible for tax purposes.
As part of the acquisition of F&C, we acquired a subsidiary of F&C, F&C REIT LLP, that is 30% owned by three other partners. We have recorded the
ownership interests of the partners in F&C REIT LLP as non-controlling interest in our Consolidated Balance Sheet based on the non-controlling
partners’ proportionate share of the net assets of F&C REIT LLP.
The fair value of the assets acquired and the liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
Cash resources
Premises and equipment
Goodwill
Intangible assets
Other assets
Total assets
Other liabilities
Non-controlling interests
Purchase price
2014
F&C
338
9
1,268
491
293
2,399
1,083
22
1,294
Note 11: Goodwill and Intangible Assets
Goodwill
When we complete an acquisition, we allocate the purchase price paid to the assets acquired, including identifiable intangible assets, and the
liabilities assumed. Any portion of the consideration transferred that is in excess of the fair value of those net assets is considered to be goodwill.
Goodwill is not amortized and is instead tested for impairment annually.
In performing the impairment test, we utilize the fair value less costs to sell for each group of cash-generating units (“CGUs”) based on
discounted cash flow projections. Cash flows were projected for the first 10 years based on actual operating results, expected future business
performance and past experience. Beyond the first 10 years, cash flows were assumed to grow at perpetual annual rates of up to 3%. The discount
rates we applied in determining the recoverable amounts in 2015 ranged from 5.9% to 11.6% (6.9% to 12.8% in 2014), and were based on our
estimate of the cost of capital for each CGU. The cost of capital for each CGU was estimated using the Capital Asset Pricing Model, based on the
historical betas of publicly traded peer companies that are comparable to the CGU.
There were no write-downs of goodwill due to impairment during the years ended October 31, 2015 and 2014.
The key assumptions described above may change as market and economic conditions change. However, we estimate that reasonably possible
changes in these assumptions are not expected to cause recoverable amounts of our CGUs to decline below their carrying amounts.
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164 BMO Financial Group 198th Annual Report 2015
A continuity of our goodwill by group of CGUs for the years ended October 31, 2015 and 2014 is as follows:
(Canadian $ in millions)
Balance – October 31, 2013
Acquisitions during the year
Other (1)
Balance – October 31, 2014
Disposals during the year
Other (1)
Balance – October 31, 2015
Personal and
Commercial
Banking
Total
2,771
–
219
2,990
–
471
Traditional Wealth
Management
Insurance
847
1,268
35
2,150
(21)
245
2
–
–
2
–
–
Wealth
Management
BMO
Capital
Markets
Total
849
1,268
35
2,152
(21)
245
199
–
12
211
–
21
Total
3,819
1,268
266
5,353
(21)
737
Canadian
P&C
69
–
(1)
68
–
–
U.S.
P&C
2,702
–
220
2,922
–
471
68 (2) 3,393 (3)
3,461
2,374 (4)
2 (5)
2,376
232 (6)
6,069
(1) Other changes in goodwill included the effects of translating goodwill denominated in foreign currencies into Canadian dollars, purchase accounting adjustments related to prior-year purchases and
disposals of businesses during the year.
(2) Relates primarily to bcpbank Canada, Diners Club and Aver Media LP.
(3) Relates primarily to New Lenox State Bank, First National Bank of Joliet, Household Bank branches, Mercantile Bancorp, Inc., Villa Park Trust Savings Bank, First National Bank & Trust, Ozaukee Bank,
Merchants and Manufacturers Bancorporation, Inc., Diners Club, AMCORE and M&I.
(4) Relates to BMO Nesbitt Burns Inc., Guardian Group of Funds Ltd., Pyrford International plc, Integra GRS, Lloyd George Management, M&I, Harris myCFO, Inc., Stoker Ostler Wealth Advisors, Inc.,
CTC Consulting LLC, AWMB and F&C Asset Management plc.
(5) Relates to AIG.
(6) Relates to Gerard Klauer Mattison & Co., Inc., BMO Nesbitt Burns Inc., Paloma Securities L.L.C. and M&I.
Intangible Assets
Intangible assets related to our acquisitions are initially recorded at their fair value at the acquisition date and subsequently at cost less accumulated
amortization. Software is recorded at cost less accumulated amortization. Amortization expense is recorded in amortization of intangible assets on the
Consolidated Statement of Income. The following table presents the changes in the balance of these intangible assets:
(Canadian $ in millions)
Cost as at October 31, 2013
Additions/disposals/other
Acquisitions
Foreign exchange
Cost as at October 31, 2014
Additions/disposals/other
Acquisitions
Foreign exchange
Cost as at October 31, 2015
Customer
relationships
Core
deposits
Branch
distribution
networks
Purchased
software –
amortizing
Developed
software –
amortizing
Software
under
development
Other
Total
389
–
171
66
626
(23)
–
80
683
754
–
–
61
815
–
–
129
944
154
–
–
13
167
(4)
–
27
190
544
24
–
(28)
540
7
–
15
562
1,606
286
17
24
1,933
345
–
42
2,320
243
69
–
4
316
42
–
11
29
–
303
(1)
331
53
–
37
3,719
379
491
139
4,728
420
–
341
369
421
5,489
The following table presents the accumulated amortization of the intangible assets:
(Canadian $ in millions)
Accumulated amortization at October 31, 2013
Disposals/other
Amortization
Foreign exchange
Accumulated amortization at October 31, 2014
Disposals/other
Amortization
Foreign exchange
Accumulated amortization at October 31, 2015
Carrying value at October 31, 2015
Carrying value at October 31, 2014
Customer
relationships
Core
deposits
Branch
distribution
networks
Purchased
software –
amortizing
Developed
software –
amortizing
Software
under
development
Other
Total
124
–
61
44
229
(8)
78
39
338
345
397
397
–
69
40
506
–
66
83
655
289
309
152
–
2
12
166
(3)
2
25
190
–
1
489
–
20
(29)
480
–
17
8
505
57
60
1,018
–
221
11
1,250
–
230
60
1,540
780
683
–
–
–
–
–
–
–
–
–
369
316
28
–
9
8
45
–
18
(10)
53
368
286
2,208
–
382
86
2,676
(11)
411
205
3,281
2,208
2,052
Intangible assets are amortized to income over the period during which we believe the assets will benefit us, on either a straight-line or an
accelerated basis, over a period not to exceed 15 years. We have $198 million as at October 31, 2015 ($178 million as at October 31, 2014) in
intangible assets with indefinite lives that relate primarily to fund management contracts.
The useful lives of intangible assets are reviewed annually for any changes in circumstances. We test finite life intangible assets for impairment
when events or changes in circumstances indicate that their carrying value may not be recoverable. Indefinite life intangible assets are tested
annually for impairment. If any intangible assets are determined to be impaired, we write them down to their recoverable amount, the higher of
value in use and fair value less costs to sell, when this is less than the carrying value.
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There were write-downs of intangible assets of $1 million in the year ended October 31, 2015 ($1 million in 2014).
BMO Financial Group 198th Annual Report 2015 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12: Other Assets
(Canadian $ in millions)
Accounts receivable, prepaid expenses and other items
Accrued interest receivable
Due from clients, dealers and brokers
Insurance-related assets (1)
Pension asset (Note 23)
Total
2015
6,502
882
309
478
502
8,673
2014
6,104
879
542
445
261
8,231
(1) Includes reinsurance assets related to our life insurance business in the amount of $nil as at October 31, 2015 ($215 million in 2014).
Note 13: Deposits
Payable on demand
(Canadian $ in millions)
Interest bearing
Non-interest bearing
Payable
after notice
Payable on
a fixed date
Total
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
Deposits by:
Banks
Businesses and governments
Individuals
Total (1) (2)
Booked in:
Canada
United States
Other countries
Total
828
15,262
3,095
997
14,958
2,524
1,222
35,212
15,095
993
28,001
12,900
4,123
57,335
83,081
2,412
57,165
75,529
20,962
155,809
46,145
13,841
139,015
44,753
27,135
263,618
147,416
18,243
239,139
135,706
19,185
18,479
51,529
41,894
144,539
135,106
222,916
197,609
438,169
393,088
17,031
1,517
637
16,753
1,191
535
35,300
16,091
138
28,832
12,972
90
75,470
68,396
673
77,232
57,314
560
120,199
76,980
25,737
111,193
66,664
19,752
248,000
162,984
27,185
234,010
138,141
20,937
19,185
18,479
51,529
41,894
144,539
135,106
222,916
197,609
438,169
393,088
(1) Includes structured notes designated at fair value through profit or loss.
(2) As at October 31, 2015 and 2014, total deposits payable on a fixed date included $26,960 million and $18,183 million, respectively, of federal funds purchased, commercial paper issued and other
deposit liabilities. Included in deposits as at October 31, 2015 and 2014 are $221,268 million and $191,155 million, respectively, of deposits denominated in U.S. dollars, and $19,898 million and
$8,204 million, respectively, of deposits denominated in other foreign currencies.
Deposits payable on demand are comprised primarily of our customers’ chequing accounts, some of which we pay interest on. Our customers need
not notify us prior to withdrawing money from their chequing accounts.
Deposits payable after notice are comprised primarily of our customers’ savings accounts, on which we pay interest. Deposits payable on a fixed
date are comprised of:
‰ Various investment instruments purchased by our customers to earn interest over a fixed period, such as term deposits and guaranteed investment
certificates. The terms of these deposits can vary from one day to 10 years.
‰ Federal funds purchased, which are overnight borrowings of other banks’ excess reserve funds at a United States Federal Reserve Bank. As at
October 31, 2015, we had borrowed $263 million of federal funds ($651 million in 2014).
‰ Commercial paper, which totalled $7,134 million as at October 31, 2015 ($4,294 million in 2014).
‰ Covered bonds, which totalled $12,611 million as at October 31, 2015 ($7,683 million in 2014).
During the year, we issued €1,500 million of 0.25% Covered Bonds, Series CBL 2 due January 22, 2020, GBP 325 million of 3MoGBPLibor + 0.19%
Covered Bonds, Series CBL 3 due January 29, 2018, €1,500 million of 0.375% Covered Bonds, Series CBL 4 due August 5, 2020, €1,000 million of
0.75% Covered Bonds, Series CBL5 due September 21, 2022 and €135 million of 1.597% Covered Bonds, Series CBL6 due September 28, 2035 under
our Global Registered Covered Bond Program. During 2014, we issued €1.0 billion of 1.0% Covered Bonds, Series CBL1 due May 7, 2019 under our
Global Registered Covered Bond Program. During the years ended October 31, 2015 and 2014, US$2.0 billion of 2.85% Covered Bonds Series CB2 and
US$2.0 billion of 1.3% Covered Bonds, Series 4 matured, respectively.
The following table presents the maturity schedule for our deposits payable on a fixed date:
(Canadian $ in millions)
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total (1)
2015
2014
144,609
23,385
23,324
7,753
11,170
12,675
222,916
124,782
22,733
23,491
8,379
8,498
9,726
197,609
(1) Includes $200,907 million of deposits, each greater than one hundred thousand dollars, of which $103,101 million were booked in Canada, $72,073 million were booked in the United States and
$25,733 million were booked in other countries ($174,612 million, $92,668 million, $62,193 million and $19,751 million, respectively, in 2014). Of the $103,101 million of deposits booked in Canada,
$36,434 million mature in less than three months, $4,956 million mature in three to six months, $11,916 million mature in six to twelve months and $49,795 million mature after 12 months
($92,668 million, $27,304 million, $7,465 million, $11,565 million and $46,334 million, respectively, in 2014). We have unencumbered liquid assets of $188,463 million to support these and other
deposit liabilities ($170,981 million in 2014).
166 BMO Financial Group 198th Annual Report 2015
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The following table presents the average deposit balances and average rates of interest paid during 2015 and 2014:
(Canadian $ in millions)
Deposits Booked in Canada
Demand deposits – interest bearing
Demand deposits – non-interest bearing
Payable after notice
Payable on a fixed date
Total deposits booked in Canada
Deposits Booked in the United States and Other Countries
Banks located in the United States and other countries
Governments and institutions in the United States and other countries
Other demand deposits
Other deposits payable after notice or on a fixed date
Total deposits booked in the United States and other countries
Total average deposits
Average balances
Average rate paid (%)
2015
2014
2015
2014
18,910
31,762
76,458
120,764
16,469
26,702
76,903
118,094
247,894
238,168
11,183
13,902
16,109
146,380
8,195
12,095
12,744
127,389
187,574
160,423
435,468
398,591
0.36
–
0.57
1.35
0.86
0.28
0.39
0.01
0.31
0.29
0.62
0.45
–
0.70
1.44
0.97
0.28
0.36
0.02
0.38
0.35
0.72
As at October 31, 2015 and 2014, deposits by foreign depositors in our Canadian bank offices amounted to $37,477 million and $30,622 million, respectively.
Most of our structured note liabilities have been designated at fair value through profit or loss and are accounted for at fair value, which aligns
the accounting result with the way the portfolio is managed. The change in fair value of these structured notes was recorded as an increase of
$196 million in non-interest revenue, trading revenue, and an increase of $143 million before tax was recorded in other comprehensive income
related to changes in our own credit spread for the year ended October 31, 2015 (a decrease of $6 million recorded in non-interest revenue, trading
revenue, of which $41 million related to changes in our own credit spread for the year ended October 31, 2014). The impact of changes in our own
credit spread is measured based on movements in our own credit spread year over year.
The cumulative change in fair value related to changes in our own credit spread that has been recognized since the notes were designated at fair
value to October 31, 2015 was an unrealized gain of approximately $67 million. Upon adoption of the own credit provisions of IFRS 9 this year,
$143 million of unrealized gain has been recorded in other comprehensive income. The remainder, an unrealized loss of $76 million was recorded
through the Statement of Income in prior periods.
The fair value and notional amount due at contractual maturity of these notes as at October 31, 2015 were $9,429 million and $9,869 million,
respectively ($7,639 million and $7,733 million, respectively, in 2014).
Note 14: Other Liabilities
Acceptances
Acceptances represent a form of negotiable short-term debt that is issued by our customers and which we guarantee for a fee. We have an offsetting
claim, equal to the amount of the acceptances, against our customers. The amount due under acceptances is recorded as a liability and our
corresponding claim is recorded as a loan in our Consolidated Balance Sheet.
Securities Lending and Borrowing
Securities lending and borrowing transactions are generally collateralized by securities or cash. Cash advanced or received as collateral is recorded in
other assets or other liabilities, respectively. The transfer of the securities to counterparties is only reflected in our Consolidated Balance Sheet if the
risks and rewards of ownership have also been transferred. Securities borrowed are not recognized in our Consolidated Balance Sheet unless they are
then sold to third parties, in which case the obligation to return the securities is recorded in Securities sold but not yet purchased.
Securities Sold but not yet Purchased
Securities sold but not yet purchased represent our obligations to deliver securities that we did not own at the time of sale. These obligations are
recorded at their fair value. Adjustments to the fair value as at the balance sheet date and gains and losses on the settlement of these obligations are
recorded in trading revenues in our Consolidated Statement of Income.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements represent short-term funding transactions in which we sell securities that we own and
simultaneously commit to repurchase the same securities at a specified price on a specified date in the future. The obligation to repurchase these
securities is recorded at the amount owing. The interest expense related to these liabilities is recorded on an accrual basis.
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BMO Financial Group 198th Annual Report 2015 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Liabilities
The components of the other liabilities balance were as follows:
(Canadian $ in millions)
Securitization and structured entities liabilities
Accounts payable, accrued expenses and other items
Accrued interest payable
Liabilities of subsidiaries, other than deposits
Insurance-related liabilities
Pension liability (Note 23)
Other employee future benefits liability (Note 23)
Total
2015
2014
21,673
8,747
969
3,948
7,060
364
1,192
22,465
7,713
1,050
3,775
6,827
229
1,204
43,953
43,263
Included in securitization and structured entities liabilities are amounts related to the notes issued by our credit protection vehicle have been
designated at fair value through profit or loss and are accounted for at fair value. This eliminates a measurement inconsistency that would otherwise
arise from measuring these note liabilities and offsetting changes in the fair value of the related investments and derivatives on a different basis. The
fair value of these note liabilities as at October 31, 2015 of $139 million ($139 million in 2014) is recorded in other liabilities in our Consolidated
Balance Sheet. The change in fair value of these note liabilities resulted in $nil in non-interest revenue, trading revenues, for the year ended
October 31, 2015 ($nil in 2014).
We designate the obligation related to certain investment contracts at fair value through profit or loss, which eliminates a measurement
inconsistency that would otherwise arise from measuring the investment contract liabilities and offsetting changes in the fair value of the
investments supporting them on a different basis. The fair value of these investment contract liabilities as at October 31, 2015 of $525 million
($407 million as at October 31, 2014) is recorded in other liabilities in our Consolidated Balance Sheet. The change in fair value of these investment
contract liabilities resulted in an increase of $24 million in insurance claims, commissions, and changes in policy benefit liabilities for the year ended
October 31, 2015 (increase of $37 million in 2014). For the year ended October 31, 2015, a gain of $20 million was recorded in other comprehensive
income related to changes in our credit spread. Changes in the fair value of investments backing these investment contract liabilities are recorded in
non-interest revenue, insurance revenue. The impact of changes in our own credit spread is measured based on movements in our own credit spread
over the year.
Insurance-Related Liabilities
We are engaged in insurance businesses related to life and health insurance, annuities and reinsurance.
Insurance claims and policy benefit liabilities represent current claims and estimates of future insurance policy benefits. Liabilities for life
insurance contracts are determined using the Canadian Asset Liability Method, which incorporates best-estimate assumptions for mortality, morbidity,
policy lapses, surrenders, future investment yields, policy dividends, administration costs and margins for adverse deviation. These assumptions are
reviewed at least annually and updated to reflect actual experience and market conditions.
A reconciliation of the change in insurance-related liabilities is as follows:
(Canadian $ in millions)
Insurance-related liabilities, beginning of year
Increase (decrease) in life insurance policy benefit liabilities from:
New business
In-force policies
Changes in actuarial assumptions and methodology
Foreign currency
Net increase (decrease) in life insurance policy benefit liabilities
Change in other insurance-related liabilities
Insurance-related liabilities, end of year
2015
2014
6,827
6,115
235
–
(355)
4
(116)
349
476
346
(291)
2
533
179
7,060
6,827
Reinsurance
In the ordinary course of business, our insurance subsidiaries reinsure risks to other insurance and reinsurance companies in order to provide greater
diversification, limit loss exposure to large risks and provide additional capacity for future growth. These ceding reinsurance arrangements do not
relieve our insurance subsidiaries of their direct obligation to the insureds. We evaluate the financial condition of the reinsurers and monitor their
credit ratings to minimize our exposure to losses from reinsurer insolvency.
Reinsurance premiums ceded are net against direct premium income and included in non-interest revenue, insurance revenue, in our
Consolidated Statement of Income for the years ended October 31, 2015, 2014 and 2013, as shown in the table below.
(Canadian $ in millions)
Direct premium income
Ceded premiums
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2015
2014
2013
2,027
(466)
1,561
1,850
(450)
1,400
1,567
(434)
1,133
Subordinated debt represents our direct unsecured obligations, in the form of notes and debentures, to our debt holders and forms part of our
Basel III regulatory capital. Subordinated debt is recorded at amortized cost using the effective interest rate method. The rights of the holders of our
notes and debentures are subordinate to the claims of depositors and certain other creditors. We require approval from OSFI before we can redeem
any part of our subordinated debt. Where appropriate, we enter into fair value hedges to hedge the risks caused by changes in interest rates (see
Note 8).
168 BMO Financial Group 198th Annual Report 2015
During the year ended October 31, 2015, we did not issue any subordinated debt. During the year ended October 31, 2014, we issued $1.0 billion
of 3.12% subordinated debt under our Canadian Medium-Term Note Program. The issue, Series H Medium-Term Notes, Tranche 1, is due
September 19, 2024. The notes reset to a floating rate on September 19, 2019.
During the year ended October 31, 2015, we redeemed all of our outstanding $500 million Subordinated Debentures, Series C Medium-Term
Notes Tranche 2, at a redemption price of 100% of the principal amount plus unpaid accrued interest to the redemption date. During the year ended
October 31, 2014, we did not redeem any of our subordinated debt.
The term to maturity and repayments of our subordinated debt required over the next two years and thereafter are as follows:
(Canadian $ in millions, except as noted)
Face value
Maturity date
Interest rate (%)
Redeemable at our
option beginning in
Debentures Series 16
Debentures Series 20
Series C Medium-Term Notes
Tranche 2
Series D Medium-Term Notes
Tranche 1
Series F Medium-Term Notes
Tranche 1
Series G Medium-Term Notes
Tranche 1
Series H Medium-Term Notes
Tranche 1
Total (6)
100
150
February 2017
December 2025 to 2040
10.00
8.25
February 2012 (1)
Not redeemable
500
April 2020
4.87
April 2015
700
April 2021
5.10
April 2016 (2)
900 March 2023
6.17 March 2018 (3)
2015
Total
100
150
–
700
900
2014
Total
100
150
500
700
900
1,500
July 2021
3.98
July 2016 (4)
1,500
1,500
1,000
September 2024
3.12
September 2019 (5)
1,000
1,000
4,350
4,850
(1) Redeemable at the greater of par and the Canada Yield Price after their redemption date of February 20, 2012 until their maturity date of February 20, 2017.
(2) Redeemable at the greater of par and the Canada Yield Price prior to April 21, 2016, and redeemable at par commencing April 21, 2016.
(3) Redeemable at the greater of par and the Canada Yield Price prior to March 28, 2018, and redeemable at par commencing March 28, 2018.
(4) Interest on this issue is payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a floating rate equal to the three-month Canadian Dealer Offered Rate (“CDOR”) plus 1.09%, paid
quarterly, thereafter to maturity. This issue is redeemable at par commencing July 8, 2016.
(5) Interest on this issue is payable semi-annually at a fixed rate of 3.12% until September 19, 2019, and at a floating rate equal to the three-month CDOR plus 1.08%, paid quarterly, thereafter to
maturity. This issue is redeemable at par commencing September 19, 2019.
(6) Certain amounts of subordinated debt were issued at a premium or discount and include fair value hedge adjustments which together increased their carrying value as at October 31, 2015 by
$66 million ($63 million in 2014); see Note 8 for further details. Subordinated debt that we repurchase is excluded from the carrying value.
Please refer to the offering circular related to each of the above issues for further details on Canada Yield Price calculations and the definition of CDOR.
Non-Viability Contingent Capital
The Series H Medium-Term Notes include a non-viability contingent capital provision, which is necessary for the notes issued after a certain date to
qualify as regulatory capital under Basel III. As such, the notes are convertible into a variable number of our common shares if OSFI announces that
the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or
agreed to accept a capital injection, or equivalent support, to avoid non-viability.
Note 16: Capital Trust Securities
We issue BMO Capital Trust Securities (“BMO BOaTS”) through our subsidiary BMO Capital Trust (the “Trust”). The proceeds of BMO BOaTS are used for
general corporate purposes. We consolidate the Trust, and the BMO BOaTS are reported in our Consolidated Balance Sheet as non-controlling interest
in subsidiaries. During the years ended October 31, 2015 and 2014, we did not issue any BMO BOaTS.
Holders of the BMO BOaTS are entitled to receive semi-annual non-cumulative fixed cash distributions as long as we declare dividends on our
preferred shares or, if no preferred shares are outstanding, on our common shares in accordance with our ordinary dividend practice.
(Canadian $ in millions, except Distribution)
Distribution dates
Distribution
per BOaTS (1)
Redemption date
Principal amount
At the option of the Trust
2015
2014
BMO BOaTS
Series D
Series E
June 30, December 31
June 30, December 31
27.37
23.17 (2)
December 31, 2009
December 31, 2010
–
450
600
450
450
1,050
(1) Distribution paid on each trust security that has a par value of $1,000.
(2) After December 31, 2015, the distribution will be at the Bankers’ Acceptance Rate plus 1.5%.
Redemption by the Trust
On or after the redemption dates indicated above, and subject to the prior approval of OSFI, the Trust may redeem the securities in whole without the
consent of the holders.
During the year ended October 31, 2015, we redeemed all of our BMO BOaTS Series D at a redemption amount equal to $1,000 for an aggregate
redemption of $600 million, plus unpaid indicated distributions. During the year ended October 31, 2014, there were no redemptions. On
November 27, 2015, we announced our intention to redeem all of our BMO BOaTS Series E on December 31, 2015.
Conversion by the Holders
BMO BOaTS Series E cannot be converted at the option of the holders.
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Automatic Exchange
The BMO BOaTS Series E will each be automatically exchanged for 40 Class B Non-Cumulative Preferred Shares of the bank, Series 12, without the
consent of the holders on the occurrence of specific events, such as a wind-up of the bank, a regulatory requirement to increase capital or violations
of regulatory capital requirements.
BMO Financial Group 198th Annual Report 2015 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17: Equity
Share Capital
(Canadian $ in millions, except as noted)
Preferred Shares – Classified as Equity
Class B – Series 13
Class B – Series 14
Class B – Series 15
Class B – Series 16
Class B – Series 17
Class B – Series 18 (1)
Class B – Series 21 (2)
Class B – Series 23
Class B – Series 25
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 35
Class B – Series 36
Common Shares
Balance at beginning of year
Issued under the Shareholder Dividend
Reinvestment and Share Purchase Plan
Issued/cancelled under the Stock Option Plan
and other stock-based compensation plans
(Note 22)
Repurchased for cancellation
Balance at End of Year
Share Capital
Number
of shares
Amount
2015
Dividends
declared
per share
Number
of shares
Amount
2014
Dividends
declared
per share
Number
of shares
Amount
2013
Dividends
declared
per share
–
10,000,000
10,000,000
6,267,391
5,732,609
–
–
–
11,600,000
20,000,000
16,000,000
12,000,000
8,000,000
6,000,000
600,000
–
250
250
157
143
–
–
–
290
500
400
300
200
150
600
0.56
1.31
1.45
0.85
0.60
–
–
0.34
0.98
1.00
0.98
0.95
0.45
0.41
–
14,000,000
10,000,000
10,000,000
6,267,391
5,732,609
–
–
16,000,000
11,600,000
20,000,000
16,000,000
12,000,000
–
–
–
350
250
250
157
143
–
–
400
290
500
400
300
–
–
–
1.13
1.31
1.45
0.85
0.64
0.41
0.81
1.35
0.98
0.59
0.46
0.31
–
–
–
14,000,000
10,000,000
10,000,000
6,267,391
5,732,609
6,000,000
11,000,000
16,000,000
11,600,000
–
–
–
–
–
–
350
250
250
157
143
150
275
400
290
–
–
–
–
–
–
1.13
1.31
1.45
1.19
0.17
1.63
1.63
1.35
0.98
–
–
–
–
–
–
3,240
3,040
2,265
649,050,049
12,357
644,129,945
12,003
650,729,644
11,957
690,471
58
2,786,997
223
2,069,269
130
842,821
(8,000,000)
51
(153)
2,133,107
–
131
–
2,068,132
(10,737,100)
116
(200)
642,583,341
12,313
3.24
649,050,049
12,357
3.08
644,129,945
12,003
2.94
15,553
15,397
14,268
(1) During the year ended October 31, 2014, we redeemed all of our Class B – Series 18 Preferred Shares. Dividends declared for the year ended October 31, 2014 were $0.41 per share and 6 million
shares were outstanding at the time of the dividend declaration.
(2) During the year ended October 31, 2014, we redeemed all of our Class B – Series 21 Preferred Shares. Dividends declared for the year ended October 31, 2014 were $0.81 per share and 11 million
shares were outstanding at the time of the dividend declaration.
Preferred Shares
We are authorized by our shareholders to issue an unlimited number of Class A Preferred Shares and Class B Preferred Shares without par value, in
series, for unlimited consideration. Class B Preferred Shares may be issued in a foreign currency.
On October 16, 2015, we issued 600,000 Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 36, at a price of $1,000.00 per share,
for gross proceeds of $600 million.
On July 29, 2015, we issued 6 million Non-Cumulative Perpetual Class B Preferred Shares, Series 35, at a price of $25.00 cash per share, for gross
proceeds of $150 million.
On June 5, 2015, we issued 8 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 33, at a price of $25.00 cash per share,
for gross proceeds of $200 million.
On July 30, 2014, we issued 12 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 31, at a price of $25.00 cash per share,
for gross proceeds of $300 million.
On June 6, 2014, we issued 16 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29, at a price of $25.00 cash per share,
for gross proceeds of $400 million.
On April 23, 2014, we issued 20 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27, at a price of $25.00 cash per
share, for gross proceeds of $500 million.
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During the year ended October 31, 2013, we did not issue any preferred shares.
During the year ended October 31, 2015, we redeemed all of our Non-Cumulative Class B Preferred Shares, Series 13, at a redemption price of
$25.25 per share for a gross redemption of $353 million. Dividends declared for the year ended October 31, 2015 were $0.56 per share and 14 million
shares were outstanding at the time of the dividend declaration. On February 25, 2015, we also redeemed all of our Non-Cumulative Class B Preferred
Shares, Series 23, at a redemption price of $25.00 per share plus declared and unpaid dividends up to but excluding the date fixed for redemption.
Dividends declared for the year ended October 31, 2015 were $0.34 per share and 16 million shares were outstanding at the time of the dividend
declaration.
During the year ended October 31, 2014, we redeemed all of our Non-Cumulative Class B Preferred Shares, Series 18, at a redemption price of
$25.00 per share plus declared and unpaid dividends up to but excluding the date fixed for redemption. Dividends declared for the year ended
October 31, 2014 were $0.41 per share and 6 million shares were outstanding at the time of the dividend declaration. We also redeemed all of our
Non-Cumulative Class B Preferred Shares, Series 21, at a redemption price of $25.00 per share plus declared and unpaid dividends up to but excluding
the date fixed for redemption. Dividends declared for the year ended October 31, 2014 were $0.81 per share and 11 million shares were outstanding
at the time of the dividend declaration.
170 BMO Financial Group 198th Annual Report 2015
During the year ended October 31, 2013, we redeemed all of our Non-Cumulative Class B Preferred Shares, Series 5, at a redemption price of
$25.00 per share plus declared and unpaid dividends up to but excluding the date fixed for redemption. Dividends declared for the year ended
October 31, 2013 were $0.33 per share and 8 million shares were outstanding at the time of the dividend declaration.
Preferred Share Rights and Privileges
(Canadian $, except as noted)
Class B – Series 14
Class B – Series 15
Class B – Series 16
Class B – Series 17
Class B – Series 25
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 35
Class B – Series 36
Redemption
amount
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
1,000.00
Quarterly non-
cumulative
dividend (1)
$ 0.328125
$ 0.3625
$ 0.211875 (3)
Floating (8)
$ 0.24375 (3)
$ 0.2500
(3)
$ 0.24375 (3)
$ 0.2375
(3)
$ 0.2375
$ 0.3125
$14.6250
(3)
(3)
Reset premiums
Does not reset
Does not reset
1.65%
1.65%
1.15%
2.33%
2.24%
2.22%
2.71%
Does not reset
4.97%
Date
redeemable / convertible
Current (2)
Current (2)
August 25, 2018 (4)(5)(6)
August 25, 2018 (4)(5)(6)
August 25, 2016 (5)(6)
May 25, 2019 (5)(6)
August 25, 2019 (5)(6)
November 25, 2019 (5)(6)
August 25, 2020 (5)(6)
August 25, 2020 (2)(6)
November 25, 2020 (5)(6)
Convertible to
Not convertible
Not convertible
Class B – Series 17 (7)
Class B – Series 16 (7)
Class B – Series 26 (7)
Class B – Series 28 (7)
Class B – Series 30 (7)
Class B – Series 32 (7)
Class B – Series 34 (7)
Not convertible
Class B – Series 37 (7)
(1) Non-cumulative dividends are payable quarterly as and when declared by the Board of Directors.
(2) Subject to a redemption premium if redeemed prior to November 25, 2016 – Series 14; May 25, 2017 – Series 15; and August 25, 2024 – Series 35.
(3) The dividend rate will reset on the date redeemable and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus the reset premium noted. If converted to a
floating rate series, the rate will be set as and when declared to the 3-month Government of Canada treasury bill yield plus the reset premium noted.
(4) On July 22, 2013, we announced that we did not intend to exercise our right to redeem the Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 16 on the initial redemption date. As a
result, subject to certain conditions, the holders of Series 16 Preferred Shares had the right, at their option, to elect to convert all or part of their Series 16 Preferred Shares on a one-for-one basis into
Non-Cumulative Floating Rate Class B Preferred Shares, Series 17, effective August 26, 2013.
(5) Redeemable on the date noted and every five years thereafter.
(6) Convertible on the date noted and every five years thereafter if not redeemed. Series 16, 17, 26, 28, 30, 32, 34 and 37 are floating rate preferred shares.
(7) If converted, the holders have the option to convert back to the original preferred shares on subsequent redemption dates.
(8) Floating rate will be set as and when declared at the 3-month Government of Canada treasury bill yield plus a reset premium of 1.65%.
Non-Viability Contingent Capital
Class B – Series 27, Class B – Series 29, Class B – Series 31, Class B – Series 33, Class B – Series 35 and Class B – Series 36 preferred share issues include
a non-viability contingent capital provision, which is necessary for the shares to qualify as regulatory capital under Basel III. As such, the shares are
convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or
provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to
avoid non-viability.
Common Shares
We are authorized by our shareholders to issue an unlimited number of our common shares without par value, for unlimited consideration. Our
common shares are not redeemable or convertible. Dividends are declared by our Board of Directors on a quarterly basis and the amount can vary
from quarter to quarter.
Normal Course Issuer Bid
On February 1, 2015, we renewed our normal course issuer bid, effective for one year. Under this normal course issuer bid, we may repurchase up to
15 million of our common shares for cancellation. The timing and amount of purchases under the program are subject to management discretion
based on factors such as market conditions and capital adequacy. We will periodically consult with OSFI before making purchases under the bid.
Our previous normal course issuer bid, which allowed us to repurchase for cancellation up to 15 million of our common shares, expired on
January 31, 2015. During the year ended October 31, 2015, we repurchased 8 million of our common shares at an average cost of $77.25 per share.
During the year ended October 31, 2014, we did not make any repurchases under the normal course issuer bid.
Share Redemption and Dividend Restrictions
OSFI must approve any plan to redeem any of our preferred share issues for cash.
We are prohibited from declaring dividends on our preferred or common shares when we would be, as a result of paying such a dividend, in
contravention of the capital adequacy, liquidity or any other regulatory directive issued under the Bank Act. In addition, common share dividends
cannot be paid unless all dividends declared and payable on our preferred shares have been paid or sufficient funds have been set aside to do so.
In addition, we have agreed that if either BMO Capital Trust, a consolidated structured entity, or BMO Capital Trust II, an unconsolidated structured
entity, (collectively, the “Trusts”), fails to pay any required distribution on their capital trust securities, we will not declare dividends of any kind on
any of our preferred or common shares for a period of time following such Trusts’ failure to pay the required distribution (as defined in the applicable
prospectuses) unless such Trusts first pay such distribution to the holders of their capital trust securities (see Note 16).
Currently, these limitations do not restrict the payment of dividends on common or preferred shares.
Shareholder Dividend Reinvestment and Share Purchase Plan
We offer a dividend reinvestment and share purchase plan (“DRIP”) for our shareholders. Participation in the plan is optional. Under the terms of the
DRIP, cash dividends on common shares are reinvested to purchase additional common shares. Shareholders also have the opportunity to make
optional cash payments to acquire additional common shares.
For the dividend paid in the first quarter of 2015, common shares to supply the DRIP were issued from treasury without a discount. Commencing
with the dividend paid in the second quarter of 2015, common shares to supply the DRIP were purchased on the open market. For the dividend paid
in the fourth quarter of 2014, common shares to supply the DRIP were issued from treasury with a two percent discount. For the dividend paid in the
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BMO Financial Group 198th Annual Report 2015 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
third quarter of 2014, common shares to supply the DRIP were issued from treasury without a discount. Commencing with the dividend paid in the
fourth quarter of 2013 and continuing through the dividend paid in the second quarter of 2014, common shares to supply the DRIP were purchased on
the open market.
During the year ended October 31, 2015, we issued a total of 690,471 common shares from treasury (2,786,997 in 2014) and purchased
1,998,589 common shares in the open market for delivery to shareholders (1,276,088 in 2014) under the DRIP.
Potential Share Issuances
As at October 31, 2015, we had reserved 5,842,932 common shares (6,533,403 in 2014) for potential issuance in respect of our Shareholder Dividend
Reinvestment and Share Purchase Plan. We have also reserved 12,111,153 common shares (13,337,765 in 2014) for the potential exercise of stock
options, as further described in Note 22.
Treasury Shares
When we purchase our common shares as part of our trading business, we record the cost of those shares as a reduction in shareholders’ equity. If
those shares are resold at a price higher than their cost, the premium is recorded as an increase in contributed surplus. If those shares are resold at a
price below their cost, the discount is recorded as a reduction first to contributed surplus and then to retained earnings for any amount in excess of
total contributed surplus related to treasury shares.
Non-Controlling Interest
Included in non-controlling interest in subsidiaries as at October 31, 2015 were capital trust securities, including accrued interest, totalling
$454 million ($1,060 million in 2014) related to non-controlling interest in subsidiaries, which formed part of our Tier 1 regulatory capital, as further
described in Note 16. Non-controlling interest in other consolidated entities was $37 million at October 31, 2015 ($31 million in 2014), which included
$27 million for F&C ($22 million in 2014).
Note 18: Fair Value of Financial Instruments
We record trading assets and liabilities, derivatives, available-for-sale securities and securities sold but not yet purchased at fair value, and other non-
trading assets and liabilities at amortized cost less allowances or write-downs for impairment. The fair values presented in this note are based upon
the amounts estimated for individual assets and liabilities and do not include an estimate of the fair value of any of the legal entities or underlying
operations that comprise our business.
Fair value represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing
market participants at the measurement date. The fair value amounts disclosed represent point-in-time estimates that may change in subsequent
reporting periods due to changes in market conditions or other factors. Some financial instruments are not typically exchangeable or exchanged and
therefore it is difficult to determine their fair value. Where there is no quoted market price, we determine fair value using management’s best
estimates based on a range of valuation techniques and assumptions; since these involve uncertainties, the fair values may not be realized in an
actual sale or immediate settlement of the asset or liability.
Governance Over the Determination of Fair Value
Senior executive oversight of our valuation processes is provided through various valuation and risk committees. In order to ensure that all financial
instruments carried at fair value are reasonably measured for risk management and financial reporting purposes, we have established governance
structures and controls, such as model validation and approval, independent price verification (“IPV”) and profit and loss attribution analysis (“PAA”),
consistent with industry practice. These controls are applied independently of the relevant operating groups.
We establish and regularly update valuation methodologies for each financial instrument that is required to be measured at fair value. The
application of valuation models for products or portfolios is subject to independent approval to ensure only validated models are used. The impact of
known limitations of models and data inputs is also monitored on an ongoing basis. IPV is a process that regularly and independently verifies the
accuracy and appropriateness of market prices or model inputs used in the valuation of financial instruments. This process assesses fair values using a
variety of different approaches to verify and validate the valuations. PAA is a daily process used by management to identify and explain changes in
fair value positions across all operating lines of business within BMO Capital Markets. This process works in concert with other processes to ensure
that the fair values being reported are reasonable and appropriate.
Securities
For traded securities, quoted market value is considered to be fair value. Quoted market value is based on bid prices. Securities for which no active
market exists are valued using all reasonably available market information. Our fair value methodologies are described below.
Government Securities
The fair value of government issued or guaranteed debt securities in active markets is determined by reference to recent transaction prices, broker
quotes or third-party vendor prices. The fair values of securities that are not traded in an active market are modelled using implied yields derived
from the prices of similar actively traded government securities and observable spreads. Market inputs to the model include coupon, maturity and
duration.
Mortgage-Backed Securities and Collateralized Mortgage Obligations
The fair value of mortgage-backed securities and collateralized mortgage obligations is determined using independent prices obtained from third-
party vendor prices, broker quotes and relevant market indices, as applicable. If such prices are not available, fair value is determined using cash flow
models that make maximum use of observable market inputs or benchmark prices for similar instruments. Valuation assumptions for
mortgage-backed securities and collateralized mortgage obligations include discount rates, expected prepayments, credit spreads and recoveries.
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172 BMO Financial Group 198th Annual Report 2015
Corporate Debt Securities
The fair value of corporate debt securities is determined using prices observed in the most recent transactions. When observable price quotations are
not available, fair value is determined based on discounted cash flow models using discounting curves and spreads obtained from independent
dealers, brokers and multi-contributor pricing sources.
Corporate Equity Securities
The fair value of equity securities is based on quoted prices in active markets, where available. Where quoted prices in active markets are not readily
available, fair value is determined using quoted market prices for similar securities or through valuation techniques, including discounted cash flow
analysis and multiples of earnings.
Privately Issued Securities
Privately issued debt and equity securities are valued using recent prices observed in market transactions, where available. Otherwise, fair value is
derived from valuation models using a market or income approach. These models consider various factors, including projected cash flows, earnings,
revenue and other third-party evidence, as available. The fair value of limited partnership investments is based upon net asset values published by
third-party fund managers.
Prices from brokers and multi-contributor pricing sources are corroborated as part of our independent review process, which may include using
valuation techniques or obtaining consensus or composite prices from other pricing services. We validate the estimates of fair value by independently
obtaining multiple quotes for external market prices and input values. We review the approach taken by third-party vendors to ensure that the
vendor employs a valuation model which maximizes the use of observable inputs such as benchmark yields, bid-ask spreads, underlying collateral,
weighted-average terms to maturity and prepayment rate assumptions. Fair value estimates from internal valuation techniques are verified, where
possible, by reference to prices obtained from third-party vendors.
Loans
In determining the fair value of our fixed rate and floating rate performing loans, we discount the remaining contractual cash flows, adjusted for
estimated prepayment, at market interest rates currently offered for loans with similar terms.
The value of our loan balances determined using this approach is further adjusted by a credit mark that represents an estimate of the expected
credit losses in our loan portfolio.
Derivative Instruments
A number of valuation techniques are employed to estimate fair value, including discounted cash flow analysis, the Black-Scholes model, Monte Carlo
simulation and other accepted market models. These vetted models incorporate current market measures for interest rates, currency exchange rates,
equity and commodity prices and indices, credit spreads, recovery rates, corresponding market volatility levels, spot prices, correlation levels and
other market-based pricing factors. Option implied volatilities, an input into many valuation models, are either obtained directly from market sources
or calculated from market prices. Multi-contributor pricing sources are used wherever possible.
In determining the fair value of complex and customized derivatives, we consider all reasonably available information, including dealer and
broker quotations, multi-contributor pricing sources and any relevant observable market inputs. Our model calculates fair value based on inputs
specific to the type of contract, which may include stock prices, correlation for multiple assets, interest rates, foreign exchange rates, yield curves and
volatilities.
We calculate a credit valuation adjustment (“CVA”) to recognize the risk that any given derivative counterparty may not ultimately be able to
fulfill its obligations. The CVA is derived from market-observed credit spreads or proxy credit spreads and our assessment of the net counterparty
credit risk exposure, taking into account credit mitigants such as collateral, master netting agreements and settlements through clearing houses. We
also calculate a funding valuation adjustment (“FVA”) to recognize the implicit funding costs associated with over-the-counter derivative positions.
The FVA is determined based on reference to market funding spreads.
Deposits
In determining the fair value of our deposits, we incorporate the following assumptions:
‰ For fixed rate, fixed maturity deposits, we discount the remaining contractual cash flows for these deposits, adjusted for expected redemptions, at
market interest rates currently offered for deposits with similar terms and risks.
‰ For fixed rate deposits with no defined maturities, we consider fair value to equal carrying value, based on carrying value being equivalent to the
amount payable on the reporting date.
‰ For floating rate deposits, changes in interest rates have minimal impact on fair value since deposits reprice to market frequently. On that basis, fair
value is assumed to equal carrying value.
A portion of our structured note liabilities that have coupons or repayment terms linked to the performance of interest rates, foreign currencies,
commodities or equity securities have been designated at fair value through profit or loss. The fair value of these structured notes is estimated using
internally vetted valuation models and incorporates observable market prices for identical or comparable securities, as well as other inputs such as
interest rate yield curves, option volatilities and foreign exchange rates, where appropriate. Where observable prices or inputs are not available,
management judgment is required to determine the fair value by assessing other relevant sources of information, such as historical data and proxy
information from similar transactions.
Securities Sold But Not Yet Purchased
The fair value of these obligations is based on the fair value of the underlying securities, which can be equity or debt securities. As these obligations
are fully collateralized, the method used to determine fair value would be the same as that used for the relevant underlying equity or debt securities.
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BMO Financial Group 198th Annual Report 2015 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements
The fair value of these agreements is determined using a discounted cash flow model. Inputs to the model include contractual cash flows and
collateral funding spreads.
Securitization Liabilities
The determination of the fair value of securitization liabilities, recorded in other liabilities, is based on quoted market prices or quoted market prices
for similar financial instruments, where available. Where quoted prices are not available, fair value is determined using valuation techniques, such as
discounted cash flows, that maximize the use of observable inputs.
Subordinated Debt and Capital Trust Securities
The fair value of our subordinated debt and capital trust securities is determined by referring to current market prices for the same or similar
instruments.
Financial Instruments with a Carrying Value Approximating Fair Value
Short-term Financial Instruments
The carrying value of certain financial assets and liabilities, such as interest bearing deposits with banks, securities borrowed, customers’ liability
under acceptances, certain other assets, acceptances, securities lent and certain other liabilities, is a reasonable estimate of fair value due to their
short-term nature or because they are frequently repriced to current market rates.
Other Financial Instruments
Carrying value is assumed to be a reasonable estimate of fair value for our cash and cash equivalents and certain other securities.
For longer-term financial instruments within other liabilities, fair value is determined as the present value of contractual cash flows using
discount rates at which liabilities with similar remaining maturities could be issued as at the balance sheet date.
Certain assets, including premises and equipment, goodwill and intangible assets, as well as shareholders’ equity, are not considered financial
instruments and therefore no fair value has been determined for these items.
Fair Value of Financial Instruments Not Carried at Fair Value on the Balance Sheet
Set out in the following tables are the amounts that would be reported if all financial assets and liabilities not currently carried at fair value were
reported at their fair values.
(Canadian $ in millions)
Securities
Held to maturity
Other (1)
Securities purchased under resale agreements (2)
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Deposits
Securities sold under repurchase agreements (3)
Other liabilities (4)
Subordinated debt
Carrying
value
Fair
value
Valued using
quoted market
prices
Valued using
models (with
observable inputs)
Valued using
models (without
observable inputs)
2015
9,432
656
10,088
55,626
9,534
2,365
11,899
54,979
105,918
65,598
7,980
145,076
106,322
64,668
7,728
143,387
324,572
322,105
438,169
33,576
22,497
4,416
438,461
33,704
23,025
4,590
856
–
856
–
–
–
–
–
–
–
–
–
–
8,678
–
8,678
54,979
–
–
–
–
–
438,461
33,704
23,025
4,590
–
2,365
2,365
–
106,322
64,668
7,728
143,387
322,105
–
–
–
–
This table excludes financial instruments with a carrying value approximating fair value, such as cash and cash equivalents, interest bearing deposits with banks, securities borrowed, customers’ liability
under acceptances, certain other assets, acceptances, securities lent and certain other liabilities.
(1) Excluded from other securities is $364 million of securities related to our merchant banking business that are carried at fair value on the balance sheet.
(2) Excludes $12,440 million of securities borrowed for which carrying value approximates fair value.
(3) Excludes $6,315 million of securities lent for which carrying value approximates fair value.
(4) Other liabilities include securitization and SE liabilities and certain other liabilities of subsidiaries, other than deposits.
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174 BMO Financial Group 198th Annual Report 2015
(Canadian $ in millions)
Securities
Held to maturity
Other (1)
Securities purchased under resale agreements (2)
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Deposits
Securities sold under repurchase agreements (3)
Other liabilities (4)
Subordinated debt
Carrying
value
Fair
value
Valued using
quoted market
prices
Valued using
models (with
observable inputs)
Valued using
models (without
observable inputs)
2014
10,344
510
10,854
33,141
10,490
1,829
12,319
33,095
101,013
64,143
7,972
120,766
101,273
63,280
7,706
119,399
293,894
291,658
393,088
25,485
23,546
4,913
393,242
25,505
23,927
5,110
838
–
838
–
–
–
–
–
–
–
–
–
–
9,652
–
9,652
33,095
–
–
–
–
–
393,242
25,505
23,927
5,110
–
1,829
1,829
–
101,273
63,280
7,706
119,399
291,658
–
–
–
–
This table excludes financial instruments with a carrying value approximating fair value, such as cash and cash equivalents, interest bearing deposits with banks, securities borrowed, customers’ liability
under acceptances, certain other assets, acceptances, securities lent and certain other liabilities.
(1) Excluded from other securities is $477 million of securities related to our merchant banking business that are carried at fair value on the balance sheet.
(2) Excludes $20,414 million of securities borrowed for which carrying value approximates fair value.
(3) Excludes $14,210 million of securities lent for which carrying value approximates fair value.
(4) Other liabilities include securitization and SE liabilities and certain other liabilities of subsidiaries, other than deposits.
Fair Value Hierarchy
We use a fair value hierarchy to categorize financial instruments according to the inputs we use in valuation techniques to measure fair value.
Valuation Techniques and Significant Inputs
We determine the fair value of publicly traded fixed maturity debt and equity securities using quoted prices in active markets (Level 1) when these
are available. When quoted prices in active markets are not available, we determine the fair value of financial instruments using models such as
discounted cash flows, with observable market data for inputs such as yield and prepayment rates or broker quotes and other third-party vendor
quotes (Level 2). Fair value may also be determined using models where significant market inputs are not observable due to inactive markets or
minimal market activity (Level 3). We maximize the use of observable market inputs to the extent possible.
Our Level 2 trading securities are primarily valued using discounted cash flow models with observable spreads or broker quotes. The fair value of
Level 2 available-for-sale securities is determined using discounted cash flow models with observable spreads or third-party vendor quotes. Level 2
structured note liabilities are valued using models with observable market information. Level 2 derivative assets and liabilities are valued using
industry-standard models and observable market information.
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BMO Financial Group 198th Annual Report 2015 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The extent of our use of actively quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and
internal models without observable market information as inputs (Level 3) in the valuation of securities, fair value liabilities, derivative assets and
derivative liabilities was as follows:
(Canadian $ in millions)
2015
2014
Valued using
quoted market
prices
Valued using
models (with
observable
inputs)
Valued using
models (without
observable
inputs)
Valued using
quoted market
prices
Valued using
models (with
observable
inputs)
Valued using
models (without
observable
inputs)
Trading Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Mortgage-backed securities and collateralized mortgage
obligations
Corporate debt
Corporate equity
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Mortgage-backed securities and collateralized mortgage
obligations
Corporate debt
Corporate equity
Other Securities
Fair Value Liabilities
Securities sold but not yet purchased
Structured note liabilities and other note liabilities
Annuity liabilities
Derivative Assets
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Derivative Liabilities
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
12,342
3,183
2,937
–
396
–
328
35,901
55,087
4,988
2,658
1,754
–
2,328
–
5,977
358
18,063
–
19,499
–
–
19,499
5
18
605
91
–
719
25
15
380
103
–
523
1,512
3,568
314
589
15
491
8,717
1,826
17,032
2,982
2,267
–
6,084
3,084
12,192
1,972
104
28,685
–
1,727
9,577
525
11,829
19,248
16,281
1,062
892
35
37,518
17,488
20,091
2,391
2,098
48
42,116
–
–
–
98
–
–
243
–
341
–
–
–
1
–
–
6
1,251
1,258
364
–
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
8,737
3,134
5,725
–
124
–
1,974
37,221
56,915
4,946
1,679
1,093
–
2,136
–
5,687
456
1,725
4,062
440
626
99
702
9,319
10,511
27,484
5,555
2,425
–
5,814
3,996
9,949
1,971
146
15,997
29,856
10
–
23,615
–
–
23,615
23
32
653
51
–
759
33
33
1,101
38
–
1,205
3,733
7,785
407
11,925
18,241
12,649
30
896
68
31,884
16,983
12,110
233
3,002
116
32,444
–
–
–
85
–
–
538
–
623
–
–
–
1
–
–
8
1,104
1,113
467
–
–
–
–
–
–
–
–
12
12
–
–
–
–
8
8
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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176 BMO Financial Group 198th Annual Report 2015
Quantitative Information about Level 3 Fair Value Measurements
The table below presents the fair values of our significant Level 3 financial instruments, the valuation techniques used to determine their fair values
and the value ranges of significant unobservable inputs used in the valuations.
As at October 31, 2015
(Canadian $ in millions, except as noted)
Reporting line in fair
value hierarchy table
Fair value
of assets
Valuation techniques
Range of input values (1)
Significant
unobservable inputs
Low
High
Securities
Private equity (2)
Corporate equity
Collateralized loan obligations securities (3)
Merchant banking securities
Corporate debt
Other
1,251
Net Asset Value
EV/EBITDA
249 Discounted Cash Flow Model
364
Net Asset Value
EV/EBITDA
Net Asset Value
Multiple
Yield/Discount Margin
Net Asset Value
Multiple
na
5.5x
1.50%
na
4.5x
na
10.1x
1.50%
na
8.7x
(1) The low and high input values represent the actual highest and lowest level of inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect
the level of input uncertainty, but are affected by the specific underlying instruments within the product category. The input ranges will therefore vary from period to period based on the
characteristics of the underlying instruments held at each balance sheet date.
(2) Included in private equity is $627 million of Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we hold to meet regulatory requirements. These shares are carried at cost, which is
deemed to approximate fair value since these shares are not traded in the market.
(3) Includes both trading and available-for-sale instruments.
na – not applicable
Significant Unobservable Inputs in Level 3 Instrument Valuations
Net Asset Value
Net asset value represents the estimated value of a security based on valuations received from the investment or fund manager. The valuation of
certain private equity securities is based on the economic benefit derived from our investment.
EV/EBITDA Multiple
The fair value of private equity and merchant banking investments is derived by calculating an enterprise value (“EV”) using the EV/EBITDA multiple
and then proceeding through a waterfall of the company’s capital structure to determine the value of the assets or securities we hold. The EV/EBITDA
multiple is determined using judgment in considering factors such as multiples for comparable listed companies, recent transactions and company-
specific factors, as well as liquidity discounts that account for the lack of active trading in these assets and securities.
Yield/Discount Margin
A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation, would
result in a decrease in the related fair value measurement. The discount margin is the difference between a debt instrument’s yield and a benchmark
instrument’s yield. Benchmark instruments have high credit quality ratings and similar maturities and are often government bonds. The discount
margin for an instrument forms part of the yield used in a discounted cash flow calculation. Generally, an increase in the discount margin will result in
a decrease in fair value.
Sensitivity Analysis of Level 3 Instruments
Sensitivity analysis at October 31, 2015, for securities which represent greater than 10% of Level 3 instruments, is provided below.
Within Level 3 trading securities is corporate debt of $239 million related to securities which are hedged with credit default swaps that are also
considered to be Level 3 instruments. As at October 31, 2015, the derivative assets and derivative liabilities were valued at $1 million and $nil,
respectively. We determine the valuation of these derivatives and the related securities based on market-standard models we use to model the
specific collateral composition and cash flow structure of the related deal. As at October 31, 2015, the impact of assuming a 10 basis point increase or
decrease in the discount margin would be a $0.2 million decrease or increase in fair value, respectively.
We have not applied another reasonably possible alternative assumption to the significant Level 3 categories of private equity investments and
merchant banking securities, as the net asset values are provided by the investment or fund managers.
Significant Transfers
Our policy is to record transfers of assets and liabilities between fair value hierarchy levels at their fair values as at the end of each reporting period,
consistent with the date of the determination of fair value. Transfers between the various fair value hierarchy levels reflect changes in the availability
of quoted market prices or observable market inputs that result from changing market conditions. The following is a discussion of the significant
transfers between Level 1, Level 2 and Level 3 balances for the year ended October 31, 2015.
During the year ended October 31, 2015, $158 million of trading securities and $122 million of available-for-sale securities were transferred from
Level 1 to Level 2 due to reduced observability of the inputs used to value these securities. During the year ended October 31, 2015, $90 million of
trading securities and $180 million of available-for-sale securities were transferred from Level 2 to Level 1 due to increased availability of quoted
prices in active markets.
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BMO Financial Group 198th Annual Report 2015 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in Level 3 Fair Value Measurements
The table below presents a reconciliation of all changes in Level 3 financial instruments during the year ended October 31, 2015, including realized
and unrealized gains (losses) included in earnings and other comprehensive income.
Change in fair value
Balance
October 31,
2014
Included in
earnings
Included
in other
compre-
hensive
income
Purchases
Sales
Maturities/
Settlement (1)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2015
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (2)
85
538
623
1
8
1,104
1,113
467
12
8
–
(13)
(13)
–
–
(25)
(25)
(34)
(11)
(8)
13
79
92
–
–
178
178
66
–
–
–
–
–
–
–
–
–
(361)
(361)
–
–
151
–
(1)
(157)
151
(158)
80
(215)
–
–
–
–
–
(1)
–
(1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
98
243
341
1
6
1,251
1,258
364
1
–
–
(13)
(13)
na
na
na
na
(26)
(11)
(8)
For the year ended October 31, 2015
(Canadian $ in millions)
Trading Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Total trading securities
Available-for-Sale Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Corporate equity
Total available-for-sale securities
Other Securities
Derivative Assets
Credit default swaps
Derivative Liabilities
Credit default swaps
(1) Includes cash settlement of derivative assets and derivative liabilities.
(2) Change in unrealized gains (losses) on trading securities, derivative assets and derivative liabilities still held on October 31, 2015 are included in earnings for the year.
na – not applicable
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178 BMO Financial Group 198th Annual Report 2015
The table below presents a reconciliation of all changes in Level 3 financial instruments during the year ended October 31, 2014, including realized
and unrealized gains (losses) included in earnings and other comprehensive income.
For the year ended October 31, 2014
(Canadian $ in millions)
Trading Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Total trading securities
Available-for-Sale Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Corporate equity
Total available-for-sale securities
Other Securities
Derivative Assets
Credit default swaps
Derivative Liabilities
Credit default swaps
Change in fair value
Balance
October 31,
2013
Included in
earnings
Included
in other
compre-
hensive
income
Purchases
Sales
Maturities /
Settlement (1)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2014
Change in
unrealized
gains (losses)
recorded in income
for instruments
still held (2)
78
822
900
1
30
918
949
488
28
19
–
6
6
–
(1)
(23)
(24)
(38)
(16)
(11)
7
59
66
–
–
92
92
35
–
–
–
–
–
–
(66)
(66)
–
(268)
(268)
–
–
192
192
80
–
–
–
(21)
(67)
(88)
(98)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4
4
–
–
–
–
(15)
(15)
–
–
(12)
(12)
–
–
–
85
538
623
1
8
1,104
1,113
467
12
8
–
6
6
na
na
na
na
(23)
(16)
(11)
(1) Includes cash settlement of derivative assets and derivative liabilities.
(2) Change in unrealized gains (losses) on trading securities, derivative assets and derivative liabilities still held on October 31, 2014 are included in earnings for the year.
na – not applicable
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BMO Financial Group 198th Annual Report 2015 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19: Offsetting of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are offset and the net amount is reported in the Consolidated Balance Sheet when there is a legally
enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability
simultaneously. The following table presents the amounts that have been offset in our Consolidated Balance Sheet, including securities purchased
under resale agreements, securities sold under repurchase agreements and derivative instruments, generally under a market settlement mechanism
(e.g. an exchange or clearing house) where simultaneous net settlement can be achieved to eliminate credit and liquidity risk between
counterparties. Also presented are amounts not offset in the Consolidated Balance Sheet related to transactions where a master netting agreement or
similar arrangement is in place with a right of set-off only in the event of default, insolvency or bankruptcy, or where the offset criteria are otherwise
not met.
(Canadian $ in millions)
Financial Assets
Securities borrowed or purchased under resale agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
(Canadian $ in millions)
Financial Assets
Securities borrowed or purchased under resale agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
Net
amounts
presented
in the
balance
sheet
Amounts offset
in the balance
sheet
2,007
16,266
68,066
38,238
Gross
amounts
70,073
54,504
124,577
18,273
106,304
58,905
41,898
16,266
2,007
42,639
39,891
100,803
18,273
82,530
Gross
amounts
57,119
38,338
95,457
39,340
43,259
82,599
Amounts offset
in the balance
sheet
3,564
5,683
9,247
5,683
3,564
9,247
Net
amounts
presented
in the
balance
sheet
53,555
32,655
86,210
33,657
39,695
73,352
Amounts not offset in the balance sheet
2015
Impact of
master netting
agreements
Securities
received/
pledged as
collateral (1) (2)
Cash
collateral
Net
amount
5,313
27,415
32,728
27,415
5,313
32,728
61,587
1,290
–
2,087
1,166
7,446
62,877
2,087
8,612
7,990
34,104
42,094
492
–
492
6,742
474
7,216
Amounts not offset in the balance sheet
2014
Impact of
master netting
agreements
Securities
received/
pledged as
collateral (1) (2)
Cash
collateral
Net
amount
10,004
24,398
34,402
24,398
10,004
34,402
41,042
1,676
42,718
3,048
28,868
31,916
–
825
825
323
–
323
2,509
5,756
8,265
5,888
823
6,711
(1) Financial assets received/pledged as collateral are disclosed at fair value and are limited to the net balance sheet exposure (i.e. any over-collateralization is excluded from the table).
(2) Certain amounts of collateral are restricted from being sold or re-pledged except in the event of default or the occurrence of other predetermined events.
Note 20: Interest Rate Risk
We earn interest on interest bearing assets and we pay interest on interest bearing liabilities. We also hold derivative instruments, such as interest
rate swaps and interest rate options, with values that are sensitive to changes in interest rates. To the extent that we hold assets, liabilities and
derivative instruments maturing or repricing at different points in time, we are exposed to interest rate risk.
Interest Rate Gap Position
The determination of the interest rate sensitivity or gap position by necessity entails numerous assumptions. It is based on the earlier of the repricing
date or maturity date of assets, liabilities and derivatives used to manage interest rate risk.
The gap position presented is as at October 31, 2015 and 2014. It represents the position outstanding at the close of the business day and may
change significantly in subsequent periods based on customer behaviour and the application of our asset and liability management strategies.
The assumptions for the years ended October 31, 2015 and 2014 were as follows:
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Assets
Fixed rate, fixed term assets, such as residential mortgage loans and consumer loans, are reported based upon the scheduled repayments and
estimated prepayments that reflect expected borrower behaviour.
Trading and underwriting (mark-to-market) assets and interest bearing assets on which the customer interest rate changes with the prime rate
or other short-term market rates are reported in the zero to three months category.
180 BMO Financial Group 198th Annual Report 2015
Goodwill and intangible and fixed assets are reported as non-interest sensitive. Other fixed rate and non-interest bearing assets with no defined
maturity are reported based upon an assumed maturity profile that considers historical and forecasted trends in balances.
Liabilities
Fixed rate, fixed term liabilities, such as investment certificates, are reported at scheduled maturity with estimated redemptions that reflect expected
depositor behaviour.
Interest bearing deposits on which the customer interest rate changes with the prime rate or other short-term market rates are reported in the
zero to three months category.
Fixed rate and non-interest bearing liabilities with no defined maturity are reported based upon an assumed maturity profile that considers
historical and forecasted trends in balances.
Capital
Common shareholders’ equity is reported as non-interest sensitive.
Yields
Yields are based upon the effective interest rates for the assets or liabilities on October 31, 2015 and 2014.
Interest Rate Gap Position
(Canadian $ in millions, except as noted)
As at October 31
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Securities borrowed or purchased under
resale agreements
Loans
Other assets
Total assets
Liabilities and Equity
Deposits
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Other liabilities
Subordinated debt
Total equity
0 to 3
months
4 to 6
months
7 to 12
months
Total
within
1 year
Effective
interest
rate (%)
1 to 5
years
Effective
interest
rate (%)
Over 5
years
Effective
interest
rate (%)
Non-
interest
sensitive
Total
38,934
7,382
88,780
441
–
863
303
–
3,632
39,678
7,382
93,275
63,600
192,385
39,199
3,375
13,943
487
1,041
23,254
1,073
68,016
229,582
40,759
0.25
0.17
0.59
0.28
3.25
na
1,413
–
22,536
50
88,412
8,998
430,280
19,109
29,303
478,692
121,409
0.12
–
2.28
0.65
3.69
na
(44)
–
14,063
–
4,723
399
19,141
245,333
21,223
18,022
–
23,935
1
287,290
21,224
0.54
1.04
133,225
–
0.86
–
17,654
2
39,588
58,211
66
1,169
121
296
700
–
182
3,245
1,500
290
39,891
61,752
2,266
1,459
0.22
na
4.21
na
–
–
3.21
–
4.04
na
0.93
–
–
na
7.83
na
(752)
–
1,044
40,295
7,382
130,918
–
11,307
11,040
68,066
334,024
61,196
22,639
641,881
–
–
438,169
21,226
–
12,232
–
35,647
39,891
98,266
4,416
39,913
47,879
641,881
(25,240)
–
(20,904)
(4,336)
(25,240)
(23,303)
956
(22,347)
–
–
–
–
–
–
–
–
–
14,312
2,000
2,207
151,744
(30,335)
48,883
6,608
11,940
18,548
16,048
5,399
21,447
–
na
4.84
na
–
9,970
150
600
28,376
(9,235)
5,321
1,054
(4,968)
(3,914)
2,082
(3,877)
(1,795)
Total liabilities and shareholders’ equity
365,590
19,139
29,153
413,882
Asset/liability gap position
64,690
(30)
150
64,810
Notional amounts of derivatives
(56,851)
(445)
3,092
(54,204)
Total interest rate gap position – 2015
Canadian dollar
Foreign currency
Total gap
Total interest rate gap position – 2014
Canadian dollar
Foreign currency
Total gap
na – not applicable
6,563
1,276
7,839
1,989
(2,464)
4,690
(1,448)
13,242
(2,636)
(475)
3,242
10,606
3,934
2,174
(5,433)
(4,072)
6,672
(580)
5,173
(2,478)
6,108
(9,505)
6,092
2,695
Note 21: Capital Management
Our objective is to maintain a strong capital position in a cost-effective structure that: considers our target regulatory capital ratios and internal
assessment of required economic capital; is consistent with our targeted credit ratings; underpins our operating groups’ business strategies; and
builds depositor confidence and long-term shareholder value.
Our approach includes establishing limits, targets and performance measures for the management of balance sheet positions, risk levels and
minimum capital amounts, as well as issuing and redeeming capital instruments to obtain a cost-effective capital structure.
Regulatory capital requirements and risk-weighted assets for the consolidated entity are determined on a Basel III basis.
Adjusted common shareholders’ equity, referred to as Common Equity Tier 1 capital under Basel III, is the most permanent form of capital. It is
comprised of common shareholders’ equity less deductions for goodwill, intangible assets and certain other items under Basel III. Tier 1 capital is
primarily comprised of regulatory common equity, preferred shares and innovative hybrid instruments, net of Tier 1 capital deductions. Tier 2 capital
is primarily comprised of subordinated debentures and the eligible portion of the collective allowance for credit losses, net of certain Tier 2 capital
deductions. Total capital includes Tier 1 and Tier 2 capital. Details of the components of our capital position are presented in Notes 11, 14, 15, 16
and 17.
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BMO Financial Group 198th Annual Report 2015 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our Common Equity Tier 1 Capital Ratio, Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio are the primary regulatory capital measures.
‰ The Common Equity Tier 1 Capital Ratio is defined as common shareholders’ equity, net of capital adjustments, divided by Common Equity Tier 1
capital risk-weighted assets.
‰ The Tier 1 Capital Ratio is defined as Tier 1 capital divided by Tier 1 capital risk-weighted assets.
‰ The Total Capital Ratio is defined as Total capital divided by Total capital risk-weighted assets.
‰ The Leverage Ratio is defined as Tier 1 capital divided by the sum of on-balance sheet items and specified off-balance sheet items, net of specified
adjustments.
We have met OSFI’s stated minimum capital ratio requirements as at October 31, 2015.
Regulatory Capital Measures and Risk-Weighted Assets
(Canadian $ in millions, except as noted)
Common Equity Tier 1 Capital
Tier 1 Capital
Total Capital
Common Equity Tier 1 Capital Risk-Weighted Assets
Tier 1 Capital Risk-Weighted Assets
Total Capital Risk-Weighted Assets
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
All 2015 and 2014 balances above are on a Basel III “all-in” basis.
na – not applicable
Basel III
2015
25,628
29,416
34,584
239,185
239,471
239,716
10.7%
12.3%
14.4%
4.2%
Basel III
2014
22,421
26,602
31,927
222,092
222,428
222,931
10.1%
12.0%
14.3%
na
Note 22: Employee Compensation – Share-Based Compensation
Stock Option Plan
We maintain a Stock Option Plan for designated officers and employees. Options are granted at an exercise price equal to the closing price of our
common shares on the day before the grant date. Stock options granted on or after December 2013 vest in equal tranches of 50% on the third and
fourth anniversaries of their grant date. Options granted prior to December 2013 vest in tranches over a four-year period starting from their grant
date. Each tranche (i.e. the portion that vests each year) is treated as a separate award with a different vesting period. Certain options can only be
exercised once certain performance targets are met. All options expire 10 years from their grant date.
We determine the fair value of stock options on their grant date and record this amount as compensation expense over the period that the stock
options vest, with a corresponding increase to contributed surplus. When these stock options are exercised, we issue shares and record the amount of
proceeds, together with the amount recorded in contributed surplus, in share capital. The estimated grant date fair value of stock options granted to
employees who are eligible to retire is expensed at the date of grant.
The following table summarizes information about our Stock Option Plan:
(Canadian $, except as noted)
Outstanding at beginning of year
Granted
Exercised
Forfeited/cancelled
Expired
Outstanding at end of year
Exercisable at end of year
Available for grant
Outstanding stock options as a percentage of outstanding shares
Number of
stock options
13,337,765
641,875
842,821
71,281
954,385
12,111,153
6,959,569
4,275,858
1.88%
2015
Weighted-
average
exercise price
76.21
78.09
54.22
64.49
139.14
74.08
80.52
2014
Weighted-
average
exercise price
78.17
68.60
53.66
79.77
139.34
76.21
90.85
Number of
stock options
15,801,966
2,003,446
2,069,588
5,558
761,555
14,968,711
7,283,321
5,201,062
2.32%
2013
Weighted-
average
exercise price
79.96
60.11
47.95
56.35
150.78
78.17
98.79
Number of
stock options
14,968,711
1,618,223
2,133,107
88,965
1,027,097
13,337,765
6,607,237
4,222,722
2.06%
Employee compensation expense related to this plan for the years ended October 31, 2015, 2014 and 2013 was $6 million, $11 million and
$14 million before tax, respectively ($6 million, $11 million and $13 million after tax, respectively).
The intrinsic value of a stock option grant is the difference between the current market price of our common shares and the strike price of the
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option. The aggregate intrinsic value of stock options outstanding at October 31, 2015, 2014 and 2013 was $179 million, $279 million and
$215 million, respectively. The aggregate intrinsic value of stock options exercisable at October 31, 2015, 2014 and 2013 was $125 million,
$145 million and $107 million, respectively.
182 BMO Financial Group 198th Annual Report 2015
Options outstanding and exercisable at October 31, 2015 and 2014 by range of exercise price were as follows:
(Canadian $, except as noted)
2015
2014
Options outstanding
Options exercisable
Options outstanding
Options exercisable
Weighted-
average
remaining
contractual
life (years)
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual
life (years)
Weighted-
average
exercise
price
Number
of stock
options
Weighted-
average
remaining
contractual
life (years)
Weighted-
average
exercise
price
Number
of stock
options
Weighted-
average
remaining
contractual
life (years)
Number
of stock
options
3.1
3.6
5.3
5.2
4.7
577,358
34.13
42.46
187,327
56.00 3,624,686
63.94 1,531,760
170.26 1,038,438
3.1
3.6
5.2
4.5
2.0
34.13
718,299
42.46
208,437
56.00 5,087,750
61.87 5,956,232
226.28 1,367,047
4.1
4.6
5.7
6.0
2.6
718,299
34.13
42.36
208,437
56.05 3,000,262
63.89 1,313,192
232.14 1,367,047
4.1
4.6
6.0
4.1
2.6
Weighted-
average
exercise
price
34.13
42.36
55.73
62.71
232.14
Range of exercise
prices
$30.01 to $40.00
$40.01 to $50.00
$50.01 to $60.00
$60.01 to $70.00
$70.01 and over (1)
Number
of stock
options
577,358
187,327
4,218,387
5,458,588
1,669,493
(1) Issued as part of the acquisition of M&I.
The following table summarizes non-vested stock option activity for the years ended October 31, 2015 and 2014:
(Canadian $, except as noted)
2015
2014
Number of
stock options
Weighted-average
grant date fair value
Number of
stock options
Weighted-average
grant date fair value
Non-vested at beginning of year
Granted
Vested
Expired
Forfeited/cancelled
Non-vested at end of year
6,730,528
641,875
1,533,402
623,730
63,687
5,151,584
The following table summarizes further information about our Stock Option Plan:
(Canadian $ in millions, except as noted)
Unrecognized compensation cost for non-vested stock option awards
Weighted-average period over which this cost will be recognized (in years)
Total intrinsic value of stock options exercised
Cash proceeds from stock options exercised
Actual tax benefits realized on stock options exercised
Weighted-average share price for stock options exercised (in dollars)
6.74
7.45
6.90
8.55
6.68
6.55
2015
4
2.3
18
46
1
76.1
7,685,390
1,618,223
1,971,073
559,841
42,171
6,730,528
2014
5
2.7
49
115
1
76.6
7.18
6.36
7.56
8.83
6.49
6.74
2013
6
2.1
35
99
–
64.8
The fair value of options granted was estimated using a binomial option pricing model. The weighted-average fair value of options granted during the
years ended October 31, 2015, 2014 and 2013 was $7.45, $6.36 and $5.29, respectively. To determine the fair value of the stock option tranches on
the grant date, the following ranges of values were used for each option pricing assumption:
Expected dividend yield
Expected share price volatility
Risk-free rate of return
Expected period until exercise (in years)
2015
2014
2013
4.7% – 4.8%
16.9% – 17.0%
1.9% – 2.0%
6.5 – 7.0
5.0%
16.4%
2.5% – 2.6%
6.5 – 7.0
6.0% – 6.2%
18.1% – 18.6%
1.7% – 1.9%
5.5 – 7.0
Changes to the input assumptions can result in different fair value estimates.
Expected dividend yield is based on market expectations of future dividends on our common shares. Expected share price volatility is determined
based on the market consensus implied volatility for traded options on our common shares. The risk-free rate is based on the yields of a Canadian
swap curve with maturities similar to the expected period until exercise of the options. The weighted-average exercise price on the grant date for the
years ended October 31, 2015, 2014 and 2013 was $78.09, $68.60 and $60.11, respectively.
Other Share-Based Compensation
Share Purchase Plans
We offer various employee share purchase plans. The largest of these plans provides the employee the option of directing a portion of their gross
salary toward the purchase of our common shares. We match 50% of employee contributions up to 6% of their individual gross salary. Our initial
contributions vest after two years participation in the plan, with subsequent contributions vesting immediately. The shares held in the employee
share purchase plan are purchased on the open market and are considered outstanding for purposes of computing earnings per share. The dividends
earned on our common shares held by the plan are used to purchase additional common shares on the open market.
We account for our contribution as employee compensation expense when it is contributed to the plan.
Employee compensation expense related to these plans for the years ended October 31, 2015, 2014 and 2013 was $52 million, $50 million and
$50 million, respectively. There were 19.0 million, 18.7 million and 19.3 million common shares held in these plans for the years ended October 31,
2015, 2014 and 2013, respectively.
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Mid-Term Incentive Plans
We offer mid-term incentive plans for executives and certain senior employees. Payment amounts are adjusted to reflect reinvested dividends and
changes in the market value of our common shares. Depending on the plan, the recipient receives either a single cash payment at the end of the
three-year period of the plan, or cash payments over the three years of the plan. As the awards are cash settled, they are recorded as liabilities.
BMO Financial Group 198th Annual Report 2015 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts payable under such awards are recorded as compensation expense over the vesting period. Amounts related to units granted to employees
who are eligible to retire are expensed at the time of grant. Subsequent changes in the fair value of the liability are recorded in compensation
expense in the period in which they arise.
Prior to 2015, we entered into agreements with third parties to assume our liabilities related to a portion of units granted for a fixed up-front
payment. For units subject to such arrangements, we no longer have any obligation for future cash payments and as a result no liability is recorded
related to these awards. All cash payments made under such arrangements are deferred on the Consolidated Balance Sheet as other assets and are
recognized on a straight-line basis over the vesting period. Subsequent changes in fair value of our common shares do not affect the amount of
compensation expense related to these awards.
Mid-term incentive plan units granted during the years ended October 31, 2015, 2014 and 2013 totalled 5.8 million, 5.9 million and 5.8 million,
respectively. Of these, we entered into agreements with third parties in 2014 and 2013 for 2.8 million and 4.8 million units, respectively. For
agreements entered into in 2014 and 2013, we made cash payments of $214 million and $292 million, respectively. The amount of deferred
compensation remaining in other assets relating to these arrangements at October 31, 2015 was $38 million ($131 million in 2014) and is expected
to be recognized over a weighted-average period of 1 year (1.7 in 2014). Employee compensation expense related to plans where we entered into
agreements with third parties for the years ended October 31, 2015, 2014 and 2013 was $81 million, $239 million and $279 million before tax,
respectively ($60 million, $177 million and $206 million after tax, respectively).
Mid-term incentive plan units for which we did not enter into agreements with third parties for the years ended October 31, 2015, 2014 and
2013 totalled 5.8 million, 3.1 million and 1.0 million units, respectively. The weighted-average grant date fair value of these awards as at October 31,
2015, 2014 and 2013 was $475 million, $228 million and $50 million, respectively. We recorded employee compensation expense of $289 million,
$159 million and $63 million before tax, respectively ($214 million, $118 million and $47 million after tax, respectively). Beginning in November
2014, we no longer enter into agreements with third parties; however, we economically hedge the impact of the change in market value of our
common shares by entering into total return swaps (equity contracts). Gains (losses) recognized for the years ended October 31, 2015, 2014 and 2013
were $(26) million, $55 million and $32 million, respectively, resulting in net employee compensation expense of $315 million, $104 million and
$31 million, respectively.
A total of 16.1 million, 16.5 million and 15.3 million mid-term incentive plan units were outstanding as at October 31, 2015, 2014 and 2013,
respectively, and the intrinsic value of those awards which had vested was $497 million, $288 million and $126 million, respectively. Cash payments
made in relation to these liabilities were $173 million, $57 million and $37 million, respectively.
Deferred Incentive Plans
We offer deferred incentive plans for members of our Board of Directors, executives and key employees in BMO Capital Markets and Wealth
Management. Under these plans, fees, annual incentive payments and/or commissions can be deferred as share units of our common shares. These
share units are either fully vested on the grant date or vest at the end of three years. The value of these share units is adjusted to reflect reinvested
dividends and changes in the market value of our common shares.
Deferred incentive plan payments are paid upon the participant’s departure from the bank.
Employee compensation expense for these plans is recorded in the year the fees, incentive payments and/or commissions are earned. Changes
in the amount of the incentive plan payments as a result of dividends and share price movements are recorded as increases or decreases in
employee compensation expense in the period of the change.
Deferred incentive plan units granted during the years ended October 31, 2015, 2014 and 2013 totalled 0.3 million, 0.4 million and 0.4 million,
respectively, and the weighted-average grant date fair value of these units was $26 million, $26 million and $22 million, respectively.
Liabilities related to these plans are recorded in other liabilities in our Consolidated Balance Sheet and totalled $395 million and $404 million as
at October 31, 2015 and 2014, respectively. Payments made under these plans for the years ended October 31, 2015, 2014 and 2013 were
$25 million, $18 million and $16 million, respectively.
Employee compensation expense related to these plans for the years ended October 31, 2015, 2014 and 2013 was $12 million, $76 million and
$85 million before tax, respectively ($9 million, $56 million and $63 million after tax, respectively). We have entered into derivative instruments to
hedge our exposure related to these plans. Changes in the fair value of these derivatives are recorded as employee compensation expense in the
period in which they arise. Gains (losses) on these derivatives for the years ended October 31, 2015, 2014 and 2013 were $(17) million, $56 million
and $75 million before tax, respectively. These gains resulted in net employee compensation expense for the years ended October 31, 2015, 2014
and 2013 of $29 million, $20 million and $10 million before tax, respectively ($21 million, $15 million and $7 million after tax, respectively).
A total of 4.9 million, 4.7 million and 4.3 million deferred incentive plan units were outstanding for the years ended October 31, 2015, 2014 and
2013, respectively.
Note 23: Employee Compensation – Pension and Other Employee Future Benefits
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Pension and Other Employee Future Benefit Plans
We sponsor a number of arrangements in Canada, the United States and the United Kingdom that provide pension and/or other employee future
benefits to our retired and current employees. The largest of these arrangements, by defined benefit obligation, are the primary defined benefit
pension plans for employees in Canada and the United States and the primary other employee future benefit plan for employees in Canada.
Pension arrangements include defined benefit pension plans, as well as supplementary arrangements that provide pension benefits in excess of
statutory limits. Generally, under these plans we provide retirement benefits based on an employee’s years of service and average annual earnings
over a period of time prior to retirement. Our pension and other employee future benefit expenses, recorded in employee compensation expense,
mainly comprise the current service cost plus or minus the interest on net defined benefit assets or liabilities. In addition, we provide defined
contribution pension plans to employees in some of our subsidiaries. The costs of these plans, recorded in employee compensation expense, are
equal to our contributions to the plans.
184 BMO Financial Group 198th Annual Report 2015
We also provide other employee future benefits, including health and dental care benefits and life insurance, for current and retired employees.
Short-term employee benefits, such as salaries, paid absences, bonuses and other benefits, are accounted for on an accrual basis over the period
in which the employees provide the related services.
Investment Policy
The assets of the defined benefit pension plans are managed in accordance with all applicable laws and regulations. The plans are administered with
a well-defined governance structure, with the oversight and decision-making resting with the Board of Directors.
The plans are managed under a framework that considers both assets and liabilities in the development of an investment policy and in
managing risk.
The plans invest in asset classes that include equities, fixed income and alternative strategies, under established investment guidelines. Plan
assets are diversified across asset classes and by geographic exposure. They are managed by asset management firms that are responsible for the
selection of investment securities. Derivative instruments are permitted under policy guidelines and are generally used to hedge foreign currency
exposures, manage interest rate exposures or replicate the return of an asset.
Asset Allocations
The asset allocation ranges and weighted-average actual asset allocations of our primary pension plans, based on the fair market values at
October 31, are as follows:
Equities
Fixed income investments
Other
Pension benefit plans
Range
2015
25% – 50%
35% – 55%
10% – 25%
Actual
2015
42%
45%
13%
Actual
2014
42%
45%
13%
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis.
Risk Management
The plans are exposed to various risks, including market risk (interest rate, equity and foreign currency risks), credit risk, operational risk, surplus risk
and longevity risk. We follow a number of approaches to monitor and actively manage these risks, including monitoring surplus-at-risk, which
measures a plan’s risk in an asset-liability framework; stress testing and scenario analyses to evaluate the volatility of the plans’ financial positions
and any potential impact on the bank; hedging of currency exposures and interest rate risk within policy limits; controls related to asset mix
allocations, geographic allocations, portfolio duration, credit quality, sector guidelines, issuer/counterparty limits and others; and ongoing monitoring
of exposures, performance and risk levels.
Pension and Other Employee Future Benefit Liabilities
Our actuaries perform valuations of our defined benefit obligations for pension and other employee future benefits as at October 31 of each year
using the projected unit credit method based on management’s assumptions about discount rates, rates of compensation increase, retirement age,
mortality and health care cost trend rates.
The discount rates for the primary Canadian and U.S. pension and other employee future benefit plans were selected using high-quality AA rated
corporate bonds with terms matching the plans’ cash flows.
The fair value of plan assets is deducted from the defined benefit obligation to determine the net defined benefit asset or liability. For defined
benefit pension plans that are in a net defined benefit asset position, the recognized asset is limited to the present value of economic benefits
available in the form of future refunds from the plan or reductions in future contributions to the plan (the “asset ceiling”). Changes in the asset ceiling
are recognized in other comprehensive income. Components of the change in our net defined benefit assets or liabilities and our pension and other
employee future benefit expense are as follows:
Benefits earned by employees represent benefits earned in the current year. They are determined with reference to the current workforce and the
amount of benefits to which employees will be entitled upon retirement, based on the provisions of our benefit plans.
Interest on net defined benefit asset or liability represents the increase in the net defined benefit asset or liability that results from the passage of
time and is determined by applying the discount rate to the net defined benefit asset or liability.
Actuarial gains and losses may arise in two ways. First, each year our actuaries recalculate the defined benefit obligations and compare them to
those estimated as at the previous year end. Any differences that result from changes in demographic and economic assumptions or from plan
member experience being different from management’s expectations at the previous year end are considered actuarial gains or losses. Second,
actuarial gains and losses arise when there are differences between the discount rate and actual returns on plan assets. Actuarial gains and losses are
recognized immediately in other comprehensive income as they occur and are not subsequently reclassified to income in future periods.
Plan amendments are changes in our defined benefit obligations that result from changes to provisions of the plans. The effects of plan
amendments are recognized immediately in income when a plan is amended.
Settlements occur when defined benefit obligations for plan participants are settled, usually through lump sum cash payments, and as a result we no
longer have any obligation to provide such participants with benefit payments in the future.
Funding of Pension and Other Employee Future Benefit Plans
We fund our defined benefit pension plans in Canada and the United States in accordance with statutory requirements, and the assets in these plans
are used to pay benefits to retirees and other employees. Some groups of employees are also eligible to make voluntary contributions in order to
receive enhanced benefits. Our supplementary pension plan in Canada is funded, while in the United States the supplementary pension plan is
unfunded.
N
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BMO Financial Group 198th Annual Report 2015 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our other employee future benefit plans in Canada and the United States are either partially funded or unfunded. Benefit payments related to
these plans are either paid through the respective plan or paid directly by us.
We measure the fair value of plan assets for our plans in Canada and the United States as at October 31. In addition to actuarial valuations for
accounting purposes, we are required to prepare valuations for determining our minimum funding requirements for our pension arrangements in
accordance with the relevant statutory framework (our “funding valuation”). An annual funding valuation is performed for our plans in Canada and
the United States. The most recent funding valuation for our primary Canadian plan was performed as at October 31, 2015 and the most recent
funding valuation for our primary U.S. plan was performed as at January 1, 2015. Benefit payments for fiscal 2016 are estimated to be $402 million.
A summary of plan information for the past three years is as follows:
(Canadian $ in millions)
Pension benefit plans
Other employee future benefit plans
Defined benefit obligation
Fair value of plan assets
Surplus (deficit) and net defined benefit asset (liability)
Surplus (deficit) is comprised of:
Funded or partially funded plans
Unfunded plans
Surplus (deficit) and net defined benefit asset (liability)
2015
7,934
8,072
138
362
(224)
138
2014
7,504
7,536
32
197
(165)
32
2013
6,181
6,267
86
192
(106)
86
2015
1,323
131
2014
1,317
113
2013
1,174
95
(1,192)
(1,204)
(1,079)
(32)
(1,160)
(1,192)
(12)
(1,192)
(1,204)
(9)
(1,070)
(1,079)
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
Pension benefit plans
Other employee future benefit plans
2015
2014
2013
2015
2014
2013
Annual benefits expense
Benefits earned by employees
Net interest (income) expense on net defined benefit (asset) liability
Gain on settlement
Administrative expenses
Remeasurement of other long-term benefits
Benefits expense
Canada and Quebec pension plan expense
Defined contribution expense
286
(5)
(13)
4
–
272
73
86
241
(11)
–
5
–
235
68
66
Total annual pension and other employee future benefit expenses recognized in
the Consolidated Statement of Income
431
369
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Weighted-average assumptions used to determine benefit expenses
234
4
–
5
–
243
69
57
369
29
50
–
–
4
83
–
–
83
25
50
–
–
(5)
70
–
–
70
27
48
–
–
(1)
74
–
–
74
Discount rate at beginning of year
Rate of compensation increase
Assumed overall health care cost trend rate
(1) Trending to 4.5% in 2030 and remaining at that level thereafter.
na – not applicable
Pension benefit plans
Other employee future benefit plans
2015
4.1%
2.9%
na
2014
4.6%
2.9%
na
2013
4.2%
2.9%
na
2015
2014
2013
4.2%
2.6%
5.5% (1)
4.7%
2.7%
5.4% (1)
4.4%
3.2%
5.4% (1)
Assumptions regarding future mortality are based on published statistics and mortality tables calibrated to plan experience, when applicable. The
current life expectancies underlying the amounts of the defined benefit obligations for our primary plans are as follows:
(Years)
Canada
United States
2015
23.5
23.9
24.5
24.9
2014
23.4
23.8
24.4
24.8
2015
22.2
23.7
23.3
24.9
2014
21.3
23.4
23.3
25.2
Life expectancy for those currently age 65
Males
Females
Life expectancy at age 65 for those currently age 45
Males
Females
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186 BMO Financial Group 198th Annual Report 2015
Changes in the estimated financial positions of our pension benefit plans and other employee future benefit plans are as follows:
(Canadian $ in millions, except as noted)
Defined benefit obligation
Defined benefit obligation at beginning of year
Opening adjustment for acquisitions
Benefits earned by employees
Interest cost on accrued benefit obligation
Gain due to settlement
Benefits paid to pensioners and employees
Settlement payments
Voluntary employee contributions
Actuarial gains (losses) due to:
Demographic assumption changes
Financial assumption changes
Plan member experience
Foreign exchange and other
Defined benefit obligation at end of year
Wholly or partially funded defined benefit obligation
Unfunded defined benefit obligation
Total defined benefit obligation
Weighted-average assumptions used to determine the defined benefit obligation
Discount rate at end of year
Rate of compensation increase
Assumed overall health care cost trend rate
Fair value of plan assets
Fair value of plan assets at beginning of year
Opening adjustment for acquisitions
Interest income on plan assets
Excess (shortfall) of actual returns over interest income
Employer contributions
Voluntary employee contributions
Benefits paid to pensioners and employees
Settlement payments
Administrative expenses
Foreign exchange and other
Fair value of plan assets at end of year
Surplus (deficit) and net defined benefit asset (liability) at end of year
Recorded in:
Other assets
Other liabilities
Surplus (deficit) and net defined benefit asset (liability) at end of year
Actuarial gains (losses) recognized in other comprehensive income
Net actuarial gains on plan assets
Actuarial gains (losses) on defined benefit obligation due to:
Demographic assumption changes
Financial assumption changes
Plan member experience
Foreign exchange and other
Actuarial gains (losses) recognized in other comprehensive income for the year
(1) Trending to 4.5% in 2030 and remaining at that level thereafter.
na – not applicable
Pension benefit plans
Other employee future benefit plans
2015
2014
2015
2014
7,504
–
286
311
(13)
(373)
(92)
12
17
(146)
108
320
7,934
7,710
224
7,934
4.2%
2.7%
na
7,536
–
316
182
231
12
(373)
(92)
(4)
264
8,072
138
502
(364)
138
182
(17)
146
(108)
(22)
181
6,181
455
241
289
–
(326)
–
12
48
532
(14)
86
7,504
7,339
165
7,504
4.1%
2.9%
na
6,267
456
300
458
284
12
(326)
–
(5)
90
7,536
32
261
(229)
32
458
(48)
(532)
14
–
(108)
1,317
–
29
55
–
(39)
–
4
(47)
(33)
11
26
1,323
163
1,160
1,323
1,174
–
25
55
–
(36)
–
3
(15)
98
(3)
16
1,317
125
1,192
1,317
4.4%
2.4%
5.5% (1)
4.2%
2.6%
5.4% (1)
113
–
5
(5)
35
4
(39)
–
–
18
131
(1,192)
–
(1,192)
(1,192)
(6)
44
35
(4)
1
70
95
–
4
5
33
3
(36)
–
–
9
113
(1,204)
–
(1,204)
(1,204)
5
14
(95)
(4)
–
(80)
N
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BMO Financial Group 198th Annual Report 2015 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis. The fair values of plan assets held by our
primary plans as at October 31 are as follows:
(Canadian $ in millions)
Canadian plans
U.S. plans (1)
Cash and money market funds (2)
Securities issued or guaranteed by: (3)
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
Pooled funds (4)
Derivative instruments (5)
Corporate debt (6)
Corporate equity (2)
2015
44
188
603
–
–
9
3,166
(5)
892
792
2014
55
151
584
4
2
5
2,780
(17)
966
834
2015
62
–
–
91
14
–
86
–
458
511
2014
39
–
–
87
18
–
85
–
401
535
5,689
5,364
1,222
1,165
(1) All of the U.S. plans’ assets have quoted prices in active markets, except pooled funds, corporate debt and securities issued or guaranteed by U.S. states, municipalities and agencies.
(2) All of the cash and money market funds and corporate equity held by Canadian plans as at October 31, 2015 and 2014 have quoted prices in active markets.
(3) $307 million ($294 million in 2014) of securities issued or guaranteed by governments held by Canadian plans have quoted prices in active markets.
(4) $1,495 million ($1,328 million in 2014) of pooled funds held by Canadian plans have quoted prices in active markets.
(5) $Nil ($1 million in 2014) of derivatives held by Canadian plans have quoted prices in active markets.
(6) $36 million ($69 million in 2014) of corporate debt held by Canadian plans have quoted prices in active markets.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
No plan assets are directly invested in the bank’s or related parties’ securities as at October 31, 2015 and 2014. As at October 31, 2015, our primary
Canadian plan indirectly held, through a BMO managed pooled fund, approximately $9 million ($11 million in 2014) of our common shares. The plans
do not hold any property we occupy or other assets we use.
The plans paid $4 million in the year ended October 31, 2015 ($4 million in 2014) to us and certain of our subsidiaries for investment
management, record-keeping, custodial and administrative services rendered.
Sensitivity of Assumptions
Key weighted-average assumptions used in measuring the defined benefit obligations for our primary plans are outlined in the following table. The
sensitivity analysis provided in the table should be used with caution as it is hypothetical and the impact of changes in each key assumption may not
be linear. The sensitivities to changes in each key variable have been calculated independently of the impact of changes in other key variables. Actual
experience may result in simultaneous changes in a number of key assumptions. Changes in one factor may result in changes in another, which
would amplify or reduce certain sensitivities.
(Canadian $ in millions, except as noted)
Discount rate (%)
Impact:
1% increase ($)
1% decrease ($)
Rate of compensation increase (%)
Impact:
0.25% increase ($)
0.25% decrease ($)
Mortality
Impact:
1 year shorter life expectancy ($)
1 year longer life expectancy ($)
Assumed overall health care cost trend rate (%)
Impact:
1% increase ($)
1% decrease ($)
(1) Trending to 4.5% in 2030 and remaining at that level thereafter.
na – not applicable
Disaggregation of Defined Benefit Obligation
Disaggregation of the defined benefit obligation for our primary plans is as follows:
Canadian pension plans
Active members
Inactive and retired members
s
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U.S. pension plans
Active members
Inactive and retired members
Canadian other employee future benefit plans
Active members
Inactive and retired members
188 BMO Financial Group 198th Annual Report 2015
Defined benefit obligation
Pension benefit plans
Other employee future benefit plans
4.2
(817)
1,033
2.7
43
(42)
(119)
116
na
na
na
4.4
(144)
183
2.4
1
(1)
(26)
26
5.5 (1)
73
(76)
2015
2014
44%
56%
46%
54%
100%
100%
68%
32%
62%
38%
100%
100%
43%
57%
45%
55%
100%
100%
Maturity Profile
The duration of the defined benefit obligation for our primary plans is as follows:
(Years)
Canadian pension plans
U.S. pension plans
Canadian other employee future benefit plans
2015
13.2
10.6
16.2
2014
13.6
11.2
16.5
Cash Flows
Cash payments we made during the year in connection with our employee future benefit plans are as follows:
(Canadian $ in millions)
Pension benefit plans
Other employee future benefit plans
Contributions to defined benefit plans
Contributions to defined contribution plans
Benefits paid directly to pensioners
2015
198
86
33
317
2014
254
66
30
350
2013
154
57
24
235
2015
2014
2013
–
–
35
35
–
–
33
33
–
–
30
30
Our best estimate of the contributions we expect to make for the year ending October 31, 2016 is approximately $195 million to our pension benefit plans and $42 million to our other employee future
benefit plans.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Note 24: Income Taxes
We report our provision for income taxes in our Consolidated Statement of Income based upon transactions recorded in our consolidated financial
statements regardless of when they are recognized for income tax purposes, with the exception of repatriation of retained earnings from our foreign
subsidiaries, as noted below.
In addition, we record an income tax expense or benefit in other comprehensive income or directly in shareholders’ equity when the taxes relate
to amounts recorded in other comprehensive income or shareholders’ equity. For example, income tax expense (recovery) on hedging gains (losses)
related to our net investment in foreign operations is recorded in our Consolidated Statement of Comprehensive Income as part of unrealized gains
(losses) on translation of net foreign operations.
Current tax is the amount of income tax recoverable (payable) in respect of the taxable loss (profit) for a period. Deferred income tax assets and
liabilities are measured at the tax rates expected to apply when temporary differences reverse. Changes in deferred income tax assets and liabilities
related to a change in tax rates are recorded in income in the period the tax rate is substantively enacted, except to the extent that the tax arises
from a transaction or event which is recognized either in other comprehensive income or directly in shareholders’ equity. Current and deferred taxes
are only offset when they are levied by the same taxation authority, levied on the same entity or group of entities and when there is a legal right to
offset.
Included in deferred income tax assets is $16 million related to Canadian tax loss carryforwards that will expire in various amounts between
2033 and 2035, $1,302 million related to U.S. tax loss carryforwards that will expire in various amounts in U.S. taxation years from 2028 through 2034
and $6 million related to U.K. tax loss carryforwards that are available for use indefinitely against relevant profits generated in the U.K. On the
evidence available, including management projections of income, we believe that there will be sufficient taxable income generated by our business
operations to support these deferred tax assets. The amount of tax on temporary differences, unused tax losses and unused tax credits for which no
deferred tax asset is recognized in our Consolidated Balance Sheet as at October 31, 2015 is $193 million. Deferred tax assets have not been
recognized in respect of these items because it is not probable that realization of these assets will occur.
Income that we earn in foreign countries through our branches or subsidiaries is generally subject to tax in those countries. We are also subject
to Canadian taxation on the income earned in our foreign branches. Canada allows a credit for certain foreign taxes paid on this income. Upon
repatriation of retained earnings from certain foreign subsidiaries, we would be required to pay tax on certain of these earnings. As repatriation of
such earnings is not planned in the foreseeable future, we have not recorded the related deferred income tax liability.
The amount of temporary differences associated with investments in subsidiaries, branches, associates and interests in joint ventures for which
deferred tax liabilities have not been recognized is $27 billion as at October 31, 2015 ($23 billion in 2014).
N
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BMO Financial Group 198th Annual Report 2015 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Provision for Income Taxes
(Canadian $ in millions)
Consolidated Statement of Income
Current
Provision for income taxes for the current period
Adjustments in respect of current tax for prior periods
Deferred
Origination and reversal of temporary differences
Effect of changes in tax rates
Other Comprehensive Income and Shareholders’ Equity
Income tax expense (recovery) related to:
Gains (losses) on remeasurement of pension and other employee future benefit plans
Unrealized (losses) on available-for-sale securities, net of hedging activities
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value
Gains (losses) on cash flow hedges
Hedging of unrealized (gains) on translation of net foreign operations
Total
Components of Total Provision for Income Taxes
(Canadian $ in millions)
Canada: Current income taxes
Federal
Provincial
Canada: Deferred income taxes
Federal
Provincial
Total Canadian
Foreign: Current income taxes
Deferred income taxes
Total foreign
Total
2015
2014
2013
685
18
248
(15)
936
51
(87)
43
174
(167)
950
547
(1)
361
(4)
903
(63)
(15)
–
51
(144)
732
1,095
(29)
(10)
(1)
1,055
126
(31)
–
(57)
(146)
947
2015
2014
2013
395
215
610
131
71
202
812
36
102
138
950
292
200
492
33
29
62
554
(58)
236
178
732
457
300
757
(109)
(76)
(185)
572
90
285
375
947
Set out below is a reconciliation of our statutory tax rates and income taxes that would be payable at these rates to the effective income tax rates
and provision for income taxes that we have recorded in our Consolidated Statement of Income:
(Canadian $ in millions, except as noted)
2015
2014
2013
Combined Canadian federal and provincial income taxes at the statutory tax rate
Increase (decrease) resulting from:
1,410
26.4%
1,382
26.4%
1,386
26.4%
Tax-exempt income from securities
Foreign operations subject to different tax rates
Change in tax rate for deferred income taxes
Income attributable to non-controlling interests
Adjustments in respect of current tax for prior periods
Other
Provision for income taxes and effective tax rate
Certain comparative figures have been reclassified to conform with the current year’s presentation.
(378)
(39)
(15)
(29)
18
(31)
936
(7.1)
(0.7)
(0.3)
(0.5)
0.3
(0.6)
17.5%
(343)
(69)
(4)
(33)
(1)
(29)
903
(6.5)
(1.3)
(0.1)
(0.7)
–
(0.6)
(250)
(10)
(1)
(35)
(29)
(6)
(4.7)
(0.2)
–
(0.7)
(0.6)
(0.1)
17.2%
1,055
20.1%
s
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190 BMO Financial Group 198th Annual Report 2015
Components of Deferred Income Tax Balances
(Canadian $ in millions)
Deferred Income Tax Assets (1)
As at October 31, 2013
Acquisitions
Benefit (expense) to income statement
Benefit (expense) to equity
Translation and other
As at October 31, 2014
Benefit (expense) to income statement
Benefit (expense) to equity
Translation and other
As at October 31, 2015
Deferred Income Tax Liabilities (2)
As at October 31, 2013
Acquisitions
Benefit (expense) to income statement
Expense to equity
Translation and other
As at October 31, 2014
Benefit (expense) to income statement
Benefit (expense) to equity
Translation and other
As at October 31, 2015
Allowance
for credit losses
Employee
future benefits
Deferred
compensation
benefits
Other
comprehensive
income
Tax loss
carry-
forwards
Other
Total
914
–
(252)
–
96
758
149
–
112
1,019
329
8
31
3
3
374
(1)
–
9
382
344
15
42
–
18
419
(16)
–
28
431
(29)
1,485
461
3,504
–
–
(3)
25
(7)
–
(20)
(4)
(31)
10
(180)
–
103
2
49
–
72
35
(310)
–
317
1,418
584
3,546
(300)
–
206
14
–
76
(154)
(20)
427
1,324
674
3,799
Premises and
equipment
Pension
benefits
Goodwill and
intangible assets
Securities
Other
Total
(320)
5
(10)
–
(24)
(349)
(71)
–
(34)
(454)
(31)
–
(35)
60
2
(4)
29
(51)
(7)
(33)
(275)
(35)
(90)
28
–
(30)
(367)
92
–
(41)
(316)
–
32
–
2
(1)
6
–
4
9
77
–
(62)
–
1
16
(135)
–
11
(584)
(85)
(47)
60
(49)
(705)
(79)
(51)
(67)
(108)
(902)
(1) Deferred tax assets of $3,162 million and $3,019 million as at October 31, 2015 and 2014, respectively, are presented on the balance sheet net by legal jurisdiction.
(2) Deferred tax liabilities of $265 million and $178 million as at October 31, 2015 and 2014, respectively, are presented on the balance sheet net by legal jurisdiction.
Note 25: Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to our shareholders, after deducting preferred share dividends by the daily
average number of fully paid common shares outstanding throughout the year.
Diluted earnings per share is calculated in the same manner, with further adjustments made to reflect the dilutive impact of instruments
convertible into our common shares.
The following table presents our basic and diluted earnings per share:
Basic Earnings per Share
(Canadian $ in millions, except as noted)
Net income attributable to bank shareholders
Dividends on preferred shares
Net income available to common shareholders
Average number of common shares outstanding (in thousands)
Basic earnings per share (Canadian $)
Diluted Earnings per Share
Net income available to common shareholders
Stock options potentially exercisable (1)
Common shares potentially repurchased
Average diluted number of common shares outstanding (in thousands)
Diluted earnings per share (Canadian $)
2015
4,370
(117)
4,253
2014
4,277
(120)
4,157
2013
4,130
(120)
4,010
644,916
645,860
648,476
6.59
6.44
6.19
4,253
9,472
(7,226)
4,157
10,832
(8,217)
4,010
10,656
(9,326)
647,162
648,475
649,806
6.57
6.41
6.17
(1) In computing diluted earnings per share, we excluded average stock options outstanding of 1,906,715, 1,734,932 and 2,677,737 with weighted-average exercise prices of $185.22, $235.07 and
$201.93 for the years ended October 31, 2015, 2014 and 2013, respectively, as the average share price for the period did not exceed the exercise price.
N
o
t
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BMO Financial Group 198th Annual Report 2015 191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26: Commitments, Guarantees, Pledged Assets, Provisions and Contingent Liabilities
In the normal course of business, we enter into a variety of contracts under which we may be required to make payments to reimburse the
counterparty for a loss if a third party does not perform according to the terms of a contract or does not make payments when due under the terms
of a debt instrument, and contracts under which we provide indirect guarantees of the indebtedness of another party all of which are considered
guarantees.
Guarantees that qualify as derivatives are accounted for in accordance with the policy for derivative instruments (see Note 8). For guarantees
that do not qualify as derivatives, the liability is initially recorded at fair value, which is generally the fee received. Subsequently, guarantees are
recorded at the higher of the initial fair value, less amortization to recognize any fee income earned over the period, and the best estimate of the
amount required to settle the obligation. Any change in the liability is reported in our Consolidated Statement of Income.
In addition, we enter into a variety of commitments, including off-balance sheet credit instruments such as backstop liquidity facilities, securities
lending, letters of credit, credit default swaps and commitments to extend credit, as a method of meeting the financial needs of our customers. These
commitments include contracts where we may be required to make payments to a counterparty, based on changes in the value of an asset, liability
or equity security that the counterparty holds, due to changes in an underlying interest rate, foreign exchange rate or other variable. The contractual
amount of our commitments represents our maximum undiscounted potential exposure, before possible recoveries under recourse and collateral
provisions. Collateral requirements for these instruments are consistent with collateral requirements for loans.
A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of
the funding likely to be required for these commitments.
We strive to limit credit risk by dealing only with counterparties that we believe are creditworthy, and we manage our credit risk for other credit
instruments using the same credit risk process that is applied to loans and other credit assets.
The maximum amount payable related to our various commitments is as follows:
(Canadian $ in millions)
Financial Guarantees
Standby letters of credit (1)
Credit default swaps (2) (3)
Other Credit Instruments
Backstop liquidity facilities (4)
Securities lending
Documentary and commercial letters of credit
Commitments to extend credit (5)
Other commitments
Total
2015
2014
15,351
9,385
5,528
6,081
1,101
101,173
3,586
13,949
11,983
5,501
5,269
1,111
78,817
2,261
142,205
118,891
(1) As at October 31, 2015, we recognized $35 million ($50 million in 2014) in other liabilities.
(2) As at October 31, 2015, $8,000 million of the credit default swaps outstanding relates to our credit protection vehicle and will mature within one year.
(3) The fair value of the related derivative liabilities included in our Consolidated Balance Sheet was $48 million as at October 31, 2015 ($124 million in 2014).
(4) As at October 31, 2015, $53 million was outstanding from backstop liquidity facilities ($53 million in 2014) and was recognized in other liabilities.
(5) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Financial Guarantees
Standby letters of credit represent our obligation to make payments to third parties on behalf of customers if they are unable to make the required
payments or meet other contractual requirements. The majority have a term of one year or less. Collateral requirements for standby letters of credit
and guarantees are consistent with our collateral requirements for loans. Standby letters of credit and guarantees include our guarantee of a
subsidiary’s debt directly provided to a third party.
Written credit default swaps require us to compensate a counterparty following the occurrence of a credit event in relation to a specified
reference obligation, such as a bond or a loan. The terms of these contracts range from less than one year to 10 years. Refer to Note 8 for details.
Other Credit Instruments
Backstop liquidity facilities are provided to asset-backed commercial paper (“ABCP”) programs administered by either us or third parties as an
alternative source of financing in the event that such programs are unable to access ABCP markets or when predetermined performance measures of
the financial assets held by these programs are not met. The terms of the backstop liquidity facilities do not require us to advance money to these
programs in the event of bankruptcy of the borrower. The facilities’ terms are generally no longer than one year, but can be several years.
We lend eligible customers’ securities to third party borrowers who have been evaluated for credit risk using the same credit risk process that is
applied to loans and other credit assets. In connection with these activities, we provide an indemnification to clients against losses resulting from the
failure of the borrower to return loaned securities when due. All borrowings are fully collateralized with cash or marketable securities. As securities
are loaned, we require borrowers to maintain collateral which is equal to or in excess of 100% of the fair value of the securities borrowed. The
collateral is revalued on a daily basis.
Documentary and commercial letters of credit represent our agreement to honour drafts presented by a third party upon completion of specific
activities.
Commitments to extend credit represent our commitment to our customers to grant them credit in the form of loans or other financings for
specific amounts and maturities, subject to their meeting certain conditions.
As a participant in merchant banking activities, we enter into commitments to fund external private equity funds and investments in equity and
debt securities at market value at the time the commitments are drawn. In addition, we act as underwriter for certain new issuances under which we
alone or together with a syndicate of financial institutions purchase the new issue for resale to investors.
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192 BMO Financial Group 198th Annual Report 2015
Indemnification Agreements
In the normal course of operations, we enter into various agreements that provide general indemnifications. These indemnifications typically occur in
connection with sales of assets, securities offerings, service contracts, membership agreements, clearing arrangements, derivative contracts and
leasing transactions. Based on historical experience, we expect the risk of loss to be remote.
Exchange and Clearinghouse Guarantees
We are a member of several securities and futures exchanges and clearinghouses. Membership in certain of these organizations may require us to
pay a pro rata share of the losses incurred by the organization in the event of default of another member. It is difficult to estimate our maximum
exposure under these membership agreements since this would require an assessment of future claims that may be made against us that have not
yet occurred. Based on historical experience, we expect the risk of loss to be remote.
Pledged Assets
In the normal course of business, we pledge assets as security for various liabilities that we incur.
The following tables summarize our pledged assets and collateral, and the activities to which they relate:
(Canadian $ in millions)
Bank Assets
Cash and securities (1)
Issued or guaranteed by the government of Canada
Issued or guaranteed by a Canadian province, municipality or school corporation
Other
Mortgages, securities borrowed or purchased under resale agreements and other
(Canadian $ in millions)
Assets pledged to:
Clearing systems, payment systems and depositories
Foreign governments and central banks
Obligations related to securities sold under repurchase agreements
Securities borrowing and lending
Derivatives transactions
Securitization
Covered bonds
Other
Total pledged assets and collateral (1)
2015
2014
14,712
5,343
42,625
72,004
7,077
6,000
44,509
64,505
134,684
122,091
2015
2014
1,626
3
25,268
46,678
12,798
27,373
12,301
8,637
540
2
25,492
42,427
8,682
26,031
7,111
11,806
134,684
122,091
(1) Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Collateral
When entering into trading activities such as purchases under resale agreements, securities borrowing and lending activities or financing and for
certain derivative transactions, we require our counterparties to provide us with collateral that will protect us from losses in the event of their default.
Collateral transactions (received or pledged) are typically conducted under terms that are usual and customary in standard trading activities. If there is
no default, the securities or their equivalents must be returned to or returned by the counterparty at the end of the contract.
The fair value of counterparty collateral that we are permitted to sell or repledge (in the absence of default by the owner of the collateral) was
$111,088 million as at October 31, 2015 ($92,464 million as at October 31, 2014). The fair value of collateral that we have sold or repledged was
$58,266 million as at October 31, 2015 ($59,440 million as at October 31, 2014).
Lease Commitments
We have entered into a number of non-cancellable leases for premises and equipment. Our computer and software leases are typically fixed for one
term and our premises leases have various renewal options and rights. Our total contractual rental commitments as at October 31, 2015 were
$2,077 million. The commitments for each of the next five years and thereafter are $353 million for 2016, $328 million for 2017, $274 million
for 2018, $236 million for 2019, $211 million for 2020 and $675 million thereafter. Included in these amounts are the commitments related to
904 leased branch locations as at October 31, 2015.
Provisions and Contingent Liabilities
Provisions are recognized when we have a legal or constructive obligation as a result of past events, such as contractual commitments, legal or other
obligations where we can reliably estimate the obligation, and it is probable we will be required to settle the obligation. We recognize as a provision
the best estimate of the amount required to settle the obligations as of the balance sheet date, taking into account the risks and uncertainties
surrounding the obligations.
Changes in the provision balance during the year were as follows:
(Canadian $ in millions)
Balance at beginning of year
Additional provisions/increase in provisions
Provisions utilized
Amounts reversed
Exchange differences and other movements
Balance at end of year
2015
195
268
(230)
(32)
10
211
2014
209
176
(133)
(59)
2
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Certain comparative figures have been reclassified to conform with the current year’s presentation.
Contingent liabilities are potential obligations arising from past events, the existence of which will only be confirmed by the occurrence or non-
occurrence of one or more future events not wholly within our control.
BMO Financial Group 198th Annual Report 2015 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The bank and its subsidiaries are party to legal proceedings, including regulatory investigations, in the ordinary course of business. While there is
inherent difficulty in predicting the outcome of these other proceedings, management does not expect the outcome of any of these proceedings,
individually or in the aggregate, to have a material adverse effect on the consolidated financial position or the results of operations of the bank.
BMO Nesbitt Burns Inc., an indirect subsidiary of the bank, has been named as a defendant in several individual actions and proposed class
actions in Canada and the United States brought on behalf of shareholders of Bre-X Minerals Ltd. Many of the actions have been resolved as to
BMO Nesbitt Burns Inc., including two during the year ended October 31, 2010. Management believes that there are strong defences to the remaining
claims and will vigorously defend them.
Note 27: Operating and Geographic Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a distinct mandate. We determine our operating groups based on our
management structure and therefore these groups, and the results attributed to them, may not be comparable with those of other financial services
companies. We evaluate the performance of our groups using reported and adjusted measures such as net income, revenue growth, return on equity,
and non-interest expense-to-revenue (productivity) ratio, as well as operating leverage.
Personal and Commercial Banking
Personal and Commercial Banking (“P&C”) is comprised of two operating segments: Canadian Personal and Commercial Banking and U.S. Personal and
Commercial Banking.
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking (“Canadian P&C”) provides a full range of financial products and services to more than eight million
customers. Personal Banking provides financial solutions for everyday banking, financing, investing, credit card and creditor insurance needs.
Commercial banking provides our small business and commercial banking customers with a broad suite of integrated commercial and capital markets
products, as well as financial advisory services.
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking (“U.S. P&C”) offers a broad range of products and services. Our retail and small and mid-sized business banking
customers are served through our branches, contact centres, online and mobile banking platforms and automated banking machines across eight
states.
Wealth Management
BMO’s group of wealth management businesses serves a full range of client segments from mainstream to ultra high net worth and institutional,
with a broad offering of wealth management products and services, including insurance products. Wealth Management (“WM”) is a global business
with an active presence in markets across Canada, the United States, Europe and Asia.
BMO Capital Markets
BMO Capital Markets (“BMO CM”) is a North American-based financial services provider offering a complete range of products and services to
corporate, institutional and government clients. Through our Investment and Corporate Banking and Trading Products lines of business, we operate in
29 locations around the world, including 16 offices in North America.
Corporate Services
Corporate Services consists of Corporate Units and Technology and Operations (“T&O”). Corporate Units provide enterprise-wide expertise and
governance support in a variety of areas, including strategic planning, risk management, finance, legal and compliance, marketing, communications
and human resources. T&O manages, maintains and provides governance over information technology, operations services, real estate and sourcing
for the bank.
The costs of providing these Corporate Units and T&O services are largely transferred to the three client operating groups (P&C, WM and BMO
CM), and only relatively minor amounts are retained in Corporate Services results. As such, Corporate Services operating results largely reflect the
impact of certain asset-liability management activities, the elimination of taxable equivalent adjustments, the results from certain impaired real
estate secured assets, purchased loan accounting impacts, certain acquisition integration costs, restructuring costs, run-off structured credit activities
and adjustments to the collective allowance for credit losses.
Basis of Presentation
The results of these operating groups are based on our internal financial reporting systems. The accounting policies used in these segments are
generally consistent with those followed in the preparation of our consolidated financial statements, as disclosed in Note 1 and throughout the
consolidated financial statements. A notable accounting measurement difference is the taxable equivalent basis adjustment as described below.
Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more
closely align our organizational structure with our strategic priorities. In addition, revenue and expense allocations are updated to more accurately
align with current experience. Results for prior periods are restated to conform to the current year’s presentation.
Taxable Equivalent Basis
We analyze net interest income on a taxable equivalent basis (“teb”) at the operating group level. This basis includes an adjustment that increases
reported revenues and the reported provision for income taxes by an amount that would raise revenues on certain tax-exempt items to a level that
incurs tax at the statutory rate. The operating groups’ teb adjustments are eliminated in Corporate Services revenue and provision for income taxes.
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194 BMO Financial Group 198th Annual Report 2015
Inter-Group Allocations
Various estimates and allocation methodologies are used in the preparation of the operating groups’ financial information. We allocate expenses
directly related to earning revenue to the groups that earned the related revenue. Expenses not directly related to earning revenue, such as overhead
expenses, are allocated to operating groups using allocation formulas applied on a consistent basis. Operating group net interest income reflects
internal funding charges and credits on the groups’ assets, liabilities and capital, at market rates, taking into account relevant terms and currency
considerations. The offset of the net impact of these charges and credits is reflected in Corporate Services.
Geographic Information
We operate primarily in Canada and the United States but we also have operations in the United Kingdom, Europe, the Caribbean and Asia, which are
grouped in other countries. We allocate our results by geographic region based on the location of the unit responsible for managing the related
assets, liabilities, revenues and expenses, except for the consolidated provision for credit losses, which is allocated based upon the country of
ultimate risk. Our results and average assets, grouped by operating segment and geographic region, are as follows:
(Canadian $ in millions)
2015 (2)
Net interest income
Non-interest revenue
Total Revenue
Provision for credit losses
Insurance claims, commissions and changes in policy benefit
liabilities
Amortization
Non-interest expense
Income before taxes and non-controlling interest in
subsidiaries
Provision for income taxes
Reported net income
Non-controlling interest in subsidiaries
Net Income attributable to bank shareholders
Canadian
P&C
U.S.
P&C
Wealth
Management
BMO CM
Corporate
Services (1)
Total
Canada
United
States
Other
countries
4,937
1,703
6,640
496
–
236
3,104
2,804
700
2,104
–
2,104
2,834
775
3,609
119
–
223
2,163
1,104
277
827
–
827
642
5,121
5,763
7
1,254
231
3,126
1,145
295
850
5
845
1,334
2,539
3,873
26
–
98
2,388
1,361
329
1,032
–
(777)
281
8,970
10,419
5,599
6,170
(496) 19,389
612
(36)
11,769
561
–
–
613
1,254
788
11,394
(1,073)
(665)
(408)
30
5,341
936
4,405
35
624
428
6,304
3,852
650
3,202
30
1,032
(438)
4,370
3,172
3,180
2,716
5,896
52
–
284
4,372
1,188
240
948
–
948
191
1,533
1,724
(1)
630
76
718
301
46
255
5
250
Average Assets
196,788 88,905
29,147 290,325
59,226 664,391 402,166 234,508 27,717
(Canadian $ in millions)
2014 (2)
Net interest income
Non-interest revenue
Total Revenue
Provision for credit losses
Insurance claims, commissions and changes in policy benefit
liabilities
Amortization
Non-interest expense
Income before taxes and non-controlling interest in
subsidiaries
Provision for income taxes
Reported net income
Non-controlling interest in subsidiaries
Net Income attributable to bank shareholders
Canadian
P&C
U.S.
P&C
Wealth
Management
BMO CM
Corporate
Services (1)
Total
Canada
United
States
Other
countries
4,780
1,625
6,405
528
–
229
2,953
2,695
679
2,016
–
2,016
2,482
669
3,151
177
–
223
1,854
897
243
654
–
654
560
4,778
5,338
(3)
1,505
193
2,647
996
216
780
3
777
1,177
2,543
3,720
(18)
–
102
2,249
1,387
310
1,077
–
(538)
147
(391)
(123)
–
–
471
(739)
(545)
(194)
53
8,461
9,762
18,223
561
1,505
747
10,174
5,236
903
4,333
56
5,476
6,541
12,017
533
1,230
424
5,871
3,959
680
3,279
54
1,077
(247)
4,277
3,225
2,836
2,325
5,161
30
–
279
3,809
1,043
212
831
–
831
149
896
1,045
(2)
275
44
494
234
11
223
2
221
Average Assets
190,092
74,371
24,980
259,746
44,739
593,928
370,687
200,915
22,326
(Canadian $ in millions)
2013 (2)
Net interest income
Non-interest revenue
Total Revenue
Provision for credit losses
Insurance claims, commissions and changes in policy benefit
liabilities
Amortization
Non-interest expense
Income before taxes and non-controlling interest in
subsidiaries
Provision for income taxes
Reported net income
Non-controlling interest in subsidiaries
Net Income attributable to bank shareholders
Canadian
P&C
U.S.
P&C
Wealth
Management
BMO CM
Corporate
Services (1)
Total
Canada
United
States
Other
countries
4,536
1,484
6,020
559
–
229
2,826
2,406
594
1,812
–
1,812
2,321
679
3,000
236
–
225
1,711
828
238
590
–
590
558
3,658
4,216
3
767
145
2,206
1,095
268
827
–
827
1,197
2,186
3,383
(36)
–
94
1,988
1,337
297
1,040
–
65
146
8,677
8,153
211
(175)
16,830
587
5,383
5,336
10,719
654
–
–
802
(416)
(342)
(74)
65
767
693
9,533
5,250
1,055
4,195
65
561
406
5,574
3,524
627
2,897
54
3,223
2,218
5,441
(65)
–
274
3,682
1,550
432
1,118
11
1,040
(139)
4,130
2,843
1,107
71
599
670
(2)
206
13
277
176
(4)
180
–
180
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Average Assets
177,033
65,764
22,143
246,702
43,789
555,431
345,703
189,476
20,252
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis – see Basis of Presentation section.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO Financial Group 198th Annual Report 2015 195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 28: Significant Subsidiaries
As at October 31, 2015, the bank, either directly or indirectly through its subsidiaries, controls the following significant operating subsidiaries.
Head or principal office
Book value of shares owned by the bank
(Canadian $ in millions)
Bank of Montreal Capital Markets (Holdings) Limited
BMO Capital Markets Limited
Pyrford International Limited
Bank of Montreal (China) Co. Ltd.
Bank of Montreal Holding Inc. and subsidiaries, including:
BMO Investments Limited
BMO Reinsurance Limited
BMO Nesbitt Burns Holdings Corporation
BMO Nesbitt Burns Inc.
BMO Private Investment Counsel Inc. (f.k.a BMO Harris Investment Management Inc.)
BMO Asset Management Inc.
BMO Capital Markets Real Estate Inc.
BMO Nesbitt Burns Securities Ltd.
BMO Private Equity (Canada) Inc. and subsidiaries
BMO Nesbitt Burns Financial Services Inc.
BMO Holding Finance, LLC
BMO Investments Inc.
BMO Global Tax Advantage Fund Inc.
BMO InvestorLine Inc.
BMO Service Inc.
Bank of Montreal Ireland plc
Bank of Montreal Mortgage Corporation
BMO Mortgage Corp.
BMO Financial Corp. and subsidiaries, including:
Monegy, Inc.
BMO Asset Management Corp. and subsidiaries
BMO Capital Markets Corp.
BMO Harris Bank National Association and subsidiaries
BMO Harris Investment Company LLC.
BMO Harris Central National Association
BMO Harris Financial Advisors, Inc.
BMO Harris Financing, Inc. and subsidiaries
BMO Private Equity (U.S.), Inc. and subsidiaries
CTC my CFO, LLC
Stoker Ostler Wealth Advisors, Inc.
Sullivan, Bruyette, Speros & Blayney, Inc.
BMO Global Asset Management (Europe) Limited
F&C Asset Management plc and subsidiaries, including:
F&C Asset Management Asia Ltd.
F&C Management Luxembourg SA
F&C Netherlands BV
Ftc Portugal, Gestao de Patrimonios
BMO Real Estate Partners LLP. and subsidiaries
BMO Life Insurance Company
BMO Life Holdings (Canada), ULC
BMO Life Assurance Company
BMO Trust Company
LGM (Bermuda) Limited
Lloyd George Investment Management (Bermuda) Limited
BMO Global Asset Management (Asia) Limited
LGM Investments Limited (f.k.a Lloyd George Management (Europe) Limited)
Lloyd George Management (Singapore) Pte Ltd.
London, England
London, England
London, England
Beijing, China
Calgary, Canada
Hamilton, Bermuda
St. Michaels, Barbados
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Wilmington, United States
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Dublin, Ireland
Calgary, Canada
Vancouver, Canada
Chicago, United States
Toronto, Canada
Chicago, United States
New York, United States
Chicago, United States
Las Vegas, United States
Roselle, United States
Chicago, United States
Chicago, United States
Chicago, United States
Palo Alto, United States
Scottsdale, United States
McLean, United States
London, England
London, England
Hong Kong, China
Luxembourg
Amsterdam, Netherlands
Lisbon, Portugal
London, England
Toronto, Canada
Halifax, Canada
Toronto, Canada
Toronto, Canada
Hamilton, Bermuda
Hamilton, Bermuda
Hong Kong, China
London, England
Singapore
273
426
27,143
2,559
18,006
18
369
918
983
89
Significant Restrictions
Our ability to transfer funds between our subsidiaries may be restricted by statutory, contractual, capital and regulatory requirements. Restrictions
include:
‰ Assets pledged as security for various liabilities we incur. Refer to Note 26 for details.
‰ Assets of our consolidated structured entities that are held for the benefit of the note holders. Refer to Note 7 for details.
‰ Assets held by our insurance subsidiaries. Refer to Note 12 for details.
‰ Regulatory and statutory requirements that reflect capital and liquidity requirements. Refer to Note 21 for details.
‰ Funds required to be held with central banks. Refer to Note 2 for details.
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196 BMO Financial Group 198th Annual Report 2015
Note 29: Related Party Transactions
Related parties include subsidiaries, associates, joint ventures, key management personnel and employee future benefit plans. Transactions with our
subsidiaries are eliminated on consolidation, and are not disclosed as related party transactions.
Key Management Personnel Compensation
Key management personnel is defined as those persons having authority and responsibility for planning, directing and/or controlling the activities of
an entity, being the members of our Board of Directors (“directors”) and certain senior executives.
The following table presents the compensation of key management personnel.
(Canadian $ in millions)
Base salary and incentives
Post-employment benefits
Share-based payments (1)
Total key management personnel compensation
(1) Amounts included in share-based payments are the fair values of awards granted in the year.
Termination benefits and other long-term benefits were $nil in 2015 ($nil in 2014).
2015
2014
20
2
27
49
18
2
21
41
We offer senior executives preferential interest rates on credit card balances, a fee-based subsidy on annual credit card fees, and a select suite of
customer loan and mortgage products at rates normally accorded to preferred customers. At October 31, 2015, loans to key management personnel
totalled $15 million ($5 million in 2014).
Directors receive a specified amount of their annual retainers in deferred stock units. Until a director’s shareholdings (including deferred stock
units) are eight times greater than their annual retainer, they are required to take 100% of their annual retainers and other fees in the form of either
our common shares or deferred stock units. They may elect to receive the remainder of such retainer fee and other remuneration in cash, common
shares or deferred stock units.
Directors of our wholly owned subsidiary, BMO Financial Corp., are required to take a specified minimum amount of their annual retainers and
other fees in the form of deferred stock units.
Joint Ventures and Associates
We provide banking services to our joint ventures and associates on the same terms offered to our customers for these services. Our investment in a
joint venture of which we own 50% totalled $256 million as at October 31, 2015 ($216 million in 2014). Our investments in associates over which
we exert significant influence totalled $389 million as at October 31, 2015 ($286 million in 2014).
Employee Future Benefit Plans
See Note 23 for a description of related party transactions with our employee future benefit plans.
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BMO Financial Group 198th Annual Report 2015 197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 30: Contractual Maturities of Assets and Liabilities and Off-Balance
Sheet Commitments
The tables below show the remaining contractual maturity of on-balance sheet assets and liabilities and off-balance sheet commitments. The
contractual maturity of financial assets and liabilities is an input to, but is not necessarily consistent with, the expected maturity of assets and
liabilities that is used in the management of liquidity and funding risk. We forecast asset and liability cash flows, both under normal market
conditions and under a number of stress scenarios to manage liquidity and funding risk. Stress scenarios include assumptions for loan repayments,
deposit withdrawals, and credit commitment and liquidity facility drawdowns by counterparty and product type. Stress scenarios also consider the
time horizon over which liquid assets can be monetized and the related haircuts and potential collateral requirements that may result from both
market volatility and credit rating downgrades, among other assumptions. For further details, see the blue tinted font portion of the Liquidity and
Funding Risk section of Management’s Discussion and Analysis.
(Canadian $ in millions)
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2015
Total
On-Balance Sheet Financial Instruments
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Trading securities
Available-for-sale securities
Held-to-maturity securities
Other securities
Total securities
Securities borrowed or purchased under resale
agreements
Loans
39,438
–
5,077
1,728
954
1,260
66
3
1,432
1,198
96
–
–
411
633
995
367
–
–
94
–
70
–
2
–
–
–
–
857
40,295
–
7,382
3,900
590
311
–
2,241
2,434
318
–
3,639
4,641
658
–
5,993
18,699
3,721
61
15,940
16,476
3,895
13
37,728
1,713
–
943
72,460
48,006
9,432
1,020
2,283
2,726
1,995
4,801
4,993
8,938
28,474
36,324
40,384
130,918
44,959
17,564
4,400
714
389
40
–
–
–
68,066
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Customers’ liability under acceptances
Allowance for credit losses
1,189
475
–
6,406
8,607
–
2,022
619
–
8,895
2,692
–
4,014
1,334
–
5,929
8
–
4,758
1,509
–
6,482
–
–
4,567
1,513
–
16,426
–
–
17,807
3,844
–
16,118
–
–
61,913
23,578
–
45,541
–
–
9,648
9,228
–
8,203
–
–
–
23,498
7,980
31,076
–
(1,855)
105,918
65,598
7,980
145,076
11,307
(1,855)
Total loans and acceptances, net of allowance
16,677
14,228
11,285
12,749
22,506
37,769
131,032
27,079
60,699
334,024
Other Assets
Derivative instruments
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax assets
Other
Total other assets
Total Assets
3,611
–
–
–
–
–
1,249
2,862
–
–
–
–
–
445
1,043
–
–
–
–
–
47
1,827
–
–
–
–
–
4
4,860
3,307
1,090
1,831
752
–
–
–
–
–
–
752
4,961
–
–
–
–
–
–
4,961
9,591
–
–
–
–
–
12
13,591
–
–
–
–
–
4,347
–
2,285
6,069
2,208
561
3,162
2,569
38,238
2,285
6,069
2,208
561
3,162
8,673
9,603
17,938
16,854
61,196
113,294
39,553
19,181
20,189
28,710
51,710
169,109
81,341
118,794
641,881
s
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198 BMO Financial Group 198th Annual Report 2015
(Canadian $ in millions)
Liabilities and Equity
Deposits (1)
Banks
Businesses and governments
Individuals
Total deposits
Other liabilities
Derivative instruments
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Current tax liabilities
Deferred tax liabilities
Securitization and liabilities related to structured
entity
Other
Total other liabilities
Subordinated debt
Total Equity
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2015
Total
10,188
22,866
1,632
5,618
39,848
3,457
2,917
22,135
5,392
966
7,498
3,872
1,172
10,962
6,086
101
14,497
8,787
–
27,112
15,135
–
27,135
6,173
10,891 107,809 263,618
1,784 101,271 147,416
34,686
48,923
30,444
12,336
18,220
23,385
42,247
12,675 215,253 438,169
2,586
8,607
21,226
35,599
–
–
2
8,148
3,858
2,692
–
3,990
–
–
880
319
121
–
–
446
30
1,574
8
–
3,493
–
–
1,259
–
–
6,030
–
–
11,637
–
–
12,202
–
–
104
–
–
77
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
102
265
42,639
11,307
21,226
39,891
102
265
2,514
15
337
185
3,864
1,071
8,834
3,181
4,796
2,201
–
7,130
21,673
22,280
76,168
11,739
2,179
6,126
1,858
10,965
23,652
19,199
7,497 159,383
–
–
–
–
–
–
–
–
–
–
100
–
–
–
4,316
–
4,416
–
39,913
39,913
Total Liabilities and Equity
110,854
60,662
32,623
18,462
20,078
34,450
65,889
36,190 262,663 641,881
(1) Deposits payable on demand and payable after notice have been included under no maturity.
(Canadian $ in millions)
Off-Balance Sheet Commitments
Commitments to extend credit (1)
Operating leases
Securities Lending
Purchase obligations
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2015
Total
1,815
29
6,081
52
6,651
60
–
104
3,994
89
–
155
5,946
88
–
155
6,549
87
–
156
15,542
328
–
561
63,885
721
–
531
2,319
675
–
133
– 106,701
2,077
–
6,081
–
1,847
–
(1) A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these
commitments.
N
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e
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BMO Financial Group 198th Annual Report 2015 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions)
On-Balance Sheet Financial Instruments
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Trading securities
Available-for-sale securities
Held-to-maturity securities
Other securities
Total securities
Securities borrowed or purchased under resale
agreements
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Customers’ liability under acceptances
Allowance for credit losses
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2014
Total
27,625
–
4,124
1,420
542
1,014
–
–
1,159
345
–
10
–
521
584
553
113
3
–
14
1,344
1,138
98
2
–
31
1,274
714
294
–
–
–
–
–
–
–
761
28,386
–
6,110
5,255
8,750
1,356
–
9,722
21,047
4,172
45
17,409
11,699
4,311
19
47,733
1,706
–
908
85,022
46,966
10,344
987
1,556
1,514
1,253
2,582
2,282
15,361
34,986
33,438
50,347
143,319
39,014
10,255
2,536
678
938
134
–
–
–
53,555
1,284
386
–
5,898
8,871
–
1,528
458
–
7,232
1,920
–
3,763
1,097
–
5,401
77
–
4,725
1,193
–
5,128
1
–
4,470
1,257
–
12,030
9
–
20,497
6,491
–
10,328
–
–
55,659
20,847
–
37,525
–
–
9,087
8,981
–
6,294
–
–
–
23,433
7,972
30,930
–
(1,734)
101,013
64,143
7,972
120,766
10,878
(1,734)
Total loans and acceptances, net of allowance
16,439
11,138
10,338
11,047
17,766
37,316
114,031
24,362
60,601
303,038
Other Assets
Derivative instruments
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax assets
Other
Total other assets
Total Assets
2,703
–
–
–
–
–
1,509
2,348
–
–
–
–
–
271
1,387
–
–
–
–
–
149
1,746
–
–
–
–
–
4
4,212
2,619
1,536
1,750
796
–
–
–
–
–
–
796
3,436
–
–
–
–
–
–
3,436
8,955
–
–
–
–
–
64
11,284
–
–
–
–
–
3,545
–
2,276
5,353
2,052
665
3,019
2,689
32,655
2,276
5,353
2,052
665
3,019
8,231
9,019
14,829
16,054
54,251
92,970
26,946
16,184
16,071
21,813
56,247
158,036
72,629
127,763
588,659
Certain comparative figures have been reclassified to conform with the current year’s presentation.
s
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200 BMO Financial Group 198th Annual Report 2015
(Canadian $ in millions)
Liabilities and Equity
Deposits (1)
Banks
Businesses and governments
Individuals
Total deposits
Other liabilities
Derivative instruments
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase agreements
Current tax liabilities
Deferred tax liabilities
Securitization and liabilities related to structured
entity
Other
Total other liabilities
Subordinated debt
Total Equity
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2014
Total
7,495
26,644
2,039
4,680
25,061
3,290
1,067
20,255
5,472
597
10,157
4,296
2
8,439
5,288
–
16,347
6,386
–
23,914
16,454
–
8,198
1,528
4,402
100,124
90,953
18,243
239,139
135,706
36,178
33,031
26,794
15,050
13,729
22,733
40,368
9,726
195,479
393,088
1,545
8,871
27,348
36,757
–
–
3
7,226
2,321
1,920
–
2,624
–
–
429
142
1,325
77
–
149
–
–
1,560
16
2,095
1
–
95
–
–
341
330
1,399
9
–
70
–
–
1,135
26
4,565
–
–
–
–
–
9,633
–
–
–
–
–
10,774
–
–
–
–
–
–
–
–
–
235
178
33,657
10,878
27,348
39,695
235
178
3,976
193
10,066
3,577
4,955
1,723
–
7,565
22,465
20,798
81,750
7,436
3,127
2,862
2,639
8,734
23,276
17,452
7,978
155,254
–
–
–
–
–
–
–
–
–
–
–
–
100
4,813
–
4,913
–
–
35,404
35,404
Total Liabilities and Equity
117,928
40,467
29,921
17,912
16,368
31,467
63,744
31,991
238,861
588,659
(1) Deposits payable on demand and payable after notice have been included under no maturity.
(Canadian $ in millions)
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2014
Total
Off-Balance Sheet Commitments
Commitments to extend credit (1)
Operating leases
Securities Lending
Purchase obligations
1,274
26
5,269
58
1,714
52
–
113
3,844
77
–
169
6,046
77
–
169
3,828
76
–
169
15,040
281
–
586
51,035
630
–
783
1,537
638
–
209
–
–
–
–
84,318
1,857
5,269
2,256
(1) A large majority of these commitments expire without being drawn upon. As a result, the total contractual amounts may not be representative of the funding likely to be required for these
commitments.
N
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BMO Financial Group 198th Annual Report 2015 201
GLOSSARY OF FINANCIAL TERMS
Glossary of Financial Terms
Adjusted Earnings and Measures
present results adjusted to exclude
the impact of certain items, as set out
in the Non-GAAP Measures section.
Management considers both reported
and adjusted results to be useful in
assessing underlying ongoing busi-
ness performance.
Adjusted Return on Tangible
Common Equity is calculated as
adjusted net income available to
common shareholders as a
percentage of average tangible
common equity.
Page 35
Allowance for Credit Losses repre-
sents an amount deemed adequate
by management to absorb credit-
related losses on loans and accept-
ances and other credit instruments.
Allowances for credit losses can be
specific or collective and are recorded
on the balance sheet as a deduction
from loans and acceptances or, as
they relate to credit instruments, as
other liabilities.
Pages 78, 97, 148
Assets under Administration and
under Management refers to assets
administered or managed by a finan-
cial institution that are beneficially
owned by clients and therefore not
reported on the balance sheet of the
administering or managing financial
institution.
Asset-Backed Commercial Paper
(ABCP) is a short-term investment.
The commercial paper is backed by
physical assets such as trade receiv-
ables, and is generally used for short-
term financing needs.
Page 71
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and
loans and securities, over a one-year
period.
Bankers’ Acceptances (BAs) are
bills of exchange or negotiable
instruments drawn by a borrower for
payment at maturity and accepted by
a bank. BAs constitute a guarantee of
payment by the bank and can be
traded in the money market. The
bank earns a “stamping fee” for
providing this guarantee.
Basis Point is one one-hundredth of
a percentage point.
Business Risk arises from the
specific business activities of a
company and the effects these could
have on its earnings.
Page 116
Collective Allowance is maintained
to cover impairment in the existing
credit portfolio that cannot yet be
associated with specific credit assets.
Our approach to establishing and
maintaining the collective allowance
is based on the requirements of IFRS,
considering guidelines issued by our
regulator, OSFI. The collective allow-
ance is assessed on a quarterly basis
and a number of factors are consid-
ered when determining its level,
including the long-run expected loss
amount and management’s credit
judgment with respect to current
macroeconomic and portfolio
conditions.
Pages 42, 97, 148
Common Equity Tier 1 (CET1)
capital is comprised of common
shareholders’ equity less deductions
for goodwill, intangible assets, pen-
sion assets, certain deferred tax
assets and certain other items.
Pages 70, 181
Common Equity Tier 1 Ratio reflects
CET1 capital, divided by risk-weighted
assets for CET1.
Pages 35, 72, 182
Common Shareholders’ Equity is
the most permanent form of capital.
For regulatory capital purposes,
common shareholders’ equity is
comprised of common shareholders’
equity, net of capital deductions.
Credit and Counterparty Risk is the
potential for loss due to the failure of
a borrower, endorser, guarantor or
counterparty to repay a loan or
honour another predetermined finan-
cial obligation.
Pages 94, 151
Derivatives are contracts with a
value that is “derived” from move-
ments in interest or foreign exchange
rates, equity or commodity prices or
other indices. Derivatives allow for
the transfer, modification or reduction
of current or expected risks from
changes in rates and prices.
Dividend Payout Ratio represents
common share dividends as a
percentage of net income available to
common shareholders. It is computed
by dividing dividends per share by
basic earnings per share.
Earnings Per Share (EPS) is calcu-
lated by dividing net income attribut-
able to bank shareholders, after
deduction of preferred dividends, by
the average number of common
shares outstanding. Diluted EPS,
which is our basis for measuring
performance, adjusts for possible
conversions of financial instruments
into common shares if those con-
versions would reduce EPS. Adjusted
EPS is calculated in the same manner,
using adjusted net income.
Pages 34, 191
Earnings Sensitivity is a measure of
the impact of potential changes in
interest rates on the projected
12-month after-tax net income of a
portfolio of assets, liabilities and
off-balance sheet positions in
response to prescribed parallel
interest rate movements.
Page 104
Economic Capital is a measure of our
internal assessment of the risks
202 BMO Financial Group 198th Annual Report 2015
underlying BMO’s business activities.
It represents management’s
estimation of the likely magnitude of
economic losses that could occur
should severely adverse situations
arise, and allows returns to be
measured on a basis that considers
the risks undertaken. Economic
capital is calculated for various types
of risk – credit, market (trading and
non-trading), operational and
business – based on a one-year time
horizon using a defined confidence
level.
Pages 73, 93
Economic Value Sensitivity is a
measure of the impact of potential
changes in interest rates on the
market value of a portfolio of assets,
liabilities and off-balance sheet posi-
tions in response to prescribed
parallel interest rate movements.
Page 104
Efficiency Ratio (or Expense-to-
Revenue Ratio) is a key measure of
productivity. It is calculated as non-
interest expense divided by total
revenue, expressed as a percentage.
The adjusted efficiency ratio is calcu-
lated in the same manner, utilizing
adjusted total revenue and non-
interest expense.
Page 43
Environmental and Social Risk is
the potential for loss or damage to
BMO’s reputation resulting from
environmental or social concerns
related to BMO or its customers.
Environmental and social risk is often
associated with credit, operational
and reputation risk.
Page 117
Fair Value is the amount of consid-
eration that would be agreed upon in
an arm’s-length transaction between
knowledgeable, willing parties who
are under no compulsion to act.
Forwards and Futures are con-
tractual agreements to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
specific price and date in the future.
Forwards are customized contracts
transacted in the over-the-counter
market. Futures are transacted in
standardized amounts on regulated
exchanges and are subject to daily
cash margining.
Page 156
Hedging is a risk management tech-
nique used to neutralize, manage or
offset interest rate, foreign currency,
equity, commodity or credit
exposures arising from normal
banking activities.
Impaired Loans are loans for which
there is no longer reasonable assur-
ance of the timely collection of
principal or interest.
Innovative Tier 1 Capital is a form
of Tier 1 capital issued by structured
entities that can be included in calcu-
lating a bank’s Tier 1 Capital Ratio,
Total Capital Ratio and Leverage
Ratio. Under Basel III, Innovative Tier
1 Capital is non-qualifying and is part
of the grandfathered capital being
phased out between 2013 and 2022.
Insurance Risk is the potential for
loss due to actual experience being
different from that assumed when an
insurance product was designed and
priced. It generally entails inherent
unpredictability that can arise from
assuming long-term policy liabilities
or from the uncertainty of future
events. Insurance risk is inherent in
all our insurance products, including
annuities and life, accident and sick-
ness, and creditor insurance, as well
as in our reinsurance business.
Page 114
Legal and Regulatory Risk is the
potential for loss or harm that arises
from legislation, contracts, non-
contractual rights and obligations,
and disputes. This includes the risks
of failing to: comply with the law (in
letter or in spirit) or maintain stan-
dards of care; implement legislative
or regulatory requirements; enforce
or comply with contractual terms;
assert non-contractual rights; effec-
tively manage disputes; and act in a
manner so as to maintain our
reputation.
Page 114
Leverage Ratio is defined as Tier 1
capital, divided by the sum of on-
balance sheet items and specified
off-balance sheet items, net of
specified adjustments.
Page 72
Liquidity and Funding Risk is the
potential for loss if BMO is unable to
meet financial commitments in a
timely manner at reasonable prices
as they fall due. Financial commit-
ments include liabilities to depositors
and suppliers, and lending, invest-
ment and pledging commitments.
Pages 105, 153
Market Risk is the potential for
adverse changes in the value of
BMO’s assets and liabilities resulting
from changes in market variables
such as interest rates, foreign
exchange rates, equity and
commodity prices and their implied
volatilities, and credit spreads, and
includes the risk of credit migration
and default in our trading book.
Pages 100, 153
Mark-to-Market represents the
valuation of financial instruments
at market rates as of the balance
sheet date, where required by
accounting rules.
Model Risk is the potential for
adverse consequences following
decisions based on incorrect or
misused model outputs. These
adverse consequences can include
financial loss, poor business decision-
making or damage to reputation.
Page 112
Net Interest Income is comprised of
earnings on assets, such as loans and
securities, including interest and
dividend income and BMO’s share of
income from investments accounted
for using the equity method of
accounting, less interest expense paid
on liabilities, such as deposits.
Page 39
Net Interest Margin is the ratio of
net interest income to average
earning assets, expressed as a per-
centage or in basis points. Net
interest margin is sometimes com-
puted using total assets.
Page 39
Net Non-Interest Revenue is non-
interest revenue, net of insurance
claims, commissions and changes in
policy benefit liabilities.
Notional Amount refers to the
principal amount used to calculate
interest and other payments under
derivative contracts. The principal
amount does not change hands under
the terms of a derivative contract,
except in the case of cross-currency
swaps.
Off-Balance Sheet Financial Instru-
ments consist of a variety of financial
arrangements offered to clients,
which include credit derivatives,
written put options, backstop liquidity
facilities, standby letters of credit,
performance guarantees, credit
enhancements, commitments to
extend credit, securities lending,
documentary and commercial letters
of credit, and other indemnifications.
Office of the Superintendent of
Financial Institutions Canada (OSFI)
is the government agency responsible
for regulating banks, insurance
companies, trust companies, loan
companies and pension plans
in Canada.
Operating Leverage is the difference
between revenue and expense
growth rates. Adjusted operating
leverage is the difference between
adjusted revenue and adjusted
expense growth rates.
Page 43
Operational Risk is the potential for
loss resulting from inadequate or
failed internal processes or systems,
human interactions or external
events, but excludes business risk.
Page 111
Options are contractual agreements
that convey to the purchaser the right
but not the obligation to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
fixed future date or at any time within
a fixed future period.
Page 156
Provision for Credit Losses is a
charge to income that represents an
amount deemed adequate by
management to fully provide for
impairment in a portfolio of loans and
acceptances and other credit instru-
ments, given the composition of the
portfolio, the probability of default,
the economic environment and the
allowance for credit losses already
established.
Pages 42, 96, 149
Reputation Risk is the potential for a
negative impact on BMO that results
from the deterioration of BMO’s
reputation. Potential negative impacts
include revenue loss, decline in
customer loyalty, litigation, regulatory
sanction or additional oversight, and a
decline in BMO’s share price.
Page 116
Return on Equity or Return on
Common Shareholders’ Equity (ROE)
is calculated as net income, less non-
controlling interest in subsidiaries and
preferred dividends, as a percentage
of average common shareholders’
equity. Common shareholders’ equity
is comprised of common share capital,
contributed surplus, accumulated
other comprehensive income (loss)
and retained earnings. Adjusted ROE
is calculated using adjusted net
income rather than net income.
Page 35
Risk-Weighted Assets (RWA) are
defined as on- and off-balance sheet
exposures that are risk-weighted
based on counterparty, collateral,
guarantee arrangements and possibly
product and term for capital
management and regulatory reporting
purposes.
Page 73
Securities Borrowed or Purchased
under Resale Agreements are low-
cost, low-risk instruments, often
supported by the pledge of cash
collateral, which arise
from transactions that involve
the borrowing or purchasing
of securities.
Securities Lent or Sold under
Repurchase Agreements are low-
cost, low-risk liabilities, often sup-
ported by cash collateral, which arise
from transactions that involve the
lending or selling of securities.
Securitization is the practice of selling
pools of contractual debts, such as
residential mortgages, commercial
mortgages, auto loans and credit card
debt obligations, to third parties.
Page 153
Specific Allowances reduce the
carrying value of specific credit assets
to the amount we expect to recover if
there is evidence of deterioration in
credit quality.
Pages 97, 148
Strategic Risk is the potential for loss
due to fluctuations in the external
business environment and/or failure
to properly respond to these fluctua-
tions as a result of inaction, ineffective
strategies or poor implementation of
strategies.
Page 116
Stressed Value at Risk (SVaR) is
measured for specific classes of risk in
BMO’s trading and underwriting activ-
ities related to interest rates, foreign
exchange rates, credit spreads, equity
and commodity prices and their
implied volatilities, where model
inputs are calibrated to historical data
from a period of significant financial
stress. This measure calculates the
maximum loss likely to be experi-
enced in the portfolios, measured at a
99% confidence level over a specified
holding period.
Page 100
Structured Entities (SEs) include
entities for which voting or similar
rights are not the dominant factor in
determining control of the entity. We
are required to consolidate an SE if we
control the entity by having power
over the entity, exposure to variable
returns as a result of our involvement
and the ability to exercise power to
affect the amount of our returns.
Pages 77, 154
Swaps are contractual agreements
between two parties to exchange a
series of cash flows. The various swap
agreements that we enter into are as
follows:
• Commodity swaps – counterparties
generally exchange fixed-rate and
floating-rate payments based on
a notional value of a single
commodity.
• Credit default swaps – one counter-
party pays the other a fee in
exchange for that other counter-
party agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
• Cross-currency interest rate swaps –
fixed-rate and floating-rate interest
payments and principal amounts are
exchanged in different currencies.
• Cross-currency swaps – fixed-rate
interest payments and principal
amounts are exchanged in different
currencies.
• Equity swaps – counterparties
exchange the return on an equity
security or a group of equity secu-
rities for the return based on a fixed
or floating interest rate or the return
on another equity security or group
of equity securities.
• Interest rate swaps – counterparties
generally exchange fixed-rate and
floating-rate interest payments
based on a notional value in a single
currency.
Page 156
Tangible Common Equity is
calculated as common shareholders’
equity less goodwill and acquisition-
related intangible assets, net of
related deferred tax liabilities.
Page 35
Taxable Equivalent Basis (teb):
Revenues of operating groups are
presented in our MD&A on a taxable
equivalent basis (teb). To facilitate
comparisons, the teb adjustment
increases GAAP revenue and the
provision for income taxes by an
amount that would increase revenue
on certain tax-exempt securities to a
level that would incur tax at the stat-
utory rate.
Pages 38, 194
Tier 1 Capital is comprised of CET1
capital, preferred shares and
innovative hybrid instruments, less
certain regulatory deductions.
Pages 70, 181
Tier 1 Capital Ratio reflects Tier 1
capital divided by Tier 1 capital risk-
weighted assets.
Pages 72, 181
Total Capital includes Tier 1 and Tier 2
capital. Tier 2 capital is primarily com-
prised of subordinated debentures and
a portion of the collective and individual
allowances for credit losses, less certain
regulatory deductions.
Pages 70, 181
Total Capital Ratio reflects Total
capital divided by Total capital
risk-weighted assets.
Pages 72, 182
Total Shareholder Return: The three-
year and five-year average annual
total shareholder return (TSR) repre-
sents the average annual total return
earned on an investment in BMO
common shares made at the begin-
ning of a three-year and five-year
period, respectively. The return
includes the change in share price and
assumes that dividends received were
reinvested in additional common
shares. The one-year TSR also assumes
that dividends were reinvested in
shares.
Page 32
Trading-Related Revenues include
net interest income and non-interest
revenue earned from on- and off-
balance sheet positions undertaken for
trading purposes. The management of
these positions typically includes
marking them to market on a daily
basis. Trading-related revenues include
income (expense) and gains (losses)
from both on-balance sheet
instruments and interest rate, foreign
exchange (including spot positions),
equity, commodity and credit
contracts.
Page 41
Value at Risk (VaR) is measured for
specific classes of risk in BMO’s trading
and underwriting activities related to
interest rates, foreign exchange rates,
credit spreads, equity and commodity
prices and their implied volatilities. This
measure calculates the maximum loss
likely to be experienced in the portfo-
lios, measured at a 99% confidence
level over a specified holding period.
Pages 100, 101
BMO Financial Group 198th Annual Report 2015 203
Where to Find More Information
Corporate Governance
Our website provides information on our
corporate governance practices, including our
code of conduct, our Director Independence
Standards and our board mandate and
committee charters.
www.bmo.com/corporategovernance
Management Proxy Circular
Our management proxy circular contains
information on our directors, board committee
reports and a detailed discussion of our corporate
governance practices. It will be published in
March 2016 and will be available on our website.
www.bmo.com/corporategovernance
New York Stock Exchange
Governance Requirements
A summary of the significant ways in which
our corporate governance practices differ
from the corporate governance practices
required to be followed by U.S. domestic
companies under New York Stock Exchange
Listing Standards is posted on our website.
www.bmo.com/corporategovernance
Sustainability Performance
BMO’s Environmental, Social and Governance
Report and Public Accountability Statement
(ESG Report/PAS) outlines how we manage
the environmental, social and governance
impacts of our business while creating value
for our many stakeholders. We use the Global
Reporting Initiative (GRI) as a framework for
reporting on our sustainability performance.
This report is available on our website.
www.bmo.com/corporateresponsibility
Corporate Responsibility
BMO’s Corporate Responsibility Report, at
companion piece to the ESG Report/PAS,
illustrates the way we conduct our business,
what we stand for and the commitments we’ve
made to our customers and the communities
where we operate. This report and additional
information are available on our website.
www.bmo.com/corporateresponsibility
Have Your Say
If you have a question you would like to ask
at our annual meeting of shareholders, you
can submit your question in person or during
the webcast. You can also submit a question to
the board by writing to the Corporate Secretary
at Corporate Secretary’s Office, 21st Floor,
1 First Canadian Place, Toronto, ON M5X 1A1,
or emailing corp.secretary@bmo.com.
204 BMO Financial Group 198th Annual Report 2015
Shareholders
Shareholders
Contact our Transfer Agent and Registrar for:
• Dividend information
•
• Change in share registration or address
•
• Lost certificates
•
• Estate transfers
•
• Duplicate mailings
•
• Direct registration
•
Computershare Trust Company of Canada
100 University Avenue, 8th Floor, Toronto, ON M5J 2Y1
Email: service@computershare.com
www.computershare.com/investor
www.computershare.com/investor
Canada and the United States
Call: 1-800-340-5021 Fax: 1-888-453-0330
International
Call: 514-982-7800 Fax: 416-263-9394
Computershare Trust Company, N.A.
Co-Transfer Agent (U.S.)
Employees
Employees
For information on BMO’s Employee Share
Ownership Plan:
Call: 1-877-266-6789
General
General
To obtain printed copies of the
annual report or make inquiries
about company news and initiatives:
Corporate Communications Department
BMO Financial Group
28th Floor, 1 First Canadian Place
Toronto, ON M5X 1A1
On peut obtenir sur demande
un exemplaire en français.
www.bmo.com
www.bmo.com
Customers
Customers
For assistance with your investment portfolio
or other financial needs:
BMO Bank of Montreal
English and French: 1-877-225-5266
Cantonese and Mandarin: 1-800-665-8800
Outside Canada and the continental United States:
514-881-3845
TTY service for hearing impaired customers:
1-866-889-0889
www.bmo.com
www.bmo.com
BMO InvestorLine: 1-888-776-6886
www.bmoinvestorline.com
www.bmoinvestorline.com
BMO Harris Bank
United States: 1-888-340-2265
Outside the United States: 1-847-238-2265
www.harrisbank.com
BMO Nesbitt Burns: 416-359-4000
www.bmonesbittburns.com
Online filing information:
BMO filings in Canada
Canadian Securities Administrators
www.sedar.com
www.sedar.com
BMO filings in the United States
Securities and Exchange Commission
www.sec.gov/edgar.shtml
www.sec.gov/edgar.shtml
For all other shareholder inquiries:
Shareholder Services
BMO Financial Group
Corporate Secretary’s Office
21st Floor, 1 First Canadian Place
Toronto, ON M5X 1A1
Email: corp.secretary@bmo.com
Call: 416-867-6785 Fax: 416-867-6793
Institutional Investors
Institutional Investors
and Research Analysts
and Research Analysts
To obtain additional financial information:
Investor Relations
BMO Financial Group
10th Floor, 1 First Canadian Place
Toronto, ON M5X 1A1
Email: investor.relations@bmo.com
Call: 416-867-7019 Fax: 416-867-3367
The following are trademarks of Bank of Montreal or its subsidiaries:
BMO, BMO DepositEdge, BMO Spend Dynamics, BMO Biz Basic, BMO Market Pro.
The following are trademarks owned by other parties:
Touch ID is a trademark of Apple Inc.
MasterCard and World Elite are trademarks of MasterCard International Incorporated.
AIR MILES is a trademark of AIR MILES International Trading B.V.
Interac is a trademark of Interac Inc.
Your vote matters.
Look out for your proxy circular in
March and remember to vote.
Shareholder Information
Important Dates
Fiscal Year End
Annual Meeting April 5, 2016,
October 31
9:30 a.m. (local time)
The annual meeting of shareholders will
be held in Toronto, Ontario, at the BMO
Institute for Learning, 3550 Pharmacy
Avenue. The meeting will be webcast.
Details are available on our website.
www.bmo.com/investorrelations
2016 Dividend Payment Dates*
Common and preferred shares record dates
February 1
August 1
May 2
November 1
Common shares payment dates
February 26
August 26
May 26
November 28
Preferred shares payment dates
February 25
August 25
May 25
November 25
*Subject to approval by the Board of Directors.
t
The Bank Act prohibits a bank from
declaring or
paying a dividend if it is or would thereby be in
contravention of regulations or an order from the
Super intendent of Financial Institutions Canada
dealing with adequacy of capital or liquidity.
Currently, this limitation does not restrict the
payment of dividends on Bank of Montreal’s
common or preferred shares.
Managing Your Shares
Our Transfer Agent and Registrar
Computershare Trust Company of Canada serves
as Transfer Agent and Registrar for common and
preferred shares, with transfer facilities in Halifax,
Montreal, Toronto, Winnipeg, Calgary and
Vancouver. Computershare Investor Services PLC
and Computershare Trust Company, N.A. serve as
Transfer Agents and Registrars for common shares
in London, England and Golden, Colorado, respec-
tively. See previous page for contact information.
Reinvesting Your Dividends and
Purchasing Additional Common Shares
Through the Shareholder Dividend Reinvestment
and Share Purchase Plan, you can reinvest cash
dividends from your BMO common shares to
purchase additional BMO common shares without
paying a commission or service charge. You can
also purchase additional common shares in
amounts up to $40,000 per fiscal year. Contact
Computershare Trust Company of Canada
or Shareholder Services for details.
Auditors KPMG LLP
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Market for Shares of Bank of Montreal
The common shares of Bank of Montreal are listed on the Toronto Stock Exchange (TSX) and
New York Stock Exchange (NYSE). The preferred shares of Bank of Montreal are listed on the TSX.
Common Share Trading in Fiscal 2015
Primary stock
exchanges
Closing price
October 31, 2015
Total volume of
shares traded
Ticker
High
Low
TSX
NYSE
BMO
BMO
$76.04
US$58.09
$84.39
US$74.40
$64.01
US$48.17
392.7 million
199.3 million
Common Share History
Date
Action
March 14, 2001
March 20, 1993
June 23, 1967
100% stock dividend
100% stock dividend
Stock split
Common share effect
Equivalent to a 2-for-1 stock split
Equivalent to a 2-for-1 stock split
5-for-1 stock split
Dividends Paid per Share in 2015 and Prior Years
Bank of Montreal has paid dividends for 187 years – the longest-running dividend payout
record of any company in Canada.
Issue/Class
Common
Common
Preferred Class B
Series 5 (b)
Series 10 (c)
Series 13 (d)
Series 14 (e)
Series 15 (f)
Series 16 (g)
Series 17 (h)
Series 18 (i)
Series 21 (j)
Series 23 (k)
Series 25 (l)
Series 27 (m)
Series 29 (n)
Series 31 (o)
Series 33 (p)
Series 35 (q)
Series 36 (r)
Ticker
BMO
BMO
Shares outstanding
at October 31, 2015
2015
2014
2013
2012
2011
642 583 341
642,583,341
$ 3 04
$ 3 20 (a)(a) $ 3.04
$ 3.20
$ 2 92
$ 2.92
$ 2 80
$ 2.80
$ 2.80
–
BMO.PR.H
–
BMO.PR.V
–
BMO.PR.J
10,000,000
BMO.PR.K
10,000,000
BMO.PR.L
6,267,391
BMO.PR.M
5,732,609
BMO.PR.R
–
BMO.PR.N
–
BMO.PR.O
–
BMO.PR.P
11,600,000
BMO.PR.Q
20,000,000
BMO.PR.S
BMO.PR.T
16,000,000
BMO.PR.W 12,000,000
8,000,000
BMO.PR.Y
6,000,000
BMO.PR.Z
600,000
–
–
–
$ 0.84
$ 1.31
$ 1.45
$ 0.85
$ 0.62
–
–
$ 0.68
$ 0.98
$ 1.00
$ 1.19
$ 1.02
–
–
–
–
–
$ 1.13
$ 1.31
$ 1.45
$ 0.85
$ 0.65
$ 0.81
$ 1.22
$ 1.35
$ 0.98
$ 0.34
–
–
–
–
–
$ 0.66
$ 1.33
$ 1.33
– US$ 0.37 US$ 1.49
$ 1.13
$ 1.31
$ 1.45
$ 1.30
–
$ 1.63
$ 1.63
$ 1.35
$ 0.69
–
–
–
–
–
–
$ 1.13
$ 1.31
$ 1.45
$ 1.30
–
$ 1.63
$ 1.63
$ 1.35
$ 0.98
–
–
–
–
–
–
$ 1.13
$ 1.31
$ 1.45
$ 1.30
–
$ 1.63
$ 1.63
$ 1.35
$ 0.98
–
–
–
–
–
–
(a) Dividend amount paid in 2015 was $3.20. Dividend amount declared
(j) The Class B Preferred Shares Series 21 were issued in March 2009
in 2015 was $3.24.
and were redeemed in May 2014.
(b) The Class B Preferred Shares Series 5 were issued in February 1998
(k) The Class B Preferred Shares Series 23 were issued in June 2009
and were redeemed in February 2013. Dividend amount declared in
2013 of $0.33 was included in the redemption price.
(c) The Class B Preferred Shares Series 10 were issued in December 2001
and were redeemed in February 2012.
(d) The Class B Preferred Shares Series 13 were issued in January 2007
and were redeemed in May 2015.
(e) The Class B Preferred Shares Series 14 were issued in September 2007.
(f) The Class B Preferred Shares Series 15 were issued in March 2008.
(g) The Class B Preferred Shares Series 16 were issued in June 2008.
(h) The Class B Preferred Shares Series 17 were issued in August 2013.
(i) The Class B Preferred Shares Series 18 were issued in December 2008
and were redeemed in February 2014.
and were redeemed in February 2015.
(l) The Class B Preferred Shares Series 25 were issued in March 2011.
(m) The Class B Preferred Shares Series 27 Non-Viability Contingent
Capital (NVCC) were issued in April 2014.
(n) The Class B Preferred Shares Series 29 NVCC were issued in June 2014.
(o) The Class B Preferred Shares Series 31 NVCC were issued in July 2014.
(p) The Class B Preferred Shares Series 33 NVCC were issued in June 2015.
(q) The Class B Preferred Shares Series 35 NVCC were issued in July 2015.
(r) The Class B Preferred Shares Series 36 NVCC were issued in
October 2015 by way of private placement and are not listed
on an exchange.
Employee Ownership*
81.2% of Canadian employees participate in
the BMO Employee Share Ownership Plan –
a clear indication of their commitment to
the company.
*As of October 31, 2015.
Credit Ratings
Credit rating information appears on pages 25
and 110 of this annual report and on our website.
www.bmo.com/creditratings
Direct Deposit
You can choose to have your dividends
deposited directly to an account in any financial
institution in Canada or the United States that
provides electronic funds transfer.
Personal Information Security
We advise our shareholders to be diligent in
protecting their personal information. Details
are available on our website.
www.bmo.com/security
Being a responsibly-managed bank means holding ourselves accountable
to all of our stakeholders and maintaining high standards of governance
and transparency when we communicate with our colleagues, customers,
communities and shareholders.
It was an honour to have been recognized by the Chartered Professional
Accountants of Canada as the winner of the 2015 Award of Excellence in
Corporate Reporting for the Financial Services industry. Judges specifically
acknowledged our thorough sustainability reporting, our best-in-class
electronic disclosure and the Management’s Discussion and Analysis section
of our 2014 annual report, which they described as “stellar.”
Telling our story clearly, fully and with transparency is just one of the ways
we work every day to earn our stakeholders’ trust.
Carbon offsets
provided by:
This annual report is
carbon neutral.